Microfinance Code of Conduct introduced | Sunday Observer

Microfinance Code of Conduct introduced

Deputy Managing Director of Berendina Micro Investments Co. LtdCharith Fernando, receiving the acknowledgement certificate for signing the Code of Conduct . Picture by Chaminda Niroshana
Deputy Managing Director of Berendina Micro Investments Co. LtdCharith Fernando, receiving the acknowledgement certificate for signing the Code of Conduct . Picture by Chaminda Niroshana

A Code of Conduct targeting microfinance practitioners was introduced by the Lanka Microfinance Practitioners’ Association (LMFPA) last week at the Centre for Banking Studies in Colombo.

Micro finance is providing funding to low income groups and we need to have a mechanism to protect them from loan ‘sharks’ who charge exorbitant interest rates. There is a need to have a national policy framework for micro finance, State Minister of National Policies and Economic Affairs, Dr. Harsha De Silva said delivering the keynote address.

The over in-debtedness of low income groups is a key problem in micro financing. However, credit is important as without credit society will not move forward. The Code will facilitate best practices in micro financing and the industry will be self regulated by this move, he said.

In a special statement at the ceremony, Minister Dr. Sarath Amunugama said that the introduction of the code of conduct is a commendable and timely intervention. He further added, “enabling better access to finance for the lower income households is of importance to the Government. But, it is of equal importance that competition among the providers does not contribute towards high levels of indebtedness. Self-regulation and compliance by the industry will help protect the interests of both the clients and industry in the long run.”

President of the LMFPA Imran Nafeer, stressed the importance of sector-wide acceptance of the Code of Conduct initiative. “As the representative body, the LMFPA has a special role to play in setting standards for our members. Through the introduction and hopefully, adoption of this Code of Conduct, we believe the basic principles governing the business model of microfinance institutions can be protected from unethical practices. This will undoubtedly help our members grow in a sustainable manner and just as importantly, help safeguard the clients by not overburdening them with debt that they cannot subsequently repay. The Code of Conduct is our way of showing that as an industry, we need to be both sensitive to, and cognisant of the changes taking place within the sector. The importance of responding in a proactive manner cannot be stressed enough”, he said.

The importance for a Code of Conduct to be adopted by the microfinance sector was underscored by the recent public debate around rising levels of indebtedness resulting from microfinance loans. The practices adopted by microfinance institutions, both those that are regulated and unregulated, have therefore, come under much scrutiny. Under these circumstances, the LMFPA felt the need to introduce a Code of Conduct that would help guide and anchor the sector as it expands its services to a growing client base.

The adoption of the Code by practitioners will help ensure that the highest level of professionalism, ethical conduct and good governance are observed by the members of the LMFPA. Since the microfinance institutions cater to a particular socioeconomic stratum in society, the Code of Conduct helps ensure that microfinance services are provided in a manner that benefits and respects clients.

Developed in consultation with multiple stakeholders, upon adoption by the sector, the Code of Conduct promises to be a powerful document that would shape how microfinance institutions carry out their respective businesses. The code targets specific areas of practice that include maintaining transparency and healthy competition, loan disbursement and recovery practices, developing a feedback mechanism, better information sharing and maintaining the quality of the staff of the institutions. In short, the Code reiterates the commitment on the part of the LMFPA members to adhere to and maintain certain standards of conduct that would assuage some of the major concerns raised by the public.

One of the key highlights and discussion points in the Code of Conduct will be on the guidelines offered to reduce over-indebtedness. The Code details how such situations can be minimised by taking into consideration the burden of outstanding loans prior to granting a new loan, the importance of considering the disposable income of the household and in ensuring that mainstream loan products have 06 months or more in tenure.

Founded over a decade ago and incorporated as a non-profit organisation under the Companies Act No. 7 of 2007, the Lanka Microfinance Practitioners’ Association is a network formed by several Microfinance Practitioners in Sri Lanka to enhance the ability of the members to provide quality financial services to grassroots communities. The LMFPA strives to achieve this goal through the promotion of microfinance and by encouraging cooperation, sharing information and assistance between member practitioners and stakeholders. Governed by a Board of Directors, the LMFPA is recognised by the Central Bank of Sri Lanka, government authorities, Institutions and other stakeholders as “the coordinating body of Microfinance Institutions in Sri Lanka”.