CB gets tough with errant micro lenders | Sunday Observer
Stringent regulations to be enforced:

CB gets tough with errant micro lenders

16 August, 2020

Discussions are being held within the Central Bank (CB) to either continue the same micro-credit program launched a decade ago or to relaunch it with modifications based on new experiences, said Central Bank Governor W.D. Lakshman responding to the urgent need to enforce stringent regulations on the micro-finance sector. He said there are several inherent issues in the sector which needs to be looked into to ensure that it supports the low income segment to enhance income in a proper manner.

It is estimated that over 30,000 micro lenders operate in the country of which only a handful is regulated. Microfinance is defined as provision of financial services by way of credit, savings and other essential financial services to those who are too poor to be served by regular banks, mainly because they are unable to offer sufficient collateral. Microfinance is expected to expand and improve income generation activities and capacities of low income people.

The Microfinance Act, No. 6 of 2016 which came into effect in July 2016 provides for the licensing, regulation and supervision of companies carrying on microfinance business, which are called licensed microfinance companies (LMFCs).

However, unregulated microfinance activities have led to illegal deposit mobilisation, exploitation of customers through excessive interest rates and unethical recovery methods. Poor corporate governance in these institutions leads to poor repayment rates, high transaction costs and recurring losses, leading the organisations to distress.

 The number of suicides in the country which could have been reduced through regulation of micro credit institutions has been alarmingly high.

The number keeps ticking each year with deaths occurring on a regular basis. The most recent incident was a 51-year old woman of Jaffna committing suicide by consuming poison since she could not repay the loan she had taken from a micro finance company in the area.

At least 170 people were forced to commit suicide a couple of years ago with women accounting for the highest number in the Vavuniya, Jaffna and Batticaloa districts. However, the increasing suicide rates in the country according to micro credit sector experts is only the tip of the iceberg of a bigger issue as unregulated microfinance entities continue to juggle with the hard earned money of the hapless segment of the country. Microfinance institutions offer daily, weekly and union loans and to those without a proper livelihood.

When contacted, State Minister of Development Banks and Loans, Shehan Semasinghe said the microfinance sector issues have been identified by the ministry which will look into to regulate the sector soon.