MICROCAPITAL STORY: German Technical Report Shows Over 60% of Sri Lankan Population has Accessed Microfinance Services

A survey conducted the German Technical Corporation (GTZ), a government aid agency, shows that 60 percent of Sri Lankan households have utilized microfinance services and 82.5 percent of households have accessed some sort of financial services (pg 7). Despite the already high adoption of microfinance services and apparent preference for state-run Samurdhi banks, the report suggests that further improvements could be made by instituting market-based reforms (pg 8). The report also suggests that poverty alleviation remains “modest” despite the high penetration of financial services (pg 8).

The study revealed a high preference for state run microfinance institutions (MFIs), which are part of the Samurdhi Program. According to the survey, these state fun MFIs have provided credit to 54.5 percent of people who are in the lowest quintile of economic well-being and savings to almost 40 percent (pg 28). These effects are even more pronounced in rural areas, possibly because other financial institutions have paid less attention to these areas. Sri Lankans view these state-run MFIs as safer and reliable than private institutions.

Despite the high levels of outreach, approximately 50 percent of households still claim to be in need of some sort of loan, implying that demand still far exceeds supply (pg 70). According to those at the bottom of the economic period, the main factors preventing households from the taking out loans are collateral requirements, too much documentation needed, high interest rates, rigid terms and conditions, high interest rates and a lack of awareness of available services, factors “which hint[s] at some inefficiencies” (pg 55, 70).

The report argues that the high outreach of state-run banks “distorts competition and causes efficiency losses” (pg 70). These inefficiencies occur due to an implicit guarantee of the government to support any state-run MFI that goes bankrupt (pg 70). This limits the pressure of state-run MFIs to offer services at the lowest possible costs, a phenomenon called ‘moral hazard.’ Meanwhile, the report suggests that private institutions must develop “long-term strategies that will allow them to build trust and credibility” (pg 70).

The report also focused on the need for an improved insurance market. While 36 percent of Sri Lankan households have insurance policies, none of them are in the lowest quintile of economic development (pg 69). The report praises both private and government financial institutions that offer insurance services because of their ability to mediate disasters (pg 70). The study also notes that it will be difficult for microinsurance services to become prevalent before insurance services reach higher steps of the economic ladder (pg 70).

Samurdhi banks are run by that government’s Samurdhi Authority of Sri Lanka and operate within the larger Samurdhi program, which also provides welfare grants to poor families and builds community infrastructure. The banks also serve as outposts for the provision of food stamps and other consumption grants.

The German Technical Corporation (GTZ) is a government enterprise that helps implicate international development projects around the world. In 2007, the organization conducted over EUR 1b (USD 1.47b) in business. Other financial data was not immediately available. This particular study surveyed residents of 3,000 households located in 22 districts, excluding the areas of Kilinochchi, Mullaitivu and Vavuniya.

By Greg Casey, Research Assistant

Additional Resources:

German Technical Corporation: Outlook of Financial Services in Sri Lanka (available here)

The Microfinance Gateway: Over 60% Sri Lankans Have Used MFIs, Survey Says

Daily Mirror: SL essentially a microfinance market – survey

Glinskaya, Elena “An Empirical Evaluation of Samurdhi Program,” World Bank Working Paper. (available here)

German Technical Corporation: About Us

GTZ: Facts and Figures

MIX Market: Demand in Sri Lanka

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