The Central Bank of Sri Lanka is planning to introduce an array of measures to tackle spiraling indebtedness among the low-income population due to unscrupulous lending practices adopted by certain microfinance institutions. Plans in the pipeline include the drafting of a new customer protection regulation, introduction of a deposit insurance scheme and a corporate governance direction for microfinance companies. In addition, the financial regulator is also to mandate reporting of financial operations of licensed microfinance institutions to the Credit Information Bureau of Sri Lanka (CRIB).
“It is unfortunate that some microfinance service providers conduct unethical and irresponsible activities to suppress the well being of microfinance customers. These institutions are a menace to other micro finance institutions which conduct microfinance in its true essence. Therefore, the industry believes that customer protection regulation is of extreme importance at this juncture,” Central Bank’s Deputy Governor, C.J.P. Siriwardana told a forum last week.
He added that the linking of microfinance companies to the CRIB will help to streamline the analysis of credit worthiness of borrowers and minimize the over-indebtedness issue currently seen as a serious problem in some parts of rural areas in the country.
On the other hand, key aspects to be addressed through the Corporate Governance Direction for Microfinance companies are board of directors’ composition and responsibilities, functions of board appointed committees, regulation of related party transactions and disclosures. Through this new framework, it is expected to promote self regulation and good governance of microfinance companies.
“At the moment we as the Central Bank, have issued prudential rules & directions for Microfinance Companies and guidelines to the Registrar of Voluntary Social Services Organisations with regard to Microfinance NGOs. We have been receiving applications for licensing from many interested companies for licensing and we are currently processing such applications,” Siriwardena, who also Chairs CRIB and is also the Deputy Governor in charge of Financial Sector Regulation and Supervision in the Central Bank, highlighted.
Last month, over 3,000 members in 100 cooperative societies took the streets of Jaffna to protest against indebtedness and handed in a letter seeking the government’s intervention on their behalf.