Analysis of Lending by Public and Private Micro-Financial Institutions to Microenterprises in Nuwara Eliya

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.