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Microfinance and leasing sectors: Public hit by a double whammy 

30 May 2021

By Maheesha Mudugamuwa    Microfinance and leasing consumers around the world have been hit hard by the challenges posed by the Covid-19 pandemic. However, Sri Lankans seem to be the worst affected by the microfinance and leasing sectors.  Most of these victims are currently facing severe financial issues due to the non-functioning of their businesses as a result of the ongoing restrictions imposed by the Government to curb the rapid spread of infections. Yet, the microfinance and leasing players are continuing their operations of collecting monthly instalments, in some cases by using illegal methods such as threatening or by use of force.  Speaking to The Sunday Morning, a women’s rights activist, Attorney-at-Law Radika Gunaratne stressed that both the victims of microfinance and leasing were suffering, as the Government had not yet taken any steps to provide relief for these victims.  “Microfinance victims are the most affected and the Government promised them a solution, but they are still waiting for relief,” she stressed.  As explained by Gunaratne, the issue with the microfinance loans is that the interest rates are much higher than usual. Therefore, the victims need some kind of relief like re-scheduling their loans by cutting-down the interest.  Comparing the interest rates of banks and microfinance institutions, she noted that the Annual Effective Interest Rate (AEIR) of a bank is around 12-13% while for microfinance institutions it is around 35%.  “But the AEIR of the illegal and unregulated microfinance institutions sometimes exceeds 200%,” Gunaratne said, adding that the whole issue is due to the lack of proper laws that govern all money lending institutions in the country.  “The majority of these institutions are not registered with the CBSL or not under any government authority. As a result, they are playing in an open market which has no restrictions whatsoever,” she stressed.  Gunaratne also noted that the interest cap of the registered microfinance institutions is also too much and urged the CBSL to revise it and match it with the interest rates of the banks.  “When we questioned the reasons for the high interest rates, the companies claimed that their operational costs are high and that’s why the rates are high. Obviously, the operational costs are going up when they have to use a number of illegal methods to recollect the loans,” she added.  Microfinance is defined as “provision of financial services to low-income people” by the Consultative Group to Assist the Poor (CGAP) and it brings credit, savings, and other essential financial services to people who are too poor to be served by regular banks, mainly because they are unable to offer sufficient collateral.  According to the Central Bank of Sri Lanka (CBSL), there is a variety of institutions providing microfinance in Sri Lanka, such as licensed banks, licensed finance companies, co-operative rural banks, thrift and credit co-operatives societies, Divineguma banks and other community-based organisations, microfinance companies, and non-governmental organisations that engage in microfinance business.  The Microfinance Act No. 6 of 2016, which came into effect on 15 July 2016, provides for the licensing, regulation, and supervision of companies carrying on microfinance business, which are called licensed microfinance companies (LMFCs). The LMFCs would be directly regulated by the Monetary Board of the CBSL.  Nevertheless, in Sri Lanka, there are about 15,000 microfinance institutions that are illegally operating in the country. However, only 54 companies have been registered with the Microfinance Association and only those who obtained loans from those companies enjoy the benefits provided by the Government on several occasions.  However, according to the CBSL website, only four institutions have been registered with the CBSL; namely, Berendina Micro Investments Company Ltd., Lak Jaya Micro Finance Ltd., Dumbara Micro Credit Ltd., and Sejaya Micro Credit Ltd.  Even though the fate of these two types of victims seem to have many similarities when it comes to the collection of monthly instalments and the actions that are being taken in an event of failure to repay their loans.  Unlike microfinance, the leasing business is regulated in Sri Lanka.  When it comes to leasing institutions, as at 12 April 2021, there are 12 licensed commercial banks, four licensed specialised banks, 41 licensed finance companies, and three specialised leasing companies operating as registered finance leasing establishments in the country, according to the CBSL.  All finance leasing establishments come under the preview of the Finance Companies Act. Banks licensed under the Banking Act and finance companies registered under the Finance Companies Act, are eligible to be registered under the Finance Leasing Act. In addition, public companies registered under the Companies Act No.17 of 1982, having an issued and paid-up capital over a specified amount (Rs. 75 million at present), are considered for registration as finance leasing establishments (FLEs).  Yet, the victims are suffering, as the leasing companies are continuing the use of force or thugs to seize the vehicles of those who failed to repay the agreed monthly instalment.  In June last year, President Gotabaya Rajapaksa instructed the Police to prevent leasing companies from seizing three-wheelers under the Government’s relief scheme. He said that leasing companies must follow the 116/2020 Circular issued on 23 March, announcing that charging instalments from three-wheeler owners should be suspended for six months.  The President pointed out that the process of forcefully seizing vehicles of payment defaulters was illegal, adding that currently, leasing companies forcefully seize vehicles of payment defaulters and then lodge a complaint with the Police.  He said the Police were not informed before the seizure. Hence, the President instructed the Police not to accept complaints lodged following seizure of vehicles until further notice.  “Leasing cases were among the most recorded cases in the country within the last five years and we don’t see any reduction this year as well. The leasing companies are continuing to seize vehicles, as they are covered under the Finance Leasing Act,” an Attorney-at-Law Nuwan Bopage told The Sunday Morning.  He stressed that under Section 20 (b) of the Finance Leasing Act, where a lessee fails to make accelerated payments as required under paragraph (a), the companies were given the authority to terminate the finance lease and to recover possession of the equipment provided and recover such damages as would place the lessor in a position the lessor would have been if the lessee had complied with the provisions of the finance lease in accordance with its terms and conditions.  Bopage noted that the law is favourable for the companies and not for the customers who failed to repay the lease. “Around 50% of the cases are coming to a settlement between the lessor and lessee and some other cases get dragged for around five years and during that period, the lessee usually pays the due amount to recover the vehicle,” he added.  According to him, to provide relief for the customers, the Act should be amended.  “In the existing Act, there is no provision for the lessee to demand the selling price of a vehicle that had been seized by the company and a provision to allow the lessee to do so should be included so as to avoid any corruptions,” he added.  Nevertheless, Attorney-at-Law Sampath Perera stressed that even though the leasing companies are covered under the Finance Leasing Act, they cannot justify the use of force and thugs to seize vehicles from customers.  “Under the Act, the companies can take over the possession of the vehicle or any other equipment that had been leased out by that respective company. But the companies are not given authority to use unlawful methods to take over the possession. If such methods amount to any sort of offence explained under the Penal Code, actions can be taken against those companies under the Criminal Procedure Code (CPC),” Perera explained.  Highlighting the Section 27 of the Act, he explained that a lessor who becomes entitled to recover the possession of equipment under the Act or under a provision of a finance lease, may notify such right to the Officer-In-Charge of the Police station for the area within which the equipment is found; obtain the assistance of a Police Officer of that Police station to prevent a breach of the peace in the exercise of that right; and recover possession of the equipment from the place where it is found, if possession could be obtained without resistance from the person in possession of the equipment or where it is not in the possession of any particular person, without resistance from any person.  When the lessor fails to recover possession of equipment under Section 27 or where a lessor has reasonable grounds to believe that it is impracticable to obtain possession under that section, the Section 28 provides that the lessor may make an application to the District Court within whose jurisdiction the finance lease had been entered into, for an order of possession of the equipment.  Perera went on to state that the lessee should be aware of the agreements that they are going to sign when obtaining a leasing facility from a company and they also should know that the property is not owned by them until the full payment is made and therefore, once the agreement is signed, they should know the consequences that they would have to face in a failure to meet the conditions.  “One reason for the increasing number of leasing cases is because of the lack of knowledge about the laws. Most people don’t know what exactly they are signing when they obtain the facility. This has become a serious issue and the companies should read and make the customers understand before they sign the agreement. It is their responsibility,” he added.  Commenting further, Perera stressed that even if the company has legal cover under the Act, the lessor cannot be unduly enriched financially after they take over the possession of the vehicle or other equipment from the lessee.  Last year, the Governor of the Central Bank of Sri Lanka appointed a three member committee to examine and report on the irregularities and illegal activities of the finance and finance leasing businesses, and to make recommendations to curtail such activities. In July, the committee recommended short term and long term proposals of which the short-term proposals are expected to address the current problems by providing more efficient solutions to the problems identified and the long-term proposals mainly focus on amendments to the Finance Leasing Act. Under the long term proposals, the amendments recommended to the Finance Leasing Act by the CBSL are included of expediting the process of recovery of possession of equipment through the court, make the concealment of equipment, a criminal offense, streamline provisions relating to “Offence” in the Finance Leasing Act, prevent the use of the word “Leasing” by illegal operators and transfer or assignment of lessee’s rights.   Further, the committee highlighted the need for broader consumer protection in the financial sector.  In April this year, the CBSL had requested licensed commercial banks, licensed specialised banks, licensed finance companies and specialised leasing companies (financial institutions), to provide concessions for lease facilities obtained by such businesses and individuals for six months or a shorter period, as applicable, commencing from 1 April 2021, considering the difficulties and constraints faced by businesses and individuals engaged in passenger transportation services due to the ongoing Covid-19 pandemic.  Meanwhile, the State Minister of Samurdhi, Household Economy, Microfinance, Self-Employment, Business Development, and Underutilised State Resources Development Shehan Semasinghe said discussions are underway to see the possibilities of offering some sort of relief for those who have obtained microfinance and leasing facilities and are of a situation where they cannot repay the instalments due to the ongoing pandemic.  “We are not yet sure of what type of relief it would be – whether it will be a moratorium or not. But I can assure that some sort of relief would definitely be provided,” he told The Sunday Morning.  Semasinghe also noted that as a permanent solution to the microfinance issue, the Government is planning to amend the Microfinance Act and to regulate the industry.  “The draft bill is already with the Attorney General’s Department and once we get the AG’s opinion we will proceed with it,” he said.  “Also, steps will be taken to regulate the leasing companies and the issue of using force and seizing of vehicles unlawfully by the companies. If an amendment is required to the existing Act, we will consider that as well,” the State Minister added.


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