Committee for the Abolition of Illegitimate Debt

Cabinet approval has already been granted to draft the proposed Microfinance and Credit Regulatory Authority Act, which seeks to address the limitations of the existing legislation.

According to the government, the new law will significantly expand the scope of the 2016 Act by establishing an independent regulatory authority with the power to license, monitor, and supervise all microfinance institutions and money lenders. The proposed framework aims to protect borrowers through legally enforceable standards governing interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate calculations, transparency of transactions, debt collection practices, and dispute resolution mechanisms.

Once enacted, the legislation will bring all microfinance providers—including informal and digital lenders—under a single supervisory authority. Under the new system, licenses will be mandatory for microfinance companies as well as money lenders operating in the country.

Meanwhile, community credit practitioners have strongly opposed efforts by ADB, CBSL, and the Ministry of Finance to bring community-based credit systems, informal money lending, and microfinance under the proposed Microfinance and Credit Regulatory Authority Bill.

More than 200 community credit practitioners, representing over 33 community-based organizations from Mannar, Kilinochchi, Jaffna, Mullaitivu, Batticaloa, Anuradhapura, Polonnaruwa, Badulla, Ratnapura, and Hambantota, gathered at the BMICH on 21 January to voice their concerns.

Participants stressed that community savings and credit services should be recognized and strengthened as a people-centred alternative to exploitative money lending and profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. -driven microfinance. They highlighted the collective ethics, self-regulatory practices, and long-standing traditions that distinguish community credit systems, arguing that these models are rooted in decades of local experience and mutual trust.

They further warned that placing community-based credit mechanisms under a regulatory framework designed for commercial microfinance institutions risks undermining their autonomy, social purpose, and effectiveness in supporting vulnerable communities.
“The community credit framework helps women build assets and wealth through small savings. Unlike microfinance and money lending, people-controlled community credit systems empower women not only materially but also through agency and collective decision-making,” said Renuka Bhadrakanti, Chairperson of the United Community Development Women’s Association, Weligepola, who has more than three years of experience working closely with grassroots communities.

She warned that globalisation and neoliberal economic policies are increasingly shaping reforms aimed at capturing people’s savings and pushing communities into dependence on market-driven financial systems. “It is important to be vigilant about these trends and to take timely action,” she added.

Microfinance in Sri Lanka was initially promoted as a mechanism to provide small loans for entrepreneurship and livelihood support, particularly targeting low-income earners and women. However, over time, many borrowers—especially rural women—have been trapped in cycles of debt due to high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. , aggressive recovery practices, and weak regulation of lenders.

According to activists and civil society organisations, the social consequences have been devastating. More than 200 women who were caught in microfinance debt traps have reportedly taken their own lives after being unable to repay loans, highlighting the human cost of exploitative lending practices.

In contrast, advocates argue that self-help community credit groups, though informal and unregulated, operate on fundamentally different principles.

“Their governance is rooted in collective ethics, community-led audits, and democratic decision-making. These mechanisms ensure transparency and accountability without exposing members to predatory financial practices,” Bhadrakanti said.

The Yuhashakti and Mahashakti community organisation network, operating across Sri Lanka’s Northern and Eastern Provinces, consists of more than 10,000 women members. Formed during the years of war, these community-based organisations have played a crucial role in enabling women to gain control over household economies and strengthen collective resilience.

According to women leaders, this economic empowerment has helped communities withstand severe shocks, including loss of life, livelihoods, and property caused by conflict and displacement.
“Unlike microfinance companies, community credit groups have no history of taking members to the police or courts when repayments fail,” a representative stated, highlighting the ethical and non-punitive foundations of community-based credit systems.

She further noted that community organisations such as Yuhashakti and Mahashakti stepped in even before the state to support families affected by Cyclone Ditwa, providing immediate relief and solidarity at a time when many were left vulnerable.

Speaking on behalf of women affected by microfinance debt, Suneth Aruna Kumara, representing the Vimukthi Rural Farmer Women’s Society, Higurakgoda, emphasised that community-led financial systems offer dignity, mutual care, and protection—values that are often absent in commercial lending models.

“People who once lived in hiding, afraid of debt collectors, are now attempting to rebuild their lives on their own terms. In this process, women are re-examining what credit really means—whether it is possible to create credit systems that do not depend on interest income, and imagining ways to de-commodify community relationships,” Suneth said.

Suneth stressed that these women-led initiatives emerge directly from lived experiences of indebtedness, shaped by predatory interest rates and violent debt recovery practices. Speaking also as a victim of the microfinance system, Suneth criticised the proposed Microfinance and Credit Regulatory Authority Bill, arguing that it fails to provide strong, legally binding safeguards for borrowers.

According to Suneth, the proposed legislation does not offer credible guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). that the microfinance crisis—marked by exploitation, coercion, and social harm—will not be repeated.
Malaiyaha women’s experiences with microfinance and credit were shared by Lechumanan Kamaleswari of CEJ.

“Estate management restricts all community associations within plantations, yet microfinance companies are allowed to enter and operate freely. The burden of debt is so severe that many Malaiyaha women are forced to work even beyond retirement age,” she said. Kamaleswari also noted that Malaiyaha communities remain at the bottom of the poverty ladder, a condition rooted in their history of being brought to Sri Lanka from South India as plantation labour.

Pubudu Manohara of RDF,Hambanthota pointed out that many national and local crises have persisted despite programmes affiliated with successive governments and supported by international institutions such as the World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and UNDP UNDP
United Nations Development Programme The UNDP, founded in 1965 and based in New York, is the UN’s main agency of technical assistance. It helps the DC, without any political restrictions, to set up basic administrative and technical services, trains managerial staff, tries to respond to some of the essential needs of populations, takes the initiative in regional co-operation programmes and co-ordinates, theoretically at least, the local activities of all the UN operations. The UNDP generally relies on Western expertise and techniques, but a third of its contingent of experts come from the Third World. The UNDP publishes an annual Human Development Report which, among other things, classifies countries by their Human Development Rating (HDR).

. Over time, however, both the government and international agencies—including ADB—have grown increasingly uneasy about people’s ability to save independently.

“They are afraid of our capacity to build community funds,” he said.
Participants in the discussion emphasized the urgent need to mobilize community organizations and local political leaders to collectively oppose the government’s proposed bill in its current form.
Strong concerns were raised about the potential harm of rigid regulatory frameworks on community-based organizations, particularly their impact on women’s resilience and self-organized economic systems.

“Domestic violence is deeply rooted in economic violence. The dismantling of community organizations directly undermines local development and grassroots economic activity, ultimately creating an additional burden on the state,” said a representative of the Yuhashakti movement in Mullaitivu.

Community organizers called on the government to engage in direct consultations with grassroots groups during the drafting of the regulations. They stressed that any new legal framework should protect, recognize, and strengthen community-led credit systems, rather than impose controls shaped by external financial interests.

Several representatives further argued that ADB—which has actively promoted the commercialization of microfinance and contributed to the current debt crisis—lacks both the legal legitimacy and ethical authority to shape regulatory frameworks governing community credit practices.

Civil society groups, including FCEJ, have criticized the government’s approach, arguing that the proposed law fails to adequately protect borrowers and was developed without meaningful public consultation.

Other organizations, such as Transparency International SL, have filed petitions in the Supreme Court challenging key aspects of the Bill. They contend that the legislation does not sufficiently address predatory lending practices and may violate constitutional principles.