Despite the long-standing microfinance crisis in Sri Lanka, which has led to severe financial hardships and even the loss of lives, particularly in the Northern and North Central Provinces, the Government has yet to announce any concrete measures to address 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.
Speaking to The Sunday Morning, Sajini Uyangoda, a sociologist actively working with victims, said: “People are suffering but the rulers never see their suffering.”
She explained 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,” Uyangoda stressed.
Having researched the issue in the deep south, she revealed to The Sunday Morning that many victims 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.
“These individuals are suffering. The Government must take swift action to regulate these institutions,” she added.
Uyangoda further pointed out that the potential benefits of microfinance institutions were being overshadowed by the unethical behaviour of these unregulated entities.
When asked about the total number of affected people, she noted that in recent years nearly all impoverished villagers had become targets of these institutions. With no other options to meet their basic needs during a severe economic crisis, they have turned to microfinance.
“Even today, most women take loans from individuals or institutions as a temporary relief to cover their daily expenses, without considering their future. They are innocent and suffering,” she said.
Uyangoda stressed that while microfinance was a positive concept, there needed to be oversight of the financial practices of these institutions within the community. She urged the Ministry of Finance and the Central Bank of Sri Lanka (CBSL) to take immediate action to regulate the microfinance industry.
However, The Sunday Morning learns that the growth pattern of these unregulated microfinance institutions has undergone a significant shift in recent years. Initially, these institutions primarily targeted rural communities, but according to reliable sources, some of the newly established institutions have now expanded into urban areas as well.
This shift in operations has resulted in a demographic change, with the focus moving from the northern part of Sri Lanka to the southern and central regions.
The nature of microfinance
Microfinance plays a crucial role in providing financial services to low-income individuals who are excluded from traditional banking. According to the Foundation for International Community Assistance (FINCA), microfinance institutions primarily offer microloans, savings accounts, insurance, and money transfer services to marginalised communities, particularly women and the rural poor.
Globally, 1.7 billion adults lack access to formal financial services (World Bank’s Global Findex). Microfinance aims 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 ‘cheetu’ existing since the early 20th century. Over time, the sector has evolved into a diverse network of licenced 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 licenced microfinance companies, while other institutions operate under different regulatory bodies.
Microfinance companies in SL
As of 30 June 2021, only four Licensed Microfinance Companies (LMFCs) have been registered in Sri Lanka under the Microfinance Act No.6 of 2016. These include Berendina Micro Investments Company, Lak Jaya Micro Finance, Dumbara Micro Credit, and Sejaya Micro Credit
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).
These include Agro Micro Investments Ltd., Arthavida Intermediary Ltd., Athugala Credit and Investment Ltd., Berendina Micro Investment Company Ltd., Candea Credit Ltd., Capital Credit and Investments Ltd., Commercial Credit and Finance PLC, DCS Credit and Investment Ltd., Dinujaya Holdings Ltd., and Dumbara Micro Credit Ltd.
Other key members are Eclof Sri Lanka Ltd., Ekabaddha Praja Sanwardhana Kantha Maha Sangamaya, FHP Micro Assist Ltd., Fintechnology Asia Pacific Lanka Ltd., Future Life Investments Ltd., Graduate Investment Ltd., Hambantota Women’s Development Federation, HNB Finance PLC, Janarukula, and KiwiFund Ltd.
Additionally, Lak Jaya Microfinance Ltd., Lanka Capital Future Investment Ltd., Lanka Credit and Business Finance Ltd., Lanka Financial Services for Underserved Settlements, LOLC Finance PLC, Muslim Aid Micro Credit Ltd., Nation Lanka Finance PLC, People’s Micro Commerce Ltd., Pragathisewa Foundation, and Purewin Credit and Investments Ltd. are part of the association.
The network also includes Reliance Credit and Capital Investments Ltd., Reliance Investments Co. Ltd., S.N. Micro Credit Ltd., Sanasa Development Bank PLC, Sejaya Micro Credit Ltd., Sesatha Economic and Livelihood Development Association, Sewa Community Credit Ltd., Silvereen Micro Credit Co. Ltd., South Asia Partnership Sri Lanka, and SAPCO.
Completing the list are the Institute for Development of Community Strengths (INDECOS), Uva Govijana Kendraya, Ventura Crystal Investments Ltd., Women Enterprise Development Service Centre, and Y Gro Ltd.
No information from Govt.
When The Sunday Morning reached out to the Department of Development Finance of the Ministry of Finance, an official declined to provide information, citing a new circular that restricted the disclosure of such details to the media.
Department of Development Finance Director General Manjula Hettiarachchi was overseas at the time. Prior to contacting the department, The Sunday Morning approached Deputy Secretary to the Treasury Ajith Abeysekera, who stated that he had no information on recent developments in the microfinance sector.
Additionally, attempts to reach CBSL Department of Supervision of Non-Bank Financial Institutions Director R.M.C.H.K. Jayasinghe proved unsuccessful. Other officials from the department also declined to share information, citing a lack of authority to do so.
Moreover, all attempts made to contact Finance Ministry Secretary Mahinda Siriwardana and Deputy Minister of Economic Development Prof. Anil Jayantha Fernando were also unsuccessful.
Committee on Public Finance (COPF) Chairman Dr. Harsha de Silva voiced his disappointment over the prolonged delay in introducing new legislation to regulate the microfinance sector.
Speaking to The Sunday Morning, 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.