Macrofinancial Strength Drives Credit Surge in 2025, But Risks Loom: CBSL

Sri Lanka’s macrofinancial conditions strengthened throughout 2025, fueling a major expansion in credit despite persistent external vulnerabilities. According to recent year-end data, the financial sector has shifted its focus heavily toward the private sector, supported by a broad-based recovery and accommodative monetary policy.

The banking sector saw credit growth accelerate to 21.4% year-on-year by the end of 2025, a massive leap from the 4.1% growth recorded in 2024. This expansion reached across multiple sectors, including manufacturing, construction, and trade.

Notably, the quality of these loan portfolios has improved for the first time in years. The stage 3 loans ratio dropped to 9.7%, marking its return to single digits since early 2022. While rapid lending led to a moderation in liquidity and capital buffers, all banks remained comfortably above regulatory thresholds, with a total Capital Adequacy Ratio (CAR) of 17.9%.

The Finance Companies (FCs) sector reported even more aggressive growth, with gross loans and advances surging by 51.9%. This was primarily driven by vehicle & gold-backed lending and Profitability.

The Colombo Stock Exchange (CSE) remained a bright spot, with the All Share Price Index (ASPI) rising by 41.9%. A cumulative net foreign outflow of USD 127.7mn was observed during the year of 2025. In the foreign exchange market, the Sri Lanka rupee (LKR) depreciated by 5.6% in 2025. This follows two years of appreciation, reflecting a natural market adjustment amid improved interbank liquidity.

Despite the domestic boom, the financial landscape faces “downside risks” from global uncertainties, including Middle Eastern geopolitical conflicts and commodity price volatility.

Crucially, the credit-to-GDP gap has widened further into positive territory. This shift underscores a potential build-up of systemic risk, prompting calls for continued vigilance. Authorities emphasize that sustained fiscal consolidation and the strengthening of external buffers remain essential to maintaining this hard-won stability.

“Against this backdrop, sustained fiscal consolidation and the strengthening of external sector
buffers will remain essential to safeguarding macrofinancial stability,” the Central Bank said.