By Jithendra Antonio

Sri Lanka, emerging from economic upheaval, the nation’s capital markets hold unprecedented promise, not only for financial gains but as a catalyst for national growth, resilience, and global integration. While this potential is clear, challenges like limited liquidity, shallow market structures, and a need for investor trust remain key barriers. To transform Sri Lanka’s capital markets into a vibrant, trusted engine of prosperity, actionable reforms, strategic collaborations, and an investor-focused framework are essential. By looking to the success of regional markets and leveraging trends in sustainable finance and digital transformation, Sri Lanka can lay the groundwork for a financial revival.

1. Market Depth - Building a Foundation of Stability and Diversity

For Sri Lanka to attract a diverse investor base, creating a market structure with depth and a variety of investment options is essential. By adopting strategies that have proven effective in India’s capital markets, Sri Lanka can move toward creating a market structure that resonates with both institutional and retail investors.

Case Study: India’s Market Expansion

India’s capital market transformed by diversifying listings, including mid-cap, small-cap, and REITs (Real Estate Investment Trusts), creating more investment options that attracted a broader investor demographic. Sri Lanka can replicate aspects of India’s success by prioritizing the following initiatives:

Encouraging Small and Medium Enterprises (SMEs) Listings
A vibrant SME sector enhances economic resilience and market depth. By easing listing requirements and providing incentives like tax benefits or subsidies, Sri Lanka can attract more SMEs to the market. Increased SME listings not only create a robust investment pool but also bolster job creation, innovation, and economic diversification. SMEs bring the potential for higher returns, appealing to a broad range of investors, especially younger demographics.

Expanding Investment Instruments
Beyond equities, the introduction of REITs, municipal bonds, and derivatives can provide investors with a variety of instruments to distribute risk and diversify portfolios. For instance, municipal bonds could finance local infrastructure projects, driving economic development while attracting regional investment. Municipal bonds have proven effective in India and the U.S., not only by providing stable returns but by enabling investors to contribute to regional development.

Public-Private Collaboration in Infrastructure Development
Public-private partnerships (PPPs) can finance critical national projects through listings on the stock exchange. For example, partnerships to fund infrastructure projects such as renewable energy plants, highways, and urban infrastructure could attract both domestic and foreign capital. Investors benefit from steady returns, while Sri Lanka strengthens its national infrastructure—creating a symbiotic relationship between capital markets and essential development goals.

2. Liquidity - Encouraging Market Participation and Investor Activity

Enhanced market liquidity is central to a dynamic financial ecosystem. Increased liquidity fosters market stability, attracts investment, and instills confidence, particularly for foreign investors considering Sri Lanka as a viable market for long-term investments.

Case Study: Singapore’s Liquidity Boost Through Market Reforms

Singapore’s approach to enhancing liquidity included cutting transaction costs, introducing automated trading systems, and incentivizing retail investor participation. Sri Lanka can benefit from adopting similar strategies.

Reducing Transaction Costs
High brokerage fees and capital gains taxes deter trading activity. Reducing transaction costs, such as lowering brokerage fees and capital gains tax, would increase trading volume, enhancing overall market liquidity. Evidence from markets such as the U.S. and Singapore shows that lower transaction costs translate to increased retail investor participation—a foundational driver for sustainable liquidity.

Establishing Market Makers and Primary Dealers
Market makers are crucial for ensuring smooth trading and reducing bid-ask spreads. Sri Lanka can attract market makers by offering incentives like tax reductions, easier regulatory processes, and credit access, enabling them to operate efficiently. A more active market-making environment would result in a less volatile market, enhancing investor confidence.

Building Digital Platforms for Retail Trading
The increasing digitization of finance worldwide highlights the need for accessible and efficient trading platforms. By investing in user-friendly, mobile-compatible trading platforms, Sri Lanka could expand its reach to young, tech-savvy investors, fostering retail participation. Malaysia’s success in integrating digital platforms provides a model: its focus on speed, reliability, and user engagement boosted liquidity and encouraged retail trading, which Sri Lanka can replicate.

Streamlining Foreign Investment Processes
Attracting foreign investors demands transparency, regulatory clarity, and efficiency. Simplifying regulatory requirements, relaxing investment restrictions, and aligning investor protection standards with international norms would make Sri Lanka more appealing to global capital. By easing foreign entry processes, Sri Lanka can expand its investor base, thus deepening market liquidity.

3. Investor Confidence - Establishing Trust through Transparency and Regulation

Confidence is the cornerstone of any thriving capital market. To attract investors, Sri Lanka must demonstrate a commitment to transparency, ethical practices, and robust governance.

Case Study: Malaysia’s Path to Investor Protection

Malaysia built investor trust through stringent regulations, transparency, and educational initiatives that aligned local practices with international standards. Sri Lanka can learn from Malaysia’s model to create a market environment that inspires confidence.

Enhanced Regulatory Oversight
A strong regulatory framework protects investors and ensures market integrity. By instituting more frequent audits, enforcing insider trading laws, and ensuring timely information disclosure, Sri Lanka can safeguard investors and promote a culture of accountability. Recent improvements in Malaysia and Thailand demonstrate that robust regulatory oversight helps align local markets with global standards, making them more attractive to foreign investors.

Promoting ESG (Environmental, Social, Governance) Standards
The global shift toward sustainable investments underscores the importance of ESG. Sri Lanka can attract ESG-conscious investors by incentivizing companies to adopt responsible practices. Government-backed initiatives such as tax breaks, grants, or listing advantages for ESG-compliant firms would further incentivize adoption, building Sri Lanka’s reputation as a responsible financial center.

Investor Education and Financial Literacy Programs
Educating the public about investment opportunities is crucial for building a stable investor base. Interactive programs across universities, community centers, and online platforms could demystify capital markets, helping more Sri Lankans make informed investment choices. In Malaysia, such educational programs have helped build a financially literate populace that participates actively in the market.

Introducing Sustainable Financial Products
Green bonds, impact bonds, and other sustainable finance products are increasingly sought after by global investors. By launching these bonds with government backing, Sri Lanka can raise capital for environmentally and socially responsible projects, reinforcing its commitment to sustainable development while attracting a dedicated class of investors.

Aligning with Global Reporting Standards
Clear, consistent financial reporting practices, like those based on International Financial Reporting Standards (IFRS), provide transparency. Sri Lanka should enforce these standards, creating confidence among both local and international investors.

Practical Steps for Implementation

1. Establish a Regulatory Task Force
   Task forces could streamline regulations and work with international stakeholders to align Sri Lanka’s regulatory framework with global norms, facilitating easier entry for foreign investors.
2. Public-Private Partnerships for Infrastructure
   A PPP-driven model for infrastructure projects would create new opportunities for capital investment in national projects with predictable returns, enhancing both market depth and economic growth.
3. Pilot Program for Digital Trading Platforms
   Collaborate with tech providers to develop a pilot trading platform, focusing on an intuitive user experience. This platform could particularly appeal to retail investors, who are essential for achieving widespread market participation.
4. Create a "Green Finance" Hub
   Positioning Sri Lanka as a regional center for green finance would attract ESG-driven investors, enhancing market reputation and enabling access to sustainable capital flows.

Sri Lanka’s financial markets are at the cusp of a transformative era. By embracing actionable strategies to deepen market diversity, boost liquidity, and build investor trust, the country can forge a resilient and globally competitive financial sector. With a commitment to regulatory reform, public-private collaboration, and digital innovation, Sri Lanka has the opportunity to attract both local and international capital, fostering economic growth, creating jobs, and solidifying its role in the global financial landscape.

(The writer is a Consultant specialised in Data Analytics with a Special Focus on Sri Lanka’s Future Direction, and in the fields of Sustainable Energy, ESG, Investments and telecommunications. He can be reached at jithendra.antonio@gmail.com.)