Abstract:
An efficient and vibrant commercial banking and financial system are essential ingredients
for any market economy to become successful. It is expected to provide lifeblood to the
efficient and effective functioning of an economy. Commercial banks mobilize savings by
offering various types of deposit products to savers and channel such savings as loans and
advances to borrowers and investors. The difference between the rates at which banks lend
money to borrowers and the rate they are paying to depositors are generally known as
³LQWHUHVWUDWHVSUHDG´ ,56 7KHHIILFLHQF\RIWKHEDQking system is reflected by series of
financial indicators and more importantly by IRS and Net Interest Margin (NIM). IRS is
an important indicator of efficiency level of a bank or a banking system. It reflects profit
maximizing ability of the financial intermediaries. The Central Bank of Sri Lanka
repeatedly expresses its concern on IRS in the recent past. This is due to relatively higher
IRS in Sri Lanka than other countries in the South Asian region. High IRS is causing high
cost to borrowers and investors. On the other hand, it reduces the deposit income of the
depositors.
Thus, the objective of the present study is to identify the factors that are contributing to
high interest rate spread in Sri Lanka and identify actions needed to reduce the spread
