By: Centre for Equality and Justice
In 2023, over half of households in Sri Lanka found themselves in debt, as reported by the Department of Census and Statistics. Alarmingly, nearly 25% of these households took out loans merely to cover their essential food needs. The cyclical and often exploitative nature of personal and small loans suggests that many of these families continue to struggle with debt, hindering local economic development and exacerbating the national public debt crisis.
To tackle this pervasive issue, the government enacted the Microfinance and Credit Regulatory Authority Act, No. 9 of 2026, in early March. The legislation aims to curb predatory lending practices and mitigate the adverse effects of unregulated microfinance by instituting a system for registration and licensing. While the intentions behind this Act are commendable, aiming to eliminate unethical lending and recovery practices, its effectiveness is hampered by significant shortcomings in its implementation.
Experts, practitioners, and community members have raised serious concerns that the current iteration of the law not only fails to meet its objectives but also poses a threat to essential community-based funding models. This situation could have been alleviated had lawmakers prioritized the input of community stakeholders, particularly women, along with those involved in community credit initiatives and microfinance regulation.
In fact, over 4,000 women from various communities across Sri Lanka came together to draft and sign a petition against the rushed passage of the Microfinance and Credit Regulatory Authority Act, which lacked adequate community engagement. Members of Self-Help Groups sought meetings with parliamentarians to share their experiences with different microfinance lending methods, but, as often happens, their requests were not accommodated.
Neglecting the insights of women, especially those who are marginalized, suggests that the Act will fall short in effectively addressing predatory lending and recovery practices. Moreover, the restrictive frameworks set forth in the legislation could outlaw vital community-based savings and credit programs typically operated by women-led Self-Help Groups.
Self-Help Groups are non-profit, trust-based, self-governing community networks that support women’s economic empowerment through collective decision-making. These groups play a crucial role in providing swift and compassionate loans with minimal service fees, which are essential for families. Beyond financial assistance, they enhance access to education and healthcare, help mitigate the impact of personal and natural disasters, promote community advocacy, empower women, and foster a sense of belonging and skill development. They also facilitate collaborative business initiatives, allowing for better market access and collective procurement. Ultimately, these groups contribute significantly to community resilience and national economic growth.
The stringent compliance requirements and burdensome registration processes outlined in the Act threaten to dismantle these community-based savings and credit programs. This would leave already vulnerable populations with fewer financing alternatives, making them more susceptible to exploitation by predatory lenders and further isolating them as they are labeled “non-credit worthy” by institutions. The disintegration of Self-Help Groups would have cascading negative effects on their members and their families.
However, there is still an opportunity to amend the situation. Although the Act has been enacted, it can be significantly refined during the regulatory phase by implementing several straightforward reforms. First, it is essential to consult relevant stakeholders, particularly women from the community, to ensure that the Act addresses gender-specific vulnerabilities and reflects real-world conditions during implementation. Second, there should be a clear definition of microfinance institutions, money lenders, and various types of community credit programs. Third, an additional registration pathway for non-commercial, women-led Self-Help Groups should be established, allowing them to operate with minimal bureaucratic hurdles and associated costs while retaining their autonomy. Fourth, consumer protection must be prioritized within the legislation. Fifth, the Central Bank of Sri Lanka should be empowered to set interest rate caps. Sixth, distinct collateral requirements for business and non-commercial community-led programs should be introduced. Seventh, safeguards against coercive recovery tactics, including sexual bribery, should be established as regulatory infringements with mechanisms for accountability. Finally, a clear appeals process against regulatory decisions should be included, ensuring borrowers’ right to legal representation is not restricted.
By adopting these recommendations, the Microfinance and Credit Regulatory Authority Act can fulfill its primary objectives and effectively safeguard the most vulnerable members of society.
Financial Chronicle Biz English | Sri Lanka Business News.
