ECONOMYNEXT- Sri Lanka’s Sarvodaya, the island nation’s largest village-based microfinance movement, sees mobilization of rural savings for the lending of the same area people as a successful economic progress model in the country.
Despite over 60 financial institutions including licenced banks, specialized banks, and finance companies, rural entrepreneurs are still struggling for capital to start or expand their business enterprises.
Sarvodaya Movement which started over 60 years ago to address this issue is trying to step up its strategies to strengthen rural financing with the rural-based small and medium enterprise (SME) lender Sarvodaya Development Finance (SDF) under its group is in the process of listing in Colombo Stock Exchange.
“When they start economic activity, they don’t start lending. They start with savings,” said Vinya Ariyaratne, the president of Sarvodaya Shremadana Movement.
“So the culture of savings is very important. Even the children were trained to save a little bit of money and even organize village fairs and things like that,” he said referring to Sarvodaya’s efforts in rural areas.
“So it was always the village’s own savings being circulated within the village or with the village that is also in similar need.”
The SDF has kicked off its initial public offering (IPO) to raise 1 billion rupees through selling a 30 percent stake of the company.
SDF started rural financing by promoting savings using rural people’s money to develop the same village at a time when most local banks raise deposits from small savers in rural areas but do not always lend to the same villagers.
Horizontal Sharing
“Sarvodaya pioneered what we call a horizontal sharing of savings based lending,’ Ariyaratne said.
“So whenever you have additional credit lines coming in the form of a formal financial institution through Sarvodaya Development Finance, it’s complementary to the community’s own resources being mobilized.”
“I think that’s very important. Otherwise, if you just focus on credit only, then I think we are contributing more to rural indebtedness, which is not at all healthy, or not even compatible with the kind of economic empowerment that we aim for.”
Contribution from the SMEs accounts for over 50 percent of the island nation’s GDP. But they face greater growth obstacles compared to larger firms as SMEs are more constrained by different obstacles, and limited access to finance is an important one of these.
Although there is a developed and competitive formal financial market in Sri Lanka, borrowing for SMEs is not easy as it requires a tedious process.
And micro financing was seen as a remedy for this.
Ariyaratne said there are about 30,000 villages in Sri Lanka and over 70 percent of the population still lives in rural area
“Anything that’s happening in those villages really will decide the future of the country,” he said.
“And the poverty is also confined to rural areas and the plantation areas. So that is the practical importance of focusing on the grassroots communities.”
“Fundamentally Sarvodaya believes in the evolving system of governance and also to create resilient economies at the local level.”
Self-Sustaining Rural Economy
He said the COVID-19 pandemic has proven when the national economy gets disrupted, it’s the rural economy which is self-sustaining and self-sufficient, will survive and production and services even mobility is possible at a micro level.
“So that is the model that we believe will provide a very stable base for social and economic development in the country,” Ariyaratne said.
SDF caters to the bottom of the pyramid market through over 5,600 community-based organizations called Sarvodaya Societies.
The over 9-billion-rupee total asset worth company was originally started to create a rural-area centric business to keep the savings of rural depositors in the same area and to serve needy entrepreneurs.
As of now, 52 percent of the SDF is owned by Sarvodaya Economic Enterprises Development Services (SEEDS) Limited, 22 percent by Sarvodaya related entities, and 13 percent each by Japanese Gentosha Total Asset Consulting Inc. and other existing shareholders.
The SDF has 30 branches and 21 service centers island wide and its profit after tax in the past four years (2018/2021) has shown a growth of 23.4 percent calculated on a three-year compounded annual growth rate (CGAR).
The profit after tax in the last financial year ended on March 31 rose 80.3 percent year-on-year to 183.4 million rupees, the company data showed.
The total asset and equity also have expanded at 12.4 percent and 24.5 percent compiled on the same three-year CGAR basis.
The loan growth, which was at 2.76 billion in 2016 had almost tripled in the last financial year ended in March 31, 2021 to 7.9 billion rupees.
It also had a total deposit of 4.55 billion rupees from customers by the end of 2018/19 financial year.
The funds raised through IPO is expected to be used to expand the empowerment of rural farmers and entrepreneurs.
“I think credit is very important, but it has to be a part of a larger financial empowerment program. We call it micro finance, because micro finance has a much broader definition including even non-financial services being given to the people who borrow money,” Ariyaratne said.
“So definitely credit is an integral part of it, but if you just look at the main problem is that people don’t have access to finance. I don’t think we agree with that.”
“We believe that you need market information, you need capacity building; you need other forms of technology-based solutions for some of the promising enterprises. So it has to get an integrated program and input.”