Abstract:
Central objective of this study is to investigate the nature and trends of interest rate margin and real
interest rate in Sri Lanka. It also focuses the impact of interest rate spread/margin and real interest
rate on depositor’s income and regional economic development. Empirical data analysis reveals that
interest rate margin in Sri Lanka is thicker when compare to other developing countries in Asia. Real
interest rate is negative in most of years during 1978-2014 and depositors have been exploited by
financial intermediaries due to the thicker interest rate margin and negative real interest rate. Average
interest rate margin and average real interest rate based on average weighted lending rate, average
weighted deposit rate and inflation rate during 1978 to 2014 are 2.4 and 0.3 percent respectively.
Financial intermediaries have been earning more than eight times of income than depositor's real
income in average during this period. From this empirical data, this study highlights capital losses to
depositors is more in the North and East provinces of Sri Lanka since most of depositors in this region
are relatives of Tamil Diaspora. Interest rate policy exploits financial gain from depositors to
intermediaries in North and East provinces of Sri Lanka. As a result it creates capital losses and
regional disparity among the regions in Sri Lanka. Government of Sri Lanka should ensure availability
of data on accumulated deposits and lending from each districts of Sri Lanka. Political uncertainty due
to the absent of political solution for long standing ethnic conflict in Sri Lanka discourages investment
in North and East of Sri Lanka. This political environment make a room to exploit the saving from this
region to other region. Permanent peace and stability in North and East of Sri Lanka plays important
role to make investment sensitive to interest rate. It will prevent financial exploitation and induce long
run investment in this region hence creation of employment and output.
