• CBSL warns that attracting funding to sustain credit expansion will be challenging in the current low-interest-rate environment
• While credit is expanding, banks must closely monitor credit quality and maintain capital buffers to ensure financial sector resilience

Sri Lanka’s banking and finance companies may face challenges in attracting funding through deposits to sustain credit expansion in the low-interest-rate regime going forward, as private credit expansion remains below the pre-crisis level, according to the Central Bank of Sri Lanka (CBSL).

In its Financial Stability Review for 2025, the CBSL stated that the performance of both banks and financial companies is expected to improve with the anticipated increase in credit supporting productive economic activities.

However, CBSL said that the credit quality of the sector and impairment coverage for stage 3 loans require close monitoring to strengthen the sector’s resilience.

The Central Bank said that attracting funding through deposits to sustain credit expansion may pose challenges going forward in the current low-interest rate environment, while current excess liquidity levels could also be impacted through the expected credit expansion.

Moreover, it added that although both capital and profitability are currently at favourable levels, continued maintenance of capital buffers would be important in ensuring the resilience of the financial sector.

While the finance companies sector recorded significant growth in its lending portfolio, recording an expansion of 35.1%, the banking sector contributed to the majority of credit expansion, albeit with a lower growth rate of 11.4% during the period under review.

Private sector credit continued to expand, supported by the low lending rate environment and broad-based distribution across key sectors of the economy.

Further, CBSL said that during the period under review, considerable growth in asset-backed credit, which includes collateral in the form of gold and vehicles, was reported, a significant expansion for both the bank and finance companies sectors.

“Domestic credit growth picked up amidst accommodative monetary policy, economic expansion, and stronger business confidence… Although acceleration in credit growth was observed, private sector credit as a percentage of GDP remained at lower levels,” the report said.

The private sector credit-to-GDP Gap (Credit Gap) sustained a widening trend during the first half of 2025 at 28.6%, remaining well below pre-crisis levels, indicating room for further expansion.