BY EDWARD THEOPHILUS

The major areas of regulating microfinance should be included. Before regulating the operation process of microfinance, it requires identifying the lender and the business format of lenders that may be a sole proprietorship, partnership or a private company, or public company. Many micro-financing businesses are not identified as business owners due to tax reasons. Therefore, regulating them to register in a recognised format of business ownership is essential. In Colombo, there may be more than a hundred lenders, and in each regional town, over five lenders are operating. The regulating process would generate additional revenue for the government.

• Purpose of lending
• Amount of lending
• Collateral of lending
• Supervision of lending
• Repayment of Lending
• Restructuring and monitoring of finance
• Remedial management
• Management of past due and legal actions
• Considering for borrowers who were past due

PURPOSE OF LENDING

The central bank authority may know that the total lending of Sri Lanka is formidable to identify and the disaggregated data with the purposes cannot reconcile with the total portfolio, because many lenders are reluctant to disclose the volume of lending, and many dislike identifying as lenders. It is not a problem getting data from organized financial institutions, such as banks, finance companies, and others. Informal lenders are averse to the disclosure and the central bank needs to explain and give an ultimatum for registration. Under the proposed regulation, the name of the lender, the amount lent and other information should be compulsory to provide. Finally, the central bank should be able to calculate disaggregated figures according to the purposes and reconcile them with total lending volume.

AMOUNT OF LENDING

Microfinance should be limited to an amount that is small size and if any person or organisation lends more than a limited amount, it should be considered as either retail or medium market or corporate lending. Microfinance could be granted against collateral or the expected cash flow of the business project that microfinance is expected to be used. This is called cash flow lending, and microfinance should be subject to cash flow lending. The amount of loan that could be granted to a customer needs to decide by the lender and regulation regarding this area should be focused on various factors, such as the borrower’s ability to pay back or creditworthiness, current obligations to other lenders, and other factors. Banks and financial institutions have credit policy and operation manuals are there and the regulation relating to the amount of loan should be subject to the borrowing purpose and the injection for the purpose. When borrowers didn’t get sufficient funds, it would be a cause to default. 

COLLATERAL OF LENDING

The term collateral is used in the USA and it says in Sri Lanka security. Clean loans could be granted, signing a promissory note. Late Dr. Wickrema Weerasooria expensively did researches on this subject and published several books. Obtaining securities for microfinance is a grey area to talk about because there is a conflict between the aspect of commercial lending and micro-credits. Granting clean loans is a highly risky task and helps to default as recorded in history.

Getting a land mortgage is an arduous task as it needs to ensure the ownership of the land. The floating charge is not relevant for fixed securities. Inter-se-guarantees, indemnity bonds, and personal guarantees, Paripasu bonds, and parate execution are complicated legal concepts, and regulating microfinance needs to consider all these concepts and it cannot be done ad hoc ways. Many customers in the SME sector have no assets to keep as security.

MONITORING OF CREDITS

The major reason to default micro-credit is a weak monitoring process. Monitoring of granted credit is a broader and complex process and many lenders (formal and informal) do not successfully monitor how credit is used and how credit affects borrower’s life. The monitoring process should be associated with related organizations and should be more organized to classify the credit until they payback. The classification of granted credit is not done by lenders, and this has been the major reason for defaulting credit.

Management of microfinance is a costly exercise and when grant credits monitoring should be explained to customers and lender needs arranging such activities. 

REMEDIAL MANAGEMENT

Remedial management should be organized while monitoring granted credit, and there are many strategies for the remedial process. Sometimes, customers may need additional credit facilities or advice, or any other supports. Monitoring and remedial management should be regulated, and lenders and borrowers should be educated on this matter.

As I mentioned before, regulating microfinance is not a simple task the way politicians think. The bill needs broadly discuss and different concerned people may propose changes and the political authority needs listening to all aspects.