Abstract:
Microenterprise activities could be considered as one of the best solutions for poor people
to realize their potentials and to improve their economic status. However, access to credit is
a critical issue that influences the development of microenterprises. The Credit Delivery
System (CDS) varies among different lenders and there are differences in terms and
conditions of the loans as well as in lender’s and borrower’s transactions costs. Therefore,
this study was conducted to analyze the lending by public and private micro-financial
institutions to micro-enterprises in the Nuwara Eliya Divisional Secretariat. Based on the
level of involvement, the Samurdhi Development Bank and Ceylinco Grameen Credit
Company Limited were selected to represent the public and private sector.
Ninety microenterprise owners who have borrowed from these two sources were selected
randomly. Primary data were collected through a pre-tested questionnaire. Analysis
revealed that the Ceylinco Grameen Credit Company Limited has a low transaction cost
than the Samurdhi Bank; however it charges a higher interest rate and this leads to a
higher gross unit cost of borrowing. Findings suggest that the transaction cost of borrowing
declines as the size of loan increases. Transaction cost of borrowing increases due to high
travel cost and opportunity cost of borrowing. Closer proximity to the borrower, regular
inspection of microenterprises by the lending staff, timeliness in loan approval and
disbursement have built a strong relationship with the Ceylinco Grameen Credit Company
Limited. Incorporation of these factors into the Samurdhi Bank CDS could reduce the
borrower’s transactions cost.
