Government to set up authority to regulate microfinance credit

By Nishel Fernando 
The Finance Ministry is planning to set up a credit regulatory authority via the proposed Credit Regulatory Authority Act by end of this year to regulate microfinance and lending firms in Sri Lanka.

Finance Minister Mangala Samaraweera recently submitted the draft version of the Act to the Cabinet of Ministers in an attempt to expedite the enactment of the proposed law to set up the credit regulatory authority.

The Central Bank is drafting the final version of the proposed Act, which aims to bring Sri Lanka’s largely unregulated microfinance and lending firms under strict regulatory control in order to protect customers from unethical practices.

“No person, other than a person licensed to carry on the business of money lending under this Act shall carry on the business of money lending,” the initial version of the draft Act stated. 
The Central Bank last month published the initial version of the draft Act for public comments.

Central Bank Assistant Governor J. P. R. Karunaratne told Mirror Business that the final version of the draft Act has been completed by incorporating stakeholder observations and comments and it will be presented to the Monetary Board at the next meeting. 

A senior Finance Ministry official noted that the final draft version of the Act prepared by the Central Bank will be incorporated with further amendments at the Legal Draftsman level before being published as a gazette. 

The Finance Ministry and the Central Bank expect that the proposed Act will be enacted by Parliament before the election cycle begins at the end of this year. 

Karunaratne noted that new laws would also allow microfinance institutions to become members of the Credit Information Bureau (CRIB), enabling them to get credit reports from the CRIB while sharing their customers’ credit data.

CRIB General Manager Nandi Anthony remarked that the proposed Act will enable CRIB to extend special services to microfinance and lending firms, which would be crucial for credit evaluation.

“Most microfinance firms don’t possess the financial capability to maintain a good credit evaluation system unlike banks and large financial firms. We can provide administrative capability through our system to set up their credit appraisal parameters,” he noted.

He pointed out that credit appraisal parameters would help these firms to identify debt-ridden customers who seek loans many times. 

The current Microfinance Act No 6 of 2016, which regulates microfinance institutions, doesn’t have sufficient provisions to protect borrowers from malpractices as it is only limited to deposit-taking lenders.

To-date, only two microfinance firms have received licences under the Act to fall under Central Bank regulations.

The proposed credit regulatory authority will be set up as a separate authority from the Central Bank, although a Central Bank Deputy Governor and two other Central Bank officials are proposed to be included in it. 

The government last year absorbed over Rs 1.25 billion worth unpaid debt from over 45,000 debt-ridden women borrowers in the drought-affected districts.
According to reports, some of the microfinance borrowers had taken multiple loans at over 200 percent interest rate and a few debt-ridden borrowers who couldn’t service their land had committed suicide.

Karunaratne noted that the proposed authority could impose interest caps to protect borrowers from excessive interest rates. 

According to the Finance Ministry, major microfinance institutions alone had loaned Rs.282 billion as of last year.