Financial Times

The alleviation of poverty is one of the prime objectives of the government. No government could solve this national issue on their own. It is a collective responsibility of all sectors, including private, non-government and civil society. It has been accepted universally that Micro Financing is an effective tool towards eradication of poverty. During the last century, a considerable number of institutions such as Cooperatives, NGOs and Village Level Groups had been in the forefront in this sector.

These institutions and informal groups had delivered a commendable service particularly to the non-bankable poor. We have now reached a stage where the attitudes of the government and the public need to be further improved towards these Grass Roots Institutions.

The Microfinance Institutions Act, intended to be implemented by the Non-Banking Supervision Department of the Central Bank of Sri Lanka seems to be one of the key milestones towards the development of Micro Finance. Incorporation of this Act has been in progress during the last one and half years with very little participation from the microfinance practitioners and civil society.

Even though it is going to directly affect positively or negatively on these Institutions, as well as on the grass roots community, it is commendable, even at a later stage, the officials have decided to consult the civil society.

Within a short period, some of the key Microfinance Organizations managed to initiate a discussion amongst 25 organisations to discus the impact of the proposed Microfinance Institutions Act, and to propose a joint list of comments in order to improve the content of the Act. Those Institutions are – SEEDS (Gte) Ltd, Lak Jaya Micro Finance, Ceylinco Grameen, PLAN.

Sri Lanka, STROMM Foundation, GTZ, Sewa Finance, SAPSRI, BRAC - Sri Lanka, SEWA Lanka Foundation, World Vision, District Women’s Development Federation, Hambanthota, Women’s Development Centre, Kandy, Arthacharya Foundation, ECLOF, and Sri Lanka Business Development Centre. The suggestions made as a group to the Non Bank Supervision Department of the Central Bank of Sri Lanka are as follows,

* The Act has specified a minimum Core Capital or Net Asset amount for National District and Divisional Secretary levels. It is suggested to have some flexibility by allowing the Director, Non-Banking Supervision to take decisions regarding the minimum core capital or net asset levels. This is because, if it is being specified in the Act, any amendment will need an amendment to the Act which will be a long and difficult process.

* The Act provides powers to examine other than the applicant, Holding Company, Substitute Company, Associate Company or any other Company. It is suggested to omit the Associate Company or any other Company from the list.

* It is suggested that smaller MFIs having a Core Capital/Net Assets less than Rs 1.0 million not be subject to regulation, unless such MFIs mobilize deposits.

* Microfinance Institutions Act indicates appointing agents by the Director, Non- Bank Supervision Department of Central Bank and District Secretaries have been suggested as Agents. The participants’ opinion is to appoint a separate set of Officers directly responsible to the Director, Non-Bank Supervision Department of Central Bank.

* It is the universally accepted in principle that the interest ceilings are detrimental to the Microfinance Sector. All internationally accepted best practices guidelines, including CEGAP clearly mention that it is important to establish interest rates which cover all costs of the delivery Institutions. The proposed Act indicates that the authorities have the power to control the interest rates. The common consensus of the practitioners and other opinion leaders are to delete the above clause.

* Co-operative Societies are governed by the Co-operative Societies Act, and have its regulatory standards. It would be a confusing issue for the Co-operative Societies to abide by two laws. Therefore, it is suggested not to cover Co-operative Societies under the proposed Microfinance Institutions Act.

* According to the views of the practitioners, it is important to set agreed Auditing Standards for Microfinance Institutions. This will be helpful for the Audit Firms to conduct standard audits in Micro Finance operations.

* The Act suggests that, audited Financial Statements should be submitted within four months after each Financial Year. Due to the large number of transactions and the grass roots outreach, it is a difficult task to provide Audited Financial Statements within a short period. Therefore it is suggested to increase the period from 4 months to 6 months.

* The proposed Act indicates that only “Qualified Auditors” should be used. It is suggested that, it be made a mandatory requirement for only the national level Micro Finance Institutions to use “Qualified Auditors”. But for the Regional and Divisional Microfinance Institutions, to allow “Partly Qualified Auditors” to conduct the same function, which will reduce the cost burden on small Micro Finance Institutions.

In addition to the above suggestions, the practitioners and opinion leaders have suggested the following inclusions,

* The Act should provide Microfinance Institutions, the authority to accept not only Cash Grants, but Material Grants as well.

* To incorporate powers for the Micro Finance Institutions to operate Micro Leasing Facilities up to a maximum of Rs 1 million, Micro Insurance Schemes and Pawning facilities.

We strongly believe that, responsible officials in the government and the Central Bank of Sri Lanka will seriously consider these important suggestions. It is the responsibility of all concerned to ensure that, the incoming Act will facilitate and promote Micro Finance in Sri Lanka rather than being a hindrance to the grass roots development.