Central Bank of Sri Lanka warns of rising credit risks

The Central Bank of Sri Lanka (CBSL) reported that the nation’s financial system remained stable during the first half of 2026. This stability was driven by economic recovery, improved fiscal performance, and sufficient capital and liquidity buffers within banks and finance companies.

Despite this stability, the CBSL’s Financial Stability Review 2026 identified several emerging risks. These include rising household indebtedness, increasing property prices, and rapid growth in gold-backed lending and vehicle financing. Banking sector credit grew by 23.6% year-on-year in the second quarter of 2026, while finance companies saw a 45% increase, largely fueled by vehicle and gold loans.

The report also warned of external vulnerabilities, such as geopolitical tensions, global inflationary pressures, elevated energy prices, and tighter international financial conditions. These factors could impact Sri Lanka through trade, tourism, remittances, and exchange rate movements. To mitigate these risks, the Central Bank increased its overnight policy interest rate in May 2026 and implemented macroprudential measures, including loan-to-value limits on specific lending sectors.