Impact of microfinance in SL’s economic development

Pradeepa Jayakody

We swung off the main road and bumped down a narrow lane until we reached a modest two-story home. As we got out of the car the sounds of children’s laughter greeted us, coming from a busy garden behind the house. 
At the heart of the scene stood a firing kiln, its flames roaring casting a bright light on its surroundings. Here, for the past 24 years, Pradeepa Jayakody has been crafting clay items, such as delicate oil lamps and intricatebowls and vases which she sells to local merchants. 

Using locally sourced clay and local workers Pradeepa’s small business is deeply connected to her community. Alongside Pradeepa and her family, local women come to work, bringing their young children who are not yet of school age. Together, they labour, shaping clay into beautiful creations, all the while sharing food, laughter, and childcaring duties. This dedication to traditional crafts, community, and entrepreneurship provides a window into microfinance at work in Sri Lanka’s rural communities. 

The beginnings of microfinance can be traced back to the efforts of Grameen Bank, founded by Nobel laureate Muhammad Yunus in Bangladesh in 1983. At its centre, microfinance, characterised by small loans, savings, and bridge financing tailored to the needs of low-income individuals and entrepreneurs, has become a lifeline for many Sri Lankans striving to improve their livelihoods. 

Given the recent economic crisis in Sri Lanka, made worse by shocks such as the COVID-19 pandemic, political

instability, and fiscal shortfalls - the role of microfinance has become even more critical. According to Anura Attapattu, Managing Director of Berendina Micro Investment Company, a leading regulated provider of microfinancing loans in Sri Lanka, “Small businesses, which form the backbone of the Sri Lankan economy, have been hard-hit by the economic downturn, facing liquidity constraints, supply chain disruptions, and reduced consumer demand.” In this environment, microfinance institutions have become crucial for small entrepreneurs, offering essential funding to sustain and modernize their businesses. Through microloans, entrepreneurs can invest in updated machinery, explore new markets, and improve fiscal resilience. 

As Sri Lanka confronts numerous economic challenges in the future, the significance of microfinance in fostering economic inclusivity, entrepreneurship, and modernization cannot be overstated. Continued investment and support for microfinance initiatives are crucial for building a more vibrant and resilient economy that benefits all parts of society. 

Nowhere is the impact of microfinance more visible than in the confines of a small two-room workshop, where the din of whirring machines fills the air. Here, amidst the hum of production, stands M.G.G. Samantha, keeping an eagle eye over his sock-making enterprise. Over the past 17-years,  Samantha has overseen the operation of his workshop, ensuring the uninterrupted functioning of each machine where one broken needle out of thousands on his three machines halts all production in its tracks. His journey into entrepreneurship was made possible through the support of Hatton National Bank’s Microfinance Division, which assisted in purchasing the necessary machinery to kickstart his business venture. Thesole proprietor of MGG Industries,  Samantha’s workshop makes plain-coloured nylon socks in black and white which he sells to his wholesale clientele. 

Looking forward, he has plans to grow his business to new heights by investing in updated machinery equipped with computer design capabilities, enabling the customization of socks with logos and designs. With additional funding, Samantha said, “I want to get more corporate customers but also increase my profit margins another 20-30 percent” The significance of this ambition cannot be overstated. His plans to expand into new markets underscore the cascade impact of microfinance, not only uplifting individual entrepreneurs but also fostering economic development propelling his modest start-up to an enterprise with the potential for substantial growth and impact for himself and his community. 

However, in the not-too-distant past, a darker side of microfinance emerged as reports surfaced detailing incidents of suicides, debtor’s prisons, and vulnerable borrowers being coerced into selling their limited assets, often accompanied by grim social consequences. Women are particularly vulnerable, and according to Bloomberg, in 2018 the government promised to write off the debts of more than 75,000 women who were impacted by predatory lending practices of microfinance companies. In response to these challenges, the Sri Lankan parliament enacted the Microfinance Act, No. 6 of 2016, which came into effect on July 15th, 2016. This legislation aimed to regulate the microfinance industry by establishing licensing requirements, oversight mechanisms, and supervision under the purview of licensed microfinance companies (LMFCs). Direct regulation by the Monetary Board of the Central Bank of Sri Lanka has been implemented, bringing much-needed oversight and transparency to the microfinance sector. Today, the Central Bank lists four licensed microfinance organizations on their website and hopes to grow the list even more. 

Against this backdrop of regulatory reform and increased oversight, our exploration of microfinance-supported businesses in Sri Lanka unveils more narratives of tenacity and success. One such inspiring example is Asiri Gram Confectionary, a family-owned enterprise that has persevered to flourish in the competitive snack products industry over the past 15 years. From its humble beginnings, the business has evolved into a thriving Small and Medium Enterprise (SME), highlighting the transformative potential of visionary planning and access to capital at the right time. “We started with our mother’s recipes and now have grown so well because we pay great attention to the quality of our ingredients and the purity of our production process,” said  Dulan and Nishan Asiri, the owners. “Our mission is to create happiness by providing tasty and good quality products to Sri Lankans at an affordable price.” Central to their growth strategy has been the strategic expansion of their retail footprint under the brand Nuts and Murukku. Now with 28 standalone retail locations strategically positioned across Sri Lanka, this business is poised to reach even greater heights as they look toward international production and export markets. 

“The true essence of microfinance lies not in the figures, but in the lives, it touches and the communities it uplifts”, says 39-year veteran of the microfinance industry Crysanthi Thambiah. “Adding a human touch plays a crucial role in fostering trust and building relationships with clients, especially in marginalized communities where personal connections hold significant sway. By offering personalized support and guidance, microfinance providers can better connect with the unique needs and circumstances of their clients, empowering them by instilling a sense of dignity and respect, and reinforcing the notion that they are valued members of their community deserving of support and opportunity.” In Sri Lanka, with continued oversight and regulation microfinance stands to be a beacon of hope, empowering individuals, businesses, and communities alike to thrive and build a brighter future together.

Dulan Asiri