📈 Strong Banking Sector Vital for Sri Lanka’s Economic Recovery

A robust banking system remains critical to channel credit into the productive economy and drive national recovery, countering public debate over banking profitability. • Overall System Health & Performance Resilience: The sector absorbed the 2023 Domestic Debt Optimisation (DDO) at material balance sheet cost and prevented depositor losses during the 2022 sovereign default. Taxation: High headline Net Interest Margins (NIM) are countered by an outsized tax burden exceeding 50% (Corporate Income Tax, VAT on financial services, and other levies). For HNB in FY2025, approx. Rs. 1 was paid to the state for every Rs. 1 retained as profit. • Credit Expansion & Industry Impact Loan Growth: Credit to the private sector expanded materially in 2025; HNB’s loan book grew by ~30% YoY, alongside improving non-performing loan (NPL) ratios. MSME Support: Banks deployed full allocations under the Government’s Rs. 95 Bn MSME financing program. • Strategic Priorities for Next Decade Development Funding: Reactivating long-tenor concessional funding lines with global partners (ADB, IFC, WB, EU, JICA) to lower the cost of funding and provide cheaper SME credit, rather than using regulatory lending caps. Digital Infrastructure: Scaling digital ecosystems requires heavy investment. Lower transaction fees depend on scale, as processing capacity, cybersecurity, and software license costs grow with volume (annual maintenance contracts rise 10-15%). Regulations: Transitioning from crisis containment to frameworks calibrated for sustainable credit expansion, such as risk-weighted incentives for productive lending.