Just six months after Independence, Sri Lanka set about the task of establishing a central bank to replace the Currency Board which was responsible for monetary matters in the country during the colonial administration. The government asked for technical expertise from the USA and John Exter, an economist attached to the Federal Reserve System of the USA was sent to advise of the establishment of a central bank in Sri Lanka.

Central Bank in the heart of Colombo Fort

The Central Bank of Ceylon was established by the Monetary Law Act (MLA) No.58 of 1949 and commenced operations on August 28, 1950. It was opened by the then Minister of Finance J. R. Jayewardene. John Exter was appointed the first Governor, the chief executive office of the Bank.

The Central Bank was given wide powers to administer and regulate the entire money, banking and credit system of the country.

The Central Bank was also given the sole right and authority to issue currency and it also became the custodian of the international reserves of the country.

The functions of the Central Bank were identified as:

– Administration and regulation of the monetary and banking system of Sri Lanka
– Sole authority for issuing currency notes
– Implementing monetary policy, influencing money supply, credit and interest rates
– Economic adviser to the Government
– Banker to the Government and banker to commercial banks In addition, it was to have a development function too.

The main objectives of the Central Bank were:

• Stabilisation of the domestic value of the rupee.
• Stabilisation of the external value of the rupee (exchange rate).
• Promotion of economic growth.

The Monetary Board is the governing body of the Central Bank. It is vested with all the powers, functions and development of the Bank. The Governor of the Bank and Secretary to the Ministry of Finance are ex-officio members of the Monetary Board. Three more members are appointed by His Excellency the President on the recommendation of the Minister of Finance. The Monetary Board is appointed for a period of six years.

The well known economist, N. U. Jayawardena was the first Sri Lankan Governor of the Central Bank. He succeeded John Exter in 1953. He was then the Deputy Governor having headed the Exchange Control Department from 1948 to 1950.

The Central Bank has expanded its activities to the provinces particularly in a bid to promoting regional growth. The first regional office was established in Matara in 1981. Two more have been set up – one in Anuradhapura (1982) and the other in Matale (1985). This has helped to make the Bank's development role more effective.

N. U. Jayawardena - first Sri Lankan Governor

The number of departments has also increased in keeping with the increase in the volume of work. For example, with the creation of the Employees' Provident Fund by the Government to provide superannuation benefits to private sector employees, a new department was created in 1958, to deal with financial matters relating to the Fund.

The Development Finance Department was created in 1974, when it became obvious that with the expansion of the economy, certain sectors tended to get neglected by conventional commercial banking. This department focuses on the preparation and implementation of policy and provision of development oriented finance.

In 1981, the Rural Credit Department was set up to focus on credit to the rural sector. In 1988, the Department of Supervision of Non-Bank Financial Institutions was established when a crisis occurred in finance companies in Sri Lanka. Now Central Bank approval must be obtained to start a finance company.

There is a Currency Museum in Central Bank. It traces the history of coins and notes dating back to the 3rd century BC. The collections have been divided into four periods: Ancient, Medieval, Colonial and Post Independence.

The Bank was renamed the Central Bank of Sri Lanka in 1985. Although it was destroyed by a LTTE bomb attack in 1996, it has since been rebuilt.