Feature-Challenges for the Government in Establishing the New Microfinance & Credit Regulatory Authority

News

By Imran Nafeer

The Microfinance and Credit Regulatory Authority Act, 2025 creates a comprehensive and much-needed framework to regulate moneylending and microfinance activities in Sri Lanka. While the Act strengthens governance, enhances consumer protection, and formalizes the sector, the Government faces multiple challenges in establishing the new Authority and implementing the Act effectively.

Below are key challenges the Government must navigate.

1. Building a New Regulatory Authority from Scratch

The Act introduces an entirely new institution with far-reaching powers—licensing, supervision, enforcement, investigations, consumer protection, and market conduct regulation. Establishing this Authority requires:

Recruiting and training qualified staff
Setting up operational systems and digital infrastructure
Creating regulatory manuals, guidelines, and supervisory procedures
Establishing coordination with the Central Bank, CRIB, Registrar of Companies, and law enforcement

Building such an institution demands technical expertise, financial resources, and time.

2. Licensing Thousands of Lenders within Tight Deadlines

Sri Lanka has a vast network of formal, semi-formal, and informal lenders. The Authority must:

Identify and register all operators
Evaluate their eligibility
Process license applications
Guide structural transformations (e.g., Pvt Ltd → Public Company)
Manage appeals and non-compliant entities

Handling this volume efficiently is a major administrative challenge.

3. Challenges in Imposing and Regulating Interest Rate Caps

Implementing an interest rate cap across diverse financial institutions is one of the most complex challenges the Government will face.

Different types of institutions have very different cost of funds, such as:

NGOs / Non-Profit MFIs

Often obtain donor funds, concessionary loans, or ultra-low-cost capital.
Can offer lower interest rates due to cheaper funding.

Private Companies & Commercial MFIs

Borrow from local banks, finance companies, and investors at market rates, which are significantly higher.
Cannot offer the same low pricing as NGOs without risking sustainability.

Licensed NBFIs (Non-Bank Financial Institutions)

Have the advantage of being able to mobilize public deposits, which dramatically lowers their cost of funds.
Therefore, their interest rates may naturally be more competitive than microfinance-only companies.

Given these variations:

A single uniform interest rate cap may be impractical or unfair.

NGOs could operate comfortably within a cap, while private MFIs and small rural institutions might struggle to survive.

Setting caps too low may push formal MFIs out of the market, giving space for informal lenders.

This would undermine the core purpose of the Act.

The Government will therefore need careful analysis, stakeholder consultations, and a dynamic pricing framework that recognizes these differences.

4. Monitoring Compliance across a Widespread Sector

Ensuring compliance with documentation, fair recovery practices, language-appropriate loan agreements, and ethical treatment of customers is difficult—especially in rural and estate areas where informal lending has existed for decades.

Regular inspections and audits require extensive field staff and strong regional presence.

5. Resistance from Informal and Unregistered Lenders

Many unregulated moneylenders may resist licensing due to:

Documentation requirements
Transparency obligations
Tax visibility
Prohibitions on unethical practices

The Government will face challenges in motivating or compelling them to formalize.

6. Ensuring Professional, Independent, and Impartial Enforcement

The Act gives powerful enforcement tools to the Authority. With strong power comes the responsibility to ensure:

Clear, fair, and consistent decisions
No political interference
Transparent regulatory actions
Professional independence

Maintaining trust is critical to sector stability.

7. Capacity Building for Staff and Stakeholders

Government staff must be trained in:

Supervisory techniques
Financial analysis
Customer protection frameworks
Investigation and enforcement
Handling complaints and mediation

Similarly, MFIs, lenders, auditors, community organizations, and legal professionals need education on the new requirements.

8. Managing Public Expectations and Complaint Volumes

With stronger consumer protection and heightened awareness, citizens will expect rapid responses to:

Predatory lending
Harassment
Over-charging
Language or documentation violations

The Authority must be prepared to manage high complaint volumes while maintaining fairness and timeliness.

9. Inter-Agency Coordination Challenges

Effective implementation requires constant coordination with:

Central Bank
CRIB
Registrar of Companies
Tax authorities
Provincial administrations

Any gaps in coordination can weaken enforcement.

Conclusion

The Government’s intent to reform Sri Lanka’s microfinance and moneylending industry is bold and necessary. However, effective implementation of the Act will require:

Strong institutional capacity
Sensible, evidence-based regulation (especially on interest rates)
Clear communication
Consistent enforcement
Technical expertise
Active cooperation with all stakeholders

If these challenges are managed proactively, the new Authority has the potential to create a fairer, safer, and more sustainable financial environment for millions of Sri Lankans.

(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)