Sri Lanka’s financial sector saw a sharp acceleration in credit growth in 2025, with lending expanding across both banks and finance companies, supported by improved macroeconomic conditions and stronger demand for credit.
According to the Central Bank’s latest financial sector assessment, gross loans and receivables in the banking sector grew by 21.4% year-on-year by end-2025, a significant increase from 4.1% in the previous year. Lending growth was broad-based, covering sectors such as financial services, trade, consumption, construction, manufacturing, and overseas activities.
A notable feature of the expansion was a 148.0% surge in credit to the financial services sector, reflecting increased funding requirements of finance companies. At the same time, asset quality improved, with the stage-3 loans ratio declining to 9.7% from 12.3%, returning to single-digit levels for the first time since mid-2022.
The rapid pace of credit growth led to some moderation in liquidity and capital buffers, although both remained well above regulatory thresholds. The rupee liquidity coverage ratio stood at 283.3% at end-2025, while the all-currency ratio was 249.7%, both comfortably exceeding the minimum requirement of 100%. The sector’s capital adequacy ratio declined to 17.9% from 20.3% a year earlier, while return on equity remained strong at 16.6%.
Finance companies recorded even faster lending growth, with gross loans and advances rising by 51.9% year-on-year, compared to 21.2% in 2024. This expansion was driven mainly by vehicle-backed lending, which grew by 52.7%, and gold-backed lending, which increased by 63.8%.
Improved recoveries supported a decline in non-performing loans in the sector, with the stage-3 loans ratio falling to 6.1% from 11.5% a year earlier. Profitability also strengthened, with profit after tax reaching Rs. 61.5 billion in the first nine months of the 2025/26 financial year, up 45.0% year-on-year. Liquidity levels remained above minimum requirements, although surplus liquid assets declined to Rs. 74.3 billion from Rs. 105.1 billion as lending accelerated.
Macrofinancial conditions improved during the year, supporting credit expansion and a shift in financial sector exposure toward the private sector, while exposure to the public sector declined in line with fiscal consolidation. However, government-related exposure remained sizeable.
The Central Bank noted that the credit-to-GDP gap widened further into positive territory, indicating a potential buildup of systemic risk. External uncertainties, including geopolitical tensions in the Middle East, commodity price volatility, and adverse weather conditions, were identified as risks that could affect credit quality.
Financial markets remained stable despite global uncertainties. The Colombo Stock Exchange recorded gains during the year, with the All Share Price Index rising by 41.9% and the S&P SL20 by 26.6%. The rupee depreciated by 5.6% in 2025 following two years of appreciation, while liquidity in the foreign exchange market improved.
The Central Bank emphasised that continued fiscal consolidation and stronger external sector buffers will be critical to sustaining financial stability amid evolving risks.