A macro-level inquiry into capital accumulation, investment, growth, and stability. The financial system in Sri Lanka was historically dominated by commercial banks and was subjected to McKinnon-Shaw-type financial repression, particularly during the period 1970 and 1977. The study addresses a number of specific questions. It questions the extent to which the positive real interest rate has been a decisive factor in increasing capital accumulation, investment and economic growth, and looks at whether the financial sector liberalization experiment in Sri Lanka has improved efficiency in the banking system in any significant manner. The inquiry also focuses on whether the path of transition from repression to financial liberalization has been efficient and whether a high rate of interest is really anti-inflationary. The purpose of the study has been to provide systematic, quantitative and qualitative evidence on these fundamental questions.