REGULATING MICROFINANCE (CREDITS) AND ENHANCEMENT OF PRODUCTIVITY OF MICRO BUSINESS PART 1
Posted on August 11th, 2021

BY EDWARD THEOPHILUS

Microfinance for various small businesses (including agriculture) has been a vital support for the economic development and the growth of Sri Lanka since the beginning of the economic activities of the country. Microfinance helped non-economic purposes such as giving dowry, spending for weddings, funerals, and many other purposes helped in the management of human affairs. In history, how microfinance had been operated cannot clearly state, however, it was a private business and the government regulation did not apply. It is difficult to identify a fixed beginning of credit support for the variety of small businesses and services, however, microfinance is informally operated in the country in various names or formats, and the publication of Robert Knox carries a picture and little details of microfinance (Knox, Robert (1681), A Historical Relation of the Island of Ceylon, translated by David Karunaratne in 1959, Page 260-262), that reflects the truth about microfinance in history. The Mahavamsa describes that the 13th King of Sri Lanka spent three hundred thousand (pieces of money) to free Buddhist bhikkus (Monks) from indebtedness so microfinance had been in the country and no doubt that since before Christ (The translation of Mahavamsa by Wilhelm Geiger 1912, PP 258-259) microfinance had been operated in Sri Lanka.  

Historical experience in the management of microfinance invites the attention of the government to develop policies and regulations for the operation of microfinance. It was an indispensable role of the government. The Central Bank of Sri Lanka is the regulatory authority for the financial system, which includes microfinance, too. However, the Central Bank has not done a complete job. Why the authority has neglected, the role is known by Gods, not any others.

Commercial credits were known by people through the operation of trading banks and other financial institutions, however, the operation of Gramin Bank in Bangladesh, was known to the world about microfinance operation, and when Noble Price was awarded to the leader of the Gramin Bank in Bangladesh, it was developed world. Now people of the world know what is microfinance and how it is important for lower-income earners to get rid of poverty. 

The explanation of Knox shows the management of microfinance in history was cruel when customers defaulted the repayment the modern management and if it can go back to history, it might seem that the open market system would not work supporting small businesses. The example of Mahavamsa shows that the release of borrowers from indebtedness was done by the government. The regulation and laws in the history of the applied that are effective today, it could be seen people are carrying heavy stones on the back everywhere. This means many defaulters of repayment today are in the country and will be subject to punishments. Therefore, today needs regulation and when the Central Bank cannot do so, it needs political leadership to consider while educating the public about the repercussion of the operating of microfinance.

Microfinance operates in a broader area that involves many lenders and borrowers for many purposes and is essential to small business operations, as business needs working capital frequently. Dr.N. M. Perera, when he was the Minister of Finance, explained in a budget speech the major reason for the failure of microfinance in the country and identified two reasons, when people borrow money for a business purpose, they would use such money for consumption if they have not income to spend for consumption, and when borrowed money used for consumption expected cash inflow would be weakened and repayment of the loan would be a failure.

When logically thinks 80% of the population associates with the microfinance field and identifying all coliseum of borrowing relate to microfinance and regulating and policymaking may be a complicated task. Usually, microfinance is related to production activities in history, but in the modern era, it is applied for various purposes such as wedding spending, giving dowry, and many others. In developed countries, microfinance is called personal loans that operate in a broader area.

I do not know how many researches have been conducted on the matter and making regulation covering all aspects of micro-financing may not be successful or possible either, and when deeply analyse the effort of the state minister it might be a reason to lose votes to the government and when submitting the bill to the parliament, many slogans and rallies outside the parliament would be incurred as a protest against the bill.

Mr. Shehan Semasinghe has not disclosed so far what contents they include in the proposed bill. Most probably, the bill has been drafted by persons who have no practical experience of micro-financing. The borrowing small quantum of money incurs in Sri Lanka in the way of mortgaging pieces of jewelry to informal lenders at a higher rate of interest. Sometimes, these informal lenders charge 15% monthly interest, which means the annual rate of interest could be 180%. Later, Peoples’ bank began micro-financing scheme called Athamaru” how far it was successful or was a failure is unknown to people.

Micro-credits contain a broader area and feel like bacillus in Sri Lanka because it operates many areas and regulating entire micro-credit is a complex task. Many credits relate to informal borrowers and lenders. Sometimes, microfinance may deal with the illicit drug business. How to identify these informal businesses. The identification of their issues for regulating purposes may difficult.  

Multi-purpose cooperatives and rural banks had been operating in Sri Lanka to provide microfinance for members, the establishment of Peoples’ Bank as an initiative of Mr. Philip Gunawardane and Mr. Ronnie de Mel took over many microfinance businesses to the Peoples’ Bank. Later, after the JVP insurrection in 1971, the government introduced two major acts, which were land reforms and supports for reforms in the agricultural sector. The authority in acts permitted establishing Agricultural Service Centres. These two laws supported the Bank of Ceylon to embark the market operating branches in Agricultural Service Centres. However, they were closed down when Mr. Felix R.D Bandaranaike was the minister of finance. Microfinance in the Bank of Ceylon was called cultivation loan and later I found that the total volume default of agricultural credits in the country was less than the default of a single corporate customer in Colombo.

When regulating microfinance operations the government should take some responsibilities as in the way King Siri Naga or Voharika Tissa played, when Dr. N. M. Perera was the minister of Finance there was a Credit Guarantee and Re-finance schemes, later the credit guarantee scheme was abandoned by the Central Bank.

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