Microfinance regulation – The case in Sri Lanka

By Cheney Wells, KF 11

With the recent financial crisis, and questionable practices by America’s biggest banks, the word “regulation” had made frequent appearances in the headlines of newspapers.

As of yet, Sri Lanka’s government has not implemented a means of regulating the microfinance industry here. However, according to Sri Lanka’s Central Bank website: “A law to regulate and supervise Micro-Finance Institutions is […] being formulated. Action is being taken to establish an independent authority for monitoring micro- finance institutions.”

That there is no regulating authority of yet for the microfinance industry has led to strong hesitation on behalf of Sri Lanka’s Central Bank to promote or support any micro-lending activities in the country.

Just as there has been debate over how much the private banks in the United States should be regulated, there are concerns over the effects of an over-regulated microfinance industry here in Sri Lanka. Such concerns include:

- A minimum capital requirement for MFIs, which could exclude some of the smaller MFIs from operation if unable to meet the minimum

- An interest rate cap provisioned by the Act, which make operational and financial sustainability for MFIs a difficult task if the cap is set too low

- The cost of regulation, which would be borne by the MFIs in the form of a license fee. This cost would ultimately affect the borrowers

What effect regulation of the microfinance industry will have remains to be seen, but MFIs would do well to prepare themselves for complying with what is a near certainty in the future of the industry here.