This paper explores the feasibility and challenges of NGO-led microfinance in conflict affected areas, based on the experiences in Shi Lanka. While NGOs have a distinct advantage to operate in conflict affected environments, capacity constraints and linkages to political network of the conflict actors can affect microfinance-led rehabilitation by influencing their priorities. Also, emergence of hierarchical power structure and complex accountability arrangements can negatively affect community based initiatives by weakening their capacity to organize social and economic activities. The paper argues for more analysis of context specific insitutional and organizational level factors, which can help to devise better rehabilitation interventions.