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There is a growing acceptance of the idea that financial institutions, in particular commercial banks, contribute significantly to real development. In Sri Lanka, Commercial banks play a dominance role in the finance sector.Accordingly the objective of the present study is to review literature and various hypotheses put forward to explain this relationship, and then to examine their relevance to the recent economic development of Sri Lanka.The interaction between financial institutions (commercial banks) and economic growth is assessed by employing correlation analysis, regression analysis, financial ratios and other related theories. The economic indicators and relevant ratios of commercial banks from fiscal year 1999 to 2008 were used for the analysis of this study. Study revealed that financial institutions have grown rapidly which has implication in overall economy. Further proved that savings rate in a country is crucial to the economic development (GDP per capita), especially for developing countries like Sri Lanka. Researchers conclude that the development of the three types of banking institutions: state-owned commercial banks, private domestic banks and foreign commercial banks are to be mostly linked with economic growth. The direction of causality should vary due to different management abilities, level of government involvement and goals of business activity that these institutions represent.

Key Words: Economic Development, Financial Intermediation


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