Sri Lanka has unfortunately been facing consecutive crises. Most recently, Cyclone Ditwah caused widespread economic fallout, especially in the poorer regions of the country. This has now been followed by yet another crisis caused by the conflict in the Middle East due to the US-Israel attacks on Iran.
According to the Ministry of Rural Development, Social Security, and Community Empowerment, one-fourth of Sri Lanka’s population is currently living in poverty. Experts note the increased vulnerability of more individuals falling under the poverty line on account of these crises, leading to higher reliance on microfinance as well.
Rise in unregulated finance
Speaking to The Sunday Morning Business, Institute of Policy Studies of Sri Lanka (IPS) Research Fellow and Head of Poverty and Social Welfare Policy Research Dr. Ganga Tilakaratna explained that recent shocks such as Covid-19, the economic crisis, and Cyclone Ditwah had led to a notable increase in poverty, with many previously non-poor households slipping into vulnerability due to sudden losses in income and livelihood.
In such contexts, she said that the demand for credit from microfinance institutions and moneylenders had risen sharply, especially among low-income groups with limited access to formal financial services.
Dr. Tilakaratna explained that borrowing was largely driven by the need to smoothen consumption, rebuild livelihoods, and manage immediate financial pressures. However, these loans usually carry high interest rates, increasing the risk of over-indebtedness and debt cycles.
She added that there had also been a rise in unregulated digital lending platforms offering instant credit at exorbitant rates. According to her, these trends highlight gaps in both financial regulation and financial inclusion in the country, making the proposed regulatory authority a timely and necessary intervention.
Dr. Tilakaratna also highlighted changing borrowing patterns, noting: “We do observe some shifts, specifically since the Covid-19 period. Borrowing among low-income households has increasingly moved towards short-term, consumption-oriented needs, with greater reliance on semi-formal and informal lenders due to ease and speed of access. At the same time, pawning or gold loans have emerged as a key coping strategy across districts during recent crises.”
Furthermore, she noted that compared to other forms of borrowing, pawning was a relatively low risk for both lenders and borrowers, and remained accessible through regulated banks and non-bank financial institutions. However, according to her, in relation to the most recent shocks, it is still too early to assess whether these borrowing patterns will change significantly.
Thus, while the proposed authority has the potential to improve market discipline and transparency, its effectiveness will depend on how it is implemented and the extent to which it addresses existing regulatory gaps.
“Poor households are highly vulnerable, specifically as housing needs increase due to both economic pressures and climate-related damage, such as in the case of Cyclone Ditwah. Housing requires long-term, affordable financing, but such options often remain limited for low-income segments. As a result, many households turn to microfinance or informal lenders (or instant loans from digital platforms), which typically offer short-term loans at relatively high interest rates,” she said.
Dr. Tilakaratna explained that this created a mismatch between the purpose of borrowing and the terms of credit, often leading to debt traps. In addition, limited financial literacy and weak regulatory oversight increase exposure to exploitative practices. Thus, she highlighted that without targeted housing finance solutions and stronger consumer protection, many households risked becoming further indebted while aiming to meet their basic housing needs.
When questioned about how crisis-induced financial issues impacted Sri Lanka’s most vulnerable, she noted that these pressures had significantly affected these groups.
“Increasing inflation, especially for food and essentials, with income disruptions, has reduced real purchasing power. Many households are using multiple coping mechanisms such as borrowing from formal, semi-formal, or informal sources, pawning or mortgaging assets, and even cutting consumption or selling assets. This has not only deepened existing poverty but also expanded it, with a growing number of ‘new poor’ who were previously above the poverty line,” she said.
Thus, Dr. Tilakaratna observed that poverty was becoming more dynamic, with increased movement into and out of vulnerability. Accordingly, these trends also highlight the need for more responsive social protection systems to address both chronic and shock-induced poverty.
Reliance on microfinance sector
The Microfinance and Credit Regulatory Authority (MCRA) Bill of 2025 involves a regulatory framework to govern Sri Lanka’s microfinance and moneylending sectors. A recent brief by Arutha, titled ‘New Microfinance Bill Regulates, But Doesn’t Protect Enough,’ notes that families in disaster-prone areas usually rely on loans after floods, cyclones, or conflict.
The report notes that the bill does not address climate-induced disasters or other emergencies, leaving borrowers exposed to interest, repayment pressure, abusive debt collection, and asset loss during crises.
Recommendations given include that the act should provide safeguards for borrowers during disasters and emergencies, with the finance minister designated as the official authority to declare a crisis. Upon such a declaration, the Microfinance and Credit Regulatory Authority should implement measures to temporarily suspend loan repayments, interest, and penalties, and protect borrowers from harassment or asset seizure.
Another recommendation is that borrowers should also be integrated into a universal social security framework, while clear reporting and monitoring procedures must be established to ensure practical and timely enforcement.
Meanwhile, analysing the potential fluctuations in the microfinance sector due to the recent cyclone and the ongoing crisis driven by the Middle East conflict, researcher and Arutha Civic Education and Outreach Consultant Amalini De Sayrah explained the implications of reliance on the microfinance sector by the vulnerable amidst such crises.
She stated that since Cyclone Ditwah had left many families and individuals without income and with partial or complete loss of belongings due to direct damage and/or displacement, work and income had yet to stabilise for many. In most cases, according to her, the relief payments promised by the Government have not been issued to them, or else have been insufficient given the scale of the damage.
Therefore, De Sayrah noted that the reliance on microfinance loans in affected communities that were already vulnerable was likely to continue or increase.
“People are likely to take, or have already taken, loans to help rebuild their homes or livelihoods. They are then faced with twice the pressure to repay: repaying these new loans and repaying any loans they had taken before the disaster. At a time when they are required to spend in order to simply get their lives back together at a basic level, such repayments will be extremely difficult.
“Furthermore, loan collectors show no empathy or understanding for people’s situations. For them, a debt is a debt – one that requires collection even from a displaced person or someone who has lost everything,” she said.
De Sayrah also explained that some of those worst affected were people already in extremely fragile livelihood situations, such as farmers and tea plantation workers, who were already in microfinance debt.
“Farmers must clear their cultivation plots, replant, and wait for the harvest while bearing other costs, whereas tea plantation workers already earn only a meagre salary and are thus forced to return to work even in areas where there is extensive landslide damage, as they need to feed their families,” she added.
Furthermore, she noted that in many places, it was possible that communities themselves were using methods like savings groups, cheetu, or local welfare groups to support each other. However, at a time when the whole community is faced with such insecurity, she pointed out that it was likely that finances in such places would be insufficient to support everyone’s recovery.
Thus, she believes that it is important to note why these communities need to take microfinance loans that have high interest rates and exploitative collection methods. She attributed this to the fact that they are unable to access loans from banks and welfare banks, given their inability to meet documentation requirements, and since they usually require money for immediate expenses.
As a result, she highlighted that such individuals were susceptible to microfinance schemes, especially due to exclusion of the most vulnerable, who require such assistance the most, from formal lending structures.
Impact on rural and urban poverty
Sri Lanka’s official poverty line has increased in January this year in comparison to figures from December 2025, according to the Department of Census and Statistics, with the figure rising from Rs. 16,658 to Rs. 16,730 within the period.
University of Peradeniya (UOP) Department of Economics and Statistics Professor Wasantha Athukorala stated that poverty levels in Sri Lanka remained above 20% – or at around 23–24% – after the crisis according to World Bank estimates.
Despite predictions that the poverty levels would gradually decrease, he explained that the Cyclone Ditwah crisis, which significantly impacted critical sectors such as agriculture, along with the current fuel crisis due to the conflict in the Middle East, were concerning. With the country facing a fuel crisis at present, he noted several aspects of the impact.
“The transport sector, including the public sector, has been affected, with the Government announcing a one-day weekly holiday and transport services being severely disrupted. At present, only a limited number of public and private buses are operating on the roads. The disruption is not limited to passenger transport, but also affects the transportation of goods, including agricultural products, which are being heavily impacted,” he said.
This situation, he stated, would increase poverty levels, especially as food prices were already high and expected to increase further over time, alongside increasing inflation.
Prof. Athukorala further noted that agricultural production was likely to be affected, with fertiliser prices also expected to increase. These developments, he explained, would have an impact on both rural and urban poverty.
He also highlighted the possibility of electricity supply constraints in the future, with prices expected to increase. He stated that such factors would affect both the industrial and services sectors. As a result, employment opportunities may decline, financial flows to rural areas may decrease, and household incomes are likely to fall, even as inflation continues to rise over time.
“However, the situation is beyond our control, since it is caused by global conditions. The Government is trying its best to manage fuel and gas shortages, although some limitations are already visible. Thus, given these constraints, poverty will certainly increase,” he said.
However, Prof. Athukorala stated that there was also an opportunity within the current crisis. He pointed out that Sri Lanka usually relied heavily on imports for many goods, and that there was now a need to assess whether these goods could be produced domestically to meet local consumption. He said that if a plan were to be developed along these lines, the country may be able to use the current situation as an opportunity and overcome similar barriers in the future.
SL’s critical poverty issue
Speaking to The Sunday Morning Business on poverty concerns, Centre for Poverty Analysis (CEPA) Executive Director Prof. Sirimal Abeyratne stated that while there was no official data on poverty in Sri Lanka after 2019, available estimates based on information from the World Bank, the United Nations Development Programme, and other institutions suggested that around 7–8 million people – more than one-third of the Sri Lankan population – remained below the poverty line, whether measured by international or national standards.
He noted that Sri Lanka had experienced a series of external shocks, which had further multiplied the issues of poverty. He further stressed that the rise in poverty was the most critical social and political issue at the moment, although it may not be sufficiently visible.
Addressing overall solutions needed in future, Prof. Abeyratne explained that creation of opportunities was necessary.
“Social protection can provide only marginal support in addressing this level of massive poverty. Social protection programmes usually cover around two million people. However, given the fiscal constraints faced by the Government and its limited ability to borrow, there is very little fiscal space to address poverty through social protection measures,” he said.
Prof. Abeyratne further noted that social protection did not reduce poverty in itself and had never been a mechanism to bring people out of poverty. He highlighted that people escaped poverty through the creation of opportunities for income and employment generation, which are caused by economic growth, where the problem of poverty is ultimately addressed.