Growing Questions Over Inter Bank-Holdings, Hidden Control, and Systemic Risk in Sri Lanka’s Banking Sector
Fresh debate is emerging within Sri Lanka’s financial and legal circles over whether the Central Bank should prohibit licensed banks from owning substantial stakes in other banks, amid rising concerns over contagion risks, indirect control structures, and the weakening of prudential safeguards intended to protect depositors and financial stability.
Under Sri Lanka’s Banking Act and related Central Bank Directions, individual shareholders and corporate entities are generally restricted from acquiring more than a prescribed percentage of voting shares in a licensed commercial bank without regulatory approval. These ownership limits were introduced to prevent excessive concentration of financial power and ensure that no single individual or connected group could dominate the banking system.
Under Sri Lankan banking law, ownership and control of licensed banks are subject to strict limits imposed by the Central Bank of Sri Lanka under the Banking Act, No. 30 of 1988 and subsequent Banking Act Directions. The current framework generally limits a “material interest” in a licensed commercial bank (LCB) to 15% of issued voting shares, although the Monetary Board may permit up to 20% in exceptional circumstances. Historically, the limits were lower, including 10% ceilings intended to prevent concentration of ownership and preserve financial system stability. The Central Bank has repeatedly justified these restrictions on prudential grounds, particularly to avoid excessive influence by a single shareholder or connected group.
However, critics argue that the purpose of these restrictions may be undermined if banks themselves are permitted to hold shares in other banks.
Financial analysts warn that such arrangements between banking institutions create the possibility of indirect control structures through layered ownership networks. In such arrangements, influential investors or business groups may exercise significant influence over multiple banks through intermediary corporate entities, finance companies, or bank shareholdings without directly breaching statutory ownership caps.
The issue has triggered renewed scrutiny following broader concerns over governance standards, related-party exposure, and systemic vulnerabilities within Sri Lanka’s financial sector.
Banking experts caution that one of the greatest dangers arising from inter-bank ownership is the potential contagion effect. If one institution experiences a major capital impairment, liquidity crisis, or governance failure, losses may rapidly spread to connected banks holding equity stakes in that institution. Such interconnected exposures could destabilize confidence across the entire banking system.
Critics further argue that inter cross-holdings can artificially inflate the perceived strength of bank capital. In certain structures, one bank’s capital base may substantially depend on investments in another financial institution, creating circular ownership arrangements that weaken genuine loss-absorbing capital during times of crisis.
Concerns have also been raised regarding the possibility of sophisticated investors using layered structures to circumvent regulatory ownership restrictions. Market observers note that indirect control through interconnected corporate vehicles may enable powerful business interests to maintain significant influence across multiple financial institutions without openly exceeding legal shareholding thresholds.
Public discussion has periodically referenced business magnate Harry Jayawardena in debates surrounding indirect influence within Sri Lanka’s banking and finance sector through broader corporate shareholding networks. While no finding of illegality has been established in relation to such discussions, analysts state that the example illustrates the wider regulatory challenge faced by banking supervisors in identifying ultimate beneficial ownership and effective control.
Financial governance advocates now question why Sri Lanka has not adopted stronger restrictions preventing licensed banks from owning substantial interests in other licensed banking institutions, particularly when several international regulatory frameworks discourage excessive interconnectedness within the banking sector.
Among the reforms now being proposed by governance and banking specialists are stricter “look-through” ownership tests, enhanced disclosure of beneficial ownership structures, tighter limits on indirect control through connected entities, and outright prohibitions on significant cross-bank equity holdings.
Supporters of reform argue that such measures are necessary to strengthen depositor confidence, improve transparency, and reduce the risk of systemic contagion within Sri Lanka’s highly concentrated banking sector.
They further warn that unless indirect ownership structures are more aggressively regulated, sophisticated investors and politically connected business groups may continue finding ways to consolidate hidden influence over strategic financial institutions while technically remaining within formal ownership limits imposed by law.
As Sri Lanka continues rebuilding confidence in its financial system following the economic crisis, the question now increasingly being asked is whether the Central Bank can continue permitting cross-bank ownership structures without exposing the banking sector to heightened systemic risk in the future.
