Sri Lanka to amend 2016 Microfinance Act as the government moves to introduce stronger oversight of the country’s microfinance and moneylending sector, including plans to establish a new independent regulatory authority.
Sri Lanka to amend 2016 Microfinance Act to create new authority overseeing microfinance and digital lenders
The government has announced plans to strengthen oversight of the country’s microfinance sector as Sri Lanka to amend 2016 Microfinance Act through new legislation presented to Parliament this week. The proposed amendments aim to address longstanding regulatory gaps that have allowed many lenders, including digital platforms, to operate outside formal supervision.
Deputy Minister of Finance and Planning Anil Jayantha Fernando said the existing law—Microfinance Act No. 06 of 2016—has proven insufficient in regulating the broader microfinance industry. While the legislation was originally intended to bring oversight to microfinance institutions, the regulatory framework currently covers only a limited number of companies.
“As you know, even though various efforts were made through the Microfinance Act No. 06 of 2016, it still had been unable to regulate the microfinance industry within those existing frameworks,” the deputy minister told lawmakers.
Under the proposed amendments, the government plans to establish a new body known as the Microfinance and Loan Regulatory Authority (MCRA). This authority would serve as the primary regulator overseeing microfinance companies, moneylenders, and digital lending platforms operating across the island.
Officials say the decision reflects growing concerns about unregulated lending practices, particularly through mobile applications and online platforms that have expanded rapidly in recent years. According to the finance ministry, hundreds of digital lending apps have been operating in Sri Lanka, many outside the supervision of the Central Bank of Sri Lanka.
The deputy minister noted that despite the scale of the industry, only a handful of companies are formally registered as microfinance institutions under the central bank’s current regulatory framework.
“Even now, under microfinance and other names, the system of lending through online and mobile phone applications has spread across a wide range,” he said. “But only about four companies have registered as microfinance businesses with the Central Bank.”
The proposed legislation introduces stronger enforcement mechanisms aimed at curbing illegal lending operations. Individuals or institutions found guilty of violating the provisions of the amended law could face fines of up to five million rupees and prison sentences of up to five years.
Authorities say these tougher penalties are intended to deter predatory lending practices and protect borrowers, particularly those in rural and economically vulnerable communities.
Over the past decade, microfinance lending has expanded significantly across Sri Lanka, providing access to credit for individuals who may not qualify for traditional bank loans. However, the sector has also drawn criticism from civil society groups and policymakers due to allegations of excessive interest rates, aggressive recovery tactics, and social impacts on low-income households.
The deputy minister acknowledged that microfinance has become a subject of intense public discussion in Sri Lanka, especially regarding its effects on rural livelihoods.
“There is a huge conversation in society regarding this microfinance,” he said, noting that unregulated lending has had devastating consequences in some village communities where borrowers struggle to repay high-interest loans.
By establishing the Microfinance and Loan Regulatory Authority, the government hopes to create a comprehensive regulatory framework that covers both traditional microfinance institutions and emerging digital lenders.
According to the proposed structure, the new authority will be governed by a seven-member board, including representatives appointed by the relevant minister. This governing body will oversee licensing, regulatory compliance, and enforcement activities across the sector.
The bill also provides for the creation of a dedicated regulatory fund to ensure the operational independence and financial stability of the authority. Such a funding mechanism is intended to allow the regulator to carry out investigations, monitoring, and enforcement without excessive reliance on external funding sources.
If enacted, the new regulatory authority will have the legal mandate to investigate unethical debt recovery practices and introduce standardized rules governing interest rate calculations. These measures are expected to bring greater transparency to the lending process and prevent exploitative pricing structures.
Financial analysts say the decision to reform the microfinance regulatory framework reflects broader efforts by the government to strengthen financial sector governance and consumer protection.
The move to amend the existing law also highlights the growing importance of regulating digital financial services. As smartphone penetration and online financial services expand across Sri Lanka, regulators increasingly face the challenge of supervising lending platforms that operate through mobile applications rather than traditional branch networks.
The proposed amendments to the law represent one of the most significant regulatory changes in the microfinance sector since the original legislation was enacted in 2016. By expanding the scope of regulation beyond a limited group of licensed institutions, authorities hope to bring greater accountability and oversight to an industry that plays a critical role in providing credit to underserved communities.
If Parliament approves the legislation, the reforms could reshape the regulatory landscape for microfinance in Sri Lanka, introducing clearer rules for lenders while strengthening protections for borrowers.