Sri Lanka’s new Microfinance Act: Who benefits? Who is protected?
The Passage of Sri Lanka’s new Microfinance Act
The Microfinance and Credit Regulatory Authority Act, No. 9 of 2026 came into force on 20th March 2026. The 2026 Act provides for the establishment of a new regulatory authority which purportedly aims to introduce a strong legal framework for regulating and supervising money lending and microfinance businesses in Sri Lanka. The objective of this authority is to regulate and supervise licensed money lenders and licensed microfinance institutions, protect customers engaged with such institutions, and coordinate with the Central Bank and other regulatory bodies. The Act repealed the previously existing Microfinance Act No. 6 of 2016.
Prior to the passage of the 2026 Act, the Bill was tabled in Parliament and read for the first time on 26th November 2025, shortly before the devastation of Cyclone Ditwah hit the country. In this context, the Bill was not challenged for its constitutionality before the Supreme Court within the two-week window after its First Reading. On 04th March 2026, the Bill was read for a Second time and briefly debated in Parliament. On the same day, the Bill was read for a Third time and passed.
Notably, serious concerns have been raised and continue to be raised by the public throughout this process, including by community-based groups directly impacted by the 2026 Act, highlighting the adverse effects and practical implications this law will have on their everyday lives.
The Microfinance Crisis in Sri Lanka
Over the past three decades, large finance companies and banks expanded into microfinance in Sri Lanka, offering easy, high-interest loans, which often targeted vulnerable and low-income borrowers who were already impacted by layers of poverty, disaster and conflict. These lending practices led to widespread indebtedness, with borrowers taking multiple loans, losing personal assets to pay off loans, and becoming victims of extractive and exploitative debt collection practices. Over time the microfinance crisis caused severe social harm and violence prompting long-standing demands – especially from disproportionately impacted women’s groups – for stronger regulation of predatory microfinance institutions.
It was against this backdrop that the Microfinance Act No. 6 of 2016 was introduced to regulate unlicensed microfinance providers. However, it failed to adequately address predatory practices and exploitation. Seemingly to address this gap, in January 2024, a Microfinance and Credit Authority Regulatory Bill was presented in Parliament and subsequently challenged before the Supreme Court, which ruled that key provisions were unconstitutional, leading to its withdrawal. A later review committee and critics, including victim representatives, rejected the Bill’s framework, calling for a completely new approach to tackling the microfinance crisis.
Failed Promises and the Lack of Transparency
Following Sri Lanka’s recent economic crisis, and connected austerity measures, the NPP government came into power pledging to alleviate the burden of predatory microfinance loans with high interest rates on women. It was hoped that the new government would address the microfinance issue afresh, breaking away from the approach of its predecessors, taking into consideration the lived experience of the communities directly affected by the crisis.
However, within barely two years of coming into power, the NPP government backtracked on this promise. Instead it continued the process adopted in 2024, and hurriedly pushed forward the 2026 Act to align with Asian Development Bank (ADB) loan conditionalities, incorporating only a few changes suggested by the Supreme Court in its Special Determination in 2024, and overlooking many of the longstanding concerns raised by affected communities.
The government appears to have succumbed to pressure from International Financial Institutions, such as ADB, to adopt these regressive structural reforms through their loan schemes, trumping the rights and freedoms of the victims of predatory lending practices who remain trapped in cycles of debt and deepening poverty.
Community Concerns: Gaps in the Law vs. Reality
On its face, while the new Act appears to be a positive development in its aim and objective of setting up an authority to regulate moneylending and microfinance practices, key concerns agitated by community-based groups expose significant gaps and detrimental effects the law will have on the lives of those directly impacted.
For instance, the provisions of the Act set out that moneylending businesses (section 20) and microfinance businesses (section 32) will be regulated through the new law. However, ambiguity remains on who must obtain a license under the law, with a range of institutions including licensed banks and finance companies appearing to be exempt from this scheme (section 20; section 32). Further, these provisions do not distinguish between microcredit and community-based credit practices, with the same regulatory scheme and compliance burdens applying across the board. In effect, the law risks shutting out community credit mechanisms and practices by subsuming them under the definition of ‘moneylending’ and / or ‘microfinance’. Additionally, the law empowers the Authority to coordinate with the Credit Information Bureau (CRIB), expanding its coverage and permitting it to collect and provide information from any moneylender or microfinance institution licensed under the law, on their borrowers or prospective borrowers (section 72). This places low-income borrowers at a significant disadvantage, labelling them as likely to default based on their creditworthiness, and effectively shutting them out of the financial market on this basis.
Notably, whilst the microfinance crisis has disproportionately impacted women over the years, the composition and representation within the new Authority’s Board of Directors does not reflect this reality. The requirement for women’s representation on the Board is set at the bare minimum – that out of the four appointed members at least one member appointed shall be a female member (section 5(3)(b)). There is no comparable requirement set for the 3 ex-officio members on the Board (section 5(3)(a)). Likewise, community-based organizations are not represented.
When the Bill was debated in Parliament on 04th March 2026, several of these key concerns were raised by members of the opposition. However, the government response was that these concerns were a matter of interpretation and could be dealt with during the implementation phase of the law and by issuing regulations under the Act.
Prior to the passage of the Bill, at committee stage, a few amendments were made to strengthen customer protections aligning with some of the concerns raised by community-based organizations. These amendments include mandating licensees to comply with existing customer protections under the 2026 Act when formulating their guidelines on customer protections (proviso, section 45); expanding obligations of licensees to include the provision of accurate and accessible information to customers, the avoidance of abusive and violent collection practices, and granting a grace period prior to commencing loan repayments (section 46); and setting an interest rate cap for licensees (section 49).
The Path Forward: Transitioning and Implementation
Following the passage of the 2026 Act, community-based groups and stakeholders continue to demand that their rights be protected and their voices meaningfully heard. Many have raised serious concerns about the inadequacy of existing safeguards and the practical challenges surrounding the implementation of the Act. For example, alongside the repeal of the Microfinance Act No. 6 of 2016 (section 81), the 2026 Act sets a transitional period of twenty-four months (section 80). Consequently, the absence of minimum consumer protection during this two-year period leaves already vulnerable communities exposed to further risk. Particularly in a context where the economy remains in crisis, this gap is likely to deepen existing cycles of debt and poverty.
Overall, the passage of the Microfinance Act of 2026 and its substantive provisions reflect a clear disconnect between lawmakers and the lived realities of affected communities. Rather than genuinely engaging with and incorporating public concerns, the law-making process appears to have fallen short of addressing the urgent needs on the ground.
Moving forward, during the two-year transition period that lies ahead, it is essential that communities, advocates, and civil society continue to demand meaningful reforms and ensure their voices remain central to the implementation process. This may include pushing for interim protection during the transition period and holding the government accountable to the commitments it has made. Against the broader backdrop of economic crisis, austerity measures, and a rising cost of living, the need for responsive, inclusive, and rights-based policymaking has never been more urgent.
References:
https://www.cpalanka.org/sri-lankas-microfinance-sector-has-a-problem/
https://polity.lk/fcej-end-the-microfinance-menace-no-to-the-new-bill/
https://srilankabrief.org/the-microfinance-bill-2025-lawmaking-without-the-people/
https://www.ft.lk/columns/MCRA-Act-2026-Aspirations-expectations-and-the-road-ahead/4-790612