Legislation to regulate unregulated money lending activities before Cabinet

The Monetary Board approved draft of Microfinance and Credit Regulatory Authority Act aimed at regulating the country’s informal money lending activities is now before t he Cabinet of Ministers.

The new legislation will effectively replace the existing Microfinance Act, No.06 of 2016. The new law will cover a broader set of money lending activities, which aren’t covered by any other Acts of Parliament.

“Enactment of a legal framework to regulate unregulated money lending activities, thereby creating a better and more effective regulatory environment for money lending institutions, is of utmost importance,” Central Bank Governor Prof. W.D. Lakshman said this week in his speech announcing the monetary and financial sector policies for 2021 and beyond.

The enactment of the Act will give effect to a new ‘Authority’ established within the Ministry of Finance consisting of ex-officio representatives from the Ministry and the Central Bank, and the nominees of the Central Bank and the Ministry.

The mandate of the new, ‘Authority’ is to regulate micro finance institutions and unregulated moneylenders, who are also referred to as loan sharks as they charge exorbitant interest rates from the innocent borrowers.

“The issues associated with the informal moneylenders such as the over-indebtedness of customers, lack of reporting of credit i nformation t o authorities, and lack of protection for customers etc., could lead to significant socioeconomic costs, unless appropriate measures are initiated on a priority basis,” the Central Bank said.

As the new Act is expected to provide regulatory oversight and guidelines t o businesses i n similar lines, t hough i n different forms of incorporation, the Central Bank considers the Act will lessen any confusions and room for regulatory arbitrage.

“The proposed Act could also assist in addressing some of the shortcomings identified in the existing Microfinance Act, where there could be a possibility of a regulatory arbitrage due to the existence of different regulators for Licensed Microfinance Companies and Microfinance Non-governmental Organisations, and also more emphasis given to regulation of deposit taking microfinance institutions over micro-credit institutions, which could result in lack of protection for small-time borrowers,” it added.