Impact of microfinance on Sri Lanka’s economic drive

• K Seeds holds forum on ‘Magnifying Microfinance: The Way Forward’ 

By Charumini de Silva

The importance of microfinancing to Sri Lanka’s economy, developing sector with the newly implemented Microfinance Act and the use of technology were the key topics discussed at a forum titled ‘Magnifying Microfinance: The Way Forward’, organised by K. Seeds Investments in Colombo recently.

The speakers weighed the impact of microfinance sector would have on the economy, advantages, challenges, trends as well as on next generation microfinance technology solutions.

Central Bank Department of Supervision of Microfinance Institutions Senior Assistant Director Tharanga Wijayakoon set the stage by outlining on the implementation of the newly introduced Microfinance Act and elaborated on background of the Act, rules for Licensed Microfinance Companies (LMFCs) and directions for LMFCs.

“The newly-enacted Microfinance Act No. 6 of 2016 intends to license, regulate and supervise unregulated microfinance companies and microfinance non-governmental organisations (MNGOs),” he added.

Wijayakoon pointed out that companies engaged in microfinance services has been given a grace period of 18 months where they have to apply for a license or obtain registration by 30 September 2017 according to the regulatory framework introduced by the Central Bank in 2016. The end of grace period is 14 January 2018.

Reputation/recognition, public deposits, commonly accepted regulatory framework, stability of the company through regulation and supervision, opportunity for development and capacity were highlighted as benefits of obtaining a license.

Challenges and way forward

Bimputh Finance PLC Director Chamindra Gamage elaborated on the challenges faced by the microfinance industry and how best it could be addressed to protect and further improve the sector. 

Describing the microfinance sector today that consists of large number of players ranging from banks, NBFCs, unlicensed investment companies to village ‘Poli Mudalalees’ he said the saturation in other sectors have prompted rapid growth in number of players and is evident with the high penetration. However, pointed out that this situation thereby is highly vulnerable to Sri Lanka’s economic state and climatic condition as close to 15,000 unregulated entities are involved in daily, weekly money lending activities.

He suggested that the industry should look back and study situations from past as history always repeats itself.

In terms of current challenges faced by the industry from externally Gamage outlined natural disasters and general economic downturn, rise in interest rates, increased informal lending, Governmental local bodies and representatives, media perception and rise in suicide rates.

Noting that the formal microfinance gross loan portfolio (GLP) is around Rs. 70 billion, he stressed the industry should shift from towards an income generation lending rather than concentrating on consumption based lending, while keeping a close tab on multiple borrowing, where many institutions today are servicing of same clients by different financial institutions.

Knowledge and capacity of existing staff, staff movement and target setting, lack of knowledge on client’s informal lending position were highlighted as internal challenges faced by the industry. 

While acknowledging microfinance as a large sector in Sri Lanka’s economy he commended the introduction of Micro Finance Act as a step in the right direction. “It is important to oversight and govern microfinance institutions and non-bank financial institutions (NBFIs) as the stability rests upon the stance taken. Also the Central Bank needs to have one-to-one discussions with all NBFIs who are significant players in the micro finance landscape,” Gamage added.

Emphasising on the way forward he said NBFIs are the single largest players in the microfinance landscape and have a key role in shaping its future including interest rates, multiple lending and staff movement, while insisting speedy registration of microfinance institutions under the new Microfinance Act and urged strict regulation of non-regulated lenders. 

“Microfinance sector is overheating and all large players must discuss a way forward on long-term sustainability of the sector and not only on short term profitability,” he pointed out.

He also said that microfinance institutions can finance their portfolios through bank borrowings, corporate debt as well as with access to debt instruments in Capital Market, while calling on international lenders and technical assistance to further uplift the industry and SMEs. 

Gamage also called on for Smart Campaign Certification and Social Compliance Ratings as well as reduction in costs through digitisation of operations. 

Next-gen tech solutions

OpenArc Systems Management Ltd Chairman and CEO Daya Hettiaratchi spoke on next generation microfinance technology solutions and lifestyle banking with poor.

It was pointed out that there is a significant transition from the conventional systems such as branches, centres, number crunching systems towards customer centric online real-time systems where mobile banking and know your data (KYD) driven next generation systems, while insisting on positive technological developments through 24*7 payments via mobile apps, better facilitated financial inclusions.

He said next generation microfinance solutions will be branchless, no point of sales (POS) but mobile, KYD not know your customer (KYC), field data collection via apps and dashboards with big data intelligence.   

“Let’s get ready for a society where everyone becomes a cashier, who will do banking without hard cash, credit cards, debit cards, pre-paid cards, and ATM machines too, but mobile phones only,” Hettiaratchi added.

Prosperous Capital and Credit Ltd. Director Vidushan Premathiratne stressed on the advantages of being registers under the Microfinance Act from a stakeholder perspective. 

Regulations 

to catalyse growth 

He commended the efforts taken by the Central Bank with the introduction and implementation of the new Microfinance Act and added that regulation enables to bridge modern-day challenges and trends faced by LMFCs.

Emphasising on how regulation could catalyse growth he pointed out eight key factors that includes; strengthening enterprise risk governance and structure, boosting the effectiveness and sustainability of the operation, new approaches to managing capital and liquidity, managing compliance surveillance and financial crimes, adjusting to the changing scope of consumer financial protection, emphasising cyber security while protecting consumer data privacy, addressing pressure from innovators and new market entrants and accountability and transparency.

Premathiratne said there were many advantages to LMFCs, investors as well as to its clients by registering under the Microfinance Act. 

However, he said: “There is a credit gap of $2.5 to $3.58 billion between licensed financial institutions and prospective client necessities. The microfinance institutions must contribute in bridging this existing gap.” 

The forum also saw a Q&A session with panellists including Central Bank Senior Director Ajani Liyanapatabendi, Former Practice Leader for Microfinance at the Asian Development Bank (ADB) Dr. Nimal A. Fernando, Prosperous Capital and Credit Limited Director Vidushan Premathiratne and Bimputh Finance PLC Director Chamindra Gamage.

Liyanapatabendi said the Central Bank is in the process of linking microfinance companies to the Credit Information Bureau (CRIB) by the end of the year as multiple lending to the same borrowers has raised concerns in the microfinance sector.

“We are expecting to link the microfinance companies also in the CRIB in the future once microfinance companies obtain and register to get the licenses. Like banks and non-bank financial institutions (NBFIs), licensed microfinance companies (LMFCs) will join the CRIB so that companies can collect the data from there,” she added.

Multiple lending a concern 

In addition Dr. Fernando said multiple lending was a serious issue and it was increasing the gravity of the problem.

He suggested introducing credit information systems that cover the entire spectrum of financial institutions that are lending to low-income households and microenterprises as one way to answer this issue.  

Dr. Fernando emphasised that right now in most of the cases credit information systems exclude low-income households and microenterprises clientele and if a credit information system was introduced that could bring about some kind of discipline to the industry. 

“You cannot depend on what potential borrowers are going to tell you. You have to rely on solid, hard and reliable data which can come through credit information systems. Regulations are not going to answer that question substantially,” he opined.  

In terms of system stability, although the microfinance sector was not going to create a system of instability even if it collapsed tomorrow considering the size of the segment out of the total spectrum of the financial system, he however stressed that it was going to upset the country from a political point of view.

Gamage addressed the issue of multiple lending, saying: “If you end up potentially looking at 80%-100% growth y-o-y, your own staff is forced out to lend to people you know are not viable for microfinance. It is really a question of each institution taking its own stand there. If all institutions get together and take the right stand then the instability is actually not caused from the financial sector, but from the people,” he pointed out.

Pix by Lasantha Kumara