By: Staff Writer
October 26, Colombo (LNW): The Central Bank of Sri Lanka (CBSL) signaled its intention to push commercial banks toward lowering their interest margins, highlighting the need for greater competition and transparency in the financial sector as the economy stabilizes. Governor Dr. Nandalal Weerasinghe said the current net interest margin (NIM) of around 4 percent higher than the pre-crisis average of 3.5 percent must gradually decline in line with falling interest rates and the recovery of economic activity.
Despite reductions in the policy rates over the past year, Sri Lanka’s banking sector has posted exceptionally high profits. According to the CBSL’s 2025 Financial Stability Review, commercial banks reported a post-tax profit of Rs. 187.5 billion in the first half of 2025, compared to Rs. 111.8 billion during the same period in 2024 a 67.8 percent surge. Much of this improvement, the Governor explained, stemmed from the reversal of loan loss provisions made during the height of the financial crisis and debt restructuring process.
Dr. Weerasinghe noted that while both deposit and lending rates are on a downward trajectory, the net interest margin has expanded by about 0.5 percentage points due to the lag effect of monetary easing and banks’ cautious approach to adjusting rates. “We would like to see the net interest margin lower than the current level,” he said. “With improved competition and regulatory transparency, margins should normalize as the economy strengthens.”
To accelerate this adjustment, the Central Bank has mandated new disclosure and transparency measures through the Financial Consumer Relations Department (FCRD) regulations. These reforms are aimed at compelling banks to compete more aggressively on lending and deposit rates, reducing intermediation costs, and ensuring that the benefits of monetary easing reach consumers and businesses more effectively.
The Governor also pointed out that higher tax burdens and a still-elevated level of non-performing loans (NPLs) have contributed to maintaining wider spreads between lending and deposit rates. “The intermediation cost remains slightly higher, but as recovery gains pace and credit quality improves, we expect margins to compress naturally,” he added.
The Central Bank expects the narrowing of interest margins to benefit the broader economy by lowering borrowing costs for the private sector and stimulating investment-led growth. Analysts suggest that the policy stance will encourage banks to adopt more efficient lending practices and prioritize productive sectors over short-term profitability.
With steady disinflation, stable exchange rates, and a rebound in confidence, the CBSL’s strategy marks a decisive shift from crisis management to growth facilitation ensuring that the banking system supports, rather than constraints, the country’s economic revival.
