Effectiveness Of Microfinance In Reducing Rural Poverty: A Case Study Of Selected Districts In Sri Lanka

Abstract

The major objective of this study is to assess the outreach and impact of the microfinance industry in dealing with rural poverty in Sri Lanka taking into account a multitude of factors affecting the performance of microfinance clients and small enterprises. The study is based on a random household sample survey conducted in five districts, and the information gathered from major microfinance providers in the selected areas. By applying the relevant statistical techniques, various hypotheses on the nexus between micro credit and different socio-economic variables are tested in this analysis using quantitative and qualitative information gathered in the field. The findings of this study cast doubts on the popular belief that microfinance fosters small enterprises, and thereby uplifts the standard of living of the poor. Factors such as unprofessional business practices, lack of economies of scale, clients’ risk aversion, inadequate technological and business guidance on new products, non-availability of resources, lack of research and development initiatives and lack of innovation have inhibited the growth of small enterprises supported by microfinance. The unfavourable natural environment, poor infrastructure and weak market linkages have further deteriorated the profitability of these enterprises. Meanwhile, the lack of a proper regulatory and supervisory framework has adversely affected the financial viability of the microfinance industry. Unless the policy makers and microfinance providers address these issues adequately and urgently, it is doubtful whether the household-based small enterprises backed by microfinance could sustain for long in the open economy environment, as clearly proved by the findings of this study.