There is a rising demand for home loans in Sri Lanka. The market has grown at a compound rate with the escalation of per capita income and changing patterns of consumption and saving habits in the recent past. Sri Lanka is an island situated in the Indian Ocean with a population of 19 million. Its GDP has been growing by an average of 6%for the last 3 years. GDP per capita stood atUS$1,200 in 2005. The Colombo Consumer Price index – the official price index to measure inflation showed growth of11.1% in the year to January 2006compared to 8.8% one year ago. The overall rise in consumer products and the rise in international commodity prices contributed to domestic inflation during2005. The unemployment rate, which is around 8%, has remained unchanged for the last 3 years. In the banking and financial sector, the Average Weighted Price lending Rate (AWPR) of commercial banks stood at12.1% in January 2006. However, during the same period, the Average Weighted Deposit Rate (AWDR) remained as low as6.34%. The rate of interest charged on housing loans currently varies from 11% to15%.

These spreads suggest that the banks in Sri Lanka keep very high margins even for secured lending. The key factors triggering the progressive growth of home loans on the demand side are: a) Declining interest rates over the past year have encouraged investment in properties rather than in low income yielding government securities and term deposits. b) Rapid rises in income in the private sector, which makes housing more affordable. Increasing income levels have shifted consumption to areas such as housing. c)Tax benefits extended to borrowers, which have further reduced the effective cost of borrowings. d)The demand arising from migrant workers and Sri Lankans residing a broad. Many Sri Lankans residing a broad prefer to invest in housing in Sri Lanka, as an alternate means of investment. Migrant employees who work and reside abroad, desire to have a house of their own in Sri Lanka once they return to the country. Therefore they invest their hard-earned money on real estate for two specific reasons: first, there turn on investments is comparatively high due to the appreciation of prices; second, they cannot expect a real positive return on their bank deposits due to negative interest rates prevailing in the country.