New laws on Micro Finance

The Pathfinder Foundation supported by the Sri Lanka Business Development Centre, organised a Sanvadaya (a stake holder discussion) on the proposed legislation on Micro Finance at the Sri Lanka Foundation Institute.

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

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 which was very useful for comparative purposes.

The participants generally in principle welcomed the new legislation, since it would legitimate the sector, which in some cases, was operating in a legal lacuna. However, it was pointed out that over 90 per cent of the players in the sector were operating under and in terms of enabling legislation such as the company 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 per cent. 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 institution (MFI) which mobilise members/non members savings and others for the purpose 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 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.

Regarding the appointment of agents of the Central Bank to undertake regulatory functions, at 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.