New Sri Lanka microfinance law getting final touches: Finance Minister
ECONOMYNEXT- A law to regulate microfinance and protect borrowers from predatory lending, is nearly ready, Finance Minister Mangala Samaraweera said after Sri Lanka wrote off more than 1.25 billion rupees in loans earlier this year with tax payer money.
"We are at the moment putting the final touches to a new act which will cover the unregulated micro finance sector stipulating industry standards in protecting borrowers from exorbitant and unnecessary charges and other malpractices commonly seen in the industry," he said.
Samaraweera was speaking at the Regional Policy Forum of the Asia Pacific Rural and Agricultural Credit Association.
He said that predatory microfinance practices were observed in rural Sri Lanka, especially in former war zones, where residents are unbanked or have no collateral to obtain loans from highly regulated banking and non-bank financial institutions.
"The proliferation of unethical lending in microfinance in particular, led to a crisis situation in some parts of the country," Samaraweera said.
In recent years, a number of suicides have been reported in rural areas after individuals got overburdened with microfinance loan repayments.
Samaraweera had intervened on humane grounds.
"To address this, the government of Sri Lanka has written off micro finance debts of more than 45,000 women that amounted to more than 1.25 billion rupees."
Microfinance companies were charging as much as 70-80 percent interest on loans, until the government intervened and came to an agreement with the industry association to introduce an interest rate ceiling of 35 percent.
The government is also pushing for banks to issue loans on project basis instead of through collateral, so that the unbanked can become entrepreneurs using regulated financial services.
Last week, Central Bank Governor Indrajit Coomaraswamy said that it would be better for the microfinance industry to regulate itself.
"We have told the association that it would be better for them to regulate themselves, because if we do it, we can regulate to the point that their businesses will crash," he said.
The best way for people to not get stuck in microfinance traps is to be more educated, Coomaraswamy said.
"We are conducting a lot of awareness programmes."
"It’s hard to regulate this. The best way is to raise awareness and increase financial literacy. That is the way to solve this problem," he said. (Colombo/Oct08/2018)