Everything else.. Micro-financing in Sri Lanka: What You Need to Know.

Micro-financing in Sri Lanka: What You Need to Know.

2021 Sep 13

The COVID-19 pandemic has taken a toll on all our lives. While some of us may have the privilege of placing online grocery orders and working from home, others have to desperately wait for travel restrictions to be lifted to secure their income, or in some cases, their next meal. In times of crisis, one has to wonder: isn’t there any way to help these people?

Enter microfinance. Formulated to provide access to resources and capital to the low-income individuals, this mechanism presents them with the opportunity to become self-sufficient. Microfinance refers to the range of financial products offered, such as micro-loans, micro-savings and micro-insurance. Since its inception, microfinance has been operating with the same objective: to alleviate poverty.

Compared to many other Asian countries, Sri Lanka is smaller, and it is still a developing nation. Of our estimated population of 21.8 million, about 80% is rural. Moreover, ours is a country that has endured a gruelling amount of hardship – from the civil war between the Liberation Tigers of Tamil Eelam (LTTE) and the Sri Lankan Government that disrupted the country for 26 years, to the tsunami that hit the coasts killing more than 30,000 people and leaving even more vulnerable from the loss of livelihoods. Against this backdrop, it is safe to say that a significant percentage of the population would benefit from microfinance.

In Sri Lanka and other less developed countries, microfinance services are available through formal and informal sectors. The formal sector comprises state owned and private Commercial Banks, Regional Development Banks, Co-operatives and various NGOs. The informal sector includes friends, relatives, landlords, traders and produce buyers, among many others.

The poverty lending approach of microfinance promotes donor-funded credit for the poor, decreasing poverty through subsidised and charitable non-finance methods. The financial system approach supports commercial microfinance for the economically active poor. This term refers to the segment of the poor who have some form of employment, but with insufficient income. Microfinance Institutions (MFIs) play a significant role in the financial framework of developing countries by acknowledging the gap in the market.

The population below the poverty line in Sri Lanka was 6.7% in 2017, according to the Department of Census and Statistics of Sri Lanka. The percentage of households below the poverty line in Sri Lanka was 5.3%. This suggests that a higher percentage of women exist in Sri Lanka in comparison to the average percentage of women in the world, who can be considered for microfinance.

History of Microfinance

Dating back to 1906, under the British colonial administration, the history of the microfinance movement in Sri Lanka is a lengthy one. Operating since the early 20th century, ‘Cheetu’ is an informal method of savings and capital accumulation that has operated as microfinance for the poor. ‘Janasaviya’ (meaning ‘strength of the people’) was introduced by the Government in the late 1980s. It was then renamed “Samurdhi” in the early 1990s. Since then, the topic has garnered interest, thanks to the success stories experienced by other countries in the region. In the 1990s, microfinance services were kick-started by non-governmental, public and private organisations in Sri Lanka, helping low-income, economically active people.

A countrywide survey of MFIs in Sri Lanka conducted by Thrift and Credit Co-operative Societies (TCCS) from September 2005 to November 2009 observed microfinance providers of various institutional types. This also included NGO-MFIs, some of which experienced rapid growth in the past decade.

The results show that the outreach of microfinance services in Sri Lanka is significant. However, access to credit remains below its potential and barriers still exist for the lower-income groups.

The Microfinance Act No 6 of 2016

After several attempts to regulate the MFIs in Sri Lanka, the Parliament enacted the Microfinance Act, No. 6 of 2016 (the Act), which came into effect on 15th July 2016. This encompasses the licencing, regulation and supervision of microfinance businesses. These are called licenced microfinance companies (LMFCs). LMFCs are directly regulated by the Monetary Board of the Central Bank of Sri Lanka (the Monetary Board). The definition of the microfinance business that the Act provides is as follows:

“Accepting deposits and providing:

(a)       financial accommodation in any form;

(b)       other financial services; or

(c)       financial accommodation in any form and other financial services

mainly to low-income persons and micro-enterprises…”

Microfinance Models Practised in Sri Lanka 

Village Banking

A community banking model that views the whole community as one unit and establishes semi-formal or formal institutions through which microfinance is dispensed. They commence with savings, progressing into providing small emergency loans that later become larger loans.

Grameen Type Group Collateral Lending

This emerged from the poor-focused grassroots institution, Grameen Bank. It was started by Professor Mohammed Yunus in Bangladesh. A bank unit is established with a Field Manager and bank workers, covering 15 to 22 villages. The group is observed for a month.

Individual lending using group as a focal point

An adaptation from ASA model where individual lending takes place utilising a group of 25 to 30 as a point of contact.

Individual lending

This is a straightforward lending model where microloans are given directly to the borrower.

Self Help Groups (SHG’s)

Groups of 10 to 20 women who save and provide credit to each other.

Credit Unions /Cooperatives

A unique member-driven, self-help financial institution.

ROSCA’s (Seettu)

 Rotating Savings and Credit Associations (ROSCAs) also known as “Seettu”. This is a group of individuals who make donations to a common fund, which is presented as a lump sum to one member in each cycle.

The Central Bank of Sri Lanka has issued a list of licenced microfinance companies in Sri Lanka that are reliable. The pandemic presents an opening for the microfinance sector to step up to the plate and provide relief to the underprivileged individuals of our country. If paid serious attention and nurtured, microfinance could prove to be an effective method in alleviating poverty, post COVID-19.

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