Sri Lanka’s urban classification system, based on local government types, categorizes Municipal Councils (MCs) and Urban Councils (UCs) as urban areas, while Pradeshiya Sabhas are considered rural. However, this classification fails to capture the dynamic nature of urban growth, resulting in challenges for policy-making, urban investment, and long-term planning. The phenomenon of “hidden urbanization,” marked by urban sprawl and ribbon development, continues despite a lag in urban population growth. This creates difficulties for planners addressing the expanding informal settlements, such as slums, which increase social vulnerability and inequality. This study explores Sri Lanka’s urbanization process through a literature review and user perception survey, highlighting the impact of unplanned development. It emphasizes the need for integrating Geographic Information Systems (GIS) and Remote Sensing (RS) technologies to monitor growth patterns in underserved areas. These tools, though underutilized, can provide real-time data, supporting better urban management. The paper advocates for their use in improving land-use planning, monitoring informal settlements, and creating smarter, more connected towns. The study also emphasizes the importance of decentralizing urban governance and empowering local governments to address region-specific challenges. Local authorities, closer to their communities, are better equipped to implement tailored solutions and strategies that meet local needs. In the context of smart cities, decentralization is essential for building inclusive, resilient urban environments that serve diverse residents, especially those in informal settlements. In conclusion, an integrated approach combining technology, decentralized governance, and community-focused planning is key to managing Sri Lanka’s urbanization challenges. Such an approach will contribute to the development of sustainable, equitable cities capable of supporting future growth and improving the quality of life for all citizens.