Prasansha Kumari* and R.J.M.M.P. Kumari
Affiliation: Department of Economics; University of Kelaniya, Sri Lanka
Abstract: Microfinance, a widely accepted instrument for poverty alleviation, has been used in Sri Lanka for over several decades. Despite its long history and large number of institutions providing microfinance services, there is limited knowledge on the impact of microfinance on poverty alleviation in Sri Lanka. This study fills this gap by examining the impact of non-government microfinance institutions on the indebtedness of poor people in Sri Lanka. The study reveals that non-government microfinance institutions have increased the indebtedness of poor people in Sri Lanka. The high interest rates and rigid repayment terms of these institutions have led to a debt trap, where poor households are forced to take multiple loans to repay previous debts, resulting in a vicious cycle of indebtedness. The study finds that 70% of microfinance borrowers in rural areas are trapped in debt, with an average debt burden of LKR 150,000 per household. This study employed a quantitative research approach, using a simple random sampling method to select a sample of 60 respondents from Ududumbara rural areas. The data was collected through a structured questionnaire and analyzed using descriptive statistics and inferential statistics. The study’s conceptual framework was based on the Joint Liability Theory and Life Cycle Permanent Theory, which provided a theoretical understanding of the relationship between microfinance and indebtedness. The study’s findings have important implications for policy and practice in the field of microfinance. The government and regulatory bodies need to take measures to regulate the interest rates and repayment terms of non-government microfinance institutions and ensure that they provide adequate financial literacy and training to their clients. Additionally, microfinance institutions need to design more effective microfinance instruments that cater to the needs of the poorest and most vulnerable groups. Overall, this study contributes to the existing body of knowledge on microfinance and
poverty alleviation, and provides insights for policymakers, practitioners, and researchers working in this field.
Keywords: Microfinance; Indebtedness; Poverty; Non-governmental Organization.