Sri Lanka finds itself confronting a silent crisis in its microfinance sector, an industry once heralded as a vehicle for inclusion is now accused of functioning as an informal loan shark network. In response, the government has moved to regulate what many civil society observers call a predatory, largely unregulated system that disproportionately targets the poorest.
On 11 August, the Cabinet formally approved the draft Micro Finance and Credit Regulation Authority Bill, forwarding it for publication in the Government Gazette before parliamentary debate.
The shift reflects mounting evidence that the existing Micro Finance Act No. 6 of 2016 is insufficient to curb abusive practices. The new legislation aims to create a standalone authority empowered to supervise microfinance and credit operations a move long demanded by activists and victim groups.
In recent years, microfinance in Sri Lanka has ballooned outside formal channels. A UNDP-commissioned brief estimates that around 15,000 microfinance institutions operate unlawfully nationwide, well beyond the regulatory reach of current law.
Only a small fraction of providers are licensed: as of May 2025, the Central Bank lists entities such as Berendina Micro Investments, Lak Jaya Micro Finance, Dumbara Micro Credit and Sejaya Micro Credit among the few authorized ones.
Despite the proliferation of lenders, official research and media investigations point to widespread abuse. According to The Morning, “hundreds of thousands” of Sri Lankans — particularly women in rural communities — are caught in spirals of debt, sometimes pushed toward desperation, eviction and even thoughts of suicide.
GroundViews reports similar patterns across impoverished districts including Polonnaruwa, Batticaloa and Nuwara Eliya, where microfinance borrowers regularly lose assets and dignity under aggressive recovery tactics.
Women’s advocacy groups have sounded alarms over the government’s regulatory proposal. Some argue that it privileges for-profit microfinance companies while imposing stricter controls on community-based and female-oriented self-help groups. Critics say these protections, which once shielded grassroots lenders, are now being dismantled despite their relatively benign role.
When grassroots borrowers fall behind, reports indicate that some lenders resort to psychological intimidation, forced repayments, and public shaming practices that can amount to human rights violations.
Proponents of regulation argue that a strong supervisory authority is essential. Without oversight, microfinance companies can levy exorbitant interest rates, hidden fees, and unsecured debt traps without recourse for victims.
The draft bill’s structure reflects lessons drawn from prior legal challenges: seven petitions were filed in the Supreme Court to block earlier drafts, prompting revision and influence from the parliamentary Sector Supervision Committee.
Yet passage and enforcement remain uncertain. The bill’s provisions on licensing, audit power, consumer protection, interest caps, transparency, and dispute resolution will determine whether it merely formalizes exploiters or protects vulnerable borrowers. Civil society insists that the regulatory body must include meaningful representation of borrowers and NGOs, not be dominated by industry interests.
Sri Lanka’s poor are already burdened by inflation, rising food costs and limited state safety nets. A microfinance regime unchecked has magnified their plight. If regulation is weak or captured, the reform could amount to a façade. Conversely, a well-crafted law, backed by vigilance and civil society participation, might begin to heal one of the country’s most persistent economic injustices. Only then could microfinance return to being a tool of support, not oppression
