Financial Deepening and its Implications on Savings and Investments in Sri Lanka

This paper investigates (a) the validity of financial deepening paradigms in the context of Sri Lanka and (b) the effects of financial deepening on savings and investment that promote growth. In investigating financial deepening in Sri Lanka the paper uses three paradigms i.e., Keynesian, McKinnon-Shaw and neo-structuralist. After examining these three versions the paper argues that an improved model which combines both Keynesian and McKinnon-Shaw versions produces a model more successful in explaining the characteristics of financial deepening in Sri Lanka. The effects of financial deepening on savings and investment were studied using this improved model. Results show that there are several factors other than interest rate influencing financial deepening in Sri Lanka. The study confirms the neo-structuralists' hypothesis which claims that financial deepening has reduced provision of credit to the informal sector. The paper also evaluates the effects of policy changes introduced since 1977 on financial deepening in Sri Lanka. DOI: http://dx.doi.org/10.4038/ss.v33i1.1245 Staff Studies Volume 33 Numbers 1& 2 2003 p.15-32