Essay on Performance of Sri Lanka’s Microfinance Sector

A worldwide accepted instrument for poverty alleviated is considered Microfinance, it has been part of Sir Lanka's economy for the past several decades. A wide geographical outreach of these financial services has been observed in Sir Lanka but private operators (Non-Government Organizations (NGO) and commercial banks) outreach is limited in rural areas of Sir Lanka. Middle-income groups have able to increase their income and assets, have helped them to increase consumption expenditures, and have appreciated them to develop the habit of doing long term and short-term savings because of microfinance. Microfinance almost helped every income group to smoothly fulfill their consumption level and it also helped the women to raise their social status and positive progression in their economic conditions. Overall object of the Government policy of SirLanka is to encourage the establishment of the small and medium enterprises (SME) sector, It has been seen as a driving force to bring impactful changes in economic growth, employment generation, regional growth and poverty reduction. Statistical data shows that these enterprises are 75% of Sir Lanka’s economy, 45% of employment generation and Gross domestic production (GDP) has been contributed by 52%. (DDF, 2017)

In Sri Lanka, poverty alleviation has been reduced due to the employment of microfinance tools in rural communities. It has shown an impressive contribution to the growth of the rural sector. Over the last decade, Sri Lanka’s micro-financial Industry has shown an impressive transformation and new instruments have been developed in form of saving associations, rotating saving clubs, funeral or death benefit societies, credit associations, credit groups and clubs at the rural and urban community level. Services provided by these microfinance institutions (MFIs) include loans, savings accounts, insurance remittance, and non-financial services to low-income people which were previously not facilitated and ignored to have benefits from such services. (DDF, 2017)

Such privileges of MFIs’ services are developed to facilitate the needs of individuals, households, small domestic enterprises and increase income & competences of low-income groups. Different micro financial institutions’ supervision are given to different authorities, a large group of microfinance institutions do not come under any framework, supervisory/regulatory authorities.

Regulatory framework is provided to microfinance institutions especially those who were previously non-regulated, it is defined in Microfinance Act No 6 which is effective from 15th July 2016. Mainly purpose of such Act is to bring improvement in financial services which are provided to lower-income people and small & medium-size enterprises, increase financial activities, maintain check & balance on the financial health of these IMFs, enhance their funds’ source pools and promote a stable and safe financial system for their customers. Central Bank of Sri Lanka (CBSL) greatly empowered due this Act, it has the authority to issue licenses for applicant companies to pursue microfinance business, it gives guidelines to Registrar of Voluntary Social Sector Services Organizations (RVSSOs) who acts as a regulatory authority to do supervision of Microfinance Non-Government Organizations and also set rules for Licensed Microfinance Companies (LMFCs).A total of eleven applications for microfinance licenses have been submitted to CBSL in year 2017. During the year 2017, MNGOs were issued a set of governing rules by the registrar of RVSSOs based on a set of principles, standards, and guidelines issued by the monetary board of CBSL. No entity could able to engage in microfinance business or use the term “Microfinance” until or unless it is a licensed microfinance company or a registered MNGO. (DDF, 2017)

Table 1.1

Major microfinance’s  sector progress (DDF, 2017)

 Government affiliated institutions have implemented many microfinance programs and their progress in 2017 is shown in (Table 1.1).Financial services inform of loans and deposit facilities are provided by these microfinance institutions. By the end of 2017, major government microfinance institutions’ loan portfolio was stood at Rs. 263 Billion, the major chunk of it is held by 49 percent in terms of monetary figure Rs. 128 billion by Regional Development bank, Co-operative Rural Bank contributed 28 percent in terms of monetary figure Rs. 75 billion and 20 percent in terms of monetary figure Rs. 54 billion by Divinegu,a Community based bank. It is recorded that by the end of 2017 the saving of poor households reached Rs. 338 billion and around Rs. 228 billion was invested by these institutions in long- and short-term investments. In 2017, the Micro financial sector availed Rs. 165 billion in form of loans given by the banking sector, out of which Rs. 87 billion loans were disbursed to these institutes in form of small loans (SMELoC, Jaya Isura, NCRCS and “Saubhagya” loan schemes by the Sampath Bank).

During 2017, loans disbursed by Regional and Development bank and People’s bank was Rs. 44 billion and 7 billion respectively. (DDF, 2017)

 Figure 1.5 loan disbursement to microfinanceby formal banks (DDF, 2017) 

References of Performance of Sri Lanka’s Microfinance Sector

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