Sri Lanka’s capital market evolution: Path to economic growth

Colombo Stock Exchange’s (CSE) former Chairman of the Board of Directors Dilshan Wirasekara, in this interview examines how the sustained progress of capital market development is built on strong foundations of progressive strategies, deep expertise, and consistent policy.  

Q: How far have the capital markets come in Sri Lanka, and how do we compare with other countries in the region?

 We’ve historically been known as a nation of savers. Growing up, we were told that saving was vital. Back then, we weren’t aware that saving diminishes the value of one’s earnings. However, the needs of emerging generations demonstrate a shift in investment behaviour. 

This shift reflects a global trend since the COVID-19 pandemic: financial disintermediation, where investors and borrowers connect directly. High interest rates are declining, liquidity is rising, and financial literacy is improving. These factors demand more efficient capital deployment.

Regionally, Sri Lanka is competitive. We are close behind India, Singapore, Malaysia, and Thailand, and ahead of Pakistan, Bangladesh, and some other South Asian counterparts. Our strengths lie in regulatory stability, investor education initiatives, and technology. The CSE is also more streamlined and transparent, with a policy framework conducive to equity investment. While capital markets currently contribute a smaller fraction of Sri Lanka’s GDP, the momentum for growth is increasing.

Q: What significant achievements were made during your three-year tenure as Chairman of the CSE?

The CSE has seen record profits in the last three years. This progress was a result of the Board’s collective collaboration and an integrated approach built on three key pillars: Product Diversification, Modernisation, and Broadening Investor Participation. Our achievements built upon existing work and ensured continuity.

For product diversification, we moved beyond a single product to offer a wider spectrum. This included debt and fixed-income products, sustainable bonds, high-yield debt products, and Islamic finance instruments like Sukuk. We also rolled out mechanisms for share borrowing and lending, and initiated plans for index funds.

Modernisation efforts democratised access to the exchange with the launch of our mobile app. We aligned the CSE with global best practices by transitioning from a T+3 to a T+2 settlement cycle, with plans for T+1 in progress. Risk mitigation is also being addressed with the launch of a Central Counterparty (CCP) Settlement System, designed to guarantee trade completion and reduce broker risks.

To Broaden Investor Participation, we upgraded our systems to global standards. Currently, out of 22 million citizens, only around 1 million have a CDS account. Of these, just 250,000 hold shares, and a mere 35,000 are considered active traders, executing at least one trade per month. We’ve encouraged extensive public financial literacy campaigns and advocated for educational reforms to embed investment knowledge at a grassroots level to better equip future generations. The CSE is fundamentally a national asset, a resource for all Sri Lankans.

Q: How could capital markets effectively contribute to the growth of Sri Lanka’s economy?

 Local market capitalisation is only about 20% of GDP, significantly lower than in countries like Singapore. This is partly due to undervaluation and the absence of many major sectors, including state-owned enterprises and apparel exporters - Sri Lanka’s largest export earning industry – from the CSE. Encouraging such enterprises to list would increase market depth and stimulate economic activity.

Listing and diversifying market sector representation could strengthen the link between capital markets and economic growth. It’s important to address public misunderstandings of listing as privatisation. Listing can improve governance, transparency, and public participation without transferring control. Broader listings would allow companies to raise capital more easily, supporting business expansion, job creation, and tax contributions. Strategically pursuing models from regional success stories like India could drive economic development.

Q: Beyond market transparency, which specific policy signals or structural reforms are crucial to significantly enhancing Sri Lanka’s international investor appeal?

Policy consistency is paramount. Historically, policy reversals have deterred foreign investors. Maintaining continuity of key economic, politically independent decision makers across governments is essential. 

It is encouraging that the current government has retained key bureaucrats like the Central Bank Governor and Treasury Secretary, signalling a shift towards  continuity and integrity. The country’s entry into a 4.5-year period without political transitions also offers a unique window for stable policy execution, allowing for progressive reforms and long-term planning.

Q: How do you envision technology and financial innovation playing a transformative role in the future of Sri Lankan capital markets?

Technology will play a pivotal and critical role moving forward. Capital markets will follow global trends, adopting measures that define modern markets elsewhere. Technology will lower barriers to market access, making markets faster, broader, and less dependent on intermediaries. AI-based applications can democratise investing, allowing users without traditional finance expertise to receive intelligent stock recommendations. Automated decision making will increasingly replace traditional analysis, enabling rapid decisions.

Q: How critical is the integration of ESG principles for the international competitiveness of Sri Lanka’s capital markets?

 ESG integration is essential, both internationally and locally. It is no longer optional. The question is not ‘should I adopt sustainable practices?’ but ‘how integral is sustainability in my strategy, truly part of my company’s DNA?’. 

Stakeholders demand transparency and favour companies with strong ESG commitments. Failing to meet ESG expectations risks alienating customers and investors. Sustainability extends beyond manufacturing, it applies equally to financial services and capital markets.

As of 2024, the CSE has mandated integrated reporting for the top 100 listed companies, requiring ESG disclosures. Annual reports from all listed companies will eventually need to comply. This means ESG principles must be integrated into the culture of companies.

Q: How will stronger collaboration between the government, regulators, and private sector participants in the capital markets drive national economic growth? 

 Collaboration is no longer optional; it is vital for sustainable growth. Public Private Partnerships (PPPs) are not just beneficial, they are necessary to create synergy and unlock shared value. The successes of SLT-MOBITEL and People’s Leasing demonstrate how blending government control with private investment and capital markets achieves growth. The key is seeing the private sector as a partner, not an adversary. Sustainable progress in the capital markets requires alignment across all parties: government, issuers, investors, the exchange, and especially the regulators.

Q: What key reforms are necessary to leverage capital markets for national economic growth?

 Demutualisation is going to be critically important in restructuring our already conflicted model which happens to be owned and governed by 15 broker firms. Demutualisation would allow an independent, profit-oriented entity to lead the CSE without direct ties to the market intermediaries it currently oversees. Consequently, greater transparency and independence will lead the way for improved efficiency, long-term growth and foreign investment in our capital markets.