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

Beneficiary targeting was generally sound with project selection criteria being
satisfied in some ninety percent of cases. The majority of micro-enterprises
did not develop capacity to expand production, improve product quality or
diversify into new lines of production. This was partly the result of a lack of
training in enterprise development.
The repayment rates of loans from NGOs/POs to the NTDF (trust fund for the
project) was about ninety-seven percent, while the repayment rate of loans
from beneficiaries to NGOs was only about eighty-three percent, suggesting
that the NGOs/POs were utilising their own funds, including the earnings and
assistance from other sources, to repay NDTF credits. The NDTF continues as
a trust fund on lending to microfinance intermediaries and other NGOs that
have microfinance components.
Iffath (2000) gave a summary of findings and recommendations that included:
Contrary to the general perception of officials, poor people in Sri Lanka are
forward-looking savers who use formal, semi formal and informal financial
services for household level risk management.
At the household level, there is evidence that poor people use financial
services – mainly saving, borrowing and/or mortgaging of assets – to manage
risks.
The formal microfinance market is largely supply-driven as evidenced by
various government interest subsidies or refinancing schemes offered to the
two state banks for rural sector lending. The same situation exists in the semiformal
market where the government supports the fast-growing credit
component of the Samurdhi Welfare Programme.
Most subsidised rural credit programmes have resulted in high arrears and
have generated losses for the financial institutions administering the
programmes and for the government. Evidence from other developing
countries show that government associated credit programmes like Samurdhi
also face risk of failure due to the potential for political capture.
Government subsidies and direct state involvement in microfinance via
Samurdhi ‘crowd out’ other well-performing microfinance institutions that do
not access government subsidies.
Rather than mandating credit allocation and being a microfinance provider
itself, the government should focus on protecting the interest of the poor
savers by creating a level-playing field that promotes financially sound and
legally unambiguous operations by all formal and semi-formal microfinance
providers.
Appropriate deposit protection policies are especially important at this point
in time as both the Samurdhi Banking Societies and a handful of semi-formal
microfinance providers are contemplating the establishment of larger, formal
financial sector institutions.
Presently the World Bank in Sri Lanka is involved only in one project concerned
with microfinance. The Energy Services Delivery project has provided credit of
US$ 24.2 million and a grant of US$ 5.9 million that is delivered through the
DFCC part of which is on lent to microfinance wholesale and retail institutions
and organisations including SEEDS for mini hydro and household solar projects.
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