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

The local NGO sector is diverse and active throughout the country. Microfinance
in the main is a recent activity that has been incorporated into the various other
social development activities that underpin the sector. Overall, the micro credit
activities of the Local NGOs surveyed and the INGO funding to this sector
represents approx. 2.2% of national activity. Accounting for issues of
representation in the survey, it is unlikely that total local NGO micro credit
activity accounts for more than 5% of micro credit activity nationwide. However,
the picture is very different in the North and East region, where INGO funded
local NGO activity accounts for between 50% in Jaffna to virtually 100% in the
Wanni.
Overall the entire sector except the CRBs and the RDBs is subsidised by donors
or the government, making micro finance unsustainable, let alone commercially
viable. In the medium term there is the risk of serious erosion of the current
access to financial services for the poor unless immediate and urgent action is
taken to strengthen practices and institutions active in the field. There is also a
need to look at the regulatory framework as currently NGOs are not permitted to
receive savings, although in practice many do, and the federation bodies of the coops
are not effective.
There appears to be a widespread belief that poverty targeting and financial
sustainability are not compatible. A general lack of financial training and the
absence of proper financial management skills or good and best practices in issues
related to monitoring and accounting is common. Furthermore, awareness of
costs of operation compared to income and analysis of loan aging with action
follow-up reports are largely missing from schemes. This is frequently placing
member savings at unnecessary risk.
2. The Commercial Banking Sector Microfinance in Sri Lanka
Part B is a separate survey of the commercial banking sector's microfinance
activity conducted separately as the commercial banks engaged in microfinance
were, with a couple of exceptions, unable or unwilling to supply district level
information about their savings and credit activities. The survey overviews
national activity and provides case studies on different aspects of the
commercialisation of microfinance, including: pawning, capacity building and
building profit-driven models of microfinance.
The survey found that commercial banks have been providing microfinance
services since the early 1960s; first by the state owned commercial banks and then
by a small number of the private banks as they developed strategies expanded into
new markets.
The government has traditionally used the two state-owned banks as tools for
implementing its various policies on agriculture and poverty alleviation with
subsidised loans, re-financing, and periodic debt forgiveness being the most
notable features. Policy is largely politically driven and financial tools tend to be
cumbersome and having high transaction costs. This somewhat contradicts the
government’s expectations for the state owned commercial banks to also be
profitable and financially viable institutions.
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