Sri Lanka’s banking sector sees cautious optimism, but Trump-era tariffs pose risks to recovery and lending momentum
Sri Lanka’s Loan Growth Faces Crosswinds from Global Tariff Tensions
Sri Lanka’s banking sector is poised for a modest rebound in loan growth, with projections showing a 6% year-on-year (y-o-y) increase by the end of 2025, according to a new report from BMI Research, a division of Fitch Solutions. This marks a recovery from the 4.3% y-o-y growth expected at the close of 2024—but the outlook remains fragile.
The forecast comes with a strong caveat: the impact of U.S. trade policy. President Donald Trump’s reintroduced tariff policy—currently paused for a 90-day negotiation window—could become a major disruptor to Sri Lanka’s economic trajectory and lending capacity.
Cautious Optimism Tempered by Tariff Threats
BMI Research acknowledged that achieving the 6% loan growth target “will not be easier,” particularly if the proposed 44% U.S. tariff rate on Sri Lankan exports is fully enforced. “This new trade dynamic has already forced us to revise GDP projections,” the firm noted.
Their updated forecast now places Sri Lanka’s GDP growth at 3.5% for 2025, down from the earlier 4%. In a worst-case scenario, where the full 44% tariff is implemented after the 90-day grace period ends, GDP growth could slump to just 3%, putting downward pressure on loan growth and financial sector stability.
The firm assumes a more moderate scenario for now, expecting negotiations to reduce tariffs to around 22%, which would still present challenges but may allow the economy—and bank lending—to maintain a growth trajectory.
Domestic Lending Trends Show Positive Momentum
Despite external pressures, domestic lending trends in Sri Lanka remain encouraging. According to Central Bank data, private sector credit expanded by Rs. 345.6 billion during the first four months of 2025, reflecting a 4.3% y-o-y increase.
Net loans and receivables in the banking sector rose by 8.2%, reaching Rs. 10.7 trillion by the end of March. Meanwhile, the Stage 3 loans ratio, which indicates non-performing loans, slightly improved to 12.7%—down from 12.9% a year earlier.
Outlook: Policy Stability Needed to Sustain Loan Growth
While these figures suggest resilience within the banking sector, much depends on how the geopolitical trade environment evolves. A favorable resolution to the tariff issue could provide breathing room for Sri Lankan banks to extend more credit and support broader economic recovery.
For now, the 6% loan growth target is both a sign of cautious optimism and a reminder of how deeply interconnected Sri Lanka’s financial outlook is with global policy shifts—especially from the U.S.