By Imran Nafeer
Introduction
Sri Lanka’s journey toward a comprehensive microfinance regulatory framework has been long, complex, and delayed. Discussions between key authorities, including the Central Bank and the Ministry of Finance, on the need for a dedicated Microfinance Act began as far back as 2006, nearly 20 years ago. Despite multiple consultations, drafts, and stakeholder engagements, these early efforts did not culminate in a functioning regulatory system.
It was not until 2016 that Sri Lanka enacted its first sector-specific law, the Microfinance Act No. 6 of 2016. However, the Act fell short of addressing the real needs of the industry and its millions of customers. This became evident in practice: only four institutions were ever registered under the 2016 Act, signaling that the framework was neither attractive nor practical for the majority of MFIs operating in the country.
After years of policy debate, institutional failures, consumer protection concerns, and growing public demand for stronger oversight, the proposed Microfinance and Credit Authority Act is a timely and much-needed step. It is more comprehensive, more realistic, and better aligned with the structural, legal, and operational realities of Sri Lanka’s diverse microfinance ecosystem.
This article explores the provisions of the new Act with a focus on the challenges that microfinance institutions (MFIs) will face when aligning themselves with the Act and preparing for licensing under the new Authority. These insights are critical for policymakers, lenders, and the general public seeking to understand both the benefits and the implications of the reform.
Challenges Microfinance Institutions May Face When Becoming Licensed Microfinance Providers Under the New Act
The Microfinance and Credit Regulatory Authority Act, 2025 marks a major shift in Sri Lanka’s microfinance landscape. While the Act aims to strengthen governance, ensure fair treatment of borrowers, and create a more stable financial environment, the process of becoming a licensed microfinance provider introduces several operational, legal, and compliance challenges for existing microfinance institutions (MFIs).
Below are some of the key challenges MFIs are likely to face during this transition.
1. Meeting Capital, Governance and Fit-and-Proper Requirements
To qualify for licensing, MFIs must meet strict standards related to minimum capital, ownership structure, governance systems and internal controls. Directors and key management personnel must also satisfy “fit and proper” criteria, including clean records, financial integrity and professional competence.
For many small and medium MFIs, especially those that evolved informally or from NGO projects, upgrading governance structures, boards, policies and control systems to the required standard will be demanding in terms of both time and cost.
2. Structural and Legal Changes Required for Licensing
One of the most significant challenges is the mandatory legal form required for a microfinance license.
Under the Act, an institution is not eligible to be licensed as a microfinance institution unless:
In practice, this means:
A Pvt Ltd MFI will need to convert into a public company (not private) before it can apply for a microfinance license.
This conversion requires:
For many MFIs, this legal and structural transition will be one of the most complex and sensitive steps in the entire licensing journey.
3. Documentation and Reporting Burden
Licensed entities will be subject to regular reporting obligations, including:
Institutions that have operated with minimal documentation, basic spreadsheets or manual registers will now need more robust management information systems (MIS) and trained staff to handle reporting and compliance work on an ongoing basis.
4. Cost of Upgrading Systems and Processes
To comply with the Act and future directives, MFIs will need to strengthen many internal processes, including:
These improvements demand investment: new software, staff training, policy development and sometimes external consultancy. For smaller MFIs, this financial and technical burden may feel heavy, even though it strengthens the institution in the long term.
5. Restrictions on Existing Operational Practices
Some MFIs have used flexible or informal methods that may no longer be acceptable under the new Act—for example:
The law requires fair, transparent, and well-documented practices. MFIs will need to:
Changing habits and field culture, especially in large networks, will require strong leadership, training and monitoring.
6. Increased Supervision and Inspections
Licensed moneylenders and MFIs will be subject to ongoing supervision, including:
MFIs that are not used to external scrutiny may feel pressure and uncertainty. Weaknesses in documentation, approvals, internal controls or staff behavior can lead to directions from the Authority or, in serious cases, penalties and reputational damage.
7. Need for Professional Compliance and Risk Management Capacity
The new environment will require MFIs to develop internal capacity in:
Many MFIs will have to recruit or designate compliance officers, risk managers and internal auditors, and provide them with authority and resources. This is a positive step for institutional maturity but again brings cost and organizational change.
8. Managing Tight Transition Timelines
Existing institutions will only have a limited transition period to:
Those who delay planning and preparation may face a last-minute rush, incomplete compliance or even risk being unable to continue business under the new framework.
Conclusion
The Microfinance and Credit Regulatory Authority Act, 2025 offers an opportunity to professionalize and stabilize Sri Lanka’s microfinance sector, protect customers and build long-term trust. However, for existing MFIs, the path to becoming a licensed microfinance provider involves significant structural, legal, operational and financial adjustments.
(Imran Nafeer is a respected microfinance professional with over 15 years of experience working with MFIs, development agencies, investors, and government bodies. He has served as President (2017–2018) and Honorary Secretary of the Microfinance Practitioners Association during multiple terms. He has contributed to national committees on microfinance regulation and played a key role in shaping Sri Lanka’s microinsurance framework, and is currently the Chief Consultant/Director of IDEAS Business & Development Academy. Contact: imran@ideaslk.com)
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