IN DEPTH STUDY ON SOCIO-ECONOMIC IMAPCTS OF GROWTH IN MICROFINANCE INSTITUTES

By:

N.D.B. Ekanayaka (HD UGC 111025) | M.K.C.U. Gunathilaka (HD UGC 111037) | Adikari A.M.N.N (HD UGC 111004) | Thusharika W.T (HD UGC 111130) | A.G.M.M. Nusaike (HD UGC 111074) | Chathurangi I.V.P (HD UGC 111013) | R.G.S.H. Pushpakumari (HD UGC 111094)

An research project submitted to the National Institute of Business Management in partial fulfillment the requirements for the B.Sc. in Business Management (Special) degree program

Supervisors: Ms. Leshika Samaraweera | Ms. A. I. F. Perera | Ms. Thilini De Silva

National Institute of Business Management, Colombo. March, 2012.

Authorization
We hereby declare that we are the sole author of this research project. We authorize the National Institute of Business Management to lend this dissertation to other institutions or individuals for the purpose of scholarly research. We further authorize the National Institute of Business Management to reproduce the dissertation by photocopying or by other means, in total or in part, at the request of the other institutions or individuals for the purpose of the scholarly research.

Mr. N. D. B. Ekanayake. (Group leader)

Acknowledgment
Over the last two decades the outreach of microfinance providers to formerly unbanked people increased tremendously. Through better adapted financial products and continuous innovation and learning many MFIs were able to improve their efficiency and as a result have become operationally and financially sustainable while reaching out to a vast amount of people. The study of in depth study on socio-economic impacts of growth in micro finance institutions in Sri Lanka done by B.Sc. in Business Management undergraduates (11.1) as a three month research to fulfill the requirement of CREST program. This research mainly based on secondary data and data provided by Microfinance institutions operating in Sri Lanka 2012. This study mainly focuses into the socio-economic impacts on the Microfinance institutions on their role. More recent studies with improved measurement methodologies such as randomized controlled trials suggest that the impact of microfinance on the target group is more modest than usually believed. These methodologies however have their own limitations, above all the very short time period in which they can reliably measure the changes on a household or a small enterprise over time. For several reasons, which will be explained in the document, we have opted for another approach to measure these changes. Impact is multi-dimensional and requires time to unfold. That microfinance is not the tool to heal all problems as it is sometimes promoted should be clear by now. This however does not mean that the overall socio-economic impacts of growth in Microfinance institutes should be ignored, because it does have significantly positive impact, as also shown by the results of the present study. We would like to thank all stakeholders who have been involved in this study. First and foremost we would like to express our deep appreciation for the support offered by the staff of the Institute of Microfinance that assisted in this study, Sabaragamuwa Development Bank, Thrift and Credit Cooperative Societies (TCCS) Union, Women Development Federation, and Sanasa Development Bank etc... Without their support this study would not have been possible. We also would like to thank the supervisors who guided us into a right path, Ms. Leshika Samaraweera, Ms. A. I. F. Perera and Ms. Thilini De Silva. Finally we thank to Central Bank of Sri Lanka and the Department of census and statistics Sri Lanka for the additional data given.

Executive Summary
The present impact assessment uses cross-sectional data from a household survey of over 300 client households from several regions in Sri Lanka to evaluate the impact of the initial Promotion of the Microfinance Institutes (ProMiS) program phase on microfinance clients. For this purpose some Microfinance Institutions (MFIs) selected during the project period. Those were selected to represent the different institutional backgrounds of the ProMiS partner MFIs during the initial phase. In particular, the effects of microfinance participation on socioeconomic impacts of growth on them, and other determinants are studied explicitly. Several MFIs that have been supported by ProMiS in the first phase of the program have been selected for the socio-economic impact study. On the one hand, the selected MFIs represent different institutional types of microfinance providers. On the other hand, the selected partner MFIs cover all regions of Sri Lanka. The distribution of clients in the impact study in different regions matches the actual share of microfinance outlets in the respective regions. Sabaragamuwa Development Bank is selected to represent Regional Development Banks (RDB), Sanasa and TCCS Union represent Credit Cooperatives, and BRAC Lanka and Women Development Federation (WDF) exemplify NGO-MFIs. Client households employ a variety of different financial products from numerous distinct sources. Overall, clients use on average 1.83 different financial services considering also services provided by other institutions than the MFIs under study. 63% of client households have currently one or more outstanding loans. 92% of client households own at least one savings account and 29% hold at least one insurance policy. Considering only financial services offered by the ProMiS partner MFIs under study, client households use on average 1.42 financial products of the MFI they are client of. 53% currently have an outstanding loan, 81% own a savings account and 8% an insurance police with a ProMiS partner MFI. Mature and recent clients employ more financial services than incoming clients. The measured impact differs across MFIs. For most outcome variables the impact is significant and positive for the majority of MFIs. However, in some cases there is no significant or even negative impact. This confirms the underlying hypothesis that different institutional settings such as lending methodology or target group focus are factors that influence impact. The most significant impact is observed for the two NGO-MFIs that focus their operations on women and relatively poor income segment clients. The observed impact of the Regional Development Bank focusing on a relatively wealthier clientele is rather limited, though it has a strong impact on the revenues of microenterprises. The latter requires a closer look into the data and the macroeconomic changes which have taken place in the North of Sri Lanka since the end of the war in early 2009. These changes should however in principle affect both, the treatment and

the control group in the same way. Hence another explanation is necessary to understand the observed negative impact in the organization. Socio-economic changes among the control group in the post-conflict area of Northern Sri Lanka could potentially have biased the results. A higher proportion of wealthier clients in the incoming client group could be an explanation for the negative impact for TCCS Jaffna clients. This is only an assumption and requires further investigation. However it would mean that the applied methodology of using incoming clients as a control group is not appropriate to measure impact in areas affected by post-conflict changes in the socio-economic environment. Impact of Microfinance Programs, A positive impact on all observed outcome variables such as consumption, income and profits from household enterprises, is observed for clients of both NGO-MFIs BRAC Lanka and WDF who are focusing on female clients. Those two microfinance programs are creating the highest measured overall impact on the client households. The cooperatively organized Sanasa also creates some positive impact on its client household, although the picture is not as clear as for the NGO-MFIs. RDB has a distinct client base that is wealthier on average than the other client households in the sample. In most aspects incoming clients are found to be better off in economic aspects than recent or mature clients. The same is observed for the cooperatively organized TCCS Union Jaffna client households. Inconsistencies between quantitative and qualitative evidence however suggests, that the impact study was not working properly in the post conflict zone TCCS Union is operating. Investments financed by Microfinance Loans, The majority of households financing investments in agriculture, livestock activities or household enterprises stated an increase in income and profits due to the investment. Although those investments seem very profitable, the share of households who actually used any micro loan for an investment in the last year is comparably small. Promotion of those investment purposes might be worthwhile given the positive effect the investments have on client households. Targeting, Comparison of clients mean and median income to national income levels and the poverty likelihoods measured by the PPI reveal that client households are on average not very likely to be poor. More accurate targeting of poor households is desirable. Tools such as the PPI to assess clients poverty level upon admission to the microfinance program can help to better target poor client households.

Literature Review
MFIs are directly effects the low income earners of a country, as they are physically vulnerable, living in dangerous conditions, without strong social safety nets. In 2008 the mid-year population of Sri Lanka was 20.2 million and 23% of Sri Lankan population were under the poverty line. (Institute of Microfinance, 2009) and the Nominal national poverty line 3 was Rs. 3421 (Department of census and statistics, Sri Lanka Jan, 2011). If we go deeper, population below US$ 1 per day is 5.6% and population below US$ 2 per day is 41.6% of the total population of Sri Lanka (Institute of Microfinance, 2009). Poverty is defined as a deprivation of essential assets and opportunities to which every human is entitled, (Asia Development Bank, 2004). Everyone should have access to basic education and primary health services. Poor households have the right to sustain themselves by their labor and be reasonably rewarded, as well as having some protection from external shocks, (Asia Development Bank). Regulator, The Central Bank of Sri Lanka (CBSL) regulates and supervises the commercial and specialized banks, finance companies, leasing companies and primary dealers, MFIs while the Securities and Exchange Commission of Sri Lanka is responsible for supervising the stock exchange, stock- broking and dealing firms, unit trusts, venture capital companies, investment managers, margin providers and credit rating agencies. The Insurance Board of Sri Lanka supervises insurance companies and brokers. CBSL is also responsible for overseeing the major payment and settlement systems. Poverty Status in Sri Lanka, Sri Lanka tends to be known as an anomaly in the SARRC region, due to its high human and social indicators which put it on a par with mid/high middle-income countries, despite its status as a low middle-income country. However, despite good GDP growth in recent years (6.0% in 2005, 7.4% in 2006, 6.8% in 2007 and 6.0% in 2008, Central Bank of Sri Lanka Annual Reports 2005/8), consumption and expenditure poverty levels remain high. More than 4 million people living below the official poverty line. This official poverty line was first introduced in Sri Lanka in June 2004 and the figure is now regularly updated by the Department of Census and Statistics. A sectorally disaggregated view shows the highest levels of poverty occurring in the South (Southern, Uva and Sabaragamuwa Provinces). which registers a 30% head count poverty ratio based on the national poverty line (as compared to Rural: 24.7% and Urban: 7.9%) (DCS, 2002: 15). The poverty maps highlight the close correlation between isolation from social and economic infrastructure,
3 Minimum expenditure per person for a month to fulfill the basic needs Central Bank of Sri Lanka 2009.

cities and markets, and higher levels of poverty incidence. This is borne out in the Estate sector which is particularly isolated from mainstream economic infrastructure. The poverty head count index is not uniform across provinces and districts, and while certain districts that have shown dramatic decreases since 2002, there are others in which poverty reduction has been marginal. According to 2002 data 07 out of 25 districts (Badulla, Hambantota, Kegalle, Matale, Moneragala, Puttalam and Ratnapura) had between 30-37% of their populations in poverty. Of these only Hambantota and Puttalam have shown huge reductions in poverty during 2006 (nearly 20% less) while others show a marginal reduction in the proportion of poor. In the Nuwara Eliya District the poverty head count index has increased significantly since 2002. The data also did not provide a full picture. In terms of income inequality, the relative position of the poor has fallen over the past few decades. Statistics from 2002 reveal that the lowest decile earned only 1.7% of total income, whereas the highest decile earned 37.4% (DCS, HIES: 2002). Less than 1/3 of the population earned around 2/3 of total income, whereas more than 2/3 earned around a 1/3 of the total income. Therefore, while GDP may be rising in Sri Lanka, this growth is not being converted into poverty reduction as the poor's share of that growth is not large enough, and falling. HIES 2006/07 estimated the national poverty head count index to be 15.2% which is a drop from a national poverty head count index of 22.7% in 2002. The data also indicates that urban and rural poverty has decreased while poverty on the estates has increased since 2002. Poverty has further come down from 23% in 2003 to 15% in 2007. (www.statistics.gov.lk). It is indeed difficult to state to what extent microfinance specially of Samurdhi program which targets the poorest segment of the population has contributed to this. No studies or research exist where this variable has been isolated and which shows microfinances contribution to national poverty alleviation. But circumstantial evidence gives enough reason to believe that microfinance both of Samurdhi and other agencies has contributed to this decline. Microfinance in Conflict Environments, Scholars and development practitioners have been worried since the late 1990s, trying to identify best practices from Microfinance Institutions in conflict-affected regions, and conceptualize guiding principles to operate under these particular conditions. However, the majority of research is solely directed towards post-conflict microfinance, whereas literature concerning the establishment and sustainability of Microfinance Institutions amidst conflict has mainly been untouched. Focusing predominantly on technical issues, lessons learnt from these studies, are generally directed towards the operational challenges of matching microfinance supply and demand, as well as client targeting strategies in post-conflict environments.

Even the MFIs contribute to enhance the lifestyle of low income earners in Sri Lanka, still they unable to cover all the issues related to finance of the poor people. Because still nearly half of the Sri Lankan population lives under the poverty line. We found some keys to enhance the lifestyle of the people. Recommendations Demand-Driven Product Development: For the success of microfinance programs, it is essential to conduct comprehensive market research in order to understand the clients needs and their capacity to use financial services. Based on these needs Microfinance Institutions have to adjust products by offering services that people need and are willing to pay for. Additionally, product design and delivery should allow for instability and economic interruptions in order to ensure the quality of services. Operational Efficiency: Quality services should be provided in an effective and efficient way in order to reduce operational costs and as a consequence thereof, costs charged on the clients. Therefore, simplified and standardized processes for providing credit and savings services should be established. To this it is added that operational efficiency is often affected by the lack of experienced personnel, and higher costs and losses at the resurgence of violence. Strong Repayment Discipline: In order to ensure sustainable operations Microfinance Institution s have to ensure a strong repayment discipline among their clients. By giving certain incentives of having continued access to financial services, Microfinance Institution s should make it the clients own best interest to repay their loans timely. Sound Financial Performance: Be it in non-violent environments or post-conflict contexts, another crucial step to sustainability for Microfinance Institution s must be undertaken by charging market-oriented interest rates. Ultimately the rates charged should cover the long-term costs for providing microfinance services. And even though donor funds in conflict-affected areas are initially often larger than in regular development settings, donor start-up funding should not be considered a laissez-faire measure in order to compensate for inefficient and wasteful operations. Efficient financial performance must be ensured from the very start of the establishment of microfinance service provision.

Achieving Scale: The last and fifth principle Larson finds that Microfinance Institution s could fulfill the first four principles and yet lose money if they are working off a small base of clients. Therefore, achieving scale is essential for reaching as many people and simultaneously for establishing sustainable microfinance institutions. The accomplishment of this principle in post-conflict environments though may be limited by low levels of economic activity, lack of trust, displacement of clients or compromised financial systems. Additional Challenges to Face: The discourse above shows that standard sound principles of microfinance even apply in hostile environments. However, Larson and other scholars also depict important aspects that require Microfinance Institution s to adjust to the post-conflict microfinance setting in order to cope with operational challenges, higher costs and a longer timeframe for financial and institutional sustainability. Separate Microfinance from Relief Operations: One principle, highlighted in post conflict microfinance literature is the clear separation of microfinance programs from relief operations. The apparent trade-off between short term relief and quick social impact on the one hand versus long term (financial) sustainability on the other hand should be considered carefully. Engaging in relief activities and microfinance operations at the same time, might bear the risk for low repayment rates, as the services provided by Microfinance Institutions are often confused by the beneficiaries for being grants. Additionally relief activities often include risky income generation activities due to excessive subsidies, which hold a threat to the successful use of microfinance services and the sustainability of the Microfinance Institutions themselves. Limited Human Resources: Microfinance Institutions should intend to hire experienced management and field staff from the start. But as risks for a depleted human resource base loom high during conflict, providing microfinance services often requires intensive training to develop the necessary skills in designing and delivering adequate microfinance-products. Therefore the costs of recruiting, retaining and training staff are significant. Consulting expatriate staff due to the lack of sufficiently qualified staff contributes to the fact that operational costs are likely to be higher in post-conflict environments. A limited human resource base might also reveal problems when trying to assemble a qualified Board of Directors to guide Microfinance Institution.

Advocacy Tasks: In conflict-affected contexts, experienced Microfinance Institutions often find themselves surrounded by newly established and inexperienced governments, donors, and other microfinance practitioners. In order to avoid market distortions due to poorly performing Microfinance Institutions, these knowledgeable Microfinance Institutions often are pushed to engage in consultancies in order to avert the evolution of a non-conducive environment for their own financial sustainability. These advocacy tasks often require significant investments of time for the senior management of experienced, well-performing MFIs and therewith increase their operational costs. Risk Reduction: A major task for Microfinance Institutions to be preoccupied with when offering microfinance services in conflict-affected communities, is the increased level of hostility they are exposed to. Therefore Microfinance Institutions in post-conflict environments must invest considerably and unconditionally in the security of staff, clients, and funds. Taking active precautions. Higher Costs: As the above mentioned points already demonstrate, operating in post conflict environments, the significant increase in operational costs, resulting from higher expenses for labor, investments in advocacy, expensive security measures, and lack of infrastructure has a strong influence on the financial sustainability and is one of the main concerns for Microfinance Institutions in conflict-affected contexts. Lack of Appropriate Regulation for Microfinance Institutions: Microfinance Institutions operate within a number of legal frameworks as described in the chapter 5 regulation. Only 3 Microfinance Institution listed in top 20 have the legal right to mobilize savings. Sathis De Mel (2009) in his discussion paper on Microfinance and Governments Responsibility shows that savings has been recognized as a key financial product required by the poor. Microfinance Institutions were strong and very successful in savings mobilization which is a very powerful instrument in mobilizing the poor. The objective of economic empowerment of the poor necessitated them to be free of debt and dependency on money lenders. Savings was seen as the tool to enhance ones own resources as well as confidence on her way out of indebtedness and poverty. Savings was also used as a form of informal collateral as well as an indicator of financial discipline. The savings is a strong capital base for Microfinance Institutions. Although the acts of parliament within which most of the Microfinance Institutions are registered do not provide legal power, savings mobilization were promoted among Microfinance Institutions by donors as well as government managed poverty

alleviation projects such as NDTF (then called JTF) and small landless farmers credit (ISURU) project. Though this issue was highlighted in many studies such as commercialization of microfinance (2002) indicating that the government fails to enforce laws against microfinance Non-Governmental Organizations mobilizing savings deposits and offers no clear legal path for those institutions subject to prudent supervision. From the recent past, due to the failure of certain private sector as well as Non-Governmental Organizations and Community Based Organizations to honor the withdrawal of deposits by savers, the government is now attempting to strictly control and prevent savings by Microfinance Institutions not authorized to do so. This is a major issue facing Microfinance Institutions including 17 of the top 20 Microfinance Institutions listed in this paper. The microfinance act, which was drafted and was on discussion for the last 2 to 3 years from time to time, has not come out so far. As this is a serious challenge some Microfinance Institutions are pursuing the option of licensing as finance companies or development banks. Only very few can pursue these options as they are costly and need specific capital requirement and changing legal statutes as public companies. Weak Portfolio Quality: The weak portfolio quality has been an issue in the industry for many years. The concern over portfolio quality increased in the industry in the recent past. From the 20 Microfinance Institutions listed in this paper only 10 in the Mix market or those that use other tools measure and report portfolio at risk. Eight out of those 10 Microfinance Institutions, which report Portfolio at Risk, 3 Microfinance Institutions have Portfolio at Risk (30 days) over 5% (refer table 8.6). The issues are lack of understanding on importance of portfolio quality, lack of appropriate loan tracking mechanisms and cultures within Microfinance Institutions to ensure on time repayments. The culture among clients for delayed payments aggravates the issue even for Microfinance Institutions having proper systems and procedures regarding portfolio quality to implement them in the field. The Community Based Organization or village banking methodology where the governance and management of the Microfinance Institutions are also from the community itself, and consist of close relatives and neighbors of borrowers, also make it difficult to take action against default. Issues in the Village Banking Model: One of the biggest challenges Sri Lanka faces is the weakness of the most prevalent model which is the Community banking model as described in the section relating to models. Sri Lanka commenced serious micro finance programs such as Sarvodaya Economic Enterprise Development Services, ISURU, Thrift and Credit Cooperative Society expansion and Janasaviya as early as mid-1980s. However, countries which began much later such as Pakistan have qualitatively much better Microfinance Institutions such as Kashf Foundation. Bangladesh too is way ahead of Sri Lanka from a quality point of view in addition to quantity. The key reasons for

this situation are the constraints placed by society or community based model that was used previously and is being used currently by Sarvodaya Economic Enterprise Development Services, Thrift and Credit Cooperative Society, ISURU, Seva Finance and by smaller NonGovernmental Organizations. Some justify this approach as bringing about both social and economic empowerment. But results of 20 years of work have shown that this model is one of the most important reasons for the poor quality of microfinance sector in Sri Lanka. Sarvodaya Economic Enterprise Development Services experience shows that approximately 40% of the societies that commenced microfinance activities have become inactive. The situation in SANASA societies is similar although the information is not available in a transparent manner. Most of these societies except Sarvodaya societies do not measure at least the repayment rate, which is a ratio easy to calculate though it is not a very sound indicator of efficiency. Similarly most of them do not know the quality of the portfolio, which is the best indicator to measure the quality of portfolio performance. Therefore, this model does not enable best practices of the sector being used; it depends on weak and changing governance of the society leadership. Even now annually large number of Sarvodaya Economic Enterprise Development Services and Credit Cooperative Society Thrift societies wind up due to poor leadership, governance and management. However, the Janashakthi and Samurdhi, which has modified village banking model with centralized management, while empowerment and social development elements are also inbuilt in the methodology found better results. In contrast to this the simple group or cluster approach followed by most Bangladeshi s including ASA, BRAC and Grameen has seen better results during last 2-3 years. A few Sri Lankan Microfinance Institutions have started following this model and this includes Ceylinco Grameen, BRAC Sri Lanka, Lak Jaya and Berendina Micro Finance Institute. It should be noted that both Lakjaya and Ceylinco Grameen at present face problems but these problems are not due to the issue in the model and both are related to the governance related issues. Lack of Transparency: As shown in the MIX market study on performance and transparency even basic data on outreach and profitability data are not available in certain Microfinance Institutions, making it difficult to assess performance levels and sustainability of operations in the sector. Most institutions lack adequate management information systems and are unable to track their loan portfolios and other performance measures. What little data are available rarely adhere to international standards and instead track cumulative indicators, which do not accurately capture institutional performance. The Microfinance Practitioners Association does not collect performance data in regular intervals on member performance although initial survey and data base is established. Only very few institutions are familiar with international best practice reporting standards for microfinance. Another related issue is that the measures of portfolio

quality often varies across organizations, some measure Portfolio at Risk at one day and others track this indicator after 90 days, which makes comparisons of performance difficult. Inadequacy of IT knowledge: Another challenge faced by the sector is automation. Most of Microfinance Institutions large and small moved for automation in the recent past. GTZ- ProMiS supported 8 Microfinance Institutions including 3 RDBs with the banking software called Micro-Banker. Other locally developed banking software such as SENOVA and SOTFWATCH and RAJEEDA are also used by many small and medium size Microfinance Institutions. While this effort has improved the efficiency of Microfinance Institutions it is noted that there are large number of known and unknown issues faced by users. An example of an unknown issue is that loan loss provisioning is not featured in most of these software programs. The major reason is inadequate microfinance related technical know-how with Microfinance Institutions as well as software companies. Lack of understanding on Microfinance Institutions accounting principles and practices and need of loan tracking systems by the software producers has resulted in poor quality products. If these concerns are not addressed immediately there is a danger in managing inaccurate FIS and MIS in Microfinance Institutions. There were certain efforts to design tailored software for larger Microfinance Institutions, which have not brought positive results over the last 2-3 years due to the same reasons. Public Sector Involvement in Retail MF: Widespread involvement of public sector with heavy subsidy on operational costs specially Samurdhi where all staff and administration costs are subsidized by government. This is a major challenge and many Banks and more in the private sector have not commenced microfinance programs due to this challenge of competing with subsidized programs of the government. Non-Governmental Organization, Microfinance Institutions and co-operatives are working amidst this type of challenge as Samrudhi is a huge program, which covers every single Grama Niladari division (lowest administrative division) and is a sizable competitor for all Microfinance Institutions in the country. Fortunately some of the stringent policies adopted by Samurdhi still leave space for others to compete successfully. Lack of suitable Human Resource: Another major factor affecting the sector is lack of competent staff. Due to the paucity of training programs in this sector there are very few trained staff and experienced staff. At senior level such as Managing Director or Operations Director it is extremely difficult to recruit staff due to lack of such experienced senior staff in the sector. However, there are few recent initiatives such as provision of CGAP microfinance training in local languages, microfinance diploma programs offered by Colombo University and Institute of Bankers to address this issue.

In depth study on socio-economic impacts of growth in Microfinance institutions.

Abstract of the study
Microfinance, one of the widely accepted instruments for poverty alleviation throughout the world, has been use used in Sri Lanka spanning for over several decades. Despite the long history and the large number of institutions providing microfinance services particularly to the poor, there is limited knowledge on the impact of microfinance on poverty alleviation in Sri Lanka. This study fills the gap by studying some important impacts relating to microfinance, role of in depth study on socio-economic impacts of growth in micro finance institutions in Sri Lanka. Microfinance services in Sri Lanka have a wide geographical outreach of private operators including NGOs and commercial banks in rural areas rather limited. Although the poor and poorest groups have been reached by Microfinance Institutions (MFIs), a significant proportion of their clientele seems to be form the non-poor groups. Microfinance has helped households in middle quantities to increase their income and assets; helped the very poor to increase consumption expenditure; has worked as an instrument of consumption smoothing among almost all income groups; and has helped women to increase their social status and improve the economic conditions. The study also funds that informal financial market is pervasive across districts and among different income groups. The study recognizes that financial services are alone not sufficient to raise the living conditions (socio-economic) of the poor. To create sustainable micro-enterprise and other economic activities, it is important that MFIs in remote rural areas and encouraging the private and NGO sectors to involve more effectively in microfinance provision.

Introduction
Microfinance/Microcredit Microfinance is the provision of broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.1 It means of extending credit, usually in the form of small loanswith no collateral, to nontraditional borrowers such as the poor in rural or undeveloped areas. This approach was institutionalized in 1976 by Muhammad Yunus, an American-educated Bangladeshi economist who had observed that a significant percentage of the worlds population has been barred from acquiring the capital necessary to rise out of poverty. In recent years, microfinance has been looked upon as an effective instrument for poverty alleviation by many governments, international organizations and donors. The United Nations general assembly, in recognition of significance of microfinance in reducing and improve the socio-economic status, has designated the year of 2005 as the international year of microcredit and microfinance, supporting sustainable access to financial services and promoting innovations and new partnerships to expand the outreach of microfinance through microfinance institutions. The idea of providing credit to the poor as a tool for increasing their income and thereby reducing their poverty too. We found some innovative methods of providing credit to the poor (the usage of social collateral such as a group guarantee instead of physical collateral, progressive lending approach, peer pressure and peer monitoring), mobilization of the savings from the poor and linking credit provisions to savings, social mobilization process that involves awareness building and formation of self-help groups and provision of other services such as insurance to cover risks and distress faced by the poor. In Sri Lanka, provision of financial services to low income households has a long history dating back to the early years of 20th century. Thrift and credit cooperative societies, which were first established in 1911 were the pioneers of providing financial facilities to the poor. It was only in the late 1980s, with the enactment of the governments Janasawiya program2 that microfinance, in its strict sense, began to be widely recognized in Sri Lanka as a central tool for alleviating poverty and empowering the poor. In 1990s, the expansion of microfinance activities embraced all sectors namely governmental, non-governmental and cooperative sectors. The establishment of National Development Trust Fund (NDTF) in 1991 as an apex lending institution was also another turning point in the Microfinance sector in Sri Lanka.
1 Asia Development Bank definition of Microfinance. 2 Janasawiya was established by the government in 1989, with the dual objective of short term income supplementation and long-term employment creation of the low income households.

Currently there is a wide range of institutions that are involved in providing microfinance services to low income groups. These include, co-operative societies, hundreds of local and international non-governmental organizations, state owned and private commercial banks, and Development banks such as Rural Development Banka, Sanasa Development Bank. In addition the governments Samurdhi savings and credit schemes established in 1996 is presently one of the largest social mobilization programs in Sri Lanka, with over 32,000 village level societies and over 1000 bank branches operating island-wide. Moreover the Central Bank of Sri Lanka is another key player, which functions as the executing agency of a number of rural credit programs funded by various donor agencies and the government of Sri Lanka. Despite the large number of institutions involved in providing Microfinance facilities in Sri Lanka, their impact on reducing poverty or improving socio-economic status is not very clear. Hence the study attempts to fill some of these gaps in literature related to microfinance by analyzing its outreach and impacts. The specific objectives of the study are: To analyze Microfinance outreach with regard to the extent, scale, spatial, and depth of outreach in Sri Lanka. To find out the extent and the role of Microfinance impacts on low-income clients in Sri Lanka. To analyze and find out how the growth of MFIs impacts on the socio-economic side of the society in Sri Lanka.

The outreach of Microfinance institutions is widely spread in Sri Lanka. Broadly they can classified into, 1. Formal Institutions 2. Semi-formal Institutions 3. Informal Sources Formal Institutions include commercial banks (both government and private banks). Semiformal institutes include NGOs, cooperative societies and community based organizations. Moreover, a wide range of informal sources exist that provide small scale financial services to individuals and households. Such sources include professional money lenders, shop keepers and Rotating Savings and Credit Associations (ROSCAS). Nevertheless we have defined Microfinance Institutions (MFIs) to include only the institutional sources, that include formal and semi-formal providers providing Microfinance services as their major or important part of their business. The Socio-economic status of Sri Lanka, Its population is estimated at between 18.73 million and 19.4 million depending upon whether one includes citizens living abroad or not. The

preliminary estimates of the 2008 national census estimate a total population of 20.21 million. However, for the purposes of this study we have assumed a total population of 20.21 million as it was necessary to calculate population on a district-by-district basis prior to the release of the total census estimates. The average annual growth rate for the period 1984 to 2008 is estimated to be 1.14 percent. This growth rate is well below that of most countries in the South Asia region and is largely due to the combination of an ageing population and overall improvement in livings conditions (Census, 2008). Sri Lanka has been in the process of liberalizing its economy for a quarter of a century, but still has some way to go. The economy has grown at a rate of five percent in real terms over the last decade. This growth is largely due to reasonable macroeconomic management and progress in trade liberalization, privatization, and financial sector reform. Trade accounts for more than seventy percent of GDP and Sri Lanka is South Asias most open economy. It has a relatively developed capital market infrastructure and a per capita income of US$ 2,389 in 2010, equating to about US$ 5,026 on a purchasing power parity basis. However, the public sector continues to dominate the financial landscape with per capita employment in the public sector being the largest in Asia (CBSL, 2010). It is generally recognized that "In terms of human development Sri Lanka is ahead of other countries with similar economic development status. Literacy levels, access to basic health care and access to education are all well above South Asia averages." (CARE, 2000). However, Sri Lanka's development continues to remain below its potential and the secessionist conflict has exacted a heavy price on the countrys overall performance and poverty persists in the North and East region, the tea plantations and pockets in dry zone areas and urban slums. The Sri Lankan Economy is presently in a fairly dangerous position, exchange rates hike, currency reserves are low, inflation is high, fiscal borrowing is high, the public sector is huge and the economy is supports unsustainable levels of military spending (c.f. ADB, 2001; World Bank, 2001). Between 25% and 45% of the local population live in conditions of poverty, predominantly within rural areas often without access to basic utilities. A Slight improvement of income of the poor may not be much in absolute terms, but the marginal benefits may be much higher in comparison to their rich counterparts. As a result household income has a particular place in all the poverty alleviation programs. The microfinance programs all over the world make attempts to raise the level of income of their participants. Sri Lankas microfinance programs are no exception in that a significant part of the effort is geared towards achieving the objective of raising household incomes. Therefore the growth of MFIs and other financial services on income needs to be evaluated to see the extent to which microfinance programs have been successful in alleviating poverty in Sri Lanka.

Conclusion
The Microfinance sector in Sri Lanka which is now performing more than 30 years. The state of Microfinance in Sri Lanka is reliable, but its not good to say in a stable state. Because of the recent social conditions and economic performance is in a slight dangerous state. But the MFIs are working to bring a better outcome of the sector. Mainly Hambantota and Puttalam district peoples lifestyle has been enhanced to a preferable condition, and the Janasawiya and Samurdhi programs came with a positive outcome. Even though there have been certain mishaps are occurring on the sector, But it was not affected the target people deeply, but the outcome and enhancement levels came down. This decline has shown a result on the socio-economic impact of the people. The inflation and interest rates are going high, at the same time the foreign exchange rates also hiked up. Due to this factors the MFIs have to increase their efficiency and effectiveness on the Microfinance sector. Recently the Hatton National Bank came to the sector to work as a MFI, it means the bank focused more to promote Microfinance in Sri Lanka. Not only that, they are getting the Excellence in retail finance services awards (The Asian Banker 2012) for recent several years. The future of Microfinance impacts in Sri Lanka should be enhanced than as it is. However most of the times the awareness of people on certain related issues is not up to a satisfactory level. This might result in possible risks and issues and also the economy might be effected. Therefore according to the study done, we found some recommendations to enhance the service even more. The recommendations have been listed under the literature review. The governing bodies and the MFIs are of the opinion that the rules, regulations and the policies of government are capable to drive the sector successfully.