The government has approved fresh legislation to rein in widespread abuses in the country’s microfinance sector, a long-criticised industry blamed for trapping poor and vulnerable families in cycles of debt.
At its weekly meeting on Tuesday (12), the Cabinet of Ministers gave policy clearance to draft a new Microfinance and Loan Regulation Authority Bill, on the recommendation of President and Finance Minister Anura Kumara Dissanayake. The new law will replace the outdated Microfinance Act No. 6 of 2016 and aims to establish a stronger regulatory authority with wider powers.
The move follows the collapse of the Microfinance and Credit Regulatory Authority Bill introduced by the previous administration.
That draft, published in October 2023 and tabled in Parliament in January 2024, was withdrawn after facing widespread public resistance, constitutional petitions, and Supreme Court challenges.
Civil society groups including Transparency International Sri Lanka (TISL) argued that the bill failed to address the heart of the problem—unethical lending practices such as exorbitant interest rates, intimidation of borrowers, and harassment during loan recovery.
Some petitioners also noted that the earlier draft excluded major players such as banks, finance companies, and leasing firms, effectively leaving large segments of borrowers unprotected. Despite amendments suggested by the Supreme Court, the Finance Ministry withdrew the bill, acknowledging that it failed to reflect the government’s intended policy.
To rebuild public confidence, the Treasury and Central Bank appointed a joint committee to review the issue, while the Parliamentary Sectoral Oversight Committee on the Economic Crisis Impact gathered submissions from stakeholders. Their recommendations form the basis of the new bill now cleared for drafting.
Sri Lanka’s microfinance industry has been at the centre of controversy for over two decades. While originally promoted as a poverty alleviation tool, the sector has increasingly been associated with debt distress, farmer suicides, and exploitation of women in rural areas.
Borrowers often take out loans for consumption or emergency needs, rather than income generation, only to find themselves unable to meet repayment schedules. With interest rates sometimes exceeding 200 percent annually, families are forced to pawn assets, sell land, or migrate for low-wage labour abroad.
Today, the country has over 11,000 microfinance institutions, but fewer than 100 are formally regulated by the Central Bank. The lack of oversight has allowed money lenders to operate unchecked, often demanding repayments on a daily or weekly basis and using public humiliation, threats, and coercion as collection tactics.
The Central Bank of Sri Lanka has consistently warned that leaving this sector unregulated could lead to illegal deposit-taking, exploitation of low-income communities, and systemic financial instability.
The proposed new authority will be tasked with licensing, regulating, and supervising all microfinance and money-lending institutions, capping interest rates, and ensuring stronger borrower protection measures.
The government’s move marks its second legislative attempt in less than a year and underscores growing recognition of the urgent need to reform microfinance. If effectively enforced, the new law could finally bring relief to thousands of Sri Lankan families burdened by years of exploitative lending.
