Microfinance and Conflict in Sri Lanka - Towards a Sustainable Socio-Economic Development in the North and East

This paper attempts to answer the question: “To what extent are microfinance operations possible in conflict-affected areas, and what are the special adjustments that need to be made to project design, in order to potentially contribute to conflict transformation”? The paper states that:

• Microfinance plays an important role in social and political development within conflict-affected environments;
• It helps poor people easily deposit and withdraw savings, thus helping them cope with external shocks and insecurity;
• However, microfinance in conflict includes more risks, higher operational costs, an unfavourable political environment, limited human resources and market distortions.

The paper examines the situation in Sri Lank and finds that:

• Microfinance institutions (MFIs) in the North and East of Sri Lanka face higher risks and operational costs than MFIs in other parts of the country;
• Repayment rates are worsening and there is a complete non-existence of training facilities;
• Demand for microfinance exceeds supply;
• Rising living costs, increased production for local markets, and the need to rebuild businesses lead to higher demand for loans.

The paper concludes that:

• The provision of microfinance services in post-conflict settings requires the same standards as microfinance in a non-violent setting;
• However, microfinance needs to continuously adapt to the rapidly changing requirements and demands in post-conflict and immediate-conflict environment.

The paper ends with a set of recommendations for development partners and practitioners operating in a conflict-affected environment.