Accessibility and Affordability of Rural Micro-Finance Services in Sri Lanka

Transcription

1 Sri Lanka Economic Journal, Vol. 10 (2) pp , 2009 Accessibility and Affordability of Rural Micro-Finance Services in Sri Lanka S.P.Premaratne Abstract Though many finance providers claim that they have various financial packages to cater to rural low-income people, there is little research available on access to rural microfinance services in Sri Lanka. The aim of this paper is to analyze the accessibility to MF by rural households in Sri Lanka. The findings of the study reveal that the accessibility of MF depends on factors such as the level of household income, distance to MFI, availability of information technology, interest rate, level of education, vocational training, and collateral availability. Micro finance providers should think about a system to minimize the transaction costs involved. 1. Introduction Since microfinance (MF) has been recognized as a valuable tool for improving the livelihoods and reducing the vulnerability of the poor, many agencies including the World Bank, the Asian Development Bank, and planners have become eager to include MF components in social funds and other multisectoral projects (Alexandra and Silva 2002). Remenyi (1997) pointed out that MF is increasingly recognized as an effective tool for poverty reduction. Microfinance institutions (MFIs) offer a variety of financial products including credit, savings, insurance, business development services and community development services to the poor strata of society. In recent years, commercial banks have also offered various types of MF products and services. However, their achievements have been inadequate, especially in terms of reaching the small entrepreneurs and the poorest of the poor, particularly the rural poor. Other problems associated with the programs were lack of planning, lack of clear-cut policy directives, inadequate or inappropriate training and lack of coordination among banks and line agencies. MF as a tool for poverty alleviation has been researched over the past 10 to 15 years. Nevertheless, in the Sri Lankan context, in spite of the long history and the large number of institutions providing MF services particularly to the poorest households (see GTZ ProMiS 2008), there are limited 1

2 acceptable research findings on access to micro financial services. This study fills this lacuna by studying some important issues related to MF sector such as institutional mechanism, constraints to access of micro financial services and accessibility of the poor. The primary objective of the study is to assess and analyze the accessibility to MF by rural households in Sri Lanka. 2. Micro-finance Sector and Economic Development 2.1. Paradigms of Microfinance The literature suggests that MFIs are generally guided and broadly defined by two competing paradigms; namely, financial self-sustainability paradigm, and poverty alleviation paradigm. The financial self-sustainability paradigm also known as profit or institutional approach, views the overall goal of MF as the provision of financial services to low-income people, but not specifically to the poorest among them (Gulli 1998). Its definition of empowerment is essentially individualist with the ultimate aim being the expansion of individual choice or capacity for self-reliance. The paradigm assumes that increasing access to MF services will in itself lead to individual economic empowerment. It is then assumed that increased economic empowerment will lead to increased well-being of the poor and low-income people, and also to social and political empowerment. The main target group, despite claims to reach the poorest, is the bankable poor'; small entrepreneurs and farmers. Financial self-sustainability is achieved when the program is fully financed from the savings of clients and capital is raised at commercial rates from formal financial institutions. The ultimate aim of this paradigm is to build institutions that are profitable and fully self-supporting in competition with other private sector banking institutions, and are able to raise funds from international financial markets rather than relying on funds from development agencies. Generally, those who deliver MF services as regulated financial institutions fall under this approach. Financial self-sustainability is seen as a necessary precondition for achieving exponential growth for MFIs (Christen 2000). Policy discussions have focused particularly on setting of interest rates to cover costs, separation of MF from other interventions to enable separate accounting and program expansion to increase outreach and economies of scale, reduction of transaction costs and ways of using groups to decrease costs of delivery. 2

3 The poverty alleviation paradigm, also known as welfarist approach, differs in many of its interpretations and understandings of empowerment in MF. This approach claims that the overall goals of MF should be poverty reduction and empowerment. The main focus of such programs as a whole is on developing sustainable livelihoods, community development and social service provisions like literacy, healthcare and infrastructure development. There is a concern not only with reaching the poor, but also targeting the poorest. There is a significant debate about the trade-off between these two paradigms. The MF community is divided between those who argue that poverty alleviation is the primary goal for MFIs and those who argue the priority is to achieve financial self-sustainability. Recently a new paradigm has emerged. This promotes a middle ground between the poverty alleviation and financial selfsustainability approaches. Accordingly, if institutions develop service delivery methods that meet client needs at an affordable rate, then financial viability as well as poverty outreach could be achieved. In addition, another group of authors believes in another approach of MF, which is known as the feminist empowerment paradigm. The feminist empowerment paradigm is firmly rooted in the development of some of the earliest MF programs in the South Asia, including the Self-Employed Women s Association (SEWA) in India. Its underlying concerns are gender equality and women s human rights. MF is promoted as an entry point in the context of a wider strategy for women s economic and socio-political empowerment that focuses on gender awareness and feminist organization. Under this paradigm, MF must be part of a sectoral strategy for change that identify opportunities, constraints and bottlenecks within industries, which, if addressed, can raise returns, and prospects for large numbers of women. Possible strategies include linking women to existing services and infrastructure, developing new technology such as labor-saving, food processing, building information networks, shifting to new markets, and policy level changes to overcome legislative barriers and unionization Relationships between MF and Economic Development At a broader level, MF and development intersect in three ways: relationship with the poor, reliance on permanent institutions, and integration with the financial system of the country (Clark et.al 2003, Senanayake and Premaratne 2006). The first relationship concerns MF as an objective to alleviate poverty. This is the client level relationship. Clients of MFIs are poor and low-income people, often living in woeful overcrowded 3

4 settings, lacking access to basic services such as education, water, electricity etc. They also lack access to convenient, affordable and appropriate financial services. MF creates access to productive financial capital, which together with two other forms of capital, i.e., human capital and social capital, enable people to move out of poverty. MFIs address the issues of human capital through education and vocational training, while it builds social capital through community organization building, promoting democratic systems, and strengthening human rights. The second type of relationships between MF and development occurs at the institutional level. MF seeks to create private institutions that deliver financial services to the poor. Institutional sustainability is very crucial to delivering MF services effectively and efficiently. The third connection between MF and development occurs at the intersection between MFIs and the financial system in a country, accomplished when MFIs become a regulated institution that is part of the financial system. The third connection with development is made possible only after attaining the creation of financially viable institutions. MF operates at its best when it intersects with development in these three dimensions. Nevertheless, the reality is that many MFIs, either because they have not become sustainable, or because they operate in an unfriendly regulatory environment, are not able to satisfactorily address these three types of connections Access to Micro Finance Services The lack of access to adequate finance for the poor has been a significant research interest to academics and policy makers for developed and developing economies for many years. Both demand side and supply side factors are attributed to the lack of access to finance for the poor (Basu 2005, 2006, Fernando 2007). The key factors which result in lack of access to financial resources are, the stage of financial sector development, financial policy and regulation, level of infrastructure development, availability of collateral, market failure, production risks, and high transaction costs. These factors vary across countries, and even across the regions of a county. When looked at from the supply side, the quality of products and services provided by financial services may not be well suitable to the poor. Their procedures are also complicated and cannot be understood by the poor. Branches of formal financial institutions are located in city areas. Financial services are not available within a reasonable distance (Fernando 2007). Therefore, the rural poor depend on informal sources particularly for their financial needs. High transaction costs of delivering financial services to rural people limit the access of these people to formal financial services. Theoretically asymmetric information, which causes adverse selections and moral hazard 4

5 problems, create high transaction costs (Ganbold 2008). Lenders lack of knowledge of their clients reinforces their perception of the high risks involved in lending to poor people. Besides, financial institutions often find that processing small loans is inefficient. They lack the techniques such as credit scoring to lower the costs. As a result financial institutions gain little or no profit by serving rural poor. Information costs for providers and users are high because the rural transportation and communication infrastructure is usually less developed (Nagarajan and Meyer, 2005). From the demand-side, the key reason is lack of need, which can be broadly attributed to the low level of education of the poor (Basu 2006) and lack of business development training (Ganbold 2008). Rajan and Zingales (2004) have pointed out that finance cannot by itself create opportunities. Good business opportunities and plans would open doors to access to finance. Rural poor have few opportunities, but they face many financial problems. Furthermore, poor people cannot afford high cost (fees and charges) involved in formal financial services (Fernando 2007). However this argument is practically indefensible because poor people rely on informal financial sources, in which poor people pay considerably high fees and charges. Financial institutions also demand collateral, which rural poor borrowers lack. The rural poor tend to have irregular and unpredictable income streams and expenditure patterns. Therefore financial institutions have little interest in dealing with the rural poor. In a nutshell financial institutions are unattractive for several reasons. Financial institutions do not provide flexible and efficient products and services to meet the income and expenditure patterns of rural borrowers. Transactions costs of dealing with financial institutions are notably high for the rural. Access to financial markets is important for poor people. But financial markets, because of their special features, often serve poor people badly. Since poor people often have insufficient traditional forms of collateral (such as physical assets) to offer, they are often excluded from traditional financial markets. Transaction costs are often high relative to the small loans typically demanded by poor people. And in areas where population density is low, physical access to banking services can be very difficult. (World Bank 2005). Transaction costs for providers and users are high because the rural infrastructure is usually less developed (Nagarajan and Meyer 2005). 3. MF in Sri Lanka: a Way Forward? 3.1. Current State of MF Sector and its Development in Sri Lanka 5

6 In Sri Lanka the provision of financial services to low income households has a long history dating back to the early years of the 20 th century. It begins with the enactment of the Cooperative Credit Ordinance in The pioneers in providing financial facilities to the poor were Thrift and Credit Cooperative Societies (TCCSs), which were established as a result of the Ordinance. By about the 1950s, the need to provide credit facilities to the rural poor had emerged as an important issue and in that context, the establishment of Cooperative Rural Banks as banking windows of the Multi- Purpose Cooperative Societies (MPCSs) in 1963 was considered to be an important government initiative. Development of MF sector, in terms of establishment of MF related institutions, was weak in the 1970s. In order to serve the rural poor in remote areas as well as small businesses that lack access to financial services from formal banks, the government established 17 Regional Rural Development Banks (RRDBs) in In addition, during the 1980s, with the enactment of Government s Janasaviya Programme, which was later converted to the Samurdhi programme, MF, in its strict sense, began to be widely recognized in Sri Lanka as a central tool for alleviating poverty and empowering the poor. The expansion of MF activity in the 1990s has embraced all sectors namely governmental, non-governmental and cooperative sectors. Establishment of the National Development Trust Fund (NDTF) in 1991 as an apex lending institution was also another turning point in the MF sector in Sri Lanka. In 1990s and 2000s, several international and local NGOs entered into the MF businesses in Sri Lanka. A recent development in the sector is the establishment of the Lankaputhra bank. The establishment of Sri Lanka Microfinance Practitioners Association in 2009 is another significant step for the industry. As the results of these developments, currently, there are a wide range of institutions that are involved in providing MF services to low income groups (GTZ ProMiS 2008). The formal MF sector in Sri Lanka comprises commercial banks, the National Savings Bank, Regional Development Banks and SANASA Development Bank, which together have almost 900 branches. The semi-formal MFIs are the over 300 Cooperative Rural Banks (CRBs) with 1,196 outlets; approximately 8,500 thrift and Credit Cooperative Societies (TCCS, or Sanasa); 970 Samurdhi Banking Societies; approximately 200 local or international NGO-MFIs; numerous government rural credit programs; pawnshops; and over 4,000 post-offices that collect savings (Wiedmaier- Pfister, and Wohiner, 2004). Informal, or non-institutional service suppliers are also numerous. Some of the more important ones include: savings associations, ROSCAs, funeral or death-benefit societies, traders, moneylenders, input suppliers, friends and relatives. Non-commercial sources likes friends, relatives play a dominant role in the informal sector, while money lender are the second most important source of finance for the informal sector (GTZ ProMS 2008). The CBSL is another key player, which functions as the executing agency for a number of rural credit programs funded by 6

7 various donor agencies and the Government of Sri Lanka. The National Development Trust Fund, which was formerly known as the Janasaviya Trust Fund (JTF) serves as an apex lending organization institution with the funds of World Bank/IDA funds. A recent trend is the commercialization of MF. As a result, commercial banks and registered financial companies have entered into the MF industry. One of the examples is Hatton National Bank s Gami Pubuduwa programme which has served over 70,000 micro enterprises over the years. When factors like savings mobilized and loans granted are taken into account, CRBs have mobilized the largest volumes of micro-savings, approximately 21 percent of the total microsavings (IPS 2005). The bulk of savings of CRBs are deposited in commercial banks and other financial institutions, implying a resource transfer from the rural to the urban sector. Regional Development Banks (RDBs) and TCCSs have mobilized a large sum of savings in recent years. In contrast to the CRBs, RDBs and SANASA, Sarvodaya (SEEDS) and Janashakthi Banking Societies have a relatively lower amount of savings compared to their loan disbursements. Legal constraints on NGOs such as prohibition of savings mobilization and lack of regulation and supervision may have contributed to lower savings by NGOs. In Sri Lanka, Microcredit loans are granted for diverse activities including agriculture, animal husbandry, housing, trade, etc. Out of the total disbursed loan amount of these institutes, a relatively higher proportion have accounted for agricultural activities. Moreover, a significant amount of loans are granted for small industries, commerce and building construction. When taking informal credit market alone, about 58 percent of informal credit has been taken for income-generation purposes and for constructing or purchasing houses (GTZ ProMiS 2008). Having briefly provided an overview of the state of MF in Sri Lanka, it is now appropriate to analyze the stakeholders within the MF sector in the country. The key stakeholders broadly fall into three categories, namely, policy makers and supervisors, financial service providers, and the wholesale facilitators. The licensed commercial banks and the licensed specialized banks, both of which provide MF services fall under the direct supervision of the Central Bank of Sri Lanka. Other supervisory bodies include the Ministry of Samurdhi that supervises Samurdhi Bank Societies and the Ministry of Cooperatives that supervises all the Cooperative Rural Banks. Recent plans have been made in order to harmonize at least to some extent the supervisory activities in relation to MF under a new agency named the Rural Finance Sector Development Agency. The MFIs which operate with a fund base of over 2 million LKR will have to apply for and obtain their license from this agency which will be responsible for the supervision of such MFIs. 7

8 Table 01 Key MF Providers and their Networks (Excluding banks and other formal financial institutions) Institutions No of Outlets Outreach (person) SANASA/TCCS 3794 societies 1 million Samrdhi Bank Societies 1038 societies 2.5 million RDBs 215 branches 1.85 million CRBs and Women s Development Cooperatives million Other MFIs (NGOs/Limited Liability companies/ million Companies limited by guarantee) Total million Note: Total client base of MFIs is difficult to estimate as many institutions do not maintain records. Source: GTZ-ProMIS 2009 Other stakeholders are the financial service providers. In Sri Lanka, as in many other developing countries, providers of MF range from highly sophisticated, well- regulated banks to basic informal systems. At the top layer of the hierarchy of the financial system in Sri Lanka stand commercial banks. However in terms of the supply of MF, less than six of the total of 22 commercial banks, which fall under the supervision of the CBSL, extend services to the low income strata of society. The story is more or less the same with licensed specialized banks (LSB). Currently 14 specialized banks are supervised by the CBSL, 6 of which are state owned regional development banks. Other LSBs include National Savings Bank, NDB Hosing Bank Ltd, SME Bank Ltd, etc. all of which are state owned, and other private banks such as DFCC bank, Ceylinco Savings Bank etc. The LSBs mostly cater only very modestly to the financial requirements of the poor income segments. Another stakeholder in MF and a rapidly developing sub-section of the local financial system is the finance companies. Currently there are 28 finance companies, which have been registered under and are supervised by the CBSL. Out of them, Lanka Orix Finance Co, Ltd provides some financial services to the low-income segment in the country. 8

9 On the other hand, government acts as a major stakeholder in MF, providing credit and savings services to the low- income and poor population directly through Samurdhi Banks and Gamidiriya, both of which, however, are administered under the Samurdhi Authority. Cooperatives are more actively involved in MF in comparison to LCBs and LSBs. This sector envelops 1,539 CRB branches, more than 7,400 TCCSs set up by the SANASA group, and numerous other cooperatives that provide savings and credit facilities to the public. The regulatory body for these cooperatives is the Ministry of Cooperatives. Unregulated providers are the MF providing institutions that are neither licensed nor regulated by the CBSL or the Ministry of Cooperatives and are generally registered as either NGOs, or societies or companies. These make up a good portion of MF sector in Sri Lanka. While there are about 3,400 unregulated cooperatives operating in Sri Lanka, around 250 of them provide financial services. Apart from these institutions, as in many other countries, there are also moneylenders who provide credit at usury rates and pawnshops are also available for the poor to pawn their valuables and obtain their financial requirements. The final set of stakeholders in MF is the wholesale facilities of MF. There are three main wholesale facilities in Sri Lanka all of which are governed by the government. The funding for these wholesale facilities comes through the following donor bodies: NDTF, Susahana and the Isuru Fund. The NDTF gives funding to over 300 MFIs including CRBs, TCCSs, RDBs, other banks and NGOs. Susahana wholesale facility has been created in the aftermath of the Tsunami disaster, and is managed by the CBSL. They own a fund base of US $ 81 million. The main source of their funds come from UNDP and the government. The Isuru Poverty Alleviation MF Project operates with a fund base of US $ 12 million, supported by Japan Bank for International Cooperation (JBIC) through CBSL. Rather than engage in direct MF services which create an unhealthy environment for competitiveness of the MF industry (Senanayake and Premaratne 2006), the CBSL provides funds to regional development banks and a few other MFIs. Having conducted a stakeholder analysis of the MF sector in Sri Lanka, it is now appropriate to analyze the donors of MF in Sri Lanka. A distinct feature in the local MF sector is that a large number of funding agencies support this sector. There are over 40 organizations varying from international donors, public organizations, national and international NGOs to private investors, which are actively involved in MF. Broadly categorized, these funding agencies fall into two segments-domestic and international. Domestic donors include six ministries and at least two private investors while international funders include more than 15 NGOs, 4 multilateral agencies, 9

10 eight bilateral agencies and six international investors. Out of international donors the largest five are the ADB, JBIC, the World Bank, USAID and BMZ. Provided below is a tabular arrangement of the MF donors in Sri Lanka. (WHERE?) Having discussed the stakeholders and funders of MF in Sri Lanka, we now discuss recent trends observed in the local MF sector. A major trend observed in recent years is the improvement in outreach that has been achieved by Sri Lanka in providing MF. According to the survey conducted by the Consultative Body to Assist the Poor (CGAP), the deposit accounts grew from about 10 million in 2000 to over 15 million in 2004, which marks a 51 per cent growth, a commendable increase in just four years. Moreover, by the end of 2004, the volume of deposits stood at about LKR 50 million as opposed to the volume of deposits of LKR 23 million reported in This indicates a growth of over 100 per cent and highlights the fact that the volume of deposits has risen faster than the number of accounts during The number of loans and the portfolio of loans outstanding have also experienced significant growth of 37 per cent and 87 per cent respectively. Table 1 shows the trend in outreach in the local MF sector in Sri Lanka. Table 02 Trend in Outreach Year No of Deposits Volume of Deposits (LKR) No. of Loans Loan Portfolio Outstanding ('000, LKR) ,983 23,250,725 1,626 16,468, ,984 26,337,688 1,878 14,777, ,408 33,710,950 1,846 16,524, ,587 39,687,5542 2,042 21,556, ,102 48,672,310 2,234 29,876,496 Source: Duflos et al 2006 (based on CGAP Survey, 2005) In Sri Lanka, there are MF service providers in almost every district indicating a high geographical coverage. Almost all rural areas are marked by the presence of MF facilities. The island wide average, is one point of financial service per 1,300 inhabitants (Duflos et al., 2006). This coverage is way ahead of the level of outreach in many other developing countries. In Mexico, for instance, there is a point of financial services per every 10,000 inhabitants only (Duflos et al., 2006). 10

11 The highest areas of coverage include Vavunia, Jaffna, Matale, Hambantota, Moneragala and Ampara. These include some of the most underdeveloped districts in the country. On the other hand the lowest coverage areas with more than 2000 people per point of service include Batticoloa, Colombo, Gampaha, and Nuwara-Eliya. Incidentally, included here are some of the relatively developed districts in the country. One reason for these areas to have lower coverage is that they are highly populated. Thus Moneragala which is a sparsely populated district falls under the highest coverage areas while Colombo and Gampaha are more densely populated and therefore fall under the lower coverage areas. Figure 01: Share of Government Loans and Deposits Source: Duflos et al 2006 (Based on CGAP Survey, 2005). Another important trend observed is the higher presence of the government in MF in terms of the market share. The government s share of loans and deposits has risen during the period In 2004, nearly half of the loan and deposit accounts in the MF sector has been owned by Samurdhi Banks and RDBs. According to GTZ-ProMIS (2009), about 65 percent of micro credit in Sri Lanka is provided through the government channels including Samurdhi. The amount of deposits has risen from about 30 per cent to 45 per cent from 2000 to Also, the share of the amount of loans of the government sector has risen by about 10 per cent from 2000 to Figure 01 presents a graphical representation of the share of government loans and deposits in the MF sector. According to the CGAP survey the proportion of loans and deposits have not undergone any significant changes from 2000 to The only exception to this trend is the CRBs, which have reduced their market share in both the number and volume of deposits and loans. Mainly the Samurdhi Program and the RDBs have absorbed this fall in market share. In 2004, RDBs and CRBs accounted for the most number of loans followed by Samurdhi Program and NGOs respectively. In terms of the number of deposits, in 2004, the highest market presence was exhibited by the RDBs 11

12 closely followed by the Samurdhi Program. NGOs showed only a low market share of 8 per cent in this segment. RDBs show a high market presence in the number of loans provided and in the outstanding loan portfolio. However, CRBs and Samurdhi dominate the number and volume of deposits. On the other hand, Samurdhi program has a reasonable presence in both the number and volume of loans and deposits. When the outreach of financial services in general, is taken into account over 60 percent of households that have utilized financial services in recent years, have accessed MFIs such as Samurdhi, RDBs, CRBs, SANASA, and NGOs (GTZ ProMiS 2008). Figure 02: Proportionate Amount of Loans and Deposits No of Deposits in 2004 Accounts Samurd hi, 34 RDBs, 16 NGOs, 8 CRBs, 42 Source: Duflos et al 2006 (Based on CGAP Survey, 2005). One distinct feature of the overall MF system is that there is excess liquidity in the MF sector with deposits being almost double the amount of loans granted. Analyzing the CGAP survey data, it is rather obvious that excess liquidity is highest among CRBs with deposits being approximately thrice the size of loans. Samurdhi also has a markedly high level of liquidity. Such high levels of liquidity represent inefficiency in fund utilization as well as the interest income lost which could have been earned had the excess funds been lent out. Table 03 Deposits and Outstanding Loans Amount of % Loans O/S MFIs Deposits ('000 LKR) ('000 LKR) RDBs SDB CRBs NGOs Samurdhi %

13 Total Source: Duflos et al 2006 (Based on CGAP Survey, 2005) while, RDBs are short of liquidity, in the Sanasa Development Bank and NGOs the amount of deposits are roughly equal to the amount of outstanding loans (see Table 02). Figure 03: Liquidity by Institutional Types Source: Duflos et al 2006 (Based on CGAP Survey, 2005). Another important feature of the local MF sector is the poor quality of its portfolio of assets and liabilities. RDBs report an average portfolio at risk (PAR) greater than 30 days ranging from 6 percent to 9 percent, while the NGOs report PAR greater than 30 days ranging from 5 percent to 25 percent, with most being closer to the 25 percent range.(duflos et al 2006, based on CGAP Survey, 2005). According to this survey, most of the MFIs have appeared to be either unfamiliar with this concept or unable to calculate PAR within their systems which in most cases are manual. In terms of loan size, banks tend to provide larger loans than NGOs or Samurdhi. Amongst commercial banks HNB reports an average disbursed loan size of LKR 80,000. On the other hand, RDBs have a disbursed loan size amounting to LKR 20,000-30,000. NGOs/ companies generally report an average loan size of LKR 5,000-10,000. However, two NGOs have a loan size that is around LKR 25,000. Samurdhi and the cooperatives have loan sizes that range between LKR 10,000-14,000. Over the period NGOs and Samurdhi have catered more to the financial requirements of the low-income groups than the RDBs. Credit plus services which also refer to non-financial services such as vocational training, marketing assistance and other development services are increasingly being recognized as an 13

14 important component of MF. Those services have been a part of the financial package of MFIs. Samurdhi Banks are the largest providers of credit plus services (GTZ ProMiS, 2008). An important development in relation to the MF sector is the increasing awareness of good practice among donor systems. In fact, some donors of funds and international NGOs have started to take the financial systems approach where MF is treated as an integral part of the overall financial system. This trend is evident in the recent project documents of the ADB Rural Finance Sector Development Program (Duflos et al., 2006). Another significant development is the funding agencies effort to better share information in matters related to MF. This in part has been a result of the Tsunami disaster. One example in this direction is the joint sponsorship of the Rural Banking Innovations Project by the People s Bank of Sri Lanka and GTZ. Improvements in information dissemination have been brought about with the creation of the website The establishment of the lankamicrofinance network is another significant development in this direction. On the other hand, International NGOs like PLAN International, hope to adapt the lessons learnt in its successful programs in the Philippines to the Sri Lankan context (Duflos et al, 2006). However, several weaknesses in the local MF sector surfaced in terms of the lack of expertise in MF relative to the significant amount of donor funding coming in to the MF sector, the inflexibility of the funding instruments in the MF sector, lack of monitoring and evaluation systems for MF, lack of coordination among donors, international NGOs and government, the lack of regulatory harmonization among various types of MFIs operating in the country. 4. Methodology This study employs household level data generated by a survey conducted in the North-Western Province in Sri Lanka in The respondents were selected using a multi-stage random sampling method. In the first stage, four Divisional Secretaries were selected. Then a sample of 200 rural households was randomly selected from the pre-selected four Divisional Secretaries for the survey. The sample selection mechanism will be designed using the stratified random sampling technique since gender factor should be taken into consideration. Focus group discussions were conducted in the province involving residents and government officials, to assess the perception of gender with regard to resource ownership, income generation and access to goods and services. In addition, in-depth interviews were conducted with policy 14

15 makers, NGOs involved in gender and community empowerment, and academics involved in gender research to examine their views with regard to intra- and inter HH resource allocations. Having discussed demand-side and supply-side factors for accessing of MF services, from clients viewpoints this study tests the following hypotheses. Older people will have better access to MF services Relatively higher income earners will have higher access to MF services Those who are closer to MFIs will readily access MF services Relatively educated people have higher access to MF services Those who have vocational training have greater access to MF services Collateral is not a significant factor. The factors affecting utilization and their relationship to accessibility to MF were examined by using the logistic model since the dependent variable is a dummy variable. Since the logit model is relatively easy to understand, this study employs a logit probability model. General form of the model is as follows: Y = f(age, Gender, Income, Distance, Interest, Edu1, Edu2, Voc. Coll) Y = 1, if the respondent has accessed microfinance services Y = 0, if the respondent has not accessed such services Age = Age (Years) Gender = Gender (1 if male, 0 if female) Income = Annual income of the household. Distance = Distance to the nearest MFI (meters) Interest = Interest rate on lending Edu1 = Level of education (1 if higher education-above a basic degree qualification, 0 otherwise) Edu2 = Level of education (1 if secondary education between ordinary passed and less than basic degree qualification) Voc. = 1 if having any vocational training, 0 otehrwise Coll = Collateral availability (1 if the respondent has collaterals, 0 otherwise) P Ln 1 P i X i 15

16 Where P represents for the probability of accessing MF services, (1 - P) is for the probability of not accessing MF services, and Xi represents for all the independent variables. 5. Result and Discussion The results of the model shows that 40% of the rural households have accessed MF services and 60 percent of the respondents have not accessed MF. Of these 80 percent of households were headed by males and 20% by females. The highest percentage (46 percent) of the MF clients belonged to the age category of years, while the lowest belonged to the over 55 years category. These findings are not surprising because those who fall into the age group of years are usually those who have more family responsibilities, have more entrepreneurial skills and are also active in the labor-force. Though there is a saying that women are better fitted to utilise MF, this study finds that 60 percent of the MF clients were men. One reason could be that though women attend most of the meetings and activities of the MFIs, they cannot apply for the loan in their own name since whatever property they have belong to their menfolk. Age (years) Gender Income (Rs) Distance (Km) Table 04 Key Information of the Respondents Factor Accessed (%) Not accessed (%) Total (%) < < Male Female < < <5 Km Km 10Km

17 10Km 15KM 15Km 20Km Education Degree or above Primary (ordinary level) or below degree Below ordinary level examination Vocational trainings Yes No Collaterals availability Adequate Inadequate None Occupation Public Private Own business Casual labor Own farm No job MF clients are neither the poorest of the poor nor are they rich. The study shows that the majority of the MF clients (41 percent) belong to the monthly income category of Rs ,000. Some of the MFIs do not cater to the poorest of the poor since they believe in the trickle-down effect and are promoting the self-sustainability paradigm. The results of the study also indicate that the households far away from the MFI seeking access to MF services is much less. Since the MF clients are engaged in daily and casual income earning activities, traveling a long distance would result in their losing their daily income. transaction costs plus opportunity costs effects. High transaction costs are a factor reducing the numbers seeking access to MF services. When the level of education of the clients is taken into consideration, the study finds that a large proportion of the MF clients (64 percent) have obtained primary education. The majority of the clients (89 percent) also have some kinds of vocational trainings obtained from a formal institution. 17

18 Collateral availability seems to be an important factor for accessing MF. Table 03 displays that 53 percent of the MF clients have adequate collateral. The study further finds (not reported) that 74 percent of the respondents who have adequate collateral facilities have obtained micro credit. Table 05 Purpose of Loans and Accessibility Number of clients (%) Purpose of Business start up 16 loans Improve the existing business (or up grade) Regain the business Non-business purposes Accessibility Samurdhi SANASA SEEDs KDB HNB Commercial banks Ceylinco Others Occupation and access to MF are also considered in this study. The results show that the majority of the MF clients (61 percent) are self-employed people (35 percent) or casual workers (26 percent). The explanation for these findings is that most of the MFIs provide their services to the people who have started enterprises or are capable of starting enterprises- (entrepreneurial poor). Accordingly, the study finds that about 58 percent of the MF clients have obtained loans either for improving their businesses or for regaining their businesses. Table 06 Results of the Logit Model: Access to Microfinance Factors Estimated coefficient P-value Predicted Probabilities Age Gender Income * Distance * Interest *

19 Education 1 Education 2 Vocational Training Collateral availability *** 0.024** 0.002* 0.004* * significant p value < 0.01, ** significant p value < 0.05, significant p-value <0.10. The regression results indicate that all variables except age and gender are statistically significant. According to the predicted probabilities, if annual income per household increases by Rs 1000, the probability of accessing microfinance goes up by percent. When the distance to MFI goes down by 1 km the probability of accessing MF increases only by percent, which indicate that distance to MFI is less likely for accessing MF. If interest rate goes down by 1 percent, there will be only percent probabilities of accessing MF. Persons having higher formal education qualification (degree and above), will have a less probability of accessing MF. Meanwhile, for those who have secondary education, the probability of accessing MF is more than 77 percent. A person who has acquired any vocational training, has a high probability of accessing MF (about 80 percent). Where collateral is available, the probability of accessing MF is very high (91.86 percent) 6. Conclusion The findings of the study reveal that the accessibility of MF depends on factors such as the level of household income, distance to MFI, availability of information technology, the rate of interest,the level of education, vocational training, and collateral availability. Among them, availability of collateral is a very strong factor influencing the accessing of MF. According to the findings, most of the respondents who have a basic level of educational qualifications compared to those who have no education and to those who have higher educational qualifications, are likely to access MF. The study finds two reasons for the above relationship. One reason is that compared to highly educated persons and persons with less or no education, persons educated at the intermediate level have also obtained some additional vocational training. The results of the logit model of this study finds that vocational training. is a highly significant factor in accessing MF. Less educated people have poor access to MF because possibly they may have less access to information and formal vocational trainings, and would be unable to follow the complex procedures involved in obtaining credit. Meanwhile the study finds that highly educated people prefer permanent jobs over starting up their own businesses. 19

20 The findings of the study show that most of the people who have accessed MF are not in the extremes of income ranges. Very poor people and people with a high level of income have not sought access to MF. One of the reasons may well be that most of the MFIs focus their programs on the people who are at a low level of income with the objective of raising their level of income: they are the entrepreneurial poor. They also do not focus on the poorest of the poor. Most of the MFIs believe that the poorest of the poor may benefit through the trickle down effects of their credit programs. Since Ceylinco applies Grameen model to deliver MF, it has become the major player. Ceylinco MF providers promote and motivate groups of the poor, use group guarantees, and mobilize compulsory savings. They also have a program to intensively supervise borrowers. Compared with the other MF providers in the surveyed areas, the Ceylinco Grameen has an extensive advertising campaign. In fact, the commercial banks are the least attractive sources of MF services among the low-income people. The key reason could be that less or no additional non-financial facilities are provided by the commercial banks. They also require collateral agreements. This study further finds that most of the MFIs are engaged in business loans with the objective of promoting self employments and SMEs. Nevertheless, the poor require financial assistance for various purposes including education, health, housing,and a smooth functioning of their daily lives.. This study also highlights the fact that distance to MFIs is a significant factor influencing access to MF services by the poor. It implicitly indicates the importance of infrastructure facilities. One of the best ways of dealing with the problem is to develop e-micro finance system or mobile-phone banking. Even though some of the MFIs use the group-lending approach, the availability of collateral is one of the significant factors which influence access to MF. Since MFIs believe in self-financial sustainability, they are reluctant to provide credit facilities without collateral. A system such as micro-insurance will probably be an excellent substitute for collateral requirements. MFIs can also develop a system to build up trust between them and their clients. Micro-savings should also be encouraged.. Further, innovations in information technology and improvement of rural infrastructure can help to reduce transaction costs. Reference 20

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