Effects of macroeconomic disturbances on the banking sector and equity markets in Sri Lanka: with special reference to civil war and COVID-19 pandemic

This paper argues that the macroeconomic disturbances resulting from prolonged civil war and the recent COVID-19 pandemic have substantially curtailed the banking sector and equity market in Sri Lanka through widening interest spreads, contracting bank credit, slowing down equity market activity, and constraining bank branch network expansion. Further, the findings show how the banks and equity market have favourably responded during periods of relative macroeconomic stability. The contributions of this paper are threefold. First, it fills a vital gap in the Sri Lankan banking literature by providing evidence on the effects of the civil war on equity markets, financial intermediation and banking system performance. Second, it explains why banking systems in some countries with advanced financial infrastructures and healthy interest spreads have failed to achieve their potential growth. Third, it explores how widespread pandemics like COVID-19 can constrain the performance of banking systems and equity markets.