Understanding the new Microfinance & Credit Regulatory Authority Act
Sri Lanka’s microfinance and moneylending sector is poised for a major transformation with the introduction of the Microfinance and Credit Regulatory Authority Act, 2025. This landmark legislation replaces the Microfinance Act No. 6 of 2016, introducing a far more comprehensive and structured regulatory framework aimed at protecting borrowers, strengthening institutions, and enhancing transparency across the financial ecosystem.
Microfinance has long played a vital role in supporting low-income households, micro-entrepreneurs, and rural borrowers. Yet persistent regulatory gaps, concerns about unethical lending, and the limited effectiveness of the 2016 Act underscored the need for a stronger, more coherent framework.
Efforts to introduce dedicated microfinance regulation in Sri Lanka date back nearly two decades, beginning with discussions between the Central Bank and the Ministry of Finance in 2006. Despite multiple drafts and consultations, these early attempts did not materialise into law, depriving the sector—and millions dependent on it—of a robust regulatory foundation.
Although the Microfinance Act No. 6 of 2016 represented an important milestone, it proved inadequate in addressing the sector’s realities. The shortfall became evident when only four institutions were registered under the Act, revealing its limited practicality and inability to attract or regulate the broader microfinance industry.
Against this backdrop, the proposed Microfinance and Credit Regulatory Authority Act represents a long-awaited and much-needed reform. The new Act is comprehensive, sector-aligned, and responsive to issues that have long challenged both MFIs and borrowers. This article reviews the provisions of the Act and highlights key insights relevant to policymakers, lenders, and the public who seek to understand the benefits and broader implications of this reform.
Establishing a Central Regulatory Authority
A central feature of the Act is the establishment of the Microfinance and Credit Regulatory Authority (MCRA)—an independent body mandated to licence, supervise, investigate, and enforce compliance across moneylenders and microfinance institutions. Its core functions include regulating licenced entities, coordinating with the Central Bank and other agencies, promoting responsible lending, and safeguarding customer rights. The Authority is also responsible for maintaining sector databases, conducting financial literacy programmes, and administering a formal complaints mechanism.
The Act introduces a decisive change: all moneylenders must obtain a licence from the Authority to operate legally. Eligible applicants include companies, partnerships, trusts, societies, and certain NGOs registered as companies limited by guarantee. Licences are valid for one year and must be prominently displayed at each business location.
A key reform is the new two-step licencing process for microfinance institutions (MFIs). Organisations may apply for a microfinance licence only after securing a moneylending licence. Eligible applicants include public companies (not private companies), and NGOs converted into companies limited by guarantee.
Microfinance licences are granted for three years, after which the moneylending licence held by the institution is automatically cancelled. This layered structure ensures that MFIs operate under higher scrutiny and governance standards.
The Act significantly broadens the scope of services available to licensed MFIs. These include offering microloans, micro-leasing, microcredit insurance, hire purchase, advisory services, training, and even pawn brokering (subject to approval). This positions MFIs as comprehensive financial service providers serving low-income and underserved segments.
Enhanced Oversight and Regulatory Controls
The Act requires institutions to obtain prior approval for key operational changes, including opening new branches, outsourcing debt collection, altering governance structures, modifying Articles of Association, or reducing capital. Failure to do so may result in penalties of up to Rs. 2 million.
Among its most progressive features, the Act imposes strict standards to protect borrowers and ensure fair treatment. Loan agreements must be simple, accurate, provided in the borrower’s preferred language, and free from misleading terms. They must clearly disclose interest rates, fees, and conditions.
Institutions are explicitly barred from taking signatures on blank documents; charging interest exceeding the principal; harassing or intimidating borrowers; misleading customers and engaging in discriminatory behavior (Section 49).
The Authority must establish formal procedures for complaints and may set up counselling centres for borrowers experiencing difficulties.
The Authority is empowered to set maximum interest rates, fees, and penalties, define acceptable collateral, standardise fair recovery methods, and regulate digital lending. This flexibility allows the regulator to respond to changing market conditions and protect consumers from harmful practices.
Fit-and-Proper Requirements for Leadership
The Act sets high standards for individuals holding leadership positions, disqualifying those with criminal records, histories of fraud or bankruptcy, unpaid debts, or prior regulatory sanctions. This safeguard prevents unethical individuals from influencing the sector.
The Authority is granted broad powers to inspect records, visit premises, question staff, and conduct investigations. It may suspend directors or employees, revise unfair loan agreements, impose penalties up to Rs. 2 million, or publish the names of non-compliant institutions.
To ensure continuity, the Act grants a transition period: Existing moneylenders may continue operations for 24 months but must apply for licensing within the prescribed timeframe; and MFIs licensed under the repealed 2016 Act are automatically recognised but must achieve compliance within 12 months.
This phased approach helps institutions adjust gradually to the new regulatory expectations.
Major Step Forward for the Sector
The new Act represents one of the most meaningful reforms in Sri Lanka’s microfinance history. It strengthens governance, enhances customer protection, and establishes clear operational requirements for institutions. For the industry, it promises higher professionalism and accountability; for borrowers, it promises dignity, fairness, and safety; and for regulators, it provides the tools needed to build a healthier financial ecosystem.
(The writer is a microfinance professional with over 15 years of experience working with MFIs, development agencies, investors, and government bodies. He has served as President (2017–2018) and Honorary Secretary of the Microfinance Practitioners Association during multiple terms. He can be reached at imran@ideaslk.com).
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