Poverty focussed development and microfinance:

from The Island

Policies and prospects - Part I

by M U A Tennakoon Ph.D,DSc

Early Policies

Sri Lanka, by the 1980s, possessed substantial achievements in human development in areas such as universal primary school enrollment, a high literacy rate, gender equality, lowered infant and maternal mortality, a high life expectancy etc. largely due to the welfare-oriented development strategies followed since independence in 1948. According to the World Human Development Index, Sri Lanka ranked 99th out of 191 countries. Some of those achievements are in par with those of the middle income countries.

In those development aspects, Sri Lanka has already met some of the Millennium Development Goals towards the turn of the twentieth century. But poverty remains a persistent worry. Out of the urban population, about 8 percent still remains poor. More than 23 per cent of the rural population is living in poverty. Poverty of the estate population is a staggering 30 percent. On the whole, out of the island’s population of nearly 20 million, a fourth or less is still living in poverty.

The welfare oriented inward looking development strategies of the post independent era though bolstered some of the human development indices stated above, they did not sufficiently facilitate a speedy economic growth amidst rapid population growth. The population of 8 million at the time of gaining independence (1948), more than doubled during the next three decades while the economic growth was slow.

It was in the late 1970s that, in place of the welfare-oriented inward looking economic development policy, an outward looking and more open development policy with a growing privatization in consonant with the global free market economic development was adopted. By that time, the slow economic growth, rising prices of imports and declining prices of agricultural commodity exports amidst an increased population, reduced the wealth of the nation, while inequalities of income distribution increased alarmingly, leaving a significant proportion of the population in poverty.

From the 1970s to the end of the 1990s, there was a significant change in the broad direction of economic policies. During this period more liberal trade and industrial policies spanned a higher growth in industry while dynamism waned in agriculture largely due to weak infrastructure. As a result, the income growth has become heavily skewed in favour of Colombo and adjoining districts while poverty persists in rural and estate areas. The economy of the North and East too was undergoing the negative impacts of the conflict.

Decline in foreign investment, falling income from tourism, rising cost of imports, slow economic growth all round etc. caused growing fiscal deficiencies, rising interest payments and declining public investment on infrastructure development (roads, water supply, electricity) and strained the nation’s economy as a whole with widening regional imbalances.

Recent Policies

At the turn of the 1980s, poverty alleviation came to be high in the development agenda. Hence, at the dawn of the 1990s the Janasaviya programme aimed at poverty alleviation was launched. Since then, every successive government attempted to alleviate poverty. The approach of the political party in power from 1977 to 1994 and once again from 2002 to 2004 differed somewhat from that of the political party in power from 1994 to 2002 and once again from 2004 to date. The approach of the former with the exception of the Janasaviya programme, was poverty reduction largely aimed through employment creation in the private sector and encouragement of self-employment creation. It desired urbanization more. In fact the desire (rather the expectation) was to facilitate about 60 percent of the population to be urban by the year 2020. This government, though did not discontinue welfare provisions to the poor, demonstrated a tendency to scale down welfare grants. In other words, it relied less on welfare-oriented development and relied more on competitive open market economic development approach.

In 1994, following the change of government, the new government evolved the Samurdhi programme for poverty alleviation under playing the previous government’s Janasaviya programme. In fact, it first wanted to abolish the Janasaviya programme in favour of the Samurdhi programme. However, in 1996 there was a change of heart and Janasaviya was scaled down by disbanding its functions such as Human Resource Development, Community Development, Strengthening Partner Organizations (POs) and Nutrition Programmes, retaining only the Microfinance Division to continue the lending to the poor under a new microfinance institution called National Development Trust Fund (NDTF).

Way back in 1982, when there were neither Microfinance Institutions (MFIs) nor widespread networks of partner organizations (POs) to liaise with the MFIs to provide microfinance on any wide scale, the Central Bank of Sri Lanka (CBSL) set up a Rural Credit Department, established Regional Rural Development Banks and a Training Institute (Rural Banking and Staff Training College) to train requisite personnel to strengthen its agency portfolio of rural credit besides training personnel for central banking. Even though a central bank is purely a regulatory body, CBSL’s extra effort made to expand the rural credit outreach is continued to the present day largely through foreign funded projects is noteworthy.

Vision for the 21st Century

While direct efforts through the provision of microfinance to the poor increased towards the end of the 20th century, overall economic development efforts too contribute to poverty alleviation. With this belief in 1999, the government declared its vision for the 21st Century where it aimed to : (a) maintain a rate of economic growth of 7-8% per annum; (b) raise the per capita income of Rs. 60,000/- per year ($ 850) to Rs. 175,000 ($ 2,500) by the year 2010; (c) raise the income level of the poorest group by raising their income from the current 4 per cent to 15 per cent by the year 2010; and (d) reduce unemployment to 5 per cent by 2010.

Despite all these policy intentions, by the year 2002, Sri Lanka experienced a negative economic growth. A new government which came into power that year, in its ‘Regaining Sri Lanka’ effort, the policy focus was largely on : a) generating a vibrant Small and Medium Enterprise (SME) sector to take the lead in generating employment opportunities and avenues for production growth and raising income for a large segment of the low income earners; (b) improvement of the SME policy environment (in SME White Paper in 2002) and the establishment of a SME policy unit to monitor SME development, review legislation and co-ordinate donor programmes in the sector; (c) inducement of banks to develop quality credit system suitable for SMEs, ensuring the provision of resources directly to ultra poor communities, with a strong element of community-based mobilization for development (d) the channeling of government subsidies to provide assets (seed capital) in the form of start-up investments, community goods and social capital to augment the resources available to the hard-core poor; (e) vesting the community-based organizations (CBOs) with responsibility, authority and capacity to operate and maintain assets created through community specific investment support; (f) provision of vocational training leadership and personality development training and career guidance to unemployed youth; (g) encouraging banks to forge formal links with the Samurdhi financial institutions while those institutions are required to undertake financial audits as they expand in size; (h) empowering women economically to be effective entrepreneurs by providing facilities to them to produce quality goods in their self-employment in Income Generating Activigties (IGAs) and effectively face the market challenges; (i) supporting microfinance institutions in a way that contributes more towards the development of financial bodies that are sustainable, solvent and secure; (j) re-structuring NDTF to become the apex organization for the development of microfinance with responsibility for the microfinance organizations and complimentary to this was the aim to develop a legal framework that classifies the role and responsibilities of the different organizations involved in microfinance; and (k) encouragement of microfinance entities at the local level to mobilize savings from target communities for investment in IGAs individually or collectively (group-wise).

The ‘Mahinda Chinthana : A Vision for a New Sri Lanka’ introduced in 2006 as a document for development for 10-years aims to increase GDP growth rate over 8 percent (9-10 percent from the 7th to the 10th year) following market oriented economic policies with the domestic aspirations by providing necessary support to domestic enterprises while encouraging foreign investments. It aims to increase economic growth particularly in sectors such as agriculture (4 to 5%), industry (8-9%), services (9-10%) plantation sector, fisheries, livelihood development and social protection, all of which have bearing on poverty alleviation.

There is provisions for gender-balanced development. For instance, in the fisheries sector, livelihood development strategies for women are intended to be established for generating/supplementing IGAs among coastal fisheries communities, and encourage them to promote savings and invest in micro-level IGAs with enhanced institutional micro-credit support. Similarly, in the industrial sector outreach of the formal financial institutions for the delivery of microfinance is to be promoted for the encouragement of the growth of micro enterprises.

Livelihood development and social protection within the context of the ‘Mahinda Chinthana’ has two major components planned – (a) ‘Gama Neguma’ or ‘Village Awakening’; and (b) Samurdhi (Prosperity) programme referred to earlier.

In the former, the concern was more on the improvement of livelihood based rural agriculture and cottage industries in particular with the objectives of : (a) increased productivity ; and (b ) marketing arrangements for the products and improved and expanded markets for traditional crafts. Programmes being launched in this regard include : a) a productivity improvement and marketing programmes; b) 1000 industrial village programmes ; and c) a dairy village programme (‘Kiri Gammana’) with credit facilities up to Rs. 100,000/-.