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Microfinance Potentials in Sri Lanka for Poor Rural Households & Small Scale Businesses

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Microfinance is not a new concept, as it has been used for many years in both developed and developing countries. Sri Lanka has a long history of having a primitive microfinance system. ‘Cheetu,’ in Sri Lanka which has existed since at least the early 20th century, is an informal but effective method of saving and capital accumulation, and therefore, serves as a basic method of microfinance for the poor.

According to the Asian Development Bank (ADB), microfinance is “the provision of a wide range of financial services to low-income people,” including deposits, loans, payment services, money transfers, insurance for the poor and their businesses, and it is closely associated with microcredit.

Often, these small and individual businesses don’t have access to traditional financial resources from major institutions, so it is harder for them to access loans, insurance, and investments that will help grow their businesses. Without microfinance, those groups such as those who are unable to get checking accounts, lines of credit, or loans from traditional banks may have to resort to using risky loans or payday advances with extremely high interest rates or even borrow money from family and friends. Microfinance helps them invest in their businesses and, as a result, invest in themselves.

Micro financing is considered to be an essential part of Sri Lanka; the reason is that because Sri-Lanka is considered to be a developing country which consists of most of homemade and small scale enterprises which are mostly based through pension funds and smaller incomes. The micro finance sector also plays a crucial role in providing large employment opportunities at comparatively lower capital cost than larger industries and helps in industrialization of rural and backward area.

Coverage of microfinance could be seen throughout the country beginning from the 1990s, as local NGOs, National Microfinance Institutions (MFIs), INGOs, and government banks started their operations. Those funders provided loans under a variety of short, medium and long-term funding programs. Many lending institutions recently became active as Granter-Lenders. Several foreign microfinance institutions also began to provide funds to help reduce the poverty level of Sri Lanka. They are offering different types of microfinance services for empowering rural communities. International organizations are working to increase the supply of soft policy instruments like skill training programs and assistance services rather than providing hard policy instruments.

International and national microfinance organizations make funds available primarily for the purpose of reducing poverty in the country. However, they also use these funds for other emergency needs as follows: Education development in the country, health and nutrition development, disease prevention, providing houses and sanitary facilities, protection programs for children and the elderly, community rehabilitation, small-scale enterprise development, and women’s empowerment, developing rural infrastructure for civil society.

In Sri Lanka Commercial Banks, Development Banks and Regional Development Banks are included in financial institutions. Although there is a role for financial institutions, most of the microcredit activities are under taken by non-formal banking sectors and non-government organizations (NGOs). 

Microfinance: Addressing a Social Disaster – GroundviewsThe government often uses financial institutions as a channel to direct its own programs aimed at achieving social welfare and micro enterprise development. The Ministry of Rural Development in Sri Lanka used two state-owned commercial banks; People’s Bank and Bank of Ceylon, to distribute approximately Rs. 500 million (US $ 6 million) through the Samurdhi Development Credit Scheme. This scheme was designed to serve the rural community through village-level task forces known as “Samurdhi Task Forces,” which functioned as a social intermediary. The task force used “Samurdhi Niyamaka” members to choose recipients of subsidized loans ranging from SL Rs. 2,500 to SL Rs. 10,000 (approximately US $ 28 to US$ 110). The Samurdhi program (Divineguma) is the current national poverty alleviation program in the country, which began in 1994. It is the largest government social mobilization and poverty alleviation program, consisting of a subsidy program and a microfinance program for the poor.

The Hatton National Bank (HNB) in Sri Lanka is one of the leading commercial bank involved in lending to commercially viable micro-enterprises in rural areas. The uniqueness of this scheme is that it revolves around field officers known as Gami Pubudu Upadeshaka (GPU) who closely associate with the rural community, identify their strengths and opportunities and make suitable financial proposals to promote successful micro entrepreneurs. The World Bank has recognized the Gami Pubuduwa scheme as one of the most successful microfinance programs implemented by a commercial bank in Sri Lanka.

Without formal collateral, loans of up to SL Rs. 15,000 (approximately US $ 165) can be approved, and this amount can be increased to SL Rs. 25,000 if the applicant is guaranteed by two villagers. Because most transactions take place at the village level, the role of bank branches is limited. Loan interest rates range from 17 to 25 percent per year. In some cases, non-governmental organizations (NGOs) are permitted to use the multiple deposits of their members in the bank to raise funds for the further development of micro-entrepreneurs.  There were over 14,000 microfinance outlets in Sri Lanka’s microfinance sector in 2006, but some of them were inactive. In the year 2007, over 10,000 microfinance outlets played an active part in the industry.

Microfinance programs in Sri Lanka can be identified based on their national and regional service coverage areas. Many government microfinance programs serve the entire country, while some international organizations and national NGOs serve at the regional or district level. Regions or districts were chosen based on special characteristics such as poverty level, lack of resources, unemployment rate, vulnerabilities of the community, and so on.

Currently, the number of MFIs has increased in many districts in Sri Lanka and they all use the same approach and methods to serve the rural community. Sarvodaya Economic Enterprises Development Services (Guarantee) Ltd (SEEDs) was the first professional MFI to be awarded a ‘BB’ credit rating in Sri Lanka. The company believes that economic empowerment plays a crucial role in poverty eradication and that economic empowerment means not only increasing the income levels but also increasing the people’s economic discipline and awareness, as well as building knowledge, abilities and the potential for livelihood improvement. Agro Micro Finance, which was formed in the year 2002, is the second specialized NGO-MFI in Sri Lanka after SEEDs. The current operational network is in the districts of Puttalam, Kurunegala, Galle, Matara, Hambantota, Moneragala and Ampara.

Earlier in the days microfinance was thought to be impractical because banks feared that small businesses would be unable to repay their loans. However, as time has passed, micro finance has turned a new leaf and blossomed into one of the most promising sectors in the economy. Through the use of microfinance, small businesses are able to thrive, benefiting both the owner and the economy. As this sector expanded, it created more job opportunities because micro-level businesses now have the necessary financing to thrive.

Most of the microfinance providers appreciating poor borrowers who want to develop their small-scale business and repay their loan on time. Provision of financial services in the form of “credit” is one of the main strategies adopted to rise poor people’s income generation through self- employment opportunities. This encouraged low income groups to involve in entrepreneurial activities which were considered as risky by them before.

Micro-financial services play a significant role in empowering poor rural households; mainly improving their microenterprises and household levels. With the support of loans and EDS, some rural people have started new microenterprises while some developed and expanded their existing microenterprises in different sectors generating different types of employment opportunities; providing a solution to the prevailing unemployment issues in the society to a certain extent. Also, rural people have improved their housing conditions including essential infrastructural facilities using the loans provided by Microfinance Institutions. Therefore, it can be concluded that microfinance has created a significant positive impact on improving socio-economic conditions of poor rural households and their microenterprises.


Asian Development Bank (ADB). (2007). Effect of Microfinance Operations on Poor Rural Households and the Status of Women. Special Evaluation Study. Reference Number: SST: REG 2007-19, available at: http://www.oecd.org/dataoecd/46/15/39503711.pdf

Gant, R., de Silva, D., Atapattu, A., & Durrant, S. (2002). National microfinance study of Sri Lanka: Survey of practices and policies. Co-sponsored by AusAid and GTZ.

Hulme, D. and Mosley, P. (1996). Finance for the poor, impacts on poverty, vulnerability and deprivation. In Hulme, D. and Mosley, P. (Ed.), Finance against Poverty, Rutledge, London, 105-137.

J.A Prasansha Kumari. (2021); Development of the Microfinance Industry: Sri Lankan Perspectives. Hmlyan Jr Eco Bus Mgn; 2(3) 21-28

Kumari, J. P., Azam, S. F., & Khalidah, S. (2019). The effect of microfinance services on poverty reduction: Analysis of empirical evidence in Sri Lankan perspectives. European Journal of Economic and Financial Research.

Perera, M. A. M. I., & Wijekoon, W. M. S. M. (2019). ROLE OF MICROFINANCE IN EMPOWERING POOR RURAL HOUSEHOLDS: A CASE STUDY IN BERENDINA1 IN SRI LANKA. Sri Lankan Journal of Business Economics8(1).


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