The Central Bank of Sri Lanka has issued Microfinance Act directions requiring all Licensed Microfinance Companies (LMFCs) to implement a structured credit risk management framework and comply with new limits and restrictions on “accommodations” (credit and certain investment exposures). LMFCs must maintain a board-approved credit risk management strategy and comprehensive policy, supported by a governance structure that assigns minimum oversight responsibilities to the Board of Directors and execution and control duties to senior management, including reporting, internal controls, MIS and internal audit. The directions also prescribe minimum process expectations for credit appraisal and approval (including borrower and facility information requirements and credit scoring or grading), measurement (expected credit loss estimation consistent with Sri Lanka Accounting Standards and Sri Lanka Financial Reporting Standards, including staging into Stage 1, Stage 2 and Stage 3 using past-due day thresholds), and monitoring (including stress testing, timely identification and management of credit-impaired loans and a documented write-off policy). On prudential limits, maximum exposure caps are set as a percentage of core capital based on the latest audited financial statements, including 0.30% for an individual borrower, 1.0% for a Community Based Organization (CBO), 0.5% for a group of borrowers and 1.5% for a group of CBOs, alongside an aggregate cap limiting “large” accommodations above specified thresholds to 40% of total outstanding accommodations. Accommodations to the holding company or ultimate parent (and other parties exerting substantial interest), directors, the Chief Executive Officer or General Manager, and specified relatives are prohibited, and the value of cash or gold collateral may be deducted when computing prudential limits. The directions take effect from 1 January 2026, with a transition until 1 July 2026 for implementing the strategy or policy and governance structure requirements. Micro Finance Act Directions No. 07 of 2016 on the regulatory framework for accommodations are revoked from the effective date of the new directions.
Central Bank of Sri Lanka 2025-08-20
Central Bank of Sri Lanka sets credit risk management framework and prudential accommodation limits for licensed microfinance companies
The Central Bank of Sri Lanka issued new directions under the Microfinance Act requiring Licensed Microfinance Companies (LMFCs) to establish a structured credit risk management framework. This includes board-approved strategies, governance structures, and specific prudential limits on credit exposures, with prohibitions on accommodations to certain related parties. The previous regulatory framework for accommodations is revoked effective 1 January 2026, with a transition period until 1 July 2026 for compliance.