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Lanka Business Online Poor Credit International micro finance experts recommend that donors put the breaks on funding microfinance in Sri Lanka, as system unsustainable. "Given the plethora of organisations, many mushrooming more after the tsunami, we are telling donors to take a step back and reflect on what they are doing here," lead microfinance specialist Brigit Helms, from CGAP, told journalists on Friday. CGAP - the Consultative Group to Assist the Poor - is a coalition of 31 development agencies created by major donor countries and focuses on building financial systems for the poor. The organisation is doing country level reviews in Sri Lanka on the effectiveness and accountability of local microfinance systems. The preliminary readings that are based on self reported and unverified data, says CGAP, is pointing to demand for credit not being met, despite excess liquidity in the local microfinance system. For instance the government’s Samurdhi programme shows over Rs 11 billion in savings but only around Rs 3 billion in loans. The savings base of local cooperative rural banks add up to over Rs 22 billion but show only around Rs 8 billion in loans – this despite the tsunami increasing the demand for micro credit. Most of this excess liquidity in the government system is invested in T-bills, actually financing the government instead of micro industries or the poor. But loan portfolios of non-governmental organisations (NGO) involved in microfinance show around Rs 2 billion in savings and a near equal amount in loans, indicating a brisk demand for credit. Meanwhile, on top of the funds available at government institutions, foreign donors have lined up at least another US$ 250 million for micro financing. As this money will also come into the country through government systems, says CGAP, it will only add to excess liquidity, since government microfinance systems are already unable to recycle even their local funds. Another problem is the interest ceiling of six percent for micro loans, introduced after the tsunami, when interest rates should be around 24 percent. CGAP says this ceiling is unsustainable and is advising donors to focus on capacity building of local institutions and to develop subsidy reduction methods, before handing out the money. "We are asking them to be very clear on their exit strategy from the highly subsidised tsunami funding, into a market based, more permanent system," said Helms. If capacity building for sustainable micro financing does not happen, says CGAP, the cost of micro credit will go up when donors leave and the subsidies come off. The net result would be to once more cut off the poor from financial services.
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