Hundreds of thousands of Sri Lankans, particularly women in rural areas, continue to be victimised by unregulated microfinance practices in Sri Lanka, despite repeated calls for multiple governments to act against the vicious cycle of debt that has led to strife, suicide and destitution. Northern and North Central Provinces have been the most impacted.

Nevertheless, despite claims on the political stage to address the issue, the Government has taken little or no concrete action regarding the issue. With microfinance institutions continuing to expand, especially in the aftermath of the economic crisis, rural communities remain vulnerable, yet no official action has been taken to regulate or monitor these institutions effectively.

When well regulated, microfinance plays a crucial role in providing financial services to low-income individuals who are excluded from traditional banking. During its origins, microfinance aimed to bridge this gap, empowering individuals by enabling entrepreneurship, improving savings, and facilitating financial stability. Sri Lanka has a long history of informal microfinance, with traditional savings methods like ‘seettu’ existing since the early 20th century. Over time, the sector has evolved into a diverse network of licensed banks, finance companies, cooperatives, and Non-Governmental Organisations (NGOs). However, many microfinance providers remained unregulated, leading to concerns over high interest rates, unethical recovery methods, and financial instability. To address these issues, the Microfinance Act No.6 of 2016 was enacted to regulate the industry, ensuring transparency and protecting low-income borrowers. The CBSL only oversees licensed microfinance companies, while other institutions operate under different regulatory bodies. As of mid-2021, only four Licensed Microfinance Companies (LMFCs) have been registered in Sri Lanka under the Microfinance Act No.6 of 2016. These institutions are regulated to provide financial services such as microloans, savings, and other financial assistance to low-income individuals and micro-entrepreneurs, promoting financial inclusion and economic empowerment. Meanwhile, a total of 46 companies are registered with the Lanka Microfinance Practitioners’ Association (LMPA). According to a report by the UNDP’s data from the National Citizen Survey, 3.8% of households resort to microfinance institutions, while 11.2% turn to finance and leasing companies. Among households borrowing from microfinance institutions, 52.2% seek funds for economic activities, and 21.3% do so for basic consumption needs. Similarly, 17.6% of households borrowing from finance and leasing companies utilise the funds for basic household consumption. “Approximately 15,000 microfinance institutions are believed to be operating unlawfully in the country, raising questions about the efficacy of existing regulatory measures and monitoring,” The UNDP report stated.

A sociologist actively working with victims said: “People are suffering, but the rulers never see their suffering.” The expert described that the primary targets of these institutions were mothers, as they were the most vulnerable in rural villages. Many of these victims fall into cycles of debt without their knowledge. “The financial literacy of these women is very low, and these institutions use application forms to fill out details in English. Most of these women cannot read English, so they have no idea what they are signing. Ultimately, when these cases are brought to court, the institutions present applications with signed consent forms from the victims to justify their actions. This is the crux of the microfinance debt trap,” the sociologist explained. According to a civil society organisation, which helps the victims, many were repaying more than they had originally borrowed or were promised in the initial agreements, due to fear of harming their families or having their properties confiscated.

Opposition MPs, such as SJB Parliamentarian and Chair of the Committee on Public Finance (COPF) Dr. Harsha de Silva voiced his disappointment over the prolonged delay in introducing new legislation to regulate the microfinance sector. Dr. de Silva noted that there had been no progress since the previous set of laws was withdrawn.  While expressing criticism of the earlier amendments, he emphasised the urgent need for the Government to enact fresh legislation and extend relief to all those affected by the microfinance crisis.

Given the Government's mandate to alleviate people from poverty and to ensure a just and free society, addressing this scourge that preys on the most vulnerable segments of our community should be a top priority for the State.