MICROCAPITAL BRIEF: Sri Lanka to Fight Overindebtedness Among Microfinance Borrowers with Subsidies, Infrastructure, Reimbursements to Lenders; Emphasizing Rural Women

The government of Sri Lanka is working to address overindebtedness in the country through the following strategies: (1) subsidized loans targeted at rural women in the Northern and North Central provinces; (2) the construction of rural infrastructure to improve the outreach of microfinance institutions (MFIs) in remote areas; and (3) fostering collaboration among private sector actors and NGOs to develop microfinance products that provide more accessible credit with sufficient flexibility to minimize overindebtedness. The government also reportedly is developing a new legal framework to address unregulated moneylending. This follows reports of 2.8 million people in the Northern and North Central provinces having fallen into cycles of debt and 200 people having committed suicide since 2018 after being unable to repay debts.

The subsidized loans will be arranged by the Sri Lankan Finance Ministry for clients to refinance debt as well as to fund new purchases. These loans are to be backed by public and private institutions and distributed by community-based NGOs, cooperatives and licensed financial institutions. The credit limit per person, at SLR 60,000 (USD 300), is higher than previous efforts in Sri Lanka. Also in contrast to previous relief efforts, there are to be no debt waivers.

In addition to supporting borrowers, the package will assist lenders. The Northern province is slated to receive SLR 292 million (USD 1.48 million) and the North Central province is receiving SLR 250 million (USD 1.27 million) to subsidize losses to rural banks from borrowers who are unable to repay their loans.

By Sophie Fiala, Research Associate

Sources and Additional Resources

The Sunday Times article
http://www.sundaytimes.lk/210418/business-times/micro-finance-sector-undergoes-reforms-despite-present-cash-crunch-440119.html

Sri Lankan Ministry of Finance homepage
https://www.treasury.gov.lk/

Government of Sri Lanka profile on the microfinance sector
https://www.cbsl.gov.lk/en/financial-system/financial-system-stability/microfinance-sector

Government of Sri Lanka guidelines for microfinance institutions
https://www.cbsl.gov.lk/en/laws/directions-circulars-guidelines-for-micro-fianace-institutions

MicroCapital brief on Sri Lankan suicides
https://www.microcapital.org/microcapital-brief-suicides-in-sri-lanka-blamed-on-microfinance-loans-regulation-criticized/

MicroCapital brief on loan forgiveness for women in Sri Lanka
https://www.microcapital.org/microcapital-brief-with-delinquency-up-24-sri-lanka-paying-off-womens-microfinance-loans-capping-microloan-interest-rates/

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