Report on NGOs- MFIs cooperation

NGOs- MFIs of The microfinancing industry of Sri Lanka.

In this research study, the main focus is on the sector of micro-finance in Sri Lanka. The micro-finance sector has influence from the characterization of traditional issues concerning loans and savings. Only a few products and services are offered in this sector. These products and services include money transfer services and insurance. In this study, many service providers in the micro-finance sector are analyzed. For instance, cooperative rural banks, thrift and credit cooperation and NGOs. The findings made a note of:

1.      Need for the supervisory and regulatory frameworks

2.      Limited knowledge about microfinance and external audit.

3.      Political interferences and an entirely centralized structure for decision making.

4.      Gender focus, specific groups, and limited data available about clients.

5.      The strong dependence of programs on default clients, guarantees, longer processing time, and greater collateral requirement.

6.      Limited access to technologies, operational challenges, and understanding about portfolio management and principles.

7.      Lack of innovation and creativity in the offered products and developed strategies for marketing. 

8.      Inadequate remuneration, limited available options for training, and various kinds of employment opportunities.

Licensed specialized banks of The microfinancing industry of Sri Lanka.

            In Sri Lanka, the banking system is highly diversified. A fine example is the Central Bank of Sri Lanka (CBSL). While on the other hand, two commercial banks: Ceylon Bank and People’s Bank are also working in the diversified system. In the country, foreign banks are 13. While total national saving banks, regional banks, housing banks, private domestic commercial banks and licensed specialized banks are 1, 1, 2, 11 and 3 respectively. However, only US banks are Citibank N.A. An entire island domestic banks are providing financial services. Although, foreign and commercial banks are working under the approval of BOL. The key responsibilities of the central bank include the supervision and regulation of the overall financial system in the country. Banking Act and Monetary Law Act are the basis of the legal framework used in Sri Lanka. However, from 2012 banks are following international financial reporting standards for the development of financial reports and financial statements. Commercial banks are also following advanced standards of IFRS from 2018 under which these commercial banks are required to set aside a provision for future financial losses from operations.

 Microfinance is one of the most widely received instruments for privation comfort entire the world (Robinson, 2001)has been used in Sri Lanka for cross over various decades. In spite of the long and lengthy history and the huge number of organizations in Sri Lanka presuming that microfinance assistance extremely to the poor, there is hardly any accomplishment on the effect of microfinance on the indigence release in Sri Lanka (Robinson, 2001). In Sri Lanka, there are a lot of microfinance organizations that have grown up mostly from the 1980s. Among them some organization has been admitted with the protector ship of the Sri Lankan government organizations and while the rest of them have been admitted with the guardianship of "INGOs and NGOs". "Govijana Bank Pilot Credit Scheme, Women's Society Based Resolving Fund Credit Scheme, Samurdhi Banking Scheme, Bhagya and Isura Credit Scheme" are a few organizations of the micro financing project/organization admitted with the protector ship of organization ran by Srilankan government, banks. The schemes are related with credits for example "SEEDS (Sarvodaya Economic Enterprises Development Scheme), SANASA, Gami pubuduwa and JBS (Janashakthi Banku Sangam)" admitted by personal commercial; banks and local non-governmental organization while the programs related with credit managed by "Seva Lanka and CARE" have been admitted with the protection ship with foreign non-governmental organization.

 Inspection admitted that the microcredit organization and programs associated with different types of models (Chavan, P & Ramakumar, R, 2002) For example, "The Farmer Bank pilot project credit scheme and Samurdhi Bank Finance Schemes" are based on "Self-help group(SHO)" models and again regulating as the units of individual banking connected with the rationalize administration organization. "Bhagya and Isura Credit Schemes" have been materialized beyond the model "Intermediaries Involvement" where the development banks and the commercial banks are being attached as benefits. Moreover, the Village or Rural banking model is operated by SANASA.

           6.3 million Accounts which are saved in the people’s bank, among them majority is the lower income people group. so, the banks have an outreach which has a large growth. Men are the most traditional customers of the formal financial sector. As per HNB the female customer percentage is lower than 25%.In a report people’s bank told that among their customers base 75% are the female customers.

Poverty Study in Sri Lanka of The microfinancing industry of Sri Lanka.

               According to the 2009 estimate of the International Monetary Fund (IMF, 2009).  Sri Lanks’s GDP per capita is $ 2041 (US dollars) which ranks it at 119th wealthiest country out of 180 countries. Its GDP per capital gives it a high rank than India - $1,033 (US dollars) and Pakistan – 1,1077 (US dollars). It doesn’t mean the GDP of a country depicts the whole picture of a country’s economy, it skips the fact that how this wealth is disturbed among masses. (Srikanthan, 2010)

           Reports like Household Income and Expenditure Survey – 2006/2007 HIES (MFP Sri Lanka, 2006) shows that Sri Lanka’s official poverty line is Rs. 3,087 a month and 15% of Sri Lankans live below it. But the figure given by the world bank is at 23 %. Reports of HIES 2009/10 (DCS, 2009) shown that the country’s poverty level has declined from 15.2% (2006/07) to 8.9 %. 41% of reduction has been indicated by HIES which is highest drop in first three years and its is noted to be higher than the previous one which was 66% exactly one third of drop from a 22.7% to 15.2% and it was reported over the 4 years and six months period which was from 2002 to 2006/2007 survey.

           Sri Lanka is a country where wealth is unequally dispersed, it is noted that 40 percent of the country’s wealth is under the hold of only 10% of the country’s richest and only 1 percent of it is under the hold of 10% of poor.Gini index of wealth distribution has given 27th rank to Sri Lanka as the most unequal country which means wealth distribution is insane, the majority of wealth in hold of few people. It is generally a percentage that shows the proportion of the poor population to the total population. 

           According to HIES-2009/2010 (DCS, 2009)  the official poverty line of Srilanka was Rs. 3,028/- and it varies over the period of time because of variation in price level. For example, in 2002 the official poverty line was Rs. 1,423/- which was eventually updated in 2006/2007.The poverty headcount ratio has been shown in Figure 1.1 by HIES Survey Period. In 1990/91, the national poverty headcount was 26.1 percent which has increased to 28.8 percent in the period of 1995/1996. But statistics of 2006/2007 survey periods show a 15.2 percent declined which indicates that 42 percent decline has been observed in poverty from the period of 1990/91 till 2006/07 survey. The poverty reduction percentage indicates the same decline for the period of 2006/07 till the 2009/10 survey period. If comparison made province wise than it is clearly evident that the rate of poverty has declined in all provinces (1990/91 to 2006/07).

           Sri Lanka is one of the countries where more than 4.1% of people leave below the poverty line. Sri Lanka is facing a major decline over the GDP of the country, where the GDP of Srilanka is is recorded as 5.5 "per annum". The main reason for the low growth of the country and low GDP is just because of remaining at the bottom of the world. Microfinance is measured as an important tool for countries like Srilanka (Kingsley Bernard, Aye Aye Khin & Kevin, 2016) Microfinance banks or NGO provided loan to the rural people of Srilanka at a normal interest rate and resulted in the growth of the people in rural areas. Microfinance provides small amount loan to the women of the rural area and resulted in a positive effect on the reduction of poverty. Microfinance plays a major role in the reduction of poverty and helps in developing countries like Srilanka. Microfinance has resulted in a positive reaction regarding the income of the house and also in the expenditure over health and cloth. They also found a positive impact on reducing poverty over household goods. It also helps the clients of rural areas in developing over household assets (Chandradasa, 2019).

           Microfinance impact on rural areas has helped in the economic growth of the countrySri Lanka is a unique case among the emerging economies. Usually economies find it hard to grow as unemployed people and cottage industries don’t have access to finances to start new businesses or to expand already established business. In case of Sri Lanka however, there are a diverse range of options available that people can use to get loans. These include formal, semi formal and informal servie providers. Micro financing is quite popular in the country. The table below shows the number of different MFi service providers operating in different regions of the country

Table 1.5

Microfinance provides in each region (microfinance industry, 2010)

Overall the MFIs in Sri lanka have been quite successful in achiving poverty alleviation and ensure the supply of credit to small businesses and people living in poverty. It has been estimated that a total of 2.6 million households have benefitted through these MFI. It is because of these MFIs that the country has seen a growth in the middle income class of the country. This has also allowed the country to maintain a reasonable GDP growth rate and unemployment level (shown below) even though the country is going through difficult years financially. The surge in government debt and obligations of the country have a major reason behind the country’s economic worries.

 These benefits of poverty alleviation and GDP growth have been achieved without the contributionof the formal sector in micro financing. Due ot the lack of collateral and guarantees, the formal sector financial institutions tend to shy away from micro credit in Sri Lanka. The MFIs in Sri Lanka have been targeting the low income households in the country which has provided them a very wide customer base.

           Another major contribution of these microfinance institutions is that they have been able to serve more customers in the past years than the formal sector insitutions. In this regard the larger MFIs have played a major roe through serving an estimated 1.5 million customers. On the other hand, the small MFIs catered to only 0.3 million customer, which is around 25% of the contribution of the larger institutions. This was mainly due to the higher reach and penetration of the larger MFIs as a result of which they are able to cater to more customers. Additionally, the capital employed by the bigger MFIs is also a reason that they are able to cater to a larger audience.

           The MFIs have been instrumental in Sri Lanka in uplift of the living standard of the common man, specially the low income people. The MFIs have helped to transform the communities across the Island. This has been done not only through employment generation for these people but also through giving out small loans which have enable the loe income households to hold house renovations and repair. Before the spread of MFIs, these households didn’t have access to loans for housing purposes as the formal sector required many different documentation for the purpose of loans and these households were not able to fulfil all those requirements. The low turn around time of these MFIs and the short processudral formalities meant that loans were readily available to these housholds which were able to utilize them fully.

           The MFIs have also played a significant part in the success of the MSME (Micro, small and medium enterprise) sector. The MFIs have targeted these enterprises for their low requirements of loans. On the other hand, the MSMEs found the MFI more aligned to their needs as there are lesser formalities and documentation needed and also there is no middle man. Additionally, the MFIs have proven to be successful in meeting the needs of this sector because of their better understanding of each region of the country and the busineses and communities which reside in those regions. This means that the products introduced by these MFIs have been tailored to the needs to specialist businesses and the requirements of each region which has had a far reaching impact on the growth of the economy.

           The MFIs in Sri Lanka has also been able to achieve a higher level fo success because of innovative products and market strategies. The marketing strategy of these institutions of financial inclusion has meant that the penetration level of these MFIs has increased which has resulted in better credit to GDP ratio. However, Sri Lanka still lags behind in this ratio as compared to other South Asian Countries. The average ratio of private credit to GDP in South Asia is 46%, whereas for Sri Lanka this ratio lingers around 35% mark. This shows that there is still a lot of room for improment in this regard. To better achive their growth targets and penetration level, the MFIs in. Sri Lanka have started better to differentiate their products, providing more customization to the customers with respect to loan size and duration. This has helped to rejuninate the growth of this sector and increase its impact on the over all economic growth of the country.

           A rather far reaching impact of these MFIs is the way they have changed the behavioural patterns of the people of the country, specially with respect to technology. MFIs have introduced digital finance services to improve inclusion and access to their services. Sri Lanka lagged behind the rest of the region in digital financial services in 2014 as is depicted by the chart below.

  It is clear that just five years ago, Sri Lanka was non existant in digital financial services. However, after the adoption of the digital servies by the MFIs, the landscape changed. People of the country, specially of rural regions became more receptive towards digital financial services, which led to a drastic increase in the services which were being used by people. The severity of the change can be gauged from the fact that today, Sri Lanka is almost at part with the region in use of digital financial services. This is a significant achievement considering that the low income households of Sri Lanka are known to have a behavioural trait of prefering useage of cash for their transactions.

        Another behavioural change which has been induced by these MFIs is the low income households of Sri Lanka have become saving orientated. The MFIs introduced savings prodcuts in rural areas where the reach of formal sector is almost negligible. Studies have shown that before the introduction of these products, the low income households were consumption based with very little to no savings. However, the pintroduciotn of saving products by the MFIs and their penetration in the market lead to a surge in savings in the low income households. This has been critical in raising heir living standards as the savings have reduced their dependence on outside credit.

           Given the above mentioned points it is relevant here that the MFI have contributed not only in economic development of the country but also in the social uplift of the country. The MFIs have helped to transform the economy into a modern progressive economy which is growing at a higher rate than most regional economies. They have also contributed towards alliveation of poverty and improvement of the living standards of the people. This has been achieved through innovative products which are tailored to the needs of the people of the region. The MFIs have also succedd in the region because of the penetration level that they have achieved.

     References of NGOs- MFIs cooperation

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Chandradasa, A. J. (2019). Microfinance and Shelter: An Impact Assessment of microfinance on improving housing conditions of rural srilanka.

charitonenko, S. (2002). Commercialization of micro finance in sri lanka. 3-20.

Chavan, P & Ramakumar, R. (2002). Micro-Credit and Rural Poverty:An Analysis of Empirical Evidence.

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Reed, L. (2011). State of the Microcredit Summit Campaign Report. Microcredit Summit Campaign 750 First Street, NE, Suite 1040, Washington, DC, 20002.

Robinson, M. S. (2001). The Microfinance revolution :Sustainable Finance for the Poor.

Roy Mersland,Ludovic Urgeghe. (2013). International Debt Financing and Performance ofMicronance Institutions. Wiley Online Library.

sanasa.coop. (2019). federation of thrift and credit cooperative societies in srilanka. Retrieved from https://sanasa.coop/

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Srikanthan. (2010). POVERTY DIMENSIONS ( WITH SPECIAL REFERENCE TO SRI LANKA ). COLOMBO.