Sanvada on new legislation on micro finance

COLOMBO: The Pathfinder Foundation, supported by the Sri Lanka Business Development Centre, organised a Sanvadaya (a discussion) on the proposed legislation on micro finance on April 27 at the Sri Lanka Foundation Institute, Colombo.

Over 75 participants representing a wide cross-section of stakeholders, practitioners, borrowers, consultants, trainers, donors, regulators and auditors from the micro finance sector participated.

Dr. M. U. A. Tennekoon, Additional Managing Director of the National Development Trust Fund, moderated the discussion with great skill. A critique of the draft legislation was provided by Dr. S. Premaratne of the Colombo University, Dr. Hassan of BRAC, Sri Lanka and Dr. David Bartocha of the GTZ presented an overview of similar legislation in Bangladesh and Cambodia which was very useful for comparative purposes. The presentations were followed by a lively discussion.

The participants in principle welcomed the new legislation, since it would legitimise the sector, which in some cases, was operating in a legal lacuna.

However, it was pointed out that over 90% of the players in the sector were operating under and in terms of enabling legislation such as, the Companies Law, Co-operative Law , the Voluntary Organisations Law and the Samurdhi Law. Was it really necessary to create a whole infrastructure under the Central Bank to make up the balance 10 %?

Wouldn't it be more economical to strengthen the regulatory capacity of those institutions, already existing ? It was also mentioned that the Samurdhi Act had provisions which limited Central Bank supervision.

It was suggested that a clear distinction be made in the law on micro finance institutions (MFI) which mobilise members / non members' savings and others for purposes of supervision. The potential cost of supervision as proposed in the draft law could cause financial problems to small MFIs. Regulation of interest rates, would have a serious negative effect, as this is not an area in which interest rates can be fixed by the Central Bank circulars.

Restrictions on, area of operation, opening and closing of branches which the Central Bank implements regarding Commercial Banks and Finance Companies, if applied to MFIs, would place great burdens on the MFIs.

Regarding the appointment of agents of the Central Bank to undertake regulatory functions, at the divisional level, there should be some criteria indicated in the act itself, which indicates the basis on which such a person has to be selected, otherwise this could lead to politicisation of the supervision. Similarly giving this role to the Divisional Secretary also would result in politicisation and this should be reconsidered.

The general view was that micro finance in Sri Lanka is still an emerging and developing sector, which has grown exponentially, in the recent past, under a legal regime, which can be described as "benign neglect ".

The need for an accounting standard for MFIs and auditing firms capacity in this area being strengthened was also highlighted. The participants were highly appreciative of the presence and positive interventions by the senior Central Bankers from relevant divisions.

The Pathfinder Foundation is reported to have planned similar programmes on other pending legislations.