THE GOLD LOAN BOOM: WHAT THE NUMBERS SAY AND WHAT THEY DON’T

At the end of 2018, Sri Lanka’s licensed finance companies and specialised leasing companies held Rs. 43.9 billion in pawning advances. By the end of 2025, finance companies’ loans secured by gold stood at Rs. 465 billion which amounted to 20.9% of the sector’s loans and advances, after growing 64.1% in that year alone. Similarly, in Licensed Commercial banks pawning advances rose by Rs. 237.7 billion during 2025 and stood at Rs. 898 billion at the end of the year.

On the 24th of May 2026 the CBSL issued Direction No. 02 of 2026, capping the loan-to-value (LTV) ratio on credit secured by gold at 70% of the collateral’s market value, with effect from 25 May 2026. The cap applies to LCBs and finance companies, including existing facilities renewed on or after that date. In announcing the decision, the CBSL’s Governing Board pointed to the significant recent growth in gold-backed credit, and to elevated volatility in asset prices, including gold, alongside exchange rate fluctuations that may affect collateral valuations and the potential impact on the financial system if such trends continue.

While the growth in lending would usually be read as evidence of a credit boom, due to the nature of the collateral, it cannot necessarily be said so. When the rupee value of gold rises, the same chain or bangle can be used to obtain a larger loan, and the loan book grows without a single new borrower.

CBSL’s Annual Report in 2022 linked a 40% YoY rise in bank pawning to the difficulties the public faced amidst the rising cost of living, which resulted in more households turning to their jewellery. Pawning and gold loans also grew 77.5% YoY in finance companies in 2022, supporting loan growth while the leasing portfolio contracted under the continued restrictions on vehicle imports.

The exchange rate might also be a factor which aided in the growth of the gold loan book. Gold is traded internationally in dollars, so its rupee price moves with both the world gold price and the exchange rate. Between 2020 and 2022, the world gold price barely moved, rising less than 2% from US$ 1,770 to US$ 1,800 an ounce. The rupee, however, fell from an average of Rs. 186 to Rs. 325 per dollar. The indicative rupee price of gold (world gold price × USD/LKR annual average) rose by about 78%, almost entirely because of the currency, however during the same period finance company gold-backed loans tripled from Rs. 71.4 billion to Rs. 229.8 billion, though part of this increase reflects a change in the CBSL’s definition from December 2021.

* 2020 - 2022: pawning advances and gold loans of LFCs and SLCs (before December 2021, pawning advances only). 2023-2025: loans secured by gold of finance companies.

Source: CBSL, WGC

However, between 2022 and 2024, the data tells a different story. The world price rose to US$ 2,386.2 an ounce while the rupee strengthened to an average of Rs. 302. The indicative rupee price of gold rose by about 23%, and Finance company gold loans rose from around Rs. 230 billion to Rs. 284 billion, which is almost the same proportion.

In 2025, the world price averaged US$ 3,431 an ounce after setting record highs, while the rupee was broadly stable at an average of Rs. 301. During this time, while the indicative rupee price of gold rose by about 43% finance company gold loans grew by 64.1%. Thus, this time the book outpaced the gold price again. Thus, through the price itself whether the gap reflects more borrowers, more gold pledged per borrower, or a larger share of each sovereign’s value being lent cannot be ascertained.

2023 is the exception. The rupee was broadly stable on average at Rs. 327.53, and the indicative rupee price of gold rose by about 9%. Yet finance companies’ loans against gold contracted by 4.7%, even as commercial bank pawning rose from Rs. 411 billion to Rs. 547 billion. Thus whatever drove the 2025 surge was not a weaker rupee.

Source: CBSL

In 2022, finance companies’ pawning and gold loans grew by 77.5%, while the indicative rupee price of international gold rose by about 63%. Between 2022 and 2024, the two moved at broadly similar rates. In 2025, finance company gold lending grew by about 64%, against a rise of about 43% in the indicative rupee gold price. And in 2023, the relationship broke down altogether with the indicative price rising by about 9%, yet finance companies’ gold lending contracting by 4.7%. These comparisons suggest that collateral prices have played an important part in the expansion of gold-backed lending, however they are not a complete explanation. Also, it is important to keep in mind that annual average prices and year-end balances are not strictly comparable, thus, if at all, they indicate direction.

K Seeds Investments (KSI) publishes quarterly rankings of listed finance companies in Sri Lanka. The writer, Nimanga Shehan Senanayake is a Director of KSI (www.kseedsinvestments.com).