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According to the Central Bank statistics 2009-2014, it can be noted that there is a gradual increase in the preference of gold loans by the borrowers as a means of consumer credit, during last 5 years period in Sri Lanka. This increase in gold loans implies several economic outcomes that can be anticipated in the future in credit market as well as in gold market in Sri Lanka. Corresponding to the gradual increase in preference of gold loans by the borrowers, the lender starts to raise the loan to value ratio or gold loan advances they grant while reducing the interest rates and encouraging more gold loan borrowing by creating a competition in the credit market. Through this encouragements, people who have various borrowing behaviors come in to the market and if most of the borrowers are in a vulnerable position and if the repayment ability is ambiguous, then loan defaulting rate will enhance in this credit channel. When loans are defaulted, lenders try to cover up their loan values through selling out the collateral. Since the common collateral is gold for these types of loans, when increasing supply of the gold, the price of gold will decline while creating a problem to the gold business as well. Gold price decline will not only be affected to the gold business but also for the financial organizations who keep their reserves in gold. They also are punished by declining the value of their gold investments creating a path for a domestic financial crisis. Therefore, apart from the mere credit supply increase I return to borrowers’ preference, lenders must have a good understanding on purpose of borrowing repayment ability and their borrowing behavior in general to avoid above mentioned type situations. Because if lenders are aware on their borrower, they can adjust their terms and conditions on gold loan and reduce possible losses arise in not repaying. On the other hand, if lenders have a good understanding on borrowing patterns, they can design variety of gold loan products by adjusting tenure, interest rate and loan to value ratio. However, in Sri Lanka, these types of studies are lacking on gold loan market. Thus through this study, it is expected to examine the characteristics and general borrowing behavior in Sri Lankan gold loan borrowers to render an understanding on their borrowing practices to the lenders by fulfilling that need. In addition to that, it demonstrates the importance of studying the participants and their behavior in gold loan market to utilize this credit facility effectively in the development of the Sri Lankan economy by identifying the borrowing segments in the gold loan market. Therefore, the results of this research will not only be beneficial for gold loan lenders and financial institute but also the policy makers in deploying effective credit sources to the various segments in the society. Therefore, this study provides a clear view on gold loan borrowers and their behavior as a solution for prevailing knowledge deficiency in Sri Lankan gold market.
