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Microfinance in Sri Lanka
 
Microfinance in Sri Lanka
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 Overview

  
The microfinance movement in Sri Lanka dates as far back as 1906 with the establishment of Thrift and Credit Co-operative Societies (TCCSs) under the Co-operative Societies Ordinance introduced by the British colonial administration. These were the first credit co-operatives to be established in Sri Lanka. The societies fulfilled a wider role during the early decades of the 20th century, being involved also involved in procurement of inputs and distribution of products, a role eventually taken over by the Multi-Purpose Co-operative Societies (MPCSs) which were originally established during the 1940s as Consumer Co-operative Societies and renamed Multi Purpose Co-operatives in the 1950s.
 
The network of TCCSs was weak and in decline by the late 1970s and there were plans to wind up many societies. It was that this time that a revival of the movement was initiated by the charismatic P.A.Kiriwandeniya, with the TCCSs being re-organized under a new name: SANASA. The SANASA TCCSs are member owned societies, grouped together as a Federation but coming under the purview of the Department of Co-operative Development. Parallel to the SANASA TCCSs are the MPCSs and their financial service arms, the Co-operative Rural Banks (CRBs). The MPCSs and CRBs also fall under the purview of the Department of Co-operative Development.
 

Commencing in 1985 the Government established 17 Regional Rural Development Banks (RRDBs) through an Act of Parliament. These institutions were given the task of reaching remote rural areas and smallholders who lacked access to financial services from commercial banks. The RRDBs covered all districts of Sri Lanka with the exception of the North and East. Their success, however, was limited by internal structural weaknesses and excessive geographical fragmentation, which prevented them from reaching a critical mass. In addition, the banks lacked sound lending and monitoring policies, and operations were difficult to improve and standardize. A significant restructuring and recapitalization took place in 1998-1999 and the RRDBs were consolidated into the six Regional Development Banks (RDBs) which exist today. This involved granting RDBs more autonomous management, allowing a broader ownership base, and having board members appointed by shareholders, with the intention of creating more professionalism of operations and, thus, their viability and sustainability in the long-term. The Government of Sri Lanka recently announced plans to merge all six RDBs into one Development Bank which would operate nationwide.

The late 1980s and 1990s saw the entry of several local and international NGOs into the microfinance business. Many of these NGO-MFIs originally combined microfinance activities with other social and community development activities. However, in the very recent past there has been an emerging trend of separation of the microfinance and non-microfinance activities of some of these institutions.

The Government plays a key role in the delivery of microfinance services. Various Government initiatives in the microfinance sector have been implemented from time to time. These are addressed in more detail in the section titled “Government Policy”. According to the “Mahinda Chintana”, the 10 year development framework of the present government, around 65% of microcredit in Sri Lanka is provided through the government. The Samurdhi Development Programme which was introduced in 1995, replacing the previous Janasaviya Programme, is the largest of these initiatives. The Programe has a savings and credit component which is administered through the network of 1,038 member-owned, Samurdhi Bank Societies (SBSs).

Following the tsunami which struck Sri Lanka in 2004, there was an influx of foreign aid to the country, of which a substantial amount was channeled to the microfinance sector. While many donors worked through established microfinance institutions, some funded the establishment of multi-sectoral livelihood programmes which included microfinance components. These were largely unsustainable in the long-term and had some detrimental effects on the sector in the short term through their mix of grants and subsidized loans and the resulting damage done to the established credit culture. Regional microfinance institutions such as BRAC of Bangladesh also entered the sector after the tsunami and rapidly scaled up to become a significant player among NGOMFIs, achieving an outreach of 75,000 microfinance clients in just 4 years.

A recently emerging trend is the entry of commercial banks and registered finance companies and other large corporate entities into the microfinance business. Hatton National Bank’s “Gami Pubuduwa” (“Village Awakening”) microfinance programme is probably the oldest microfinance programme among the licensed commercial banks, having been established in 1989 and disbursing over Rs. 3.5 Bn (approximately US$ 35 Mn) to around 70,000 micro entrepreneurs over the years. Some recent entrants are aggressively moving into the sector and have the resources and infrastructure to scale up rapidly. However, for many commercial banks and finance companies, microfinance is more a Corporate Social Responsibility (CSR) or image building activity.

As mentioned below in the section on regulation, the absence of a cohesive regulatory and supervisory system for the microfinance sector is one of the barriers to the future growth of the sector. With donors moving out of the Sri Lankan microfinance sector, funding becomes a key issue, especially for NGO-MFIs, which are restricted by law from accepting public deposits and further restricted from obtaining off-shore debt and equity funding due to prevailing exchange control restrictions. Accessing local funding is also somewhat of an issue as local banks and other funding agencies are still reluctant to lend to or invest in the microfinance sector due to the perception of high risk. 
 
Regulation of the Microfinance Sector

The absence of a cohesive regulatory and supervisory system for the microfinance sector has been one of the barriers to the growth of the sector. Various providers of microfinance, especially those which are owned by or linked to the state, are regulated and supervised by different entities e.g. the SBSs are regulated by the Samurdhi Authority of Sri Lanka; the CRBs are regulated by the Department of Co-operative Development; the RDBs, as licensed specialized banks, fall under the purview of CBSL. However, the methods and standards of supervision vary widely and the absence of a single regulatory and supervisory authority has resulted in the lack of uniform standards and development of a common direction. Furthermore, there are a large number of NGO-MFIs which are entirely unsupervised and whose microfinance activities are not governed by specific regulations. To remedy this situation, CBSL drafted a Microfinance Institutions Act (MFI Act), by which it was proposed to regulate and supervise microfinance institutions (MFIs). However, a large number of microfinance providers would still have been excluded from under the proposed Act as all the RDBs, registered finance companies, building societies, co-operative societies and some not-for-profit organizations were exempted from the requirement to obtain a license to operate from CBSL. The SBSs were not mentioned at all and it was not clear whether they would be regulated by the Act. MFIs which were required to obtain a license under the Act were also expected to meet certain capital requirements depending on their scale of operations. The proposed Act would have permitted the licensed MFIs to accept public deposits. This is currently not possible for institutions other than those which are regulated and supervised by CBSL (e.g. the RDBs and registered finance companies) or those established as co-operative societies and building societies which are restricted to accepting deposits from their members.

The proposed MFI Act, if it had been implemented, would also have exempted licensed MFIs from the provisions of the Money Lending Ordinance. Microfinance is currently classified as a money lending business and therefore restricted from obtaining offshore equity investment into such business. This has a negative impact on a number of large, better performing, unregulated MFIs which are unable to access offshore equity capital which could enable them to scale up their operations.

The attempt to introduce a regulatory and supervisory system for the microfinance sector has been going on for a number of years. Many MFIs and other sector stakeholders have expressed concern over some provisions in the draft document released by CBSL. However, at the time of writing this report, the draft MFI Act has been withheld for restructuring and possibly, significant amendment. It is not known when the amended Act would be available and submitted to Parliament for approval.

*Adapted from 2009. GTZ/BWTP. Microfinance Industry Report. Sri Lanka.


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ProMiS (Promotion of the Microfinance Sector) is a comprehensive cooperation programme implemented by the Ministry of Finance, Sri Lanka in collaboration with German Technical Cooperation(GTZ), financed by the German Government.