FIN 3315

Theory and Practice of

Banking

Lecture 1 – Overview of banking industry

(24/02/2022)
Overview of the module
Activity 1

Find answers to followings

•How long Sri Lanka remained a colony of different
nations?
•Under how many countries Sri Lanka remained as a
colonial state? What are these countries?
•Population of Sri Lanka?
•GDP per capita of Sri Lanka?
•Category of Sri Lanka as to the World Bank ranking?
ACTIVITY 2

Licensed Commercial Banks

Deposit taking Licensed Specialised Banks

institutions

Registered Finance Companies

Find differences as much as possible

Category of bank Ownership Number of Assets base in
type banks the banking
sector
Domestic 11 46%
private banks
Licensed State banks 2 34%
commercial banks
Foreign banks 11 6.5%

State banks 4 13%

Licensed Domestic 3 0.5%
specialised banks private banks

Total 33 100%
Percentage of total assets owned by local
banks from total banking industry assets
Evolution of Banking Institutions
Most ancient bank
The Bank of Venice’ 1157
Was an office that transfer public debt

Beginning of English banking – London

Goldsmith
 Receive customer valuables (gold) and funds for
safe custody
Bank
Issue receipts of acknowledgment Note
Payable to bearer on demand
Circulation
Government of Charles II – ill-treatment to
Goldsmith
Ordered to deposit the reserves in
government treasury. “Exchequer”
Then Shut up “Exchequer” and sealed the
funds
Goldsmith ruined

Path for private banking

Bank of England’ 1694
Banking history in Sri Lanka
Cheetu system

Group of people contribute money to a fund and

distributed among them after drawing tickets.
Nattukottai Chettiars
The money lenders from India
To help South Indians to remit the money
Scattered all over the country and played active
role in money lending system
556 firms
Loans to plantation sector and business community
‘Shylocks’ – charged exorbitant rates of interest

First commercial bank

“Bank of Ceylon” on 1st June,1841 By William
Thompson
1st investment capital = 125,000 pounds
Had local board of directors
Opened Kandy branch in 1843
Remittances from Government, The Merchant House,
Nattukottai Chettiars
The bank closed down in 1847 with ‘Coffee boom’
Bank of Western India, 1843
Two branches in Colombo & Kandy
In 1845 became Oriental Bank, and took over the assets
and liabilities of BOC
Expanded branches in Nuwara Eliya, Badulla & Jaffna
The only bank in the country from 1847 to 1854

• 1854 – Merchant Bank of India, London & China

• 1865 – The Asiatic banking corporation
• 1865 – Royal Bank of India
• 1867 – The Bank of Madras
• 1881 – The National Bank of India
• 1887 – Comptoir D’Escompte de Paris
• 1884 – Collapse of the Oriental Bank
• 1884 - Sri Lanka Paper currency ordinance
Withdraw the privilege of the chartered banks to issue
their own currency notes and introduced a government
paper currency to take place of the bank note currency.

 Indian Bank
 Indian Overseas Bank
 1951 = Habib bank (Overseas) Ltd
 In, 1939 Bank of Ceylon established
Bank of Ceylon Ordinance No: 53 of 1938
In, 1961 People’s Bank established
People’s bank Act No 29 of 1961

These two state banks began to dominate the banking sector.

Act as Commercial banks and Social banks
Helped to promote banking habit in rural areas
lost their profit concerned and faced with threatening the viability due to various
reasons,

• branch expansion based on social and political considerations

• credit was extended to the borrowers who were not creditworthy
• credit were provided to public corporations that were not
economically sound
• To provide employment
• Larger losses resulted from the default of government directed
loans
 1992, on the verge of bankruptcy
 1996 the government had to inject Rs. 19,300 million into these two
banks to improve their condition.

Privately owned commercial banks

 1969 Commercial bank of Ceylon Ltd = by taking over a
British bank, Eastern Bank and later absorbing three branches of
Merchant Bank Ltd.
 1970 Hatton national Bank Ltd = the amalgamation of Hatton
Bank and three branches of Grind lays Bank. Also acquired the
business of the Mercantile bank Ltd in 1974
ECONOMIC REFORMS IN 1977
encouraged foreign banks to establish their branches
banks were permitted to set-up Foreign Currency
Banking Units to cater to Free Trade Zone Enterprises
and to develop Sri Lanka as an off-shore financial centre.
• 1979 - Banque Indosuez
Citi Bank N.A.
Bank of Credit and Commerce International
• 1980 - American Express Bank, Bank of Oman, Overseas
Trust Bank, Bank of America, European Asian Bank,
Habib Bank A.G. Zurich and Algemein Bank Netherlands.
• 1981 - Dubai Bank, Bank of Middle East and Amsterdam
Rotterdam Bank (AMRO).
Algemein Bank Netherlands were amalgamated with AMRO Bank in
1991 to become ABN AMRO Bank.
• 1982 - Middle East Bank Ltd
This branch was taken over by Muslim Commercial Bank in May
1994.
• 1992 – The
Public Bank Berhard
• 1995 - Korea Exchange Bank 1
• 1987 – Sampath Bank Ltd
• 1988 - Seylan Bank Ltd
• 1996 - Union Bank Ltd and Pan Asia bank Ltd
• 1993 - Sri Lanka joined the Society for worldwide Inter-
bank Financial Telecommunication (SWIFT) system
• 2003 - Real Time Gross Settlement System (RTGS)
• Scrip less Securities Settlement System (SSSS)
• 2006 - Cheque imaging and Truncation System (CITS)
 Be prepare for next
week…..
• Read chapter 8 of CBSL 2018 annual
report
• Ready with a newspaper/magazine
article on bank/industry to present
• Have an annual report of a bank
• Have CBSL annual report 2020