Sri Lanka entered 2026 with materially stronger macroeconomic and banking-sector conditions than during the 2022–2023 crisis period. The easing cycle through 2025 reduced market rates and supported a marked recovery in private-sector credit. That position changed in early 2026, when heightened Middle Eastern tensions, higher petroleum prices, stronger domestic demand, and credit-driven imports led the Central Bank of Sri Lanka (CBSL) to raise the Overnight Policy Rate by 100 basis points to 8.75%. Headline inflation, measured by the Colombo Consumer Price Index, reached 8.0% year-on-year in August 2026, compared with 7.3% in July.

The loan market has therefore moved from rapid re-expansion into a more selective phase. Banks are continuing to lend, but pricing, tenor, debt-service capacity, and interest-rate sensitivity are receiving greater scrutiny. The CBSL has also used macroprudential measures; from May 2026 it introduced a 70% maximum loan-to-value ratio for gold-backed lending and tightened motor-vehicle LTV limits.

Further, the non-performing loan (NPL) recoveries have reportedly accelerated, taking industry NPL down to 6.1% (historical low), which is probably due to the re-introduction of parate execution by banks.

Sri Lanka is particularly exposed to global conflicts through fuel, freight, food, and other imported-input prices. The escalation of tensions in the Middle East in 2026 materially affected petroleum prices and contributed to the CBSL’s May 2026 policy-rate increase. For borrowers, this has translated into higher refinancing risk and greater sensitivity to floating-rate debt, particularly in import-dependent, transport, manufacturing, construction, and consumer-facing sectors.

Borrowers who borrow in foreign currencies also have to contend with the foreign currency fluctuations, and risks arising from reduced foreign currency earnings. Nevertheless, the banking system entered this period with improved capital, liquidity, and asset-quality indicators, so the present situation is one of repricing and more disciplined underwriting rather than a withdrawal of bank credit.

The loan market is facing a rising interest rate environment following CBSL’s decision to increase its policy rates in May 2026. Market lending rates have subsequently increased, with the six-month average of the average weighted prime lending rate (AWPR) standing at approximately 10.09% in August 2026. Notwithstanding the higher interest rate environment, credit growth remains robust, with CBSL data indicating year-on-year growth in the loan market of approximately 24.7% as at the end of June 2026.

Sri Lanka does not have a deep high-yield debt market comparable with those in the United States or Europe. The domestic government bond market forms the core of Sri Lanka’s debt market.

Lower-rated and growth-stage borrowers continue to rely principally on secured bank lending, shareholder funding, private placements of debentures, private equity, and in appropriate cases, subordinated or mezzanine-type capital.

Public corporate-debt issuance exists, but the domestic investor base and secondary-market liquidity remain comparatively limited. Accordingly, the principal effect of higher-risk credit on financing terms is seen through pricing, security coverage, tenor, amortisation, sponsor support, and financial covenants rather than through a distinct high-yield documentation standard.

Gold-backed and vehicle lending have been important higher-margin retail products, but they should be distinguished from a high-yield securities market. The CBSL’s 2026 LTV measures for those asset classes also demonstrate the increasingly active use of macroprudential tools where credit expansion is concentrated.

Sri Lanka’s alternative credit providers include Islamic banks and Islamic banking windows, finance companies, microfinance providers, and the informal sector. Sri Lanka has one fully fledged Islamic bank, Amana Bank PLC, which commenced operations in 2011 and has grown steadily, with total assets rising from approximately LKR14.5 billion in 2011 to LKR215.2 billion as at 30 June 2025. In addition, several licensed commercial banks, including Bank of Ceylon, Commercial Bank, HNB, NDB, and MCB Bank, as well as a number of finance companies, operate Islamic banking or finance units. With the reopening of vehicle imports, credit provided by banks and finance companies has grown significantly, particularly in vehicle-backed lending. Islamic leasing (Ijarah) is popular for vehicle financing.

The introduction of Islamic banking products in Sri Lanka has created a need to develop banking and financing documentation that complies with local legal and regulatory requirements while also being Sharia-compliant. There is no uniformity in the documentation used by different institutions, unlike conventional banking products, particularly because institutions may structure similar products using different Islamic financing concepts, while all such transactions remain subject to the laws and regulatory framework of Sri Lanka. Sharia principles do not constitute a separate governing commercial-law regime in Sri Lanka, and Islamic banking operations are therefore conducted within the existing statutory and regulatory framework applicable to banks and financial institutions.

In respect of the microfinance sector, several large banks and finance companies provide microfinance schemes, while microfinance institutions provide microcredit. In addition, co-operative societies and community-based credit associations operate at grassroots level. The recently enacted Microfinance and Credit Regulatory Authority Act, No 9 of 2026, provides for the establishment of a new regulatory authority and a more comprehensive framework for the regulation of microfinance and money-lending businesses.

Nevertheless, apart from larger refinancing schemes funded under government or international institutional credit lines, individual credit amounts are generally small and the documentation is relatively standardised and limited.

For larger transactions, private equity, shareholder loans, and structured subordinated funding are increasingly relevant where conventional leverage is constrained, but they remain bespoke rather than standardised substitutes for bank debt.

Sri Lankan financing techniques are evolving primarily through more sophisticated structuring rather than wholesale displacement of conventional bank products. In the corporate credit sector, traditional overdrafts, import and export facilities and short-term loans continue to predominate. However, financing arrangements increasingly incorporate additional terms, covenants and monitoring mechanisms. For example, conditions relating to sustainable development, ESG considerations, and green financing are becoming increasingly relevant to credit assessment.

In the personal lending market, particularly housing finance, banks have supplemented traditional equated instalment structures with repayment arrangements linked to borrowers’ anticipated future cash flows. Thus, young professionals whose income is expected to increase as their careers progress may take advantage of step-up repayment schemes under which instalments increase in line with projected income growth.

Project and acquisition financing transactions commonly use special-purpose companies and, where appropriate, holding-company structures. In particular, such structures are commonly used in the renewable energy and real estate sectors. This is influenced by the restrictions imposed on foreigners and foreign-owned companies acquiring land under the Land (Restrictions on Alienation) Act, No 38 of 2014, as amended. The restriction applies to a Sri Lankan company where direct or indirect foreign shareholding is 50% or above, subject to some limited exemptions. Accordingly, real estate investors may use locally controlled landholding structures supported by shareholders’ agreements and long-term leasing arrangements with foreign investors.

Preference equity has also been used in development-finance structures in Sri Lanka, with investments combining preference shares and medium- or short-term lending. Currently, such structures are more commonly associated with venture capital, private equity, and structured investments. Sri Lankan company law permits different classes of shares, including shares carrying preferential distribution rights and special or limited voting rights. The rights and protections attaching to preference shares are typically set out in the terms of issue and the articles of association of the investee company.

Sustainable finance has moved from policy aspiration to a more integrated supervisory and product-development framework. The CBSL introduced its first Sustainable Finance Roadmap in 2019, followed by the Sri Lanka Green Finance Taxonomy in May 2022 and sustainability-related directions for licensed banks. In May 2025, the CBSL launched Sustainable Finance Roadmap 2.0 for 2025–2029, placing greater emphasis on climate resilience, social inclusion, environmental and social risk management, disclosures, governance and co-ordination across banking, non-bank finance, capital markets, and insurance.

This is increasingly relevant to renewable energy, infrastructure, water, agriculture, export manufacturing, and other transition-sensitive sectors. Lenders are integrating environmental and social due diligence, controls on use-of-proceeds, and monitoring obligations into credit processes. Sri Lanka’s first blue-bond issuance in late 2025 also illustrates increasing market interest in labelled sustainable instruments. The practical challenge is ensuring that eligibility criteria, reporting, and performance claims are sufficiently measurable to manage greenwashing and compliance risk.

In Sri Lanka, the authorisation required to provide financing depends principally on the nature of the lender and whether it is carrying on a regulated financing business in Sri Lanka.

A bank carrying on banking business in Sri Lanka must be licensed under the Banking Act, No 30 of 1988, as amended. Banking business may be conducted by a licensed commercial bank or, within the permitted scope of its licence, a licensed specialised bank. Licensing and ongoing supervision are administered by the CBSL. An applicant must satisfy statutory and prudential requirements relating to matters such as capital, ownership, management, governance, fitness and propriety, risk management, and operational capability. A foreign bank wishing to conduct banking business through a Sri Lankan branch must likewise obtain the requisite banking licence and comply with branch office registration requirements under the Companies Act, No 07 of 2007.

Non-bank entities that accept deposits from the public and lend or invest those funds ordinarily fall within the Finance Business Act, No 42 of 2011, and must be licensed by CBSL as licensed finance businesses. An applicant must, among other matters, be incorporated as a public company, satisfy the minimum core-capital requirement prescribed by CBSL, demonstrate its ability to comply with applicable prudential directions and rules, and submit the prescribed application and supporting information to CBSL. Finance leasing is separately regulated under the Finance Leasing Act, No 56 of 2000, and requires registration where applicable.

The provision of a loan from a lender’s own funds does not, merely by itself, constitute regulated “finance business” under the Finance Business Act. However, the Microfinance and Credit Regulatory Authority Act, No 9 of 2026, establishes a licensing regime for money-lending businesses.

An overseas lender providing financing to a Sri Lankan company from outside Sri Lanka does not ordinarily require a Sri Lankan banking or finance company licence merely by making that loan. The borrowing must nevertheless comply with the Foreign Exchange Act, No 12 of 2017, and regulations made under it, including applicable permitted borrowing routes, designated account requirements, and any sector-specific approvals.

Ordinary companies may provide intra-group, trade or isolated financing, but carrying on a regulated finance business requires the relevant statutory authority.

Foreign lenders may lend to Sri Lankan companies, subject to the Foreign Exchange Act, No 12 of 2017 (FEA), the regulations made under it, and directions issued by the Department of Foreign Exchange of the CBSL.

Foreign Exchange Regulations No 2 of 2021, read with Direction No 19 of 2021, provides a framework for external commercial borrowings by eligible Sri Lankan companies. The applicable method differs for regulated financial institutions, state entities, or specially approved projects. Foreign lenders should therefore verify the current FEA regulations and directions at signing and before each material remittance.

The borrowings and loan proceeds must be routed through an External Commercial Borrowings Account (ECBA) maintained by the borrower with an authorised dealer, usually a licensed commercial bank. In addition, all repayments relating to such loans, including interest payments, must also be routed through the ECBA.

The authorised dealer must be furnished with copies of the relevant documentation, together with the requisite corporate approvals and an affidavit from the borrower confirming that the loan proceeds and repayments will be routed through the same ECBA. The financing agreement must therefore be structured not only as a matter of contract but also to ensure that drawdowns, debt service, fees, and other remittances can lawfully be processed through the banking system.

Sri Lankan law does not impose a blanket prohibition on security or guarantees in favour of foreign lenders. The position depends on the type of security, the identity of the borrower or security provider and the applicable FEA regulations and directions governing the underlying foreign borrowing. Subject to approval from CBSL/Department of Foreign Exchange, external commercial borrowing structures can accommodate security and guarantees where the relevant requirements are satisfied.

The security must also comply with the perfection requirements under Sri Lankan law. Mortgages over land must be executed by notarial instrument and registered with the relevant Land Registry. Security over movable property should be perfected by registration under the Secured Transactions Act, No 17 of 2024. Where the security constitutes a charge created by a company, the requirements of the Companies Act, No 7 of 2007, as amended, must also be complied with, in addition to registration under the Secured Transactions Act.

Enforcement of corporate guarantees or mortgaged assets is subject to court procedure, and the proceeds and remittances to a non-resident must comply with the FEA. Land ownership restrictions may affect the manner in which a foreign lender realises real property, so enforcement structures should be considered when security is first taken.

Sri Lanka has liberalised most current-account transactions, while capital transactions remain regulated under the FEA and subsidiary regulations and directions. The framework uses designated bank accounts and documentary controls for foreign investment, external borrowings, outward investment, and repatriation. The Investment Inward Account and External Commercial Borrowings Account are important examples.

Following the severe foreign-exchange shortages of 2022, a number of temporary capital-flow management measures were imposed. As reserves and external conditions improved, the CBSL progressively relaxed several measures during 2024–2025, including restrictions affecting imports and certain foreign-exchange transactions.

Restrictions in Respect of Currency

• Persons in or resident in Sri Lanka may retain foreign currency notes up to USD10,000 or its equivalent, subject to applicable requirements.
• Foreign currency notes issued or withdrawn for travel are generally limited to USD5,000 per person. However, there is no general limit on the amount of foreign exchange that may be carried. Foreign exchange exceeding USD15,000 must be declared on arrival or departure, while foreign currency notes exceeding USD10,000 must also be declared on arrival, where they are intended to be taken back out of Sri Lanka.

Credit/Debit Cards

• Electronic fund transfer cards may be used to make overseas payments for permitted current transactions, including medical and educational expenses.
• Such cards may not be used for foreign-exchange trading, virtual-currency transactions, or betting, gaming, or gambling outside Sri Lanka. Their use for capital transactions depends on the applicable foreign-exchange permissions.

Payments for Acquisitions of Real Estate and Shares by Foreigners

• Non-residents may invest in shares of Sri Lankan companies and other permitted investments by remitting funds through an inward investment account (IIA) opened with a licensed bank in Sri Lanka. Foreigners may also acquire condominium parcels, subject to the entire purchase price being remitted from abroad. Income and capital proceeds may generally be repatriated through the same IIA.

Outward Investments

The Foreign Exchange (Overseas Investments Made by Persons Resident in Sri Lanka) Regulations No 1 of 2026 now govern overseas investments. As at September 2026, the current Order under Section 22 of the Foreign Exchange Act also restricts outward remittances through Outward Investment Accounts. At present:

• companies listed on the Colombo Stock Exchange may make qualifying direct investments overseas up to USD750,000 or 20% of net assets, whichever is lower; and
• unlisted Sri Lankan companies or bodies corporate may make such investments up to USD200,000 or 20% of net assets, whichever is lower.

Separate rules apply to other permitted categories, including qualifying employee share plans.

Loan proceeds may generally be applied for the commercial purposes specified in the financing documents, subject to any sector-specific restrictions. An external commercial borrowing must comply with the permitted purposes, tenor, account, and documentary requirements applicable under the relevant regulations and directions. Proceeds used for imports, capital expenditure or payments to non-residents must also comply with the foreign-exchange and import/payment rules applicable to those transactions.

Regulated borrowers, listed entities, and project companies may also be constrained by sector licences, concession agreements, investment approvals or financing covenants. For project finance, the use of proceeds is typically tied closely to an agreed budget, eligible project costs and disbursement conditions, with direct payment or controlled-account mechanisms for material expenditure.

Sri Lankan syndicated financings may use an agent to administer the facility and, where commercially appropriate, a security trustee to hold and enforce security for the finance parties. Trust concepts are recognised under Sri Lankan law, and a properly constituted security trust can facilitate changes in the lender group without requiring the underlying security to be released and retaken on each transfer.

The precise structure depends on the asset and perfection regime. Land mortgages, company charges, and security over movable property each have statutory formalities that must be reconciled with the agency/trust mechanism. In domestic bilateral transactions, security is commonly taken directly in the lender’s name. In larger club or syndicated facilities, agency and security-trust provisions are increasingly used to centralise notices, voting, enforcement proceeds, and intercreditor arrangements.

Loans may be transferred by cession or assignment, novation or other mechanisms provided in the finance documents. A cession or assignment ordinarily transfers the lender’s contractual rights, but not its continuing obligations, and generally does not require borrower consent unless otherwise provided in the finance documents or the relevant right is not transferable. Where both rights and obligations are to pass, the transfer is ordinarily effected by novation, requiring the necessary agreement to substitute the incoming lender for the outgoing lender. Facility agreements commonly regulate such transfers and may require, waive or qualify borrower consent for specified transferees.

The associated security must be considered separately, as transfer of the loan does not necessarily transfer or perfect the security. Assignment or transfer of a land mortgage ordinarily requires a notarial instrument and registration at the Land Registry. Security over movable property is subject to the Secured Transactions Act, No 17 of 2024, and registration as provided therein. Changes affecting charges registered by a company will require appropriate corporate actions, and registration with the Registrar General of Companies as well as under the Secured Transactions Act, No 17 of 2024.

Syndicated structures using a security trustee can reduce the need to re-perfect security whenever the lender group changes. Cross-border transfers should additionally consider the provisions of FEA applicable to the incoming lender and the account through which repayments will be made.

Debt buybacks are generally permissible, but the applicable process depends on the instrument and the borrower’s constitutional and contractual arrangements, particularly where a buyback benefits a shareholder or related party.

Bilateral or syndicated loans may be prepaid or repurchased if the facility documents permit it, subject to prepayment fees, break costs, pro rata sharing provisions, and any restrictions on borrower or sponsor affiliates becoming lenders. For bonds or debentures, early redemption or repurchase is governed by the issue terms, trust deed, Companies Act requirements and, for listed instruments, Colombo Stock Exchange and Securities and Exchange Commission rules.

Where external debt is repurchased, such repurchase must be effected subject to the provisions of the FEA, and the regulations made thereunder, with all payments being made through the relevant foreign-exchange account. In distressed situations, debt buybacks may also raise intercreditor, disclosure, market-abuse and equal-treatment issues, requiring careful structuring rather than being treated as a simple bilateral repayment.

Sri Lanka does not have a separate statutory “certain funds” regime equivalent to that applicable in some other jurisdictions. However, in the case of a mandatory offer for a listed public company, the Company Take-overs and Mergers Code 1995, as amended in 2003, imposes a similar requirement. No person may incur an obligation to make a mandatory offer unless that person has sufficient financial resources to implement the offer in full. A person who incurs such an obligation must, within three market days, submit to the SEC an affidavit, with supporting documents, demonstrating the ability to implement the offer in full. The offer must also include confirmation from the offeror’s financial adviser that sufficient resources are available to satisfy full acceptance of the offer.

These requirements are not generally mandatory in private acquisition finance transactions. In such transactions, certainty of funding is principally a contractual matter and the extent of any “certain funds” provisions depends on the transaction and the parties. Sri Lankan law does not prescribe either short-form or long-form acquisition-finance documentation; commitment or interim documentation and full facility and security documents may be used depending on the transaction timetable and complexity.

Takeover announcements and offer documents are subject to SEC approval and are publicly disseminated. Recent mandatory-offer documents published through the CSE include confirmations from the offeror’s bank or financial adviser as to the availability of sufficient financial resources. Financing documents are not generally publicly filed as part of the takeover process, although instruments creating registrable charges are subject to registration under the Companies Act and the Secured Transactions Act, as well as the inspection requirements of the Companies Act.

Two recent reforms have materially affected finance documentation and due diligence. First, the Companies (Amendment) Act, No 12 of 2025, introduced a beneficial-ownership reporting regime for companies. This necessitates the maintenance of information pertaining to the ultimate beneficial owners of companies and regular filings with the Registrar General of Companies.

Secondly, the Secured Transactions Act, No 17 of 2024, created a modern statutory framework for security rights in movable property, including the Secured Transactions Registration Authority and an electronic Register of Security Rights in Movable Property maintained through the Credit Information Bureau of Sri Lanka. The system became operational in 2025. Security-taking and due diligence for receivables, inventory, equipment and other movable assets now require attention to the Act’s rules on creation, perfection, registration, and priority. Banks are also updating documentation for the CBSL’s enhanced governance, recovery-planning, outsourcing, cybersecurity and operational-risk requirements.

There is no single general interest-rate cap applicable to all corporate lending in Sri Lanka. However, section 5 of the Civil Law Ordinance provides that the amount recoverable as interest or arrears of interest shall not exceed the principal; this limitation does not apply to interest recoverable in banking transactions. In the case of other lenders, including finance companies, the position may depend on the nature of the transaction and the applicable statutory regime; for example, qualifying lending institutions may, in proceedings under the Debt Recovery (Special Provisions) Act, recover interest exceeding the principal.

In addition, CBSL has statutory powers to prescribe maximum interest rates and other charges applicable to regulated financial institutions, including licensed finance companies, although no general maximum lending rate is presently imposed on all such lending. The Microfinance and Credit Regulatory Authority likewise has power under the Microfinance and Credit Regulatory Authority Act, No 9 of 2026, to prescribe maximum interest rates, commissions, fees, penalties, and other charges applicable to its licensees.

Financial contracts are subject to different disclosure requirements depending on the parties and transaction. Charges created by a company over its assets must be registered under the Companies Act and the Secured Transactions Act, No 17 of 2024. Further, security rights in movable property require registration under the Secured Transactions Act. These registers are used for public notice and priority purposes.

Listed companies are also subject to Colombo Stock Exchange and Securities and Exchange Commission disclosure requirements for price-sensitive information, material transactions, related-party transactions and listed debt. Quarterly financial statements and annual reports are also required to be submitted to the Colombo Stock Exchange, where they are available to the public. Such annual reports typically contain the audited annual financial statements together with disclosures relating to specified financial transactions, in accordance with the applicable accounting and auditing standards.

A transaction constituting a “major transaction” under Section 185 of the Companies Act requires the prescribed shareholder approval unless an exception applies. Banks and regulated financial institutions additionally make prudential and regulatory disclosures under CBSL directions. Confidentiality provisions in finance documents therefore need to accommodate compulsory regulatory and market disclosures.

Repayment of loan principal is generally a return of capital and is not itself subject to withholding tax. Under the Inland Revenue Act, No 24 of 2017, as amended, interest or discount having a source in Sri Lanka is generally subject to withholding/advance income tax at 10% from 1 April 2025. However, interest paid to a financial institution on ordinary loans and advances provided by that institution is not subject to such withholding.

For cross-border loans, the applicable source rules and any relief available under a double-tax treaty should also be considered. The statutory definition of “interest” is broad and includes premiums, payments functionally equivalent to interest and commitment, guarantee or service fees paid in respect of a debt obligation. Accordingly, the withholding treatment of financing fees and other payments should be determined by reference to their characterisation, the identity of the lender and any applicable treaty relief.

Financing transactions may attract several taxes and transaction costs depending on their structure.

VAT on financial services is imposed on the value addition attributable to financial services at 20.5% with effect from 1 July 2026. Financial services subject to VAT at this rate are exempt from the Social Security Contribution Levy (2.5%). These taxes are principally imposed on the provider of financial services rather than as conventional VAT charged as a separate line item on each loan instalment.

Certain security instruments may also attract stamp duty, notarial fees, and registration fees. A bond or mortgage for a definite and certain sum of money affecting property is currently subject to stamp duty of LKR1 per LKR1,000 or part thereof. Land mortgages additionally require notarial execution and registration at the relevant land registry, while company charges are subject to applicable corporate registration requirements and fees. Tax deductibility of financing costs is subject to the financial-cost limitation under the Inland Revenue Act, and related-party financing may also be subject to transfer-pricing rules prescribed under the said Act.

Foreign lenders should consider Sri Lankan withholding tax on interest and other financing payments, applicable source rules, treaty relief and whether their activities could create a taxable permanent establishment or other Sri Lankan tax presence. Sri Lankan tax law does not generally distinguish between money-centre and other banks for these purposes. The lender’s jurisdiction and legal form may, however, affect whether it qualifies as a “financial institution”, the availability of the exemption for interest on ordinary loans and advances, and access to treaty benefits. Finance documents therefore commonly contain tax gross-up and tax-indemnity provisions, together with obligations to co-operate in obtaining available treaty or statutory relief.

Borrowers should also consider the deductibility of financing costs, the statutory financial-cost limitation and transfer-pricing requirements for related-party debt. The statutory definition of “interest” is broad and includes commitment, guarantee, and service fees paid in respect of a debt obligation. Where an intermediary or special-purpose financing vehicle is used, treaty eligibility, ownership, and commercial substance should therefore be carefully considered.

Types of assets typically available to lenders as security in Sri Lanka include:

• land and buildings;
• machinery and equipment, whether fixed to the land or otherwise;
• stocks, inventory, and book debts or receivables;
• other movable property; and
• shares in companies.

Security (including over land) is generally created by a mortgage bond.

Under Section 2 of the Prevention of Frauds Ordinance, a mortgage affecting land or other immovable property must be in writing, signed by the relevant parties, and duly attested by a notary public. The mortgage should also be registered at the relevant Land Registry. Where a debt is secured by a mortgage of land, Section 46 of the Mortgage Act generally limits recovery in an action upon the mortgage to the mortgaged property. However, in the case of a qualifying mortgage in favour of a lending institution, the mortgagor may execute the separate declaration contemplated by Section 47A, renouncing that protection, thereby permitting recourse to other property of the mortgagor after the mortgaged property has first been realised.

Security over movable property is now principally governed by the Secured Transactions Act, No 17 of 2024. A security right may be created by an agreement describing the collateral and may cover machinery, inventory, receivables, deposit accounts, and other movable or intangible property. Security rights may generally be perfected by registration in the electronic Secured Transactions Register and, for specified assets, by possession. Registration also determines priority between competing registered security rights. An unperfected security right may lose priority and is ineffective against a liquidator if it remains unperfected when the winding-up order is made.

Where listed shares are offered as security, they are dealt with through the Central Depository Systems (CDS) collateral-account procedures applicable to lending transactions. The CDS requires, among other matters, the relevant facility agreement and authority granted by the shareholder to the lending bank. Intermediated securities credited to a securities account are excluded from the Secured Transactions Act.

Where the security provider is a company, charges falling within Section 102 of the Companies Act, No 7 of 2007, must be registered with the Registrar of Companies within 21 working days where the instrument is executed in Sri Lanka, or within three months where it is executed outside Sri Lanka. An unregistered charge is void against the liquidator and creditors, and the secured money becomes immediately payable. In addition, following the Companies (Amendment) Act, No 23 of 2024, a floating charge over movable property must be registered under the Secured Transactions Act, No 17 of 2024, and its priority is determined in accordance with that Act. Where a floating charge includes land, the applicable land-registration requirements also continue to apply.

Movable-security documentation and electronic registration can generally be completed relatively quickly once the asset information is available. A land mortgage ordinarily takes longer, often around two to three weeks in practice, because title and encumbrance searches must first be completed. Costs comprise legal and notarial fees, registration fees and applicable stamp duty. A bond or mortgage securing a definite and certain sum is presently subject to stamp duty of LKR1 per LKR1,000 or part thereof. These costs are ordinarily borne by the borrower.

In addition, banks generally have contractual and common-law rights of set-off against deposits maintained by the borrower with the same bank. Where cash collateral is specifically taken, it is customary to obtain a letter of set-off creating an express right over the relevant deposit.

Sri Lankan company law recognises floating charges over the whole or part of a company’s undertaking and assets, including classes of present and future property. A floating charge is useful where the borrower must continue to deal with circulating assets in the ordinary course of business until crystallisation. It is commonly supplemented by fixed security over key assets such as land, identified machinery, bank accounts, or shares.

The practical effectiveness of a charge over all assets depends on compliance with the perfection regime applicable to each asset. Charges must be registered under the Companies Act, as well as, under the Secured Transactions Act, No 17 of 2024. Priority may differ between fixed and floating security, and preferential claims can affect recoveries from assets subject to a floating charge in insolvency.

Sri Lankan companies may generally give downstream, cross-stream, and upstream guarantees, subject to their constitutional documents, directors’ duties, solvency, and the Companies Act rules on financial assistance and distributions. Downstream guarantees are common and are commonly used by banks. Upstream and cross-stream support require closer scrutiny because the commercial benefit to the guarantor may be less direct.

Directors should record the corporate benefit and proper purpose for entering into the guarantee and consider whether the company remains solvent after assuming the contingent liability. If the guarantee supports an acquisition of shares in the guarantor or its holding structure, the financial-assistance provisions under the Companies Act will apply. Lenders commonly mitigate these risks through board and, where appropriate, shareholder approvals, solvency certificates, limitation language, and representations concerning corporate benefit.

Depending on the nature, type, and extent of the guarantee, a guarantee proposed to be provided in favour of a non-resident may require the prior approval of the Department of Foreign Exchange of the CBSL under the FEA, and the regulations and directions issued thereunder.

Sections 70 and 71 of the Companies Act regulate financial assistance in connection with the acquisition of a company’s own shares. There is no absolute prohibition. A company may provide financial assistance if, before providing the assistance, the board resolves that:

• the assistance is in the interests of the company;
• the terms of the assistance are fair and reasonable to the company and to any shareholders who are not receiving the assistance; and
• the company will satisfy the solvency test immediately after the assistance is provided.

The type of assistance that may be provided is broad and can include loans, guarantees, security, and other assistance.

The principal additional restrictions arise from asset-specific laws, corporate approvals, and regulatory consents. State land, land held under grants or permits and certain leasehold interests require the consent of the relevant governmental authority before mortgage or assignment. Regulated entities may require the consent of the CBSL or the relevant sector regulator before granting material security or guarantees, entering into related-party exposures, or disposing of material assets. Project assets may also be subject to restrictions under applicable concessions, licences, or offtake agreements on their assignment or encumbrance.

For land security, lenders generally require satisfactory title, a current survey where appropriate, planning/building approvals, and evidence of lawful construction and use. These are often prudential or title requirements rather than conditions imposed by a single statute. Cross-border security must also be reviewed under the FEA.

Transaction costs include notarial fees, registration charges, valuation, registry search, and stamp-duty expenses.

Security is released in the form required by the instrument and the applicable registry. A land mortgage is discharged by the lodging of a notarial release at the registry so that the release is reflected against the registered instrument. Possessory security requires the secured party to return the collateral or control documents, while account security and contractual set-off arrangements are released by written notice or agreement.

Where a company charge has been registered, the appropriate satisfaction or release filing should be made with the Registrar of Companies. Security registered under the Secured Transactions Act should also be discharged or amended on the electronic register in accordance with that Act.

In syndicated transactions, the security trustee normally executes releases following the agent’s confirmation that the secured obligations have been discharged. Partial releases should be documented carefully to preserve the lender’s remaining security and priority.

Priority depends on the nature of the asset and the applicable perfection regime. For land mortgages, priority is principally determined under the Registration of Documents Ordinance, under which an unregistered instrument may be void against a subsequent duly registered instrument acquired for value. For movable property, the Secured Transactions Act, No 17 of 2024, contains detailed priority rules, generally based on the method and timing of perfection. As between competing security rights perfected by registration, priority generally follows the date of registration, subject to specific statutory exceptions.

Contractual subordination is commonly effected through intercreditor or subordination agreements and may regulate payment priority, turnover, enforcement standstill, and voting rights. Section 45 of the Secured Transactions Act expressly permits a secured party to subordinate its security right to another interest by agreement, with the subordination taking effect according to its terms. Such arrangements cannot, however, override mandatory statutory priorities applicable to third parties.

Contractual subordination can survive the insolvency of a Sri Lankan company. Section 366(3) of the Companies Act expressly provides that an agreement entered into before winding-up under which a creditor accepts a lower priority may take effect according to its terms.

Sri Lankan law recognises certain statutory claims and security interests which may take priority over a lender’s security. Amounts due by an employer under the Employees’ Provident Fund Act and Employees’ Trust Fund Act constitute first charges on the employer’s assets. Tax in default also gives rise to a statutory lien under the Inland Revenue Act, subject to protections afforded to certain security interests. In addition, a lien over goods arising from materials or services provided in the ordinary course of business may, under the Secured Transactions Act, have priority over a perfected or unperfected security right. A fixed security arising by operation of law also generally ranks ahead of a floating charge. Preferential claims in a winding-up may also rank ahead of a floating-charge holder.

These risks are generally addressed through due diligence, including obtaining evidence that taxes, EPF, ETF and other statutory dues are up to date, appropriate representations and continuing payment covenants, and taking and promptly perfecting fixed security where available. Lenders may also require reserves or payment of identified arrears as a condition precedent. Statutory priorities cannot generally be displaced merely by an intercreditor agreement.

Enforcement depends on the nature of the debt and security. A lender may sue for the debt and enforce contractual guarantees through the courts.

A mortgage of land may be enforced under the Mortgage Act through a hypothecary action and judicial sale. Qualifying lending institutions may also recover debts under the expedited procedure in the Debt Recovery (Special Provisions) Act, No 2 of 1990, under which the court may initially enter a decree nisi, which is then made absolute.

Licensed commercial and specialised banks that fall within the Recovery of Loans by Banks (Special Provisions) Act, No 4 of 1990, may, where its requirements are satisfied, exercise parate execution and sell mortgaged property without first obtaining an ordinary judgment from court.

The Secured Transactions Act, No 17 of 2024, provides enforcement remedies in respect of qualifying movable-property security, subject to its prescribed procedures.

Enforcement may also be affected by prior-ranking security, insolvency proceedings, and foreign-exchange rules where enforcement proceeds are remitted in violation of, or otherwise not in conformity with, applicable foreign-exchange regulations.

Sri Lankan courts generally recognise an express choice of foreign governing law in a genuine cross-border commercial contract, subject to Sri Lankan conflict-of-laws principles, mandatory legal principles, and public policy. Accordingly, the choice of English or another foreign law does not exclude overriding Sri Lankan rules on security creation, land, companies, insolvency, foreign exchange, or regulated banking activity. The foreign law may need to be proved as a matter of fact in Sri Lankan proceedings.

A contractual submission to a foreign court is likewise generally capable of recognition, although questions of jurisdiction, forum, service, and enforcement remain governed by applicable Sri Lankan law. In cross-border finance, parties often select English law for the facility agreement while taking Sri Lankan-law security over domestic assets. Arbitration is also frequently preferred for material cross-border commercial contracts because Sri Lanka has a modern arbitration statute and recognises foreign arbitral awards under the framework of the New York Convention.

A foreign judgment may be enforced in Sri Lanka under the Reciprocal Recognition, Registration and Enforcement of Foreign Judgments Act, No 49 of 2024, where the judgment and originating country fall within the statutory regime and satisfy its conditions. Registration does not involve a retrial of the merits, but enforcement can be refused on the statutory grounds, including matters such as jurisdiction, procedural fairness, and public policy.

Foreign arbitral awards are enforceable under the Arbitration Act, No 11 of 1995, which implements New York Convention obligations of Sri Lanka. The High Court may recognise and enforce an award without rehearing the substantive dispute, subject to the limited refusal grounds in the Act.

Foreign status does not of itself prevent a lender from enforcing a valid loan or security. The principal additional considerations are foreign-exchange compliance, the validity and perfection of the security, any restrictions affecting foreign ownership of the underlying asset, and the route for remitting enforcement proceeds.

Land security is particularly sensitive because the Land (Restrictions on Alienation) Act can prevent a foreign person or foreign-owned company from taking title subject to certain statutory exceptions. Accordingly, enforcement may be structured through a court or authorised sale to an eligible purchaser rather than appropriation of the asset by the foreign lender.

A lender should also check whether regulatory, concession, or governmental consents are needed to transfer project assets. If the borrower enters insolvency, statutory stays and priority rules may affect timing. These issues are best addressed when the security is being negotiated rather than after default.

Corporate resolution and winding-up are presently governed principally by the Companies Act, No 7 of 2007, as amended.

Where an administrator has been appointed, enforcement of security and other proceedings against the company are generally restricted without the consent of the administrator or leave of court. Once a winding-up petition has been presented, the court may stay or restrain proceedings against the company, and after a winding-up order has been made or a provisional liquidator appointed, proceedings against the company generally require leave of court. Dispositions of the company’s property after commencement of winding-up are also generally void unless the court orders otherwise.

A lender holding valid and properly perfected fixed security will generally be entitled to look to the secured asset, subject to the applicable insolvency provisions and any prior-ranking claims. Recoveries under floating charges may be subject to preferential claims. The lender should therefore consider the validity, perfection, and priority of its security, any restrictions on enforcement arising from the insolvency process, possible challenges to antecedent transactions, rights of set-off, and the enforceability of guarantees.

The Rescue, Rehabilitation and Insolvency (Corporate and Personal) Act, No 12 of 2026 has been enacted but is not yet in operation. Once brought into force, it will introduce a new insolvency regime, including moratoria restricting enforcement of security during administration and liquidation, subject to the exceptions and approvals provided under that Act.

The Companies Act distinguishes secured and unsecured recoveries.

Property subject to a valid fixed charge is generally dealt with by reference to the secured creditor’s proprietary rights and is not simply pooled with unencumbered assets, subject to redemption, surrender, and applicable insolvency rules. In the general estate, liquidation costs and statutory preferential claims are paid in the order prescribed by the Act and its schedules. Preferential claims can also affect assets subject to a floating charge.

After preferential claims, unsecured creditors rank pari passu within their class. Subordinated claims rank according to their contractual and statutory position, and shareholders receive value only after creditor claims have been satisfied. The precise waterfall should therefore be analysed by asset and security type rather than described as a single list applying uniformly to all property. Registration and perfection are critical, as an unregistered company charge is void against the liquidator and other creditors.

An uncontested winding-up order can be obtained relatively promptly, but liquidation and asset realisation frequently take much longer, particularly where there are title disputes, litigation, numerous creditors, difficult-to-sell assets, or challenges to transactions. Court proceedings can extend over several years.

Recoveries therefore depend less on a nominal timetable than on the quality and priority of the lender’s security, asset values, the existence of competing claims, and the efficiency of the realisation process. Well-perfected fixed security over readily marketable assets can materially improve recovery prospects, while unsecured recoveries are more uncertain. Lenders commonly seek early covenant intervention, additional collateral, cash controls, or consensual restructuring before formal insolvency, where deterioration becomes apparent.

Restructurings may be implemented consensually through standstill agreements, maturity extensions, covenant waivers, debt rescheduling, refinancing, debt-equity arrangements, and asset disposals. For multi-creditor situations, intercreditor arrangements and common restructuring terms are generally used to prevent individual enforcement from undermining the restructuring.

The Companies Act, No 7 of 2007, also provides for compromises between a company and its creditors or classes of creditors, including the cancellation or variation of debt, and for court-approved compromises and arrangements. Administration is also presently available under the Companies Act for, among other purposes, preserving the company or its business as a viable concern or facilitating a compromise or arrangement.

The Rescue, Rehabilitation and Insolvency (Corporate and Personal) Act, No 12 of 2026, has been enacted but is not yet in operation. Once operative, it will introduce a more comprehensive rescue and rehabilitation regime, including administration, deeds of company arrangement and specific restructuring procedures for qualifying MSMEs. Until then, the existing Companies Act procedures and consensual restructuring arrangements continue to apply.

The central risks are imperfect or low-value security, priority disputes, delay in realisation, deterioration of collateral, and the operation of statutory preferences. A lender relying on an unregistered company charge or an unperfected movable security interest can lose priority or find the security ineffective against the liquidator and other creditors. Floating-charge recoveries may also be diluted by preferential claims.

Where a guarantor or third-party security provider becomes insolvent, the borrower’s primary debt remains, but the credit support may be impaired. The lender may prove in the guarantor’s liquidation while continuing to pursue the borrower, subject to the rule against double recovery. Cross-border lenders face additional enforcement and remittance considerations. For groups, insolvency of an operating subsidiary can also expose structural subordination at holding-company level. Robust due diligence, perfection, covenant monitoring, and intercreditor arrangements are therefore the principal protections.

Project finance activity has increased as Sri Lanka’s economy has stabilised and access to domestic and foreign financing has improved. Renewable energy is currently one of the most active sectors, particularly utility-scale solar and wind projects, battery energy storage and related transmission and grid infrastructure. Ports and logistics are also significant areas of activity. Large tourism, real estate, industrial, and other infrastructure projects may also use project-finance or project-style structures, depending on the availability of a long-term concession, power purchase agreement, or other identifiable revenue stream.

Funding commonly combines sponsor equity with local-bank, foreign-bank, development-finance-institution or multilateral financing. IFC, ADB, and other international lenders and development institutions remain important for larger infrastructure and energy projects and for financings incorporating environmental and social standards. Sri Lankan projects require particular attention to land tenure, permits and approvals, foreign-exchange flows, tax, construction risk, offtake arrangements, and government or state-owned counterparty risk. Security commonly includes shares, project accounts, receivables, movable assets and, where available, land or leasehold interests.

Sri Lanka uses public-private partnership structures for ports, logistics, transport, energy, urban development, and other infrastructure, but does not have a single comprehensive PPP or concession statute applicable to all sectors. The Public Financial Management Act, No 44 of 2024, provides the principal framework for the appraisal, approval, budgeting, and monitoring of PPP projects. PPPs are also subject to applicable public procurement requirements, Cabinet and ministerial approvals and the sector-specific legislation governing the relevant asset or service. Project-specific concessions, investment agreements, and state land arrangements may also be required.

The principal legal and practical issues include allocation of construction and demand risk, government support and guarantees, tariff or offtake arrangements, foreign-exchange convertibility, land access, change in law, termination compensation, and lender step-in rights. Where a state-owned enterprise or public authority is the contracting party or offtaker, its statutory powers and applicable approval process require careful consideration. Bankability therefore frequently depends on the interaction between the concession or project agreement, direct agreements, security package, and applicable public-law approvals.

Project documents are not subject to a universal rule requiring Sri Lankan law merely because the project is located in Sri Lanka. Parties to private and genuinely international contracts may generally agree on a foreign governing law, including English or New York law, and provide for international arbitration, subject to mandatory provisions of Sri Lankan law. The Arbitration Act, No 11 of 1995, expressly recognises the parties’ choice of substantive law and provides for the recognition and enforcement of foreign arbitral awards.

However, contracts entered into through government procurement are generally required to be governed by Sri Lankan law under the Procurement Guidelines 2024. Power purchase agreements, concessions and other agreements with public authorities or state-owned entities also commonly prescribe Sri Lankan law and particular dispute-resolution procedures.

Sri Lankan law will in any event govern matters that are inherently local, including land rights, mortgages and other domestic security, corporate matters, statutory licences, foreign exchange, insolvency, and regulatory approvals. The typical structure may therefore be mixed, with international financing or supply documents governed by an agreed foreign law, while project, security, and regulatory documents remain subject to Sri Lankan law.

The Land (Restrictions on Alienation) Act, No 38 of 2014, as amended, restricts transfers of title to land to foreigners, foreign companies, and Sri Lankan companies in which direct or indirect foreign shareholding is 50% or more, subject to specified exemptions. Companies listed on the Colombo Stock Exchange are exempt from this restriction in respect of land transferred on or after 1 April 2018. Foreigners and foreign-controlled companies may generally lease land for a maximum period of 99 years.

A foreign lender may take a mortgage over land, as the creation of a mortgage does not itself constitute a transfer of title. However, where enforcement results in title being transferred to the lender, the restrictions under the Act must be considered. The Act expressly permits a bank licensed under the Banking Act with a foreign shareholding of 50% or more to acquire mortgaged land through specified enforcement procedures. An offshore lender that does not fall within such an exemption would ordinarily enforce by procuring a sale to an eligible purchaser rather than taking title itself.

Subsurface mineral rights do not arise merely from ownership of the surface land. Exploration and mining require licences under the Mines and Minerals Act, No 33 of 1992, as amended. Rights to use surface water and groundwater are likewise subject to applicable state-land, irrigation, water-resource and environmental laws, and regulatory approvals. Lenders therefore generally require appropriate consents, assignments or step-in arrangements in relation to material project licences and permits.

A project company may take several forms, including a private company limited, a public company, or a company limited by guarantee.

A project may also be carried on through a branch or project office of a foreign company registered in Sri Lanka as an overseas company. The appropriate structure will depend on the nature of the project, financing arrangements, foreign ownership, land requirements, applicable licences and approvals, taxation, and repatriation requirements.

The principal law governing companies is the Companies Act, No 7 of 2007. Foreign investment is principally governed by the FEA and the Foreign Exchange (Classes of Capital Transactions Undertaken in Sri Lanka by a Person Resident Outside Sri Lanka) Regulations No 2 of 2021, as amended. Foreign equity investment by a non-resident investor must be routed through an Inward Investment Account (IIA).

Under these Regulations, non-residents are not permitted to acquire voting shares in companies engaged in:

• pawn broking;
• coastal fishing; and
• retail trade where the capital contributed by non-residents is less than USD 5 million.

Foreign investment in certain specified sectors (eg, deep-sea fishing, mass communication, education, etc) is limited to 40% of voting shares, unless the Board of Investment of Sri Lanka approves a higher percentage. Foreign investment in some regulated sectors (eg, air transportation, coastal shipping, etc) is permitted only up to the percentage approved by the relevant regulatory authority.

A foreign company operating through a branch, project office, or similar place of business must generally remit a minimum investment of USD200,000 through an IIA. Overseas companies are prohibited from carrying on certain activities, including money lending, pawn broking, specified retail trade, coastal fishing, certain agricultural activities, mining and primary processing of non-renewable resources, freight forwarding, shipping agency business, mechanised gem mining and lotteries. Other specified activities require prior approval of the relevant authority.

Where foreign debt financing is used, loans from non-residents to an ordinary Sri Lankan company are generally required to have a tenure of at least three years and must be routed through an External Commercial Borrowing Account in accordance with the applicable FEA directions.

Where the project requires ownership of land, the Land (Restrictions on Alienation) Act, No 38 of 2014, as amended, should also be considered. It restricts transfers of land to foreigners and to Sri Lankan companies in which direct or indirect foreign shareholding is 50% or more, subject to statutory exemptions.

Sri Lanka is also party to bilateral investment protection treaties and double-taxation agreements. Their application should be considered by reference to the nationality and structure of the foreign investor and lenders, particularly in relation to investment protection, withholding taxes and repatriation.

Domestic licensed banks remain important providers of construction, working-capital and term debt, while larger projects may also use development finance institutions, multilateral lenders, bilateral agencies and foreign commercial banks. IFC, ADB, and other international institutions remain significant in infrastructure, renewable energy, and private-sector development. Export credit agency financing may also be used where major equipment or services are sourced from the relevant supporting jurisdiction.

Typical structures combine sponsor equity with senior secured debt, with shareholder loans, subordinated debt or preferred equity used where required. Syndicated and parallel facilities may be used for larger projects. Private equity and other institutional capital may also be available at sponsor or project-company level. Project bonds remain less common than bank and development-finance debt, reflecting the comparatively limited depth of the domestic corporate-debt market. Streaming, royalty, and commodity-trader financing are not commonly used for mainstream Sri Lankan project financings, although transaction-specific alternative financing may be used.

Security generally includes project-company shares, project accounts, receivables, insurances, material contracts, plant and movable assets, together with land or leasehold security where available. Direct agreements with key counterparties are also commonly used to preserve the cure and step-in rights of lenders.

Natural-resource projects are heavily dependent on the underlying statutory licence or state right. Mining is governed principally by the Mines and Minerals Act, No 33 of 1992, as amended, and administered by the Geological Survey and Mines Bureau (GSMB).

Mining licences can be relatively short-term, as industrial mining licences in Categories B, C, and D are generally valid for not more than one year and are subject to renewal. Category A licences may be granted for a longer period determined by the GSMB having regard to established mineral reserves. Licence tenure and renewal are therefore important considerations for long-term project financing.

Foreign investment is also restricted. Under the FEA regulations, non-residents may generally hold only up to 40% of the voting shares of a company engaged in mining and primary processing of non-renewable national resources, unless a higher percentage is approved by the Board of Investment of Sri Lanka.

Export of minerals requires the applicable GSMB authorisation and payment of royalties. The National Mineral Policy 2026 promotes local value addition and processing of minerals prior to export. However, implementing regulations giving general statutory effect to the new Policy have not yet been published, and exports continue to be governed by the existing Mines and Minerals Act, regulations, and GSMB licensing requirements.

Forestry, wildlife, coastal resources, water use, and marine activities are subject to separate environmental and sector-specific regulatory regimes.

From a financing perspective, the principal issues are therefore licence tenure and renewal, security over licence-derived rights, assignability, foreign ownership restrictions, lender step-in, land and water access, environmental approvals, rehabilitation obligations, export requirements and commodity-price exposure.

The CBSL Sustainable Finance Roadmap 2.0 also requires lenders increasingly to consider environmental and social risks in financing decisions. A bankable structure therefore requires the resource licence, land and water rights, environmental approvals, processing and export arrangements, and financing security to be considered together.

The principal environmental statute is the National Environmental Act, No 47 of 1980, as amended, and administered by the Central Environmental Authority (CEA). Prescribed projects may require an initial environmental examination or environmental impact assessment through the relevant project-approving agency. EIA reports are subject to public inspection and comment for a mandatory 30-day period.

The 2026 amendment to the National Environmental Act strengthens environmental licensing and enforcement and introduces requirements relating to hazardous-waste management, prescribed chemicals, wastewater discharge and strategic environmental assessments for government policies, plans and programmes. Other relevant legislation includes the Fauna and Flora Protection Ordinance, Forest Ordinance, Coast Conservation and Coastal Resource Management Act, and Marine Pollution Prevention Act.

Occupational health and safety obligations arise principally under the Factories Ordinance and related labour legislation, with the Department of Labour and the National Institute of Occupational Safety and Health playing important roles. Projects may also require local-authority, water, building, archaeological and sector-specific approvals. International lenders frequently impose additional IFC/World Bank-type environmental and social standards contractually, making compliance an ongoing financing covenant rather than merely a pre-construction permitting matter.