Strengthening microfinance through Business Development Services
In my earlier article, “Microfinance Act: A Second Chance for Sri Lanka?”, I discussed how the proposed Microfinance and Credit Regulatory Authority Act (MCRA) can restore confidence and fairness in the sector by ensuring that microfinance once again serves as a genuine tool of empowerment. Yet even the most progressive regulatory framework will fall short — unless microfinance institutions (MFIs) strengthen what happens on the ground.
This article therefore examines one critical area that deserves both regulatory attention and institutional focus: the provision of Business Development Services (BDS). These non-financial services, when integrated with credit, can multiply the developmental impact of microfinance and ensure that it truly contributes to nationwide poverty alleviation as well as micro and small enterprise (MSME) development.
Current context
One of the key objectives of microfinance is the promotion of livelihoods and small enterprises as sustainable sources of income and employment for low-income communities. It is encouraging to note that more than 75 per cent of loans granted by MFIs are directed toward this purpose.
However, in most instances, these loans finance existing income-generating activities such as agriculture, small trading, or household-based services. While such support helps maintain livelihoods, it does not necessarily lead to expansion, diversification, or innovation — the elements required for real poverty reduction and local economic growth. The challenge, therefore, is not only to sustain what already exists, but to help borrowers move beyond subsistence-level activities.
This raises an important question: should MFIs limit their role to providing credit, or should they go a step further — offering the guidance and support needed to transform small-scale livelihoods into viable and growing micro and small enterprises?
Why MFIs should engage in BDS provision
The impact of credit can be multiplied many times over through the provision of non-financial BDS such as information on business opportunities, access to technology, advisory and counselling support, and facilitation of market and supply linkages. These services help borrowers translate financial access into sustainable enterprise success.
There are several reasons why MFIs should engage in such support functions. Among them, three stand out as particularly important.
1. Creation of New Opportunities
There is a limit to how many people can benefit from existing livelihood activities due to resource constraints and market saturation. Land availability, climate risk, and the younger generation’s reluctance toward traditional agriculture all restrict growth.
Yet new opportunities are emerging through the expansion of value chains, the integration of new technologies, and the evolution of consumer needs and preferences. For low-income entrepreneurs, especially those with limited education or access to information, hands-on support is essential to recognise and seize such opportunities. MFIs can bridge this gap by facilitating information, training, and exposure to appropriate technology and markets.
2. Stability and growth of MSMEs
Many small income-generation initiatives fail not due to lack of effort, but because of avoidable risks. In agricultural ventures, for instance, these risks may include pest or disease outbreaks, inefficient water use, or sudden declines in market demand. Limited business management capacity is another contributing factor — such as using sales income for household consumption rather than reinvesting profits to sustain operations. Providing timely business counselling and advisory support can enable micro-entrepreneurs to identify root causes, strengthen decision-making, and adapt their enterprises for long-term viability.
3. Improving the Effective Use of Credit
High repayment rates do not always reflect successful enterprise performance. In many cases, borrowers repay loans by borrowing again or using other income sources. Such patterns undermine the true purpose of microfinance. Extending business development support enables borrowers to use credit productively, ensuring that repayment comes from profit, not substitution.
Role of MFIs in providing BDS
The expertise required by microfinance clients is highly diverse — from agriculture and food processing to retail, handicrafts, or beauty services. It is neither feasible nor necessary for MFIs to house all this expertise internally.
Instead, MFIs can act as facilitators, creating structured partnerships with existing public and private institutions such as:
Department of Agriculture and Department of Livestock Development
Tea, Rubber, and Coconut Development Boards/Authorities
Industrial Development Board (IDB), Small Enterprise Division (SED), and Vidatha Centres
Vocational training and private-sector agribusiness development organisations
Many of these services are already available at district and divisional levels — often free or subsidised. The real challenge lies in connecting rural clients to these opportunities at the right time. MFIs can fill this gap by maintaining formal networks with service providers and deploying dedicated linkage teams to support clients. This specialised facilitation should not be an added duty for field officers providing loans, but a distinct developmental function within the organisation.
Why MFIs are reluctant to engage in BDS Facilitation
The most common concern is cost. In a market economy, very few services can be sustainably delivered free of charge. Moreover, people tend to undervalue services they do not pay for.
However, it is also true that not every borrower requires business development assistance at all times. For example, an experienced tea farmer or shop owner may gain little from training or advisory sessions. Therefore, it would be unfair to charge all borrowers uniformly. A targeted, need-based fee model is more equitable and sustainable, where those who benefit from specific services contribute a modest fee.
Role of Policymakers and Regulators
As Sri Lanka prepares to operationalise the new MCRA, this is an opportune moment for policymakers to institutionalise the link between finance and development.
The NPP government’s recognition of micro and small enterprise development as a pillar of inclusive growth provides a timely foundation for this shift. The MCRA can function not only as a regulatory safeguard but also as a developmental framework, ensuring that each rupee of microcredit contributes meaningfully to livelihood generation, asset accumulation, and employment creation.
Regulators should therefore:
Encourage or mandate BDS facilitation as a standard component of licenced microcredit and microfinance operations;
Recognise BDS-related partnerships and client capacity-building initiatives as legitimate and measurable components of service impact; and
Incentivise the integration of financial and non-financial services through mechanisms such as low-cost funding facilities, technical assistance, and blended performance-based assessments for microfinance and business development centres (BDCs)..
Conclusion: From Regulation to Real Impact
The forthcoming MCRA provides the structure Sri Lanka’s microfinance sector has long needed: a framework for accountability, transparency, and social responsibility. But as emphasised in my earlier article, legislation alone cannot transform the sector.
For microfinance to fulfill its developmental promise, MFIs must go beyond credit. They must extend a guiding hand, helping borrowers convert loans into livelihoods, and livelihoods into lasting prosperity. If regulation sets the stage, BDS will deliver the story’s success.
(The writer is a member of the committee appointed by the Ministry of Finance, Economic Stabilization and National Policies to propose recommendations to the MCRA. He can be contacted atathapaththuge.anura11@gmail.comandanura@berendinalk.org).
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