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Sharing of Microfinance Policies, Practices and Problems in Sri Lanka with Nepalese MFI Officials

A webinar talk series (Episode 14) on “Microfinance Policies, Practices and Problems in Sri Lanka” was organized by the Centre for Self-help Development (CSD) on September 6, 2021, with the aim to discuss the policies, general practices, working mechanism as well as prevalent issues seen in the microfinance sector in Sri Lanka. Mr. Anura Atapattu, Honorary President of Lanka Microfinance Practitioners’ Association (LMFPA) was the keynote speaker and Dr. Sumitra Manandhar Gurung, Governing Board Member of CSD was the moderator.

In the presentation on the current economy, practices, and the latest trend of microfinance in Sri Lanka Mr. Anura Atapattu said, “ The economic growth rate of Sri Lanka is currently negative. There is high inflation due to the effect of Covid-19. We are currently in the third week of lockdown. We had similar lockdowns in March 2020 and April 2021 also and have been having lockdowns in the month of September also. Due to the lockdown, the Covid-19 cases have gradually declined in the last couple of days.“He added, “In 2019 there were 2.3 million microfinance borrowers but the number of borrowers has been steadily declining in the last two years. Similarly, the PAR in 2019 was 6% and in 2021 it has risen to 40% due to the Covid-19.”

With regard to various types of MFIs providing microfinance loans and their operating modality in Sri Lanka, he said, “In Sri Lanka both registered and non-registered MFIsare catering microfinance services to the people. In 2008, NGOs also started providing microfinance services but their numbers have started to dwindle. ”With regard to the regulatory framework, he said, “The Parliament passed the Microfinance Act in 2016, which came into effect on 15th July 2016. The Act provides for the licensing, regulation, and supervision of the companies carrying on microfinance business, which are called licensed microfinance companies (LMFCs). LMFCs are directly regulated by the Monetary Board of the Central Bank of Sri Lanka. There is a provision for the registration of Microfinance Non-Governmental Organizations (MNGOs) under the Voluntary Social Services Organizations (Registration and Supervision) Act, No. 31 of 1980 (VSSO Act), by the Registrar of Voluntary Social Service Organizations. There are currently 4 LMFCS and 23 NGOs providing microfinance services. Other NGOs not registered under the Act also provide credit but do not take deposits.” He further added, “From 2008 there was a paradigm shift. The earlier practice was based on community-based organizations (CBOs) model and now it is based on Grameen and Asa models.”

He also spoke on the interest rate cap in Sri Lanka where he said, “Interest rate cap regulated by the central bank for LMFCs is 35% and 42% for NGOs capped by Lanka Microfinance Practitioners’ Association (LMFPA).”  He also said that business development practices like enterprise-based support and training on agriculture and livestock is not effectively done by NGOs and private sectors because they do not have coordination among themselves and try to go independently which is also the cause of program duplications. Therefore government service is more reliable in comparison to private sectors and NGOs.”

In context to issues in microfinance, Mr. Atapattu said, “Problems like multiple borrowing and over-indebtedness is common among clients. To minimize loan delinquency the parliament brought out the practice of loan write-off. The parliament also devised various criteria to be eligible for this which includes loans less than Sri Lankan Rupees hundred thousand and borrowers not been involved in multiple financing. The government would pay the principal of delinquent loans and the particular financial institution had to cover the unpaid interest by themselves.”

Mr. Atapattu also spoke about the survival strategy where he said, “The government, the central bank and LMFPA have formulated microfinance code of conduct, provided training on responsible financing for MFIs with the support from the government, media coverage to develop goodwill of MFIs as well as microfinance hotline (helpline) to lodge complain on issues like unethical practice and over-indebtedness. The lodged complaint will be responded to within 7 days and within the next7 days, the complaint should be sent to the government in writing for the grievance to be handled. Grievances on unethical practices are negligible which could be due to social media which has a widespread mass following.”

Dr. Manandhar raised the issue of interest rate and said 35% and 45% cap for LMFCSs and NGOs respectively are very high in comparison to Nepalese standards. In response to this Mr. Atapattu said, “The cost of fund for a wholesale loan is 15-20% which is provided by banks.  Due to high operational cost as well as a mechanism for provisions and write-offs and in order to make a small profit, the interest rate is not very high. Earlier when there was no cap, MFIs were charging 60%. We should also consider that the PAR for overall registered MFIs is currently 40% and it is necessary to set interest rate that high to incorporate default risk as well.”

Mr. Shankar Man Shrestha, Chairman of CSD and chairperson of the webinar, who was also present there said,” CSD has developed a good relationship with Lanka Microfinance Practitioners’ Association (LMFPA). A Nepalese delegate has visited Sri Lanka to learn about the microfinance practice there. Similarly, the Sri Lankan team also visited remote regions of Nepal and observed the microfinance practices in rural settings.” He added, “Nepalese MFIs should learn from Sri Lanka on grievance handling techniques which could be a stepping stone for developing good relationships with clients. Similarly, LMFPA has developed a code of conduct that could also be relevant in Nepal. Similarly, Nepalese MFIs should aggressively promote entrepreneurship development and not be satisfied by meager increments in the income of their clients. We should also establish a rational institution which promotes, provides technical assistance and supports in developing market access of finished products of the clients.” With regard to Covid-19, he said, “There have been no major write-offs in Nepal due to the effect of Covid-19. MFIs have been able to generate profit in Nepal even when the effect of Covid-19 is not fully under control and there is an interest rate cap of 15% for retail MFIs.” He also said that CSD and RMDC Laghubitta Bittiya Sanstha Ltd are jointly organizing the Covid-19 education ToT program targeted at awareness-raising of the clients of MFIs so that they could follow the safety measures.

One of the participants Mr. Ram Kumar Shrestha, Chairman of the Swabalamban Laghubitta Bittiya Sanstha Ltd said, “30 years ago I visited Federation of Thrift and Credit Co-operative Societies in Sri Lanka (SANASA Federation) which was focusing on community-based organizations (CBOs) model. The Grameen model was not prevalent then.” Mr. Atapattu replied, “SANASA is the umbrella organization or the apex body of primary societies dealing in microfinance which represented service organization based on a cooperative philosophy. It was based on the principle that a member has to save for at least 1 year before being eligible for a loan. With the new fast track models in place, a client is eligible for a loan only after 2 weeks of being a member. So they opted for a new model.” Another participant, Mr. J.B. Panday, queried on the relevance of the government’s write-off scheme which was also a breeding ground for delinquency. To this, Mr. Atapattu said that this scheme was a result of the UN study report’s prescription which had a distinction of being a negative trendsetter in terms of delinquency. Mr. Pawan Yogi from Jalpa Samudayik Laghubitta BittiyaSanstha Ltd. spoke of touring Enterprise Development Service (EDS), a concept based on credit plus program in Sri Lanka. He said that similar models have been used to develop programs in his branches located in Dang, Rolpa, Rukum, Salyan, and Pyuthan.

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