This paper provides an overview of the history of formal sector micro finance services, and examines the demand for and supply of Micro Finance Institutions (MFI), examines the constraints and prospects of such institutions and reviews the role of government and other agencies in facilitating a viable and sustainable micro finance sector in the country. The paper shows that micro finance sector in Sri Lanka suffers from inadequate capacity of MFI's, lack of proper financial structure and defects of the regulatory framework among other things, Support is needed in the areas of training and technical assistance, regulatory and supervisory system development, modification of legal framework, development of financial infrastructure and above all policy support rather than providing funds for on lending purposes.