By: Staff Writer
December 13, Colombo (LNW): As Sri Lanka prepares to enact the Microfinance and Credit Regulatory Authority Act 2025, an escalating crisis among vulnerable communities highlights the gravity of unregulated lending’s human toll.
In massive a scale of exposure in the aftermath of Ditwah cyclone, 2.3 million people, including 522,000 children and 263,000 older persons, were affected by floods and landslides
Microfinance loans small in size but far reaching in impact have become both a tool of survival and a gateway to indebtedness for impoverished households across the island.
The new Act, expected to replace the outdated 2016 framework, will formalise licensing and extend oversight to all moneylenders and microfinance providers.
However, the hard realities on the ground reveal why reform has become urgent. Informal and semi-formal lenders operate outside formal supervision, with no reliable data on borrower outcomes.
Parliamentary sub-committees are now gathering information in areas such as Batticaloa, Polonnaruwa and Nuwara Eliya to assess how many borrowers have defaulted and are facing financial distress.
For many rural families, microfinance debt is not financing business growth but meeting basic survival needs. Dubbed “loan traps” by activists, these cycles of borrowing to cover food, healthcare or school fees often push households deeper into poverty.
Women estimated to represent a large majority of microfinance borrowers face disproportionate stress, loss of assets, and in some tragic cases, consequences as severe as contemplated suicide due to intense collection pressure.
Advocates say unregulated interest rates and coercive recovery practices have eroded the dignity and stability of farming families and informal workers.
The effort to secure affordable credit becomes a destructive pursuit when repayments consume a disproportionate share of meagre incomes. Community leaders report that traditional safety networks have frayed under financial strain, forcing many to take multiple simultaneous loans, a known precursor to over-indebtedness.
Lenders, meanwhile, contend they face risks too: unclear legal frameworks limit their ability to assess risk consistently and maintain sustainable portfolios.
Without a credible risk assessment ecosystem, both borrowers and lenders operate in uncertainty, exacerbating financial system fragility. Formal data points on non-performing microloans remain elusive, but anecdotal evidence suggests defaults are rising in poorer districts.
Economists argue that a balance is needed stronger consumer protections combined with financial literacy and alternative income-boosting initiatives for low-income borrowers.
As Sri Lanka’s wider economy continues its uneven recovery from recent crises, policymakers are under pressure to implement measures that protect borrowers while strengthening lender governance. The new regulatory authority could be a turning point if it successfully addresses the structural drivers of microfinance distress, not just the symptoms.
