Cargills Bank Gets a Breathing Room – CBSL's Balancing Act on Bank Regulation
With an evolving financial scenario, Sri Lanka's banking sector is being led by the Central Bank of Sri Lanka (CBSL) with a firm but flexible fist. CBSL announced on 4th July 2025 that Cargills Bank PLC was to be granted an extension up to 2029 to reach the aimed LKR 20 billion minimum level of capital. The bank currently has LKR 11.89 billion, slightly greater than half the target level.
In terms of regulation, this is a pragmatic step. Capital adequacy is perhaps the strongest tool in ensuring banking system stability, especially now that sudden shocks can cause system meltdown. But what CBSL has done here is not merely to dictate a figure; it has formulated a roadmap.
Banks are financial intermediaries, and capital is their buffer against unexpected losses. Banks are required to maintain minimum levels of high-quality capital to absorb shocks under Basel III, the international regulatory standard designed by the Basel Committee on Banking Supervision. The most significant measure is Common Equity Tier 1 (CET1) capital, which includes ordinary shares and retained earnings. CET1 is going-concern capital, in other words, the capital that can be relied upon to absorb losses as long as the bank remains in business.
Basel III also introduced some capital requirements:
These requirements are established to enhance the resilience of the banking system and prevent insolvency under financial stress. The existing shortage of capital on the part of Cargills Bank indicates the difficulty of fulfilling these requirements, particularly for smaller banks. Compliance phased over some time allows time to accumulate the capital gradually, while ensuring stability in operations, without precipitating liquidity problems or credit squeezing
What CBSL did here was offer a time extension of compliance together with conditions.
Sri Lanka's banking sector comprises Licensed Specialized Banks (LSBs) and Licensed Commercial Banks (LCBs). Even though major banks like Commercial Bank (ComBank) and Bank of Ceylon (BOC) are well-capitalized enough under Basel III, their small counterparts like Cargills Bank have a tougher road ahead. BOC reported a CET1 ratio of 11.83% and a Total Capital Ratio of 15.50%, both well above regulatory thresholds. Similarly, Commercial Bank achieved a Group CET1 of 11.9%, far over the minimum required of 4.5% plus buffers. These outcomes show the strength of the nation's leading banks, but reserving capital problems for smaller banks still need to be resolved.
CBSL's response is proof that regulation is not enforcement, it's enablement. Banks are slow to mobilize funds during a weak economy. Acting too fast, too soon can tighten credit supply and lose customers. Far from inducing panic, CBSL has instilled a message of confidence in the bank, in investors and in depositors.
Perhaps the most valuable lesson from this directive is the need for ownership dilution. CBSL has rightly noticed that the concentration of ownership is risky, particularly in the smaller banks. It hinders objectivity, and discourages innovation.
By insisting that the majority shareholder dilute control to 15%, CBSL is instilling a culture of accountability, building investor confidence, and expanding market access.
This action by CBSL sends a strong message to the banking sector: capital adequacy is not optional, but being flexible in strategy is essential. Small banks like Cargills Bank need competition and financial inclusion, but they must innovate within the paradigm of stability. The phased capital approach showed risk-sensitive supervision, allowing the banks to grow without compromising depositor protection or systemic confidence.
Furthermore, by linking capital expansion with ownership restructuring, CBSL is encouraging not only economic strength but also reform in governance. It is an action following best international practice preventing control accumulation in the financial market, making decision-making transparent and appropriately managed.
Cargills Bank has some distance to cover—if it does, it can be a better ,more respected bank in the next decade. But if it waits until the last minute to raise capital or reform governance, there is a risk.
Do you think CBSL's phased approach will help Cargills Bank succeed? Share your views below
Written by - Vihara Thennakoon
Title of the original article -"CBSL gives Cargills Bank longer time for minimum capital"
Publication Date - 4th July 2025
Source- Daily FT
 |
| Difference between the current level and the needed minimum level of capital of Cargills Bank |
In terms of regulation, this is a pragmatic step. Capital adequacy is perhaps the strongest tool in ensuring banking system stability, especially now that sudden shocks can cause system meltdown. But what CBSL has done here is not merely to dictate a figure; it has formulated a roadmap.
 |
| Central Bank of Sri Lanka (CBSL),Source: Daily News |
Banks are financial intermediaries, and capital is their buffer against unexpected losses. Banks are required to maintain minimum levels of high-quality capital to absorb shocks under Basel III, the international regulatory standard designed by the Basel Committee on Banking Supervision. The most significant measure is Common Equity Tier 1 (CET1) capital, which includes ordinary shares and retained earnings. CET1 is going-concern capital, in other words, the capital that can be relied upon to absorb losses as long as the bank remains in business.
Basel III also introduced some capital requirements:
- Minimum total capital requirement of 8% of risk-weighted assets (RWAs).
- Minimum CET1 requirement of 4.5%, and a further Capital Conservation Buffer of 2.5%, totaling 7% CET1.
- Countercyclical Buffer up to 2.5% during periods of credit growth over prudent levels.
- Leverage Ratio of 3%, which limits excessive borrowing regardless of asset risk.
These requirements are established to enhance the resilience of the banking system and prevent insolvency under financial stress. The existing shortage of capital on the part of Cargills Bank indicates the difficulty of fulfilling these requirements, particularly for smaller banks. Compliance phased over some time allows time to accumulate the capital gradually, while ensuring stability in operations, without precipitating liquidity problems or credit squeezing
What CBSL did here was offer a time extension of compliance together with conditions.
- Raise LKR 2.5 billion by 2025
- Decrease the principal shareholder holding to 50% by 2025, and 15% by 2029
Why This Matters
Sri Lanka's banking sector comprises Licensed Specialized Banks (LSBs) and Licensed Commercial Banks (LCBs). Even though major banks like Commercial Bank (ComBank) and Bank of Ceylon (BOC) are well-capitalized enough under Basel III, their small counterparts like Cargills Bank have a tougher road ahead. BOC reported a CET1 ratio of 11.83% and a Total Capital Ratio of 15.50%, both well above regulatory thresholds. Similarly, Commercial Bank achieved a Group CET1 of 11.9%, far over the minimum required of 4.5% plus buffers. These outcomes show the strength of the nation's leading banks, but reserving capital problems for smaller banks still need to be resolved.
.png) |
| BOC's and Commercial Banks CET 1 ratios compared to the minimum required level |
Perhaps the most valuable lesson from this directive is the need for ownership dilution. CBSL has rightly noticed that the concentration of ownership is risky, particularly in the smaller banks. It hinders objectivity, and discourages innovation.
By insisting that the majority shareholder dilute control to 15%, CBSL is instilling a culture of accountability, building investor confidence, and expanding market access.
A Broader Regulatory Signal
This action by CBSL sends a strong message to the banking sector: capital adequacy is not optional, but being flexible in strategy is essential. Small banks like Cargills Bank need competition and financial inclusion, but they must innovate within the paradigm of stability. The phased capital approach showed risk-sensitive supervision, allowing the banks to grow without compromising depositor protection or systemic confidence.
Furthermore, by linking capital expansion with ownership restructuring, CBSL is encouraging not only economic strength but also reform in governance. It is an action following best international practice preventing control accumulation in the financial market, making decision-making transparent and appropriately managed.
 |
| Cargills Bank logo, Source: Sri Lanka Mirror |
Cargills Bank has some distance to cover—if it does, it can be a better ,more respected bank in the next decade. But if it waits until the last minute to raise capital or reform governance, there is a risk.
Do you think CBSL's phased approach will help Cargills Bank succeed? Share your views below
Written by - Vihara Thennakoon
Title of the original article -"CBSL gives Cargills Bank longer time for minimum capital"
Publication Date - 4th July 2025
Source- Daily FT
Comments
Post a Comment