Government intensifies efforts to regulate micro finance units
With the aim of fulfilling a long felt need, the government as part of its 100-day programme is hoping to introduce a draft bill to regulate and supervise around 20,000 Microfinance Institutions (MFIs) in Sri Lanka by setting up a regulatory authority.
This is the fourth attempt by the government since 2006 to regulate these institutions apart from several measures that have been taken to streamline MFIs.
The previous government had prepared a similar draft bill in 2011 and it was updated twice by devising a regulatory and supervisory framework in 2012 /2013. That draft bill was not presented in parliament by the previous regime due to protests by micro finance practitioners who alleged that the previous government’s plan was to politicise the MF sector.
U.G. Ratnasiri, Additional Secretary of the Ministry of Policy Planning told the Business Times that the new government has called for public comments and suggestions on a draft legal framework to finalise the proposed bill., Details could be obtained from the Department of Project Management and Monitoring website of the Planning Ministry (www.pmm.gov.lk), he said.
The proposed authority will be responsible to license/register, regulate and supervise institutions (Companies, Non-Governmental Organisations Co-operative Societies and Societies which are registered under the Companies Act, Voluntary Social Service Organisations (Registration and Supervision) Act, that carry on the microfinance business, he added.
This bill on approval would provide for the licensing, regulation and supervision of companies, carrying on the micro finance business, registration of non governmental organisations and societies carrying on micro finance activities at divisional secretariat level.
Micro finance regulatory councils will also be set up to maintain standards, strengthen, develop and make qualitative improvements in relation to the regulation and supervision of micro finance business and to provide for matters connected it.
However it is unlikely, that this draft bill will be passed in parliament due to its eminent dissolution under the present volatile political situation in the country.
Samurdhi Banks, Cooperative Rural Banks and Thrift and Credit Cooperatives, Regional Development Banks and other institutions from the ‘formal’ financial sector have ventured into microfinance. Several NGOs are also operating micro finance schemes without any regulatory or supervisory mechanism, he pointed out.
Dr. Vinya Ariyaratne, General Secretary of the Sarvodaya Shramadana Movement, told the Business Times that the setting up of a regulatory authority for MFIs was a long-felt need and several attempts were made to enact a law in parliament during the past several years. The Sri Lanka Micro Finance Practitioners Association has been lobbying for a legal frame work for MFIs and it is yet to be materialised.
The association has already submitted their suggestions to the Planning Ministry to include in the new draft legal framework.
The MF sector could play a vital role in alleviating poverty in the country by mobilising resources and strengths of community groups empowering them through loan schemes designed to suite their needs, he added.
He expressed fears that if there is a run on any of those financial institutions, the consequences would be drastic for the economy. The sooner they are brought under some strict prudential regulation the better and this is indeed a welcome step. There is no question about the importance of regulation and supervision for a microfinance sector, which supports the delivery of financial services to the poor in a sustainable manner. But the question is whether the country is prepared to implement the desired level of regulation of microfinance.
The main risk MFIs are facing now is the lack of funds to finance their portfolio. MFIs – which are not regulated – do not have access to commercial investments and are unable to mobilise deposits, which aggravates the problem.