LMD Interview – Recent challenges facing the Microfinance Sector

 

Date – 20th June 2018

What are the reasons behind the growing interest in the microfinance sector?

  • Amongst the private, for-profit segment, Finance Companies and informal lending by individuals (colloquially referred to as ‘Poli Mudalali’) are the main players in the sector.
  • There has been growing interest by Banks where some banks have setup or acquired separate entities to conduct microfinance lending activities.
  • The Microfinance sector has approx. Rs 70 bn in gross loans which is still a fraction of lending compared to the Banking sector
  • However, given the vulnerability of the population segments that these microfinance lendings are targeted at, these activities carry significant risks.

What is happening to household indebtedness?

  • At present, Microfinance is mostly an unregulated market and hence there is less constraints with regard to how much can be lent, caps on interest rates etc.
  • As a first step towards regulating this segment, the Central Bank introduced the Microfinance Act in 2016
  • The Act allows private firms engaged in Microfinance lending to register and hence would come under regulatory supervision of the Central Bank
  • However, the focus of the Act is on bringing firms into a common regulatory framework while at the same time the Act has very little to say about consumer protection to prevent over-lending.
  • CBSL surveys reveal that household indebtedness is on the rise. In 2016 household debt was approx. Rs. 375,000 per household.
  • While the amounts are small in a global context, the debt levels in agricultural areas such as Anuradhapura is higher than the national average.

Is microfinance being used for the purpose it is being used for?

  • Successful case studies such as Grameem Bank in Bangladesh reveal that when done right, microfinance lending can have a significant impact on boosting economic activity and improving the livelihood of households.
  • However, in Sri Lanka the majority of the microfinance lending is not to facilitate income-generating activities but instead they are more consumption driven.
  • Borrowing for the latter is problematic as it doesn’t really improve your livelihood over a long term and households can get trapped in cycles of debt because of it.
  • Hence the importance of having checks and balances in place to prevent over-lending.

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