Abstract:
The paper evaluates the impact of microfinance on poverty alleviation in the Northern
Province of Sri Lanka. After being the central area of conflict over the last three decades, the
cessation of hostilities has provided the residents of the province the opportunity to rebuild
their lives and recommence their economic livelihood. Since many residents have limited
access to funds, the microfinance product has become a key component in the revival of the
economy in the region. Data was collected and analyzed in 2013, through a structured
questionnaire, from all five districts in the Northern Province where microfinance is offered
by banks and a large number of private financial institutions all competing to offer the
product as the returns and risk on the product are deemed very attractive. The conceptual
model associates beneficiaries‘ income and living standards with the key dimensions of the
microfinance product which include interest cost, credit availability and the credit appraisal
process. An econometric methodology using the ANOVA model was used to assess the data.
The results of empirical analysis indicate a positive relationship between microfinance and
poverty alleviation in the period under study. Awareness levels of the population on the
micro finance product were extremely high. However, a lack of an integrated credit appraisal
system and competition among vendors to attract customers has provided an enabling
environment for possible misuse of the product. Access to low cost funding and high interest
rates has made the product very attractive even for the more established financial institutions,
though the objective of using the product to alleviate poverty has got blurred. The results are
similar to what was found in Bangladesh, where it was found that microfinance not only
contributes to alleviating poverty, but also contributes to overall human development in the
country. However, the results are contrary to what was observed in Indonesia, where it was
found that the impact of micro finance on various household outcomes is generally
insignificant.
