Microfinance Act: A Second Chance for Sri Lanka?
Sri Lanka’s microfinance industry is at a turning point. The Government is moving ahead with the Microfinance and Credit Regulatory Authority Act (MCRA), after the Supreme Court’s determination in February 2024 prompted a redraft. With Cabinet approval now in place, the bill seeks to create a stronger, fairer framework for one of the country’s most debated development tools.
From Promise to Crisis
In Sri Lanka, for many decades, microfinance was practiced as a results oriented development tool by many successive governments, cooperatives, NGOs and the private sector. However, the word “microfinance’ today comes with a negative connotation.
The turning point came in 2017, when excessive lending to poor and low-income households — often under the banner of ‘microfinance’ but without adherence to its core principles — triggered widespread over-indebtedness. The fallout was grim. Reports surfaced of women facing harassment (including allegations of sexual bribery) and in some cases, suicides. Two UN human rights reports drew attention to these issues.
In 2018, the government intervened, using over Rs. 1.4 billion of taxpayer money to bail out indebted women in 12 districts.
Since then the sector has had a reputation as exploitative, rather than empowering. Public discussion has focused largely on its negative elements, while positive impacts have become much less visible.
Microfinance Done Right
Despite Sri Lankan discourse framing microfinance as negative, it must be noted that the said negative results were a consequence of certain providers prioritising profit over social impact. Microfinance itself is not the enemy. On the contrary, it has proven to be a powerful tool for poverty reduction and grassroots economic development, not just in Sri Lanka, but in South Asia and the world at large.
The best-known example is Bangladesh, where Prof. Muhammad Yunus pioneered collateral-free lending through the Grameen Bank. His model lifted millions out of poverty and earned him the Nobel Peace Prize, inspiring similar initiatives across the SAARC region. These examples show that microfinance, when practiced with integrity, can transform lives.
At its core, microfinance means lending without collateral, or with affordable collateral options for poor and low- income populations. In the latter case, lending is based on the strength of a poor person’s investment idea rather than their assets. The focus is on income-generating activities — from farming to small businesses — but it also supports essential non-income needs such as housing, water, sanitation, and education.
Crucially, microfinance is not just about credit. Successful systems also build:
- Savings habits, to help low-income families develop resilience.
- Micro-insurance, to protect against shocks such as illness, death or crop failure.
- Capacity building, where mission-driven organisations provide training, technology, and access to markets alongside loans. Financial literacy education is also a common key intervention.
Another defining feature is women’s participation. Across the world, women form the majority of microfinance borrowers. Beyond economic benefits, this has driven social empowerment, allowing women to gain influence within households and communities.
In short, microfinance has worked — and worked well — when embedded in a mission-driven, developmental framework. The challenge for Sri Lanka is not to dismiss bad practices but to build the safeguards and systems that make it a force for good.
The Economic Backdrop
Sri Lanka’s economy has been on a rollercoaster over the past decade. After enjoying 8 per cent growth in 2011, the momentum faltered, dipping to unsustainable highs in 2016, 2017 and again in 2021 before crashing to a historic low of -7.5 per cent in 2022 — the sharpest contraction on record.
The past two years, however, have shown signs of stability. Growth rebounded in 2023 and reached around 5 per cent in 2024, according to World Bank data. The government now projects a steady 3.5 per cent annual growth rate through 2030, a target that, if achieved, would provide much-needed breathing space for the economy.
But headline growth hides a harsher reality: poverty has deepened. The national poverty headcount rose from 14.3 per cent in 2019 to 24.5 per cent in 2024, meaning nearly one in four Sri Lankans now live below the poverty line. Out of roughly 5.4 million households, more than 1.25 million are officially poor.
It is this combined group — roughly half the country’s households — that represents the true target market for microfinance. Engaging them productively in the economy is not just a matter of welfare; it is essential to sustaining growth and ensuring that recovery is broadly shared.
Why the Bill matters
For Sri Lanka to meet its growth targets, more adults from low-income and vulnerable households must become economically active. Mission-driven microfinance is one of the most effective ways to achieve this — not by fostering dependency, but by enabling people to build livelihoods, generate income, and eventually scale up into the SME sector.
That is why the new Microfinance Act is so important. It positions microfinance as a development tool, not a debt trap, while ensuring that the benefits of growth are more fairly shared. The NPP government itself recognised this priority in its manifesto, “A thriving nation, a beautiful life”, where micro and small enterprise development sits at the heart of inclusive economic recovery.
Why This Act, Why Now
Sri Lanka’s microfinance industry is too important to the economy to remain in a grey zone. Yet without a proper framework, it has too often slipped into socially unacceptable practices. The Microfinance Act No. 6 of 2016, introduced under the previous administration, was meant to address these gaps but in practice fell far short. When the government that followed attempted to replace it with the Microfinance and Credit Regulatory Authority Bill (MCRA) in 2023, the draft collapsed at the Supreme Court stage — another sign of inadequate preparation and a lack of consensus.
Meanwhile, the sector has drifted with little transparency. The last comprehensive statistics from the Lanka Microfinance Practitioners Association date back to 2018. Its partial 2023 update covered only 29 institutions, showing an outstanding loan book of Rs. 58 billion with 0.8 million borrowers and savings of Rs. 5 billion. The Central Bank’s 2024 Annual Report listed just four licensed firms with Rs. 11.4 billion in loans and Rs. 1.1 billion in deposits. Yet the largest players — Samurdhi banks and cooperatives — remain absent from public records. Without credible data, policy has been flying blind.
What the New Act Should Deliver
This is why the new Act is so critical. For the first time, it should facilitate fair, mission-driven microcredit and microfinance policies and practices, while bringing all credit providers under one umbrella — including those that previously operated outside regulatory scrutiny. By linking every loan to the Credit Information Bureau (CRIB), the Act should prevent over-lending, protect borrowers from debt traps, and give lenders the confidence to act prudently. Just as importantly, it must create the conditions to raise capital from both local and foreign sources.
In short, if crafted well, the Act can succeed where earlier attempts failed: by giving Sri Lanka a framework that makes microfinance not just regulated, but transparent, accountable, and socially responsible.
Second Chance for Microfinance
Sri Lanka cannot afford to let microfinance remain a story of exploitation and mistrust. With the right safeguards, it can once again become what it was always meant to be: a tool of empowerment, enterprise, and shared prosperity. If this Act incorporates the lessons of past failures and sets clear, transparent rules, the NPP government will have shown the resolve needed to put microfinance back on a developmental footing — where borrowers are protected, lenders are accountable, and the economy as a whole is strengthened.
(The writer is a member of the committee appointed by Ministry of Finance, Economic Stabilization and National Policies to propose recommendations to the Microfinance and Credit Regulatory Authority Act and also the past President of Lanka Microfinance Practitioners Association. He can be reached at athapaththuge.anura11@gmail.com and anura@berendinalk.org).
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