• Govt. promises oversight, says new regulatory authority will curb predatory lending practices
• Activists warn loopholes may leave vulnerable borrowers exposed
• Women’s groups and researchers say law fails to address structural causes of crisis
• More than 2.4 m women believed to be affected by microfinance debt traps

“I obtained a loan of Rs. 50,000 from an institute that came to our village in 2018. One of the women in our village introduced me to it. I paid two or three weekly installments. But the interest was so high that after some time I could not keep up with the payments. Then the men who came to collect the money became more aggressive. 

“They told all the villagers that I was a thief who had neglected repaying a loan. They even targeted my children. I was beaten by my husband several times because of their threats. One day, when I came home with my daughter from school, one of the collectors was there. He said he would not leave until I paid the installment. I begged him until he finally left. After he left, I jumped into the well on our land thinking to end my life. Because of my daughter’s scream, neighbours came and rescued me,” said Shriyalatha (38), from a rural village in the Puttalam District (name changed to protect the victim’s identity). 

On Thursday (5), three days before International Women’s Day, Parliament passed the Microfinance and Credit Regulatory Authority Bill, introducing a new regulatory framework for microfinance institutions and moneylenders. The law, according to the Government, aims to address long-standing concerns over high interest rates, excessive indebtedness, and the absence of effective oversight over parts of the microfinance sector. 

When the National People’s Power (NPP) was in the Opposition, its members, including now Prime Minister Harini Amarasuriya, were among those who supported protests by microfinance victims. However, years later, the paths of the victims’ movement and the NPP have diverged. Critics note the irony that under an NPP Government, the legislation which earlier governments withdrew following protests has now been passed, despite opposition from groups that once stood alongside the party.

According to the Central Bank of Sri Lanka (CBSL), microfinance services are intended to support income generation, encourage savings, and improve the living standards of economically vulnerable groups. However, in Sri Lanka, microfinance has increasingly become a debt trap for underprivileged communities, particularly women. The crisis has spread across many rural parts of the country, targeting vulnerable people who cannot obtain loans from licensed banks and financial institutions. As a result, many borrowers have fallen into a vicious cycle of debt and poverty.

History and background of the legislation

The Microfinance and Credit Regulatory Authority Bill will replace the Microfinance Act No. 6 of 2016, which had been criticised for failing to cover the entire sector. The earlier law mainly regulated registered microfinance companies under the CBSL, leaving many informal lenders and non-governmental organisations outside its scope. 

Attempts to regulate the sector date back nearly two decades, with initial proposals having been discussed as early as 2006. They did not, however, materialise into comprehensive legislation. 

A new bill was introduced in 2023 and later revised to include provisions addressing informal lending and consumer protection. However, the bill introduced in 2023 was withdrawn by the then Government following protests from civil society groups and victims. Following Cabinet approval in August 2025, the legislation was gazetted in November 2025 before being passed by Parliament this month. 

The new legislation establishes the Microfinance and Credit Regulatory Authority of Sri Lanka, which will oversee microfinance institutions and licensed moneylenders. Among its powers are the authority to set limits on interest rates and fees, regulate loan recovery practices, and introduce formal complaint-handling mechanisms. It will also supervise digital lending practices and impose penalties on institutions that fail to comply with regulatory requirements. 

The law introduces a mandatory licensing regime for moneylending businesses. Under the new framework, no person can legally operate as a moneylender without obtaining a licence from the authority. Existing lenders will be allowed to continue operations during a transitional period but must apply for licences within a timeframe set by the authority. 

Several categories of institutions are exempt from licensing requirements, including licensed banks, finance companies, Government entities, cooperative societies, and certain community-based financial organisations already regulated under other laws. 

The Government, during the second reading of the bill, defended it as a step to safeguard individuals trapped in microfinance debt. Opening the debate, Deputy Minister of Finance and Planning Anil Jayantha Fernando claimed the law was intended to address long-standing regulatory gaps in the microfinance sector and strengthen protections for borrowers. 

According to Fernando, the existing regulatory framework under the Microfinance Act No. 6 of 2016 had proven inadequate, with only four companies currently registered with the Central Bank despite the widespread growth of microfinance activities, including informal lending and digital loan platforms. He said the proposed new act sought to establish a dedicated authority to regulate both microfinance institutions and money lending businesses, particularly targeting unregulated lenders who charge excessive interest rates. 

Fernando added that the Government intended to focus particularly on protecting individuals working in the informal economy, estimated to account for around 65% of the workforce, including street vendors, small traders, and cottage industry workers who often rely on microloans. He also assured that the Government did not intend to undermine community-based financial organisations but rather support them in transitioning into a regulated legal framework.

Under the new law, individuals operating illegal lending businesses could face fines of up to Rs. 5 million and imprisonment. The Deputy Minister said the legislation was aimed at creating a more transparent and regulated financial environment while preventing predatory lending practices. 

Minister of Women and Child Affairs Saroja Savithri Paulraj said that introducing the bill marked a step towards rescuing women who had fallen into the microfinance debt trap.

Sub-Committee on Future Steps to Address the Microfinance Lending Problem Chairperson NPP MP Samanmalee Gunasinghe said many women had obtained microfinance loans not for business activities but for day-to-day survival. 

“We held discussions with several parties. According to reports, about 2.4 million women have become victims of these debt traps. Loan agreements require borrowers to specify the purpose of the loan, such as a project or business. But in reality, much of the money has been used for daily expenses. Previously, companies lent money to women and earned high interest without regulation. That will change through this bill,” she said.

However, Opposition Leader Sajith Premadasa criticised the bill, arguing that authorities lacked a clear understanding of the origins and development of the microfinance sector. Premadasa alleged that the new law failed to properly regulate predatory lending practices, including fraudulent online loan schemes. Instead, he claimed the legislation could undermine grassroots community credit programmes while protecting powerful actors within the microfinance industry. 

He warned that the measures could negatively affect community-based credit systems, including women-led lending groups, rural and urban microcredit programmes, and financial support networks serving communities in the north, east, and plantation areas. 

While acknowledging the need for regulation due to rising indebtedness and reports of suicides linked to high-interest loans, Premadasa argued that regulatory efforts should focus on large financial institutions and predatory lenders rather than small community organisations providing grassroots financial support.

Women’s struggles and real-life stories

In 2021, United Nations Special Rapporteur on contemporary forms of slavery Tomoya Obokata identified Sri Lanka’s microfinance crisis as a “highly gendered sector”. He noted that the efforts of women trapped in microfinance debt to repay their loans could amount to a “contemporary form of slavery”.

Outside the Northern and Eastern Provinces, Polonnaruwa District has emerged as one of the main areas where the microfinance crisis has intensified in Sri Lanka. Microfinance institutions have been providing loans with extremely high and largely unregulated annual interest rates ranging from 30% to as high as 220%. 

There have been instances where women have attempted self-immolation due to the trauma caused by continuous harassment. Reports also indicate that some recovery officers used intimidation tactics, including sexual coercion, death threats, and threats of rape.

A common method used by collectors is to inform relatives, neighbours, and acquaintances about borrowers’ debts in order to shame them publicly and damage their reputations. The use of abusive language has also been widely reported. In some cases, collectors have even threatened the children of borrowers. 

As a result, many women like Shriyalatha have faced domestic violence. Some have been forced to leave their homes and villages, while others have migrated to the Middle East as domestic workers in an attempt to repay their debts. 

A young man who worked as a recovery officer at a leading financial company in Chilaw said witnessing the methods used to collect installments from rural women led him to resign after only a few months. 

“I felt it was a grave sin to pressure women like that. Sometimes I used abusive language, followed them to their children’s schools, and humiliated them. At one point, I felt ashamed of myself for doing this. I began to wonder what would happen if one of them took their life because of me. I could not bear that thought, so I resigned,” he said. 

The crisis gained national attention in 2021. On 8 March that year – International Women’s Day – rural women in Hingurakgoda launched a long-term satyagraha protest led by the Collective of Women Victimised by Microfinance. The protest continued for more than 55 days and received support from the NPP at the time.

Researchers and victims up in arms

Activists who observed the parliamentary debate alleged that the Government, once a partner in the struggle, had used the debate to justify the continued presence of large microfinance companies in the sector. 

Dr. Amali Wedagedara, a researcher and long-time advocate working with communities affected by microfinance debt, argued that the industry’s business model itself had contributed to widespread exploitation, particularly among women borrowers. 

According to Wedagedara, the sector’s heavy focus on women borrowers is not simply about financial inclusion or empowerment. Instead, she argued, it was based on assumptions about women’s social roles and perceived compliance. 

“The logic is that lending to women is easy. They are considered more docile and more likely to comply with repayment demands. Women are also easier to monitor. They have homes and children. They cannot simply disappear without repaying a loan. Because of that, they can be kept under constant surveillance,” Wedagedara said. 

Wedagedara also highlighted the financial structure of many microfinance loans as a key driver of debt cycles. Borrowers may apply for loans of around Rs. 50,000 for small-scale agriculture or family businesses. However, deductions for insurance, documentation, and deposits are often made before the loan is disbursed. “Parts of the loan are deducted for various charges, but the interest is still calculated on the full amount,” she said. 

Unlike traditional development loans, many microfinance loans also lack grace periods, with repayment obligations beginning almost immediately. Because income-generating activities take time to produce returns, borrowers frequently take additional loans to repay earlier debts, creating what Wedagedara describes as “multiple borrowing”. 

Interest rates can range between 28% and 35%, significantly higher than typical market lending rates of around 10% to 17%. “The business model of microfinance itself works to place a person, often a woman, into a debt cycle,” she said.

Wedagedara noted that the social consequences of indebtedness extended far beyond financial hardship. Debt collectors employed by microfinance companies often operate under strict recovery targets, leading to aggressive collection tactics. Such pressure, she said, had taken a serious toll on borrowers’ health and well-being. Many women experience depression, anxiety, and stress-related illnesses such as high blood pressure and diabetes.

The crisis has also been linked to more extreme outcomes. By 2021, reports suggested that more than 200 suicides in Sri Lanka were associated with microfinance-related debt, although this figure has not been officially confirmed through Government data or academic research. The number was previously cited in Parliament on 7 June 2017 by President Anura Kumara Dissanayake, in his capacity as Janatha Vimukthi Peramuna Leader.

Another structural issue highlighted by Wedagedara is the role of the Credit Information Bureau (CRIB). Borrowers who default on loans are often blacklisted, preventing them from accessing credit from formal banking institutions or Government programmes. “In some villages, more than half the population is listed in the CRIB,” she said.

This exclusion leaves borrowers with few alternatives other than returning to high-interest lenders willing to accept greater risk, often at even higher interest rates.

While acknowledging the need for regulation, Wedagedara argued that the new legislation did not adequately address the structural causes of the microfinance crisis. 

“We submitted our proposals on 19 January to the Sectoral Oversight Committee on Economic Development and International Relations, chaired by NPP MP Lakmali Hemachandra. These proposals included measures to stop harassment of borrowers, such as forcibly entering homes, discrimination, coercion, and unfair debt agreements. We were told that these proposals would be incorporated into the bill, but they have not been included, except for one consumer protection demand related to social security,” she noted.

“There are no strong consumer protections in the bill,” she said, noting that it did not clearly prevent lenders from claiming social security payments or welfare benefits to recover debts. 

She also criticised the composition of the proposed regulatory authority, pointing out that women, who represent the majority of affected borrowers, were not adequately represented. “We proposed that at least half of the authority should comprise women, but that was not included.” 

Wedagedara further warned that the law could unintentionally affect small community organisations that provide informal financial support within villages. Grassroots groups such as funeral aid societies and small community funds often provide low-interest emergency loans to members excluded from formal banking systems.

“These groups sometimes lend at very small interest rates to help their members during emergencies. They fear that the new law will force them to register as commercial moneylenders.”

At the same time, she argued that large financial institutions dominating the sector appeared to remain largely shielded from similar scrutiny. “This bill risks freeing the large companies again while placing pressure on small community groups,” she cautioned.

Meanwhile, following the passage of the bill, National Movement of Victims of Microfinance Convenor Nirosha Guruge strongly criticised the legislation, describing it as a betrayal of thousands of women affected by the microfinance debt crisis. 

Guruge said the law closely resembled a bill introduced in 2023 under the previous administration, which civil society groups and victim collectives had successfully opposed at the time. “Now the current Government, which promised to stand with the people, has revived and passed the very same policy,” she said. “Until now, these companies did not have an official legal mandate to enter homes, threaten borrowers, or aggressively recover loans. With this bill, the Government has effectively given them a legal licence to continue exploiting the poor.”

“They (the Government) speak about empowering women and say that when women rise, the country rises. But at the same time, they are handing companies the power to tighten the noose around those very women,” Guruge added. 

According to Guruge, the law risks placing greater regulatory pressure on small community-based organisations while leaving larger financial institutions largely outside the scope of the new authority.  

Guruge further warned that the removal of the 35% interest rate ceiling that existed under the Microfinance Act of 2016 could worsen borrower indebtedness. 

“These women did not take loans for luxury. They borrowed to buy fertiliser for farming, to pay for their children’s education, to cover medical expenses, or simply to survive during the Codiv-19 period,” she said. “Our struggle has not ended. We will move forward with the message ‘Cannot pay, will not pay’. We call on all victims of microfinance and civil society organisations to unite and continue this fight until these predatory loans are abolished,” she said. 

TISL raises concerns

Transparency International Sri Lanka (TISL) has also raised concerns about the legislation, warning that the new law fails to adequately address long-standing regulatory gaps in the microfinance sector. 

In a statement issued following the passage of the bill, TISL said the legislation fell short of its stated objective of protecting vulnerable borrowers and correcting serious regulatory failures. The organisation noted that the Supreme Court, in a 2024 determination on a bill challenge, ruled that all entities engaged in microfinance activities must be subject to equal regulation. 

However, TISL said the new law continued to leave significant loopholes. Under the proposed act, lending to low-income borrowers is classified as ‘microfinance business’ only if its primary objective is defined as ‘social empowerment’. According to TISL, this definition allows large banks, finance companies, and leasing institutions to provide similar small loans to vulnerable borrowers while avoiding classification as microfinance providers by presenting the lending as purely commercial activity. As a result, borrower protections could depend on how lenders describe their business purpose rather than the nature of the loan or the vulnerability of the borrower. 

TISL also pointed to broader weaknesses in the law’s consumer protection framework, noting that it did not introduce income verification requirements or debt-to-income limits for borrowers, lacked a clear appeals mechanism for regulatory decisions, and restricted borrowers’ right to legal representation in certain proceedings. 

The organisation further warned that the legislation did not adequately address documented abuses in the sector, including intimidation, coercive debt recovery practices, and sexual exploitation targeting women borrowers. It noted that the law did not explicitly recognise such conduct as regulatory violations or require mandatory reporting or sanctions against institutions involved. 

TISL also raised concerns about governance arrangements for the proposed Microfinance and Credit Regulatory Authority, highlighting the absence of mandatory conflict-of-interest disclosures, limited transparency regarding funding sources, and the concentration of discretionary powers without sufficient accountability mechanisms. 

TISL stated that the legislation, in its current form, risked leaving economically vulnerable communities, particularly women who rely on small loans to sustain livelihoods, exposed to the same exploitative lending practices the law was intended to address.