Report on enormous emerging economies

    There is an enormous impact of microfinancing on rural development, especially in emerging economies. Governments of different countries play a vital role in the building of favorable conditions for poor households and they also use it as an important tool for the social-economic revival of the poor.Formal financial services are not easily accessible to every citizen in emerging and developing countries, a substantial amount of individual especially women don’t have access to financial credit facilities. According to (Demirguc-Kunt, A., Klapper, L., Singer, D. and Oudheusden, 2015) worldwide near about 2 billion adults in 2014 don’t have their bank accounts and were unable to access the financial services from commercial or non-commercial banks.

            Microfinance which is also called microcredit is a kind of banking sector is giving facilities to a jobless or needy independent person or set of people who would have no other way in a monetary act of assistance (karim, 2011).Fundamentally microfinance presuming loans, credits, and approach to a savings account- even financial protection and transfer of funds to the owner of the small business and business executive (karim, 2011).The microfinance industry was commenced in Bangladesh and some sections of Latin America in the mid -1970s to supply financial standing to the indigent people. This representation obtained popularity

                It really essential for poor households to have access to financial services, research shows that it helps them to smoothly fulfill their daily consumption needs, opportunity of establishing their own business and become part of the formal economy in the long run. (Makokha, 2014)

                Micro financial services growth was picked a pace in the late 1970s, when poor in developing countries get access to it. Figures show that clients had increased from 10 million in 1997 to grow over 200 million in 2010. (Reed, 2011)

We need to know the factors that help these institutions to fulfill their financial and social goal which eventually help these MFIs to be part of the economy in the long run and easily accessible to poor households. Financial sustainability is an important debate for an MFI which is aiming for maximum outreach because still many MFIs are under financial support of government bodies, NGOs, etc. (Hudom, & Hermes, 2018). Report results show that in 2010 roughly only 20 to 25 percent of MFIs are not using subsidies provided by different bodies to conduct their activities. (Beatriz Armendáriz,Bert D’Espallier ,Marek Hudon , 2011)

It is not considered a sustainable business model of an MFI to depend on subsidy for a long period of time. A review study’s results will help the policymakers to define the determinants of the performance and efficiency of MFIs that how micro-financial institutions do poverty alleviation in a financially sustainable way. The research on MFI efficiency is still in its early stages. (Roy Mersland,Ludovic Urgeghe, 2013)

In the early 1990s, the number of papers had been published to address this pressing matter but there is a controversy among these papers and no evident result was concluded and measurement of MFIs performance is still considering a research gap to be fulfilled by researchers.

Sri Lanka – Country Context of The microfinancing industry of Sri Lanka.

               Sri Lank is an island state located off the south – eastern direction of India, it’s a small country compared to other Asian countries with a surface area of around 65,000 sq km. The latest census figure shows that the Sri Lanka population was estimated at around 21.7 million people in 2018.

           It is a land of multi-religious and multi-ethnic society. The majority of the population of Sir Lanka are Sinhalse by ethnicity and religion-wise Buddhist, with the large presence of Tamil, Muslim and Christian community. For the past 25 years, a dispute has been going on between Sri Lanka Government and Tamil separatists, the Liberation Tigers. It has critically disrupted the country's economic, social and well-fare activities. The country’s topography is irregular and divided. It has a coastal belt which is less than 100m above the sea level and along it, rolling plains of changing width leading to the foothills of the central hill. It has an equatorial and tropical climate. The country’s climate is divided into two zones (wet-zone in the south west & a dry zone covers the reminder part) due to uneven rainfall

Microfinance Industry in Sri lanka

               MFIs have been practicing different models in Sri Lanka. Historically, In 1990s most popular term is in use was Village Revolving Funds and community-based organizations were operational in the form of credit Co-operatives, Village Societies. In the early century, credit co-operatives were only introduced for those salaried employees who come under the middle-class category than in the 1980’s, it was introduced to rural masses. In 1986, SEEDS and the majority of NGOs adopted the village society model. Limitations of these models made new organizations like Lakyaya, Ceylinco Grameen and BMI to employ methods of client lending directly. (Atapattu, 2009). These models have been discussed in detail below;       

Village Banking of The microfinancing industry of Sri Lanka.

               Another name of Village Banking is Community Banking in which semi-formal or formal institutes are made which treats the whole community as one unit and also disperse microfinance in community. NGOs and other organizations put their great effort in the establishment of these institutions, who also conduct training sessions of community members to handle the various matters of finances of the community bank. (Atapattu, 2009)

Village banks firstly start with the creation of savings accounts than eventually provides emergency loans and finally, it leads to larger loans. They operate the bank accordingly to their own needs, they appoint their own officers, dedicate their own bylaws, authorized to distribute loans to individuals, do recovery of payments and collect savings. A moral collateral (a promise made by a group to back each individual) has been used as a guarantee of payback for these loans instead of papers of property or goods.

Garmeen Type Group Collateral Lending

     These are grassroots level institutes especially focus on poor people. Origin of Garmeen banks is from Bangladesh, it is the initiative of Prof. Mohammad Yunus. This establishment is consisting of a Field Manager and a number of bank workers and it covers normally 15 to 22 villages. To understand the environmental settings of these villages, field managers and workers pay a number of visits to these villages. Their main purpose is to identify their clientele and let them know about the purpose and function of the bank. Potential borrowers are identified and make groups of five of them. Initially, at the first level, only two of them are given the opportunity to apply for and receive, a loan. They observe the group for at least a month to check that if group members are following the specified rules of the bank. If all installments have been paid by the first two borrowers within fifty weeks than the rest of the group members are given the opportunity to receive a loan from the bank. Such a practice of restrictions put a group pressure on each group individual to keep their records clear. Such responsible behavior from a group effort considered as collateral for a bank to give loans to them. (Silva, 2012)

     Numerous Sri Lankans’ agencies tried to follow the approach of Grameen but Ceyline Gareem Credit Co.Ltd is the only one who keenly adopted and followed the Grameen model. Now they operate in Sri Lanka  with a new name “Grameen Credit Company”

Group acts as a focal point for an individual borrowing

     This approach is adapted from ASA model where a group of 25 to 30 members becomes a point of contact for individual-level borrowing. Group is only formed to bring efficiency in loan collection and ensure provision of other services, they don’t consider as a form of collateral. These groups do minimum savings and the majority of time two members volunteer to provide a guarantee. Weekly or monthly group meetings are held at specific times and venues where new applications are submitted and all loan collections are done by the credit officer of the MFIs. (Silva, 2012)

Lak Jaya and Berendina Microfinance institutions follow ASA model with some changes accordingly. Lak Jaya implements this ASA model to get weekly recovery results with women.

     The model implemented by BRAC Sri Lanka is similar to the Bangladesh BRAC model. In this model, only women are allowed to take a loan and give them a form of small groups. The payment method is made once in a week which is another difference of this model from other Sri Lanka models. They work in close geographical area and door to door surveys are being done with 4 sq meter to find out potential clientele. (Atapattu, 2009)

Individual Borrowing of The microfinancing industry of Sri Lanka.

     It is the simplest model to be adopted in which lending is given directly to a borrower. It does not require to form a specific number of groups or put peer pressure for recovery of these loan payments. Commercial and regional development banks both followed this model to give loans in Sri Lanka. Groups are not involved to put pressure but individuals will be asked for collateral or letters from guarantors. Since the 1960’s, both commercial and private banks are giving loans based on this model and presently it is still the most popular mode of loan model for commercial banks to lend money to people. The majority of loans issued by regional development banks are based on the approach of this model. (Atapattu, 2009). It is also increasingly in practice of NGOs like SEEDS (MFI) to lend large loans or products specific loans, for example, solar loans and business development loans of specific types.

Self Help Groups      of The microfinancing industry of Sri Lanka.

In this model, credit is generated via group members’ savings, it usually a small group of 10 to 20 women. In a few cases, agencies facilitate initial training and capital to the group to encourage the activity. In Sri Lanka, the existence of this model is limited to specific areas but popular among them. It trains the local people to become the supporting pillar of each other and develops habits of saving among them.

Credit Unions/ Cooperatives of The microfinancing industry of Sri Lanka.

         These are self-help financial institutions in which members of a particular group or organization make an agreement to do saving than give loans to each other on a reasonable rate of interest.

Rosca’s (Seettu) of The microfinancing industry of Sri Lanka.

Rosca stands for Rotating Saving Credit Association other name of it is ‘Seettu”. It is a group of people who does cyclical contributions to generate a common fund and this lump sum amount is given to one member in each cycle. For example, 12 members make a group and decided to contribute Rs. 10 by each member at the end of each month. This collection of Rs. 120 monthly will be given to each member once in 12 months cycle. This practice is really popular in urban and rural areas of Sri Lanka. (Atapattu, 2009)

Financial provides of The microfinancing industry of Sri Lanka.

Srilankan’s financial system consists of wide range of financial provides . they are

·         Semi-formal financial institution: such as cooperative organization, non-government organization, self help groups and government carried outing programmes like divineguma, samurdhi etc.

·         Informal institution: such as money lenders , credit and saving  service

Regulation and supervision of The microfinancing industry of Sri Lanka.

        Central bank of srilanka regulates and superving the commercial banks n specialized banks , financial companies and leasing companies ,insurance board of srilanka supervising the insurance companies and brokers , increasing the development of micro finance in the last decade  by effective requlatoty of srilanka  can help to  the substainability. To the  substainable  development of micro microfinance  sector and its inclusion in the financial system depends on how micro finance effort to adopt the best pratices and to ensure the conductive to  growth. An oview of financial regulation and supervision of micro finance institutions its presenting in the following (Table1.1 )

Table 1.1

Regulation and supervision of micro finance institution (modoran, 2009)

Micro-finance institutions" take a vital role in the current "financial field" and they could carry a double social and financial responsibility. The population of Sri Lanka is almost 21 million among which approx 70% of people are staying in the "rural areas", whose primary profession is agriculture. Per capita earnings of this country have been increased remarkably starting from 871 dollars to 3835 dollars by the end of 2015. In a country like Sri          Lanka "microfinance" has a practical and unique developmental approach. There is agreement that those "microfinance institutions" generally provide "financial services" to comparatively weak, avoided by conventional financial intermediaries. Retrieve to capital is essential for poor for raising the productivity range, generate income, create wealth, empower women, encourage entrepreneurship, access education, reduce poverty and improve wealth.

Microfinance’ sector in srilanka can be catercarized by following ways

·         Cooperatavie rural bank and other co-operativies

·         Thift and credit co-operative societies

·         Samurdhi societies

·         NGOs- MFIs

·         Licensed specialised banks

·         Others micro finance institution( commercial banks , registered  financial companies )

Microfinance industry report in srilanka providing the types of institution and their outlets its presenting the following( Table 1.2)

Table 1.2

Micro finance industry report in srilanka (microfinance industry, 2010)

A new discipline for academic research is micro-finance which is based on an effective and unique approach. Traditional financial intermediaries have not enough focused on this new discipline. Normally ignored by the traditional financial intermediaries, consensus results present that financial services are extended to the poor people by the microfinance institutes. Access to the finance is essential in order to meet the objectives of empower women, improved healthcare system, utilization of goods and services, access to the educational institutes for all, create wealth, raise of productivity, encourage entrepreneurship, and reduction in poverty. Research findings of Kipesha elaborate on the maximization of goods production. Research explains that to maximize the production of the goods and services of the firms, efficiency as a better use for the utilization of resources in better order.  Just like Sri Lanka, regarding the efficiency of microfinance institutions very limited research work is done, particularly in the developing and poor countries.  Some studies which considered only financial efficiency did not give attention to social efficiency.  To include microfinance services, this social efficiency research work has vital importance for the policy makers and managerial staff, considering this requirement many new financial institutions are opened in the rural areas of Srilanka after the year 2005. Furthermore, many activities of the commercial banks are diversified to serve the poor Srilanka microfinance industry is evolved as a key player (charitonenko, 2002)

Cooperative rural bank of The microfinancing industry of Sri Lanka.

Colombo District Co Operative Rural bank, incorporated in 1994, to personal and corporate customers. The prime purpose of this group is to provide various services related to finance and banking in the market of Sri Lanka. The Company working in three areas: Commercial, wholesale and retail. To do business, these services are centred upon the commercial banking wholesales services. Moreover, this service of retail is also licensed. By the establishment of a huge network in a socially responsible way covering the entire country SriLanka the bank exists to deliver services in all customer segments. Considering distinct objectives, strategic action plan, a monitoring system, and success sharing system with relevant people, the bank has made it possible to achieve success goals and superior financial services in the competitive banking sectors during last few years. In the cooperative rural bank reaching greater heights as good cooperate governance and corporate management based on directors who are fully committed towards organizational goals bank is projecting accomplishment of its aims and goals. Although, the overall wellbeing of the banking system has become instrumental.

The supply and demand for microfinance have a major difference in the financial system of the country. In the formal sector, private commercial banks great concentrate in the short term lending to medium and large enterprises and also salaried employees. Only a few micro finance programs are profitable for the banks and give them long term benefits (crbbank.lk, 2017)

Thrift and credit co-operative societies of The microfinancing industry of Sri Lanka.

The areas of township and rural sites in the country are populated with the Tamil people who can only understand the Tamil language. Although these are named Tamil people as the name implies in the north and east areas of the country. Umbrella organizations working in these federations of thrift and credit cooperative societies are dealing with around eight thousand societies and communities to ensure appropriate micro-finance services for these territories and rural areas of the country. 

A primary society that serves the population living in the villages and communities of east and north areas is known as  “Primary SANASA Society”. Additionally, the organization is also famous as SANASA federation because it concerns with the movement of people in this area. Federation is also named as the movement in some areas. Federation is mainly working for the largest group of people. Services supported by this organization are also in the Sinhala language as the majority of people living in these areas speak the Sinhala language. People of this area have given credit to the SANASA for improvement in their lives and the success of this movement.

In Sri Lanka, the SANASA is the Sinhala acronym for the credit cooperative societies and movement of thrift. Records present that for 8424 primary societies the only working network of micro-finance is SANASA in the east and north areas of Sri Lanka.  Additionally, SANASA also covers other provinces of the country. Around 805000 people belonging to different religions and races are a member of this organization and movement in Sri Lanka. In Srilanka, the total population coverage. By multiple sociocultural political and economic issues, The internal strengths of this movement and organization were the reason that contributed in its survival and resulted in the growth of movement while protecting it from getting devasted by ethnic conflicts. An area designated for the societies is used for the primary societies function and operation.  There are several reasons behind the unique name and objective of "Sanasa movement” in Sri Lanka:

·         It is the organization which follows a cooperative philosophy among the whole community and its members.

·         From the last 100 years, the organization has successfully managed to work independently on cooperative principles.

·         In its service to humanity, Nonpartisan and nonpolitical present

·         as Sanasa Community,  Sanasa family has members from various castes, religions, and ethnicities. 

·         by the centre has the democratic right for governance, Bottom up management style where each village entity guided.

·         to the corporate institutions, Utmost transparency from the grass root level.  to express opinion and vote, Supremacy of the member (sanasa.coop, 2019)

Samurdhi societies of The microfinancing industry of Sri Lanka.:

            The Samurdhi programme also known as prosperity program was implemented in 1995. The program was focused on public participation based development in the country. Moreover, the prime objective of the program was to bring down the poverty level in Sri Lanka. In the late 1990s, Samurdhi was successfully working in 21 districts of the country. However, total districts are around 25. The main goal was to reduce poverty thus under this program many resources including food stamps were distributed and divided in the families of poor people in accordance with their requirements and needs. After this, one-third of the national poverty line was developed for households in 1998. Samurdhi programme had these components: 

1.      Total 80% of the programme budget was spent on the distribution of food stamps in the eligible and needy households.

2.      Samurdhi banks presented a programme for credit services, savings in the banks, and a fixed interest rate based loans offered to businessman and entrepreneurs for the startup of a new business.

3.      Through various social forces and workfare development and rehabilitation of community was ensured. Moreover, various training programs were offered regarding this e.g. training in accounting functions, productivity training, and materials resources development. 

           In 2003, the government of Sri Lanka requested to world bank for the provision of non-lending technical assistance for team working in the Samudhi program. From the beginning to now, Samudhi program has been changed a lot as reforms are made. Currently, reforms have divided this program into two main categories which include empowerment program and relief program.

In this relief program, some other programs are introduced with different themes. For instance, nutrition program, social security program and cash transfer program are included in this relief program. The Department of the Commissioner General of Samurdhi (DCGS) was established in 2008 as a kerosene program of relief in Sri Lanka. Moreover, this program was related to the dry ration stamps distribution. This program was mainly started for IDPs (internally displaced people). For these IDPs, ministries and financial departments are responsible to accomplish financial allocations and needs.

While on the other hand, the program started with the theme of empowerment was based on 5 sub-programs including Samurdhi housing programmes, social development, micro-finance program, a rural infrastructure program, and livelihood (Irigoyen, 2017).

Table 1.3

Process of poverty alleviation programs (divineguma, 2015)

Avove the chart (seeTab1-3) relieved that process of poverty alleviation program in  department of divinuguma development. chart shows project that what kind of project , how many percentage each contributed in the field. Project are  agriculture development ,live development ,fisheries development,enterprise development marketing development and vocational training. here the statistic report indicated that specially enterprise development contribution is high than others and 71.6 (Mn) got contribution of the beneficiaries and 9,481 number of beneficiaries secondly agriculture and live development are mostly contrituted to the poverty alleviation.below the table (seeTab1-4) shows that number of benficiaties from 2013 to 2017 in department of divineguma development and statistic shows that many many peoples get benefits from the department of diveneguma development throuth the all project in srilanka.

Table 1.4

No of Samurdhi Beneficiaries During the past 05 years (annual report of divineguma, 2017)

Above the chart(seeTab1.4) shows that those who got benefits from the samurdhi bank during the past 05 years.chart shows that 2013 to 2017 of beneficiaries from all the samurdhi project

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