The main objective of the Sri Lankan Microfinance Act No. 06 of 2016 was to regulate microfinance institutions and give them a legal recognition both locally and internationally. The Act focused more on regulating MFIs that lend as well as accept deposits. The high cost of capital requirement by the Central Bank was only fulfilled by 4 microfinance companies that received their licenses. However, a large contingent of MFIs that are only engaged in lending were left out of the regulatory framework. This gave rise to the emergence of many private money lenders who formed their own companies and exploited the grassroots level in the guise of microfinance by charging exorbitant interest and other charges from their clients.
In 2018 the Lanka Microfinance Practitioners’ Association (LMFPA) reestablished a self-regulatory framework for its members by introducing a Code of Conduct and also introducing a Recommended Maximum Interest Rate (RMIR) for the benefit of the end borrower. This helped distinguish LMFPA member organizations from other financial institutions to some degree yet the influx of money lenders posing as MFIs were on the rise and a legal framework to regulate micro credit became a crucial need for the betterment of the industry.
The LMFPA intervened on several occasions to address this issue that was bringing disrepute to the entire industry. Therefore in 2019, the Central Bank of Sri Lanka drafted a new regulatory framework for the microfinance industry called the Microfinance and Credit Regulatory Authority Act. In many moons thereafter, the draft Act has now received fresh approval from the present Cabinet to be drafted by the Legal Draftsman in 2021. The LMFPA has already forwarded its observations on the 2019 draft and proposed a sustainable mechanism to several key parties regarding the implementation of the proposed regulation. The Association will be closely monitoring the developments on the latest draft which is expected to be finalized in the near future.