Impact of Risk Management towards Sustainability of Microfinance Industry in Sri Lanka: A Case Study
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Government of Sri Lanka, Central Bank, Microfinance Institutes, Risk Management, Self Helped Groups (SHG), Microfinance information exchanges (MIX)
Abstract
The purpose of this study is to investigate the relationship between risk management practices and the sustainability of the microfinance industry in Sri Lanka. Given the rapid growth of the microfinance sector over the past two decades, understanding how effective risk management contributes to long-term sustainability is crucial. The study employed a quantitative research design, utilizing simple regression analysis to explore the hypothesized relationship between risk management (independent variable) and sustainability of the microfinance industry (dependent variable). The sample consisted of 376 women microfinance borrowers from three districts in Sri Lanka, selected using a cluster sampling approach. Primary data were collected through surveys, while secondary data were obtained from the Central Bank of Sri Lanka (CBSL), MFI annual reports, and the Microfinance Information Exchange (MIX). The analysis revealed a significant positive relationship between effective risk management and the sustainability of the microfinance industry in Sri Lanka. The results indicate that improvements in risk management practices are likely to enhance the long-term viability of microfinance institutions, ensuring their capacity to continue serving low-income clients effectively. The findings underscore the importance of robust risk management frameworks for the sustainability of the microfinance industry in Sri Lanka. Despite the growth of the sector, without effective risk management, the long-term success and stability of microfinance institutions may be compromised. This study highlights the need for microfinance institutions to prioritize risk management as a critical component of their operational strategies. Policymakers and industry regulators should encourage and support the development of risk management capacities within MFIs to safeguard the industry’s future. Further research could expand the scope to include more districts and a broader range of MFIs to validate these findings and explore additional factors influencing sustainability.
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