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South Asia

Sri Lanka: Banks start the countdown to consolidation

Thanks to new capital and accounting rules, higher costs and increased competition, the island’s cosy banking sector is heading for a long overdue shake-up.

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For a frontier economy of $87 billion, with moderate growth and just 21 million people, Sri Lanka has far too many banks.

Customers have a choice of 25 commercial lenders, seven specialists and 47 non-banks. 

The bigger players include state-owned Bank of Ceylon (BoC) and People’s Bank, as well as private-sector lenders Sampath Bank and Hatton National Bank (HNB). Then there are the banks that began life as development outfits before switching to commercial lending (National Development Bank), Islamic finance specialists (Amana Bank) and lenders run by big conglomerates (Cargills Bank).

This over-banked market is ripe for a shake-up. New regulatory and accounting requirements, tougher competition and disruptive technology will force Sri Lanka’s banks to find cost savings and tap local markets for fresh capital. Smaller or struggling lenders that cannot – or will not – do so may well find themselves swept away, analysts warn, by a wave of much-needed consolidation.

Ratios up

In June 2017, the Central Bank of Sri Lanka said that all licensed lenders would have to meet new minimum capital standards, in line with Basel III guidelines, while any systemically important lender with more than SLRs500 billion ($3.2

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