Transparency International Sri Lanka (TISL) has raised serious concerns over a newly passed law intended to regulate the microfinance sector, stating it fails to address key regulatory gaps and may leave vulnerable borrowers exposed to exploitation.
The anti-corruption watchdog said the recently approved Microfinance and Credit Regulatory Authority Bill fell significantly short of its expected role of correcting long-standing regulatory weaknesses and strengthening protection for borrowers.
The legislation was passed by Parliament of Sri Lanka on Wednesday.
Concerns over regulatory loopholes
TISL said the law does not adequately address issues raised in a constitutional challenge brought last year.
In response to a petition filed in 2024 by TISL and others, the Supreme Court of Sri Lanka ruled that all entities engaged in microfinance activities should be subject to equal regulation.
However, according to TISL’s analysis, the new legislation still leaves room for unequal regulatory treatment.
While the final law removed wording that previously allowed some institutions to be exempt from regulation, the organisation said the core constitutional concern identified by the court remains unresolved.
The legislation defines “microfinance business” partly based on whether lending to low-income borrowers is primarily aimed at “social empowerment”.
TISL said this definition could allow large financial institutions, including banks, finance companies and leasing firms, to offer small loans to vulnerable borrowers while avoiding classification as microfinance providers by stating their purpose is commercial rather than social.
“This loophole allows lenders to escape the customer-protection and regulatory standards applicable to licensed microfinance institutions,” the organisation said.
Borrower protection questioned
TISL also argued that the borrower-protection provisions included in the law are broad and lack practical enforcement mechanisms.
The statement noted the legislation does not require lenders to verify borrowers’ income or apply clear debt-to-income limits. It also lacks a defined appeal process against regulatory decisions and restricts borrowers’ access to legal representation in certain proceedings.
The microfinance sector in Sri Lanka has previously faced allegations of abusive lending practices.
TISL said these have included intimidation, coercive debt recovery methods and corruption targeting women borrowers, including demands for sexual favours.
However, the organisation said the new law does not explicitly recognise such conduct as a regulatory breach, nor does it impose mandatory reporting obligations or sanctions within the regulatory framework.
Governance concerns
The watchdog also highlighted what it described as governance weaknesses in the proposed regulatory authority.
These include the absence of mandatory conflict-of-interest disclosures, limited transparency regarding grants and funding sources, and the concentration of discretionary powers without sufficient accountability safeguards.
TISL said an effective regulator must itself be subject to strong transparency and integrity standards.
Call for more inclusive lawmaking
The organisation warned that passing the law in its current form risks failing the communities it was meant to protect.
Microfinance borrowers in Sri Lanka are largely drawn from economically vulnerable households, particularly women and low-income communities who rely on small loans to support their livelihoods.
TISL said the concerns surrounding the legislation also highlighted broader weaknesses in Sri Lanka’s lawmaking process, which it described as opaque and fragmented.
It called for a more consultative approach in drafting future legislation, urging authorities to incorporate public and expert input during the early stages of policy development rather than after key provisions have already been finalised.
(Source–Leader)
