Banking structure constrains RoC, credit growth: Hosking Partners

Monday, 12 January 2026 03:59 - - {{hitsCtrl.values.hits}}

Sri Lanka has too many banks, echoing CBSL view on consolidation with Master Plan in place
Multiple banks offering high-cost mortgage products limits housing finance, keeps credit penetration low, despite savings within system
Ripe for technological disruption

Sri Lanka’s fragmented banking sector is limiting returns on capital (RoC) and constraining the growth of credit relative to the size of the economy, according to Hosking Partners Founding Partner Django Davidson.

Speaking at a presentation on ‘The Capital Cycle Way’ hosted with CT Smith Securities, Davidson said the large number of banks operating in the system has created structural inefficiencies, raising costs and diluting shareholder outcomes without materially improving access to long-term finance.

He described the sector as overbanked, arguing that a smaller number of digitally enabled institutions with leaner operating models would be better suited to support sustainable credit expansion.

While noting that a limited number of banks are likely to perform well over time, Davidson said the current structure creates space for digital and non-traditional players to serve customers more efficiently by bypassing legacy banking models.

Davidson also highlighted the absence of a scalable, low-cost mortgage intermediary as a key weakness. Drawing a comparison with India, he said the development of a long-term mortgage market there played a central role in expanding household consumption and supporting middle-class growth.

In contrast, he said Sri Lanka’s model of multiple banks competing to offer relatively high-cost mortgage products has constrained housing finance and kept credit penetration low, despite the availability of savings within the system.

According to Davidson, improving credit access and allocation will require not just macroeconomic stability, but structural changes that allow financial institutions to support long-term lending rather than compete inefficiently in short-term banking activity.

Last week, Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe said it has a Master Plan for the consolidation of banks and finance companies, with a strong focus on long-term sustainability and systemic stability.

Delivering the annual policy address, he noted that consolidation will enable banking and financial institutions to achieve the scale and balance sheet strength required to support large-scale and complex investments, which are critical to boosting investment activity and economic growth in the country. “Consolidation is also expected to facilitate greater investment in technology, promote financial inclusion, and foster healthy and sustainable competition within the financial system,” he said.