National Microfinance Study of Sri Lanka: Survey of Practices and ...

The apex organisations are assured of trading volumes and benefit from being
identified as the recognized merchandisers for their community by handling the
sale of production inputs and being paid through invoices by the bank. The bank
saves on documentation and staff time, and also develops a loyal clientele that is
gradually improving its income and social standards. Interest rates for the credit
are market related although the interest rate for paddy cultivation is supported by
a government subsidy of 10% under a national scheme for paddy farmers.
The audited accounts of one of these apex organisations shows a net profit of SLR
84,720 for the period January to December 2001. The bank is encouraging the
development of apex organisations in all eight of the districts within the scheme
so that the credit card system and its benefits can be accessed by all the farming
communities concerned.
Recently a proposal has been presented to the senior management of the bank to
utilise the apex organisations as microfinance intermediaries by on lending capital
to them for on lending to their members.
People’s Bank Case Study - ‘ Pawning and Savings Centres’
Introduction into the pawning business 28
Pawn brokering differs from other secured lending in that the lender takes
physical possession of the collateral at the time of lending. Pawn broking also
differs from most bank lending in that it is generally characterised by a high
volume of small size advances, made for a relatively short period of time. A credit
evaluation of the borrower is not required nor any monitoring of the loan. If the
amount is not repaid when due, the pawnbroker can recover the advance by
auctioning the collateral. Therefore, the credit risk and associated recovery costs
are largely avoided (Skully, 1994)
A successful pawnbroker-customer relationship relies on mutual trust. The
pawnbroker trusts that the customer pays back the advance when due and the
borrower trusts the pawnbroker that he/she will return the collateral when the
advance is fully paid back. This constitutes a sale and buy back concept.
It is common throughout South Asia as well as East Asia to pawn gold jewellery.
The desire by most Asians to hold some of their assets in gold jewellery may be
the major reason for the pawning industry’s success. The Asian preference for
relatively pure gold, usually at least 24 carat, has also helped to ensure the
industry’s regular source of business (ibid.)
The Pawning and Savings Centre of the People’s Bank
History of People’s Bank and the pawning business
The People’s Bank Act created the People’s Bank of Sri Lanka in 1961 as a stateowned
institution. The bank was set up to develop the rural economy of Sri Lanka
and was allowed to conduct all banking business, including pawn brokering,
which the bank started within the same year.
28 The case study is presented for inclusion in the study by Mr. Lutz Grashof of GTZ and shows
the importance of this type of collateralised credit in the arena of microfinance.