Contents - Microfinance in Sri Lanka

7.2.5 Micro Finance
7.2.5.1 The Existing Situation
Microfinance in Sri Lanka has a long tradition. It has been regarded as an effective instrument for
reduction of poverty through the creation of jobs for the poor and restoration of their livelihood. At
present, microfinance is practiced by many actors that range from ministries to commercial banks,
specialized banks, registerd finance company and informal lenders. Many donors and NGOs also support
to improve the accessibility of poor people to financial services. The government of Sri Lanka is the
major provider of financial services through various agencies. About 65 percent of the total micro credit
in the country is provided by the government.
According to a survey conducted by the Consultative Group to Assist the Poorest (CGAP),
microfinance in Sri Lanka has achieved impressive outreach; with more than 15 million deposit accounts
and 2 million outstanding micro loans from a population of 20 million people. In addition to micro loans,
working capital, trade finance, investment credit, crop loans and savings facilities are the most common
services provided. Notwithstanding this achievement, several challenges hinder the development of an
effective and sustainable microfinance sector in the country.
7.2.5.2 Issues and Challenges:
At present a microfinance policy is not found in the country. In consequence, there is no
institutionalized mechanism to coordinate the microfinance interventions with other policies, which have
been formulated for rural development. In this environment the sector has been fragmented. Responsibilities
in the sector are scattered among different agencies, which in part have quit different views of the role of
the microfinance sector in the development process of Sri Lanka.
The supervisory and regulatory framework are found for commercial banks, specialized banks,
finance companies and regional development banks with the Central Bank of Sri Lanka being the
supervisory body. There is a very rough framework for Co-operative Rural Banks. However, no regulations
are found for Micro Finance Institutions (MFIs) and NGOs. The absence of a unique policy and
supervisory framework has allowed the proliferation of fundamentally unsustainable MFIs which weakens
governance, diminishes the institutional autonomy, exacerbates the lack of enforcement of financial
prudence and does not provide for transformation of MFIs and NGOs into depository institutions or
regularize their savings activities.
The lack of institutions for specialized training and research in microfinance is a major issue. The
training programme conducted by certain government agencies and NGOs do not meet the entire
requirements of the sector. They do not offer a comprehensive curriculum that is consistent with
microfinance best practices, which is a requirement of the majority of MFIs. Some semiformal MFIs are
unaware of their need for such training. Further, the academic courses in microfinance are not found in
universities. The dearth in training and research activities has contributed to the fragile nature of the
sector and weaknesses such as substandard portfolio management, low qualifications of the staff, shortage
of clear business concepts, obsolete accounting standards and the rudimentary level of information
technology.
The financial results of the majority of MFIs, have failed to conform to internationally accepted
standard for sustainability. Their financial viability is deteriorating. Services offered do not sufficiently
take into account the needs of the target group. Supply as a whole is not differentiated enough and the
terms of credit have a rather prohibitive effect on clients. The long – term credits are lacking. Supply of
financial services also differs from region to region. The offers are deficient since they are mainly used by
non-poor or people close to the poverty line. The microfinance financial services system needs to have
a broader outreach to the poor and very poor members of the population.
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