The impact of microfinance on Sri Lanka’s economic growth

The importance of micro-financing to Sri Lanka’s economy and development was the critical issue discussed at a forum held in commemoration of the fourth anniversary of the Lanka Micro Finance Practitioners’ Association.

By Cassandra Mascarenhas

One of the key speakers was the Senior Lecturer of the Department of Economics at the University of Colombo Dr. S.P. Premaratne, who in his presentation weighed the impact the sector would have on the economy, stating that its collapse would not have a direct impact on the overall economy of the country.

However, the Senior Lecturer spoke about how important the microfinance sector really is to Sri Lanka’s economy, pointing out that the sector currently employs a vast number of people and that the Government, while not playing a direct role, should look to help the industry but at the same time should look to strike a balance between the microfinance industry and the bigger corporate.

“There is a policy to reduce interest rates but if loans are given at a low rate in the micro-financing sector, it will prove to be very big competition to the conventional banks and would therefore have a disastrous effect,” he stated.

Micro-financing currently contributes a mere 2 to 3% to the Sri Lanka’s GDP, which is low in comparison to other countries in the region, however it cannot be assumed that it would not affect the economy of the country directly if the industry collapsed.

“The most important factor is the regulatory mechanism. If we just forget about regulation, it will affect the economy of the country. There is currently no regulatory mechanism in place, therefore there is no way of knowing how many microfinance institutions there really are or how much of an impact they really have on Sri Lanka’s economy,” Premaratne explained.

Stating that his intent was not to criticise the Central Bank, Premaratne also said that he felt that Sri Lanka was not bothered by regulations as the Central Bank generally tended to impose regulations only when a particular organisation was on the brink of collapse instead of framing such regulations in advance.

He mentioned that on the other hand it must be kept in mind that microfinance plays a vital role in poverty alleviation, increasing overall production, and providing employment to people and promoting entrepreneurship.

A question posed to the lecturer questioned his assumption that microfinance does not directly affect the country’s economy when over 40% of the total families in Sri Lanka currently manage their businesses with the assistance of microfinance loans.

According to statistics, there are currently 15,000 to 16,000 organisations in the microfinance sector, this is however a rough estimate as an exact figure cannot be reached due to the lack of information on institutions in the sector, another point that was brought up and discussed heavily during the presentation.