New legislation on micro finance
DISCUSSION: The Pathfinder Foundation, supported by the Sri
Lanka Business Development Centre, organised a Sanvadaya (a stakeholder
discussion) on the proposed legislation on micro finance recently at the
Sri Lanka Foundation Institute, Colombo.
Over 75 participants representing a wide cross-section of stake
holders, practitioners, borrowers, consultants, trainers, donors,
regulators, auditors etc. from the micro finance sector were
represented. Since simultaneous translation facilities in Sinhala, Tamil
and English were provided, there was full participation in discussion.
Additional Managing Director of the National Development Trust Fund,
Dr. M. U. A. Tennakoon, moderated the discussion.
A critique of the draft legislation was provided by Dr. S. Premaratne
of the University of Colombo, Dr. Hassan of BRAC, Sri Lanka and Dr David
Bartocha of the GTZ presented an overview of similar legislation in
Bangladesh and Cambodia respectively, which was very useful for
The participants generally 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, Cooperative Law, the Voluntary
Organizations Law, the Samurdhi Law etc.
It was suggested that a clear distinction be made in the law on micro
finance institutions (MFI) which mobilise members/non membersâ€™ savings
and others for purpose of supervision.
The potential cost of supervision as proposed in the draft law could
cause financial problems to small MFIâ€™s. Regulation of interest rates,
would have a serious negative effect, as this is not an area in which
interest rates can be fixed by Central Bank circulars.
Interest rates in the MF sector are a function of the type of
project, credit history of the borrower, amount of savings deposited,
group dynamics and would defer from borrower to borrower, since there is
no traditional collateral.
Restrictions on area of operation, opening and closing of branches
which the Central Bank implements regarding Commercial Banks and
Financial Companies, if applied to MFIs, would place great burdens on
the MFIs, a press release detailing this outcome of the discussion
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
politicization of the supervision. Similarly giving this role to the
Divisional Secretary also would result in politicization and this should
be reconsidered, it further states.