By: Staff Writer
October 25, Colombo (LNW): The Sri Lankan government has kicked off a data‐collection drive aimed at unraveling the troubling dynamics of the country’s microfinance sector an industry whose rapid expansion has saddled thousands of vulnerable borrowers with unmanageable debt and, tragically, driven some to suicide. The directive, issued by the Sub-Committee on Rural Development, Social Security and Community Empowerment, targets borrowers in four pilot Divisional Secretariat Divisions: Hatton (Nuwara Eliya), South Koralaipattu (Batticaloa), Welikanda (Polonnaruwa) and Wellawatte (Colombo), where officials will compile systematic data on individuals unable to repay microfinance loans.
The timing of the initiative signals growing alarm in Colombo about the shape of lending practices across the microfinance field. According to recent research, non-government microfinance institutions (MFIs) have succeeded in expanding outreach but at the cost of mounting borrower indebtedness: one study found that up to 70 per cent of rural borrowers were trapped in debt cycles, with average burdens around Rs 150,000.
Unregulated interest rates, rigid repayment schedules and aggressive collections have become common complaints among borrowers.
Despite the proliferation of micro-loans, the legal and regulatory environment remains weak. The long-awaited Microfinance Act is yet to be passed in Parliament, and the Central Bank of Sri Lanka (CBSL) register currently lists only four institutions, according to Governor Nandalal Weerasinghe. The discrepancy between official numbers and the many thousands of informal or semi-formal lenders operating on the ground has left swathes of borrowers outside formal oversight.
The pilot data collection aims not only to quantify the scale of default and distress, but also to design relief measures and rehabilitation programmes. Representatives of the 34 microfinance institutions registered with the Lanka Microfinance Practitioners’ Association (LMfPA) have been summoned for consultations. The Sub-Committee is discussing potential interventions for borrowers facing multiple loans, spiralling repayments and coercive recovery tactics.
From sectoral analysis, it’s clear that many micro-finance borrowers—especially women in rural or post-conflict areasare borrowing not for investment but to cover household expenses, pay prior loans or cope with income shocks.
This has produced a pernicious cycle: taking new loans to service old ones, mounting interest, and deteriorating conditions.
Critics argue that the micro-finance model in Sri Lanka has tilted toward “loan‐shark”-style practices, unchecked by robust regulation. Numerous reports link aggressive collection, multiple overlapping loans and even suicides among borrowers who feel trapped and powerless.
For the CBSL and the government, the task ahead is substantial. Crafting and passing the Microfinance Act is only the beginning. Regulatory capacity must be strengthened, interest rate caps considered, borrower protection mechanisms implemented and enforcement scaled up to bring informal lenders into oversight. Transparent data collection will help—but equally important is enforcement of fair recovery practices, financial literacy training and rehabilitation pathways for indebted households.
Without such interventions, the very tool meant for financial inclusion may become a source of deep social and economic damage undermining livelihoods, creating distress and placing the risk back on depositors, taxpayers and the broader economy. The pilot data initiative offers hope, but it must be followed by decisive regulatory action and accountability across the micro-finance sector.
