The Central Bank of Sri Lanka has released its annual Financial Stability Review (FSR) for 2025, which provides an assessment of the stability of the financial system, identifies and evaluates the associated risks and vulnerabilities, and outlines the policy measures implemented by the Central Bank and other regulatory authorities.
This statutory report has been published in terms of Section 70(1) of the Central Bank of Sri Lanka Act, No. 16 of 2023.
A summary of the FSR 2025 and the financial stability outlook is as follows;
1.The resilience of the financial sector improved during the first half (H1) of 2025 compared to H1 of 2024. This was supported by favourable developments in domestic macroeconomic conditions amidst heightened global uncertainty and lingering effects of the economic crisis experienced in the recent past.
2.The stress in the financial markets, as reflected by the Financial Stress Index (FSI), remained subdued during the eight months ending August 2025, as overall market conditions improved compared to the corresponding period of 2024.
3.Amidst the recovery in macroeconomic conditions, the resilience of the banking sector improved as reflected through profitability, capital adequacy, efficiency, asset quality, and resilience to market risk indicators. This was reflected in the performance of the Banking Soundness Index.
4.The FCs sector recorded a strong credit expansion during H1 of 2025. Increase in credit growth of the sector was driven by the expansion in vehicle and gold-backed facilities amidst the removal of restrictions on vehicle imports, increased gold prices, and lower market interest rates.
5.Credit to both Household2 and Institutional3 sectors reported an expansion during H1 of 2025. This growth in credit was supported by lower market interest rates and an improvement in macroeconomic conditions.
6.The Central Bank took an array of policy measures to support financial system stability during the period. The momentum in macroeconomic recovery along with ongoing fiscal consolidation is expected to improve the stability of the financial sector.
7.The performance of both banks and FCs is also expected to improve with the envisaged increase in credit supporting productive economic activities, while the credit quality of the sector and impairment coverage for Stage 3 Loans require close monitoring to strengthen the resilience of the sector.
The Central Bank says, thus, going forward, financial system stability is expected to be maintained, with continued improvements in the macroeconomic conditions.
The publication can be accessed through the Central Bank website;