Sri Lanka’s financial sector stands at a pivotal moment in its green finance journey, with strong leadership recognition and ambitious plans, yet significant capability and market development challenges remain.
An assessment conducted by the Centre for a Smart Future in partnership with Biodiversity Sri Lanka reveals a sector that is strategically aligned with green finance objectives but struggling with implementation barriers that could hinder the country’s sustainable development goals.
Strong leadership commitment, limited operational readiness
The survey of financial institutions, comprising 85% banks and 15% finance companies, reveals encouraging top-level commitment to green finance initiatives. A striking 70% of FIs report that their Board and senior management demonstrate “very strong recognition” of green finance’s strategic role in future lending portfolio growth, with the rest (30%) showing “some recognition.”
This leadership buy-in has translated into internal policy development, with 70% of institutions having Board-approved green finance policies or internal guidelines.
However, this strategic alignment hasn’t fully materialised into operational sophistication. While all surveyed institutions offer green lending facilities, the sector’s approach remains nascent. Two-thirds of financial institutions have been actively engaged in green finance for less than two years, and around one-third have been operating in this space for two-to-five years, indicating that despite the strategic recognition, practical implementation is still in its early stages.
Market demand exceeds understanding
One of the most significant findings relates to the demand-supply dynamics in Sri Lanka’s green finance market. Customer interest appears robust, with 40% of institutions reporting “strong interest among customers, and it is growing,” while 55% observe “some interest among customers, but it is limited.” However, this interest exists alongside a troubling knowledge gap.
The assessment reveals a stark disconnect between customer enthusiasm and understanding. According to the surveyed FIs, among SME customers 95% demonstrate only “limited understanding” of green finance products and potential, while corporate banking customers fare only marginally better, with 65% showing limited understanding and 35% demonstrating high understanding. This knowledge gap creates a challenging environment where demand exists but customers struggle to effectively engage with available green finance solutions.
The primary purpose driving customer borrowing is “installation of renewable energy such as solar (residential, office, industrial),” suggesting that while understanding may be limited, customers are gravitating toward easily-understood green technologies rather than more complex sustainable finance activities.
Critical capability and knowledge gaps
Perhaps the most concerning finding relates to internal capabilities within financial institutions. The survey reveals significant gaps in staff expertise and institutional knowledge that will hold back the sector’s ability to capitalise on green finance opportunities.
When assessing green credit proposals, institutions face multiple challenges – lack of credit department knowledge on environmental issues, lack of understanding of the customer’s green proposition, and inability to properly assess credit risks being primary concerns.
The institutional response to these challenges has been mixed. Equal numbers of respondents indicated they either have “a separate green lending department or desk with dedicated staff” or “do not have a separate department or desk, but have hired dedicated green finance specialists to work within existing departments.” This suggests a sector still experimenting with organisational structures and not yet converging on best practices.
Recognising these gaps, 50% of institutions have sought external technical expertise recently, covering areas such as developing sustainable finance policies, green credit appraisals, and mobilising green funds. The variety of external support sought indicates the breadth of capability gaps institutions are attempting to address.
External funding challenges and opportunities
Access to external green funding presents opportunities and constraints for Sri Lankan financial institutions. Only 20% have accessed green credit lines, while 30% have used SME credit lines with explicit green lending portfolio requirements. Notably, several institutions reported that funding sources are currently unavailable due to the country’s credit rating, highlighting how macroeconomic factors constrain green finance development.
Despite these challenges, institutions demonstrate awareness of emerging opportunities. Responses indicate engagement with various funding sources including the Green Climate Fund, ADB-funded loan schemes, and overseas head office funding for local branches of international banks.
Optimistic growth projections despite current constraints
The growth outlook in the near-term is nascent, with more than half of respondents expecting less than 10% of their lending portfolio to comprise green finance projects in the next five years. But the ten-year outlook is significantly more optimistic, with 70% projecting 10-25% of their portfolio in green finance and 25% expecting 25-50%.
This optimism is backed by funding intentions, with 85% of institutions planning to raise green funding through deposits, debentures, or other instruments in the near future. This suggests that despite current constraints, the sector anticipates significant growth in green finance activities.
Limited environmental sector collaboration
Despite the growing importance of environmental considerations in green finance, Sri Lankan financial institutions show relatively limited formal engagement with environmental organisations. While institutions do interact with environmental groups, only 30% have established formal partnerships or collaborations specifically for green finance matters, beyond traditional CSR activities. When engagement does occur, it tends to focus on understanding environmental risks and issues rather than co-developing green lending products.
The organisations mentioned as partners include Biodiversity Sri Lanka, Federation of Environment Organisations, and The Wilderness and Wildlife Conservation Trust. Most institutions engage with environmental organisations less than once per year (35%) or a few times annually (45%), with few maintaining quarterly engagement. This limited collaboration represents a missed opportunity for financial institutions to leverage environmental expertise in developing more robust green finance offerings.
Policy foundation recognised
The regulatory and policy environment shows promise, with 40% of respondents indicating that national policies and frameworks like the green finance taxonomy and sustainable finance roadmap have “greatly helped” advance green finance both nationally and within their organisations. An additional 55% report these frameworks have “somewhat helped,” suggesting broad recognition of policy support.
Building capabilities and market infrastructure
The assessment reveals a sector with strong strategic intent but significant implementation gaps. Success in advancing Sri Lanka’s green finance agenda will require coordinated efforts across multiple dimensions. Institutions need to invest heavily in staff capabilities, develop more sophisticated risk assessment frameworks for green projects, and create clearer internal processes for evaluating and approving green finance proposals.
From a market development perspective, extensive customer education programs are essential to bridge the understanding gap between customer interest and product comprehension – especially among SMEs. The sector also needs greater access to external funding sources, which are expected to improve as debt sustainability returns.
Sri Lanka’s financial sector stands at a critical juncture in its green finance journey. With strong leadership commitment, growing customer interest, and supportive policy frameworks, the foundation for growth exists. However, realising this potential will require sustained investment in capabilities, market infrastructure, and practical implementation to bridge the gap between strategic intent and operational advancement.
The Centre for a Smart Future (CSF) collaborated with Biodiversity Sri Lanka (BSL) on the ‘Green Finance Maturity Assessment 2024’ that surveyed 20 financial institutions. To read the report, visit www.csf-asia.org/GFMA2024.
