Margin loans issued by Sri Lanka’s banking sector have surged by nearly 25 percent—from Rs. 48 billion in January to Rs. 60 billion by August 2025 raising fresh concerns about growing speculative exposure in the financial system. The Central Bank’s latest Financial Stability Review confirms this increase, even as authorities attempt to balance post-crisis recovery with financial discipline.
According to B.H.P.K. Thilakaweera, Director of the Central Bank’s Macroprudential Surveillance Department, the sharp rise in margin lending reflects both investor optimism and increasing credit appetite amid a rebounding economy. Although Central Bank Governor Dr. Nandalal Weerasinghe downplayed the risk stating that margin credit remains a small share of total banking sector lending—analysts warn that the pace of growth could signal emerging vulnerabilities.
Margin loans, which allow investors to borrow against their equity portfolios to buy more shares, have historically amplified market cycles in frontier economies. With the Colombo Stock Exchange (CSE) rallying on the back of improved earnings, falling inflation, and restored investor confidence, the risk of over-leverage has increased. The Central Bank report notes that stock market volatility, measured by the 20-day moving standard deviation, has already exceeded 2024 averages, peaking in January 2025 the highest level since April 2022.
Such volatility, coupled with a sharp increase in leveraged positions, could expose both investors and banks to severe losses if markets correct sharply. The Review also highlights elevated geopolitical tensions ranging from global trade disputes to armed conflicts that have further intensified risk levels.
Economists caution that a sustained rise in margin lending without commensurate oversight could threaten broader financial stability. While corporate earnings and improved liquidity have driven a bullish sentiment, the same optimism may lead to speculative excesses if not closely monitored.
For depositors, the concern lies in potential contagion. If stock market corrections trigger defaults on margin loans, banks could face balance sheet pressures, particularly smaller ones with limited capital buffers. This, in turn, may weaken depositor confidence especially in a country with a history of monetary instability and periodic financial shocks.
The Central Bank faces a delicate policy challenge: supporting capital market growth while preventing excessive risk-taking. Experts suggest tightening margin lending guidelines, imposing higher risk weights on equity-backed loans, and enhancing transparency on exposure levels across financial institutions.
Sri Lanka’s experience underscores the fine line between economic recovery and speculative overheating. As the nation rebuilds confidence after years of instability, maintaining macroprudential discipline will be key to avoiding another cycle of financial distress.
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