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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 comparative purposes.

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 members’ savings and others for purpose of supervision.

The potential cost of supervision as proposed in the draft law could cause financial problems to small MFI’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 states.

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.

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