The Microfinance Industry Report - Sri Lanka

05th August 2009, www.microcapital.org

PAPER WRAP-UP: The Microfinance Industry Report-Sri Lanka by Roshini Fernando

Produced by the Banking with the Poor Network, this microfinance industry report on Sri Lanka gives an overview of the country while providing the most recent information available regarding the financial sector, regulators, microfinance activities, microfinance providers, access to financial services, meso level support for the microfinance sector and government policy donor support for microfinance.

As of 2007, the total population of Sri Lanka is at 20 million with an annual population growth rate of 1.10 percent. The population below poverty line (Poverty Head Count Index) is at 15.2 percent with GNP per capita at USD 1,599 and a 7.1 percent GNP growth rate.

The commercial banks dominate the financial system in Sri Lanka with 23 commercial banks operating in the country. The Bank of Ceylon and the People’s Bank are the largest state-owned banks in terms of asset size and outreach. The introduction of modern technology is a means to improve service quality and stay ahead the competitive banking landscape. Competition has also encouraged financial deepening as formal financial institutions seek to reach lower income clients.

There country has received a substantial amount of foreign aid that was channeled to the microfinance sector following the tsunami that struck Sri Lanka in 2004. The report notes that while many donors have worked through established microfinance institutions, some funded the establishment of multi-sectoral livelihood programs that included microfinance components. Unfortunately, these were largely unsustainable in the long-term and had some detrimental effects on the sector in the short-term through their mix of grants and subsidized loans and the resulting damage done to the established credit culture.

As a result, regional microfinance institution BRAC of Bangladesh managed to rapidly scale up to become a major player among NGO-MFIs. BRAC has achieved an outreach of 75,000 microfinance clients in 4 years.

Sri Lanka has an absence of a cohesive regulatory and supervisory system for the microfinance sector. The report views this as one of the barriers to future growth of the sector. Also, with donors leaving the microfinance sector in Sri Lanka funding becomes a challenge, especially for NGO-MFIs that are restricted by law from accepting public deposits. They are also further restricted from obtaining off-shore debt and equity funding due to prevailing exchange control restrictions. Local funding is difficult to access as local banks and other funding agencies are still reluctant to lend to or invest in the microfinance sector (due to the perception of high risk).

Sri Lanka’s microfinance sector is served by a range of institutions as follows:
Type of institution & Number of outlets
• Regional Development Banks - 215 branches
• Other licensed specialized banks, Sanasa Development Bank - 36 branches
• Samurdhi Bank Societies - 1,038 societies
• Co-operative Rural Banks & Women’s Development Co-operatives - 1,684
• Sanasa/Thrift and Credit Co-Operative - 3,794 active societies
• Other MFIs (NGOs/LLCs/companies limited by guarantee) - 2,500
• Total (excluding banks & other financial institutions) - 9,267

Sectoral distribution of outlets regarding microfinance in Sri Lanka is heavily concentrated in rural areas. Almost 90 percent of the 7,141 outlets are located in rural areas. Less that 10 percent of outlets are located in urban areas with only 1 percent in the estate sector.

The annual interest rates on loans in Sri Lanka range roughly from 6 percent to a maximum of 36 percent (some NGO-MFIs). Loans are given for periods ranging from 1 month to 5 years (usually for housing loans). A small number of institutions report longer term loans going up to 10-12 years (CRB and Sanasa societies).

By Roshini Fernando, GTZ-ProMIS and Tharmini Kularajasingam, BWTP Network, published by the Banking with the Poor Network, Spring 2009, available at:
http://collab2.cgap.org//gm/document-1.9.36554/18.pdf