BIS Review 22/2008  1  it was felt that, unless an effective strategy is adopted to alleviate poverty among those who could not get integrated to the market economy policies, the country was within sight of another socio-economic explosion similar to the one which it experienced in 1971 in the near future 4 . As a counter strategy, several poverty alleviation schemes were initiated by the government with focus on the poor. Along with these schemes, the Central Bank too entered the foray by implementing some pilot projects based on microfinance and support services so that it could develop microfinance techniques and systems for others to emulate. One such project, funded by the International Fund for Agricultural Development (IFAD) and Canadian International Development Agency (CIDA) was implemented by the Central Bank in four districts where the incidence of poverty was the highest under the title “Small Farmers and the Landless Credit Project (SFLCP) or Isuru Project. To supplement this project, another initiative was taken to introduce a Forward Sale Contract Scheme for agricultural produce to facilitate farmers to obtain a pre-agreed price for their major agricultural crops. This paper will cover the strategy, methodology and the techniques adopted in these initiatives so as to develop a sustainable socio-economic security system in Sri Lanka. The paper is organised into four parts. Part I will critically review some aspects of the current theoretical knowledge on socio-economic security systems from the point of view of costeffectiveness and sustainability.
It is also necessary to take steps to restore the banking system to health as soon as possible. This means forcing banks to cut their capital distributions early and to raise new capital in a timely way even if such capital-raising results in the forced dilution of existing shareholders. With respect to bank capital, we saw two unwelcome behaviors during the crisis that central banks and other banking regulators need to lean against. Banks were reluctant to cut their capital distributions because of worries that this would signal weakness. Of course, these capital distributions just made the banks and the banking system weaker. Also, we saw that banks were reluctant to raise capital to guard against particularly bad states of the world because they thought this might unnecessarily dilute their shareholders should such bad states of the world not materialize. Of course, the collective action of banks to not raise this additional capital made the banking system weaker than it would otherwise have been. This in turn made the possibility of the particularly bad states of the world more likely. In such circumstances – which the U.S. faced in 2009 and arguably the Eurozone faces today – it is essential for the authorities to force sufficient capital into the system. The subtlety here is that in a time of stress it is necessary to overcapitalize the banking system relative to the base case scenario in order to ensure financial stability and an ongoing supply of credit to the real economy in a stress scenario.