Focus/Spotlight

Microfinance | Cycle of debt continues

  • Govt. plans relief mechanism
  • Majority of rural women affected

By Maheesha Mudugamuwa

Yasawathi Bandara is a chena cultivator in Kebithigollewa, a remote village to the north of the Anuradhapura District. Having suffered for many years due to the 30-year war while living in a village once termed as a “border village”, her life truly turned upside down when she turned to microcredit in an effort to lift herself out of poverty.

Like thousands of other people in the North Central Province, with most of them being women, Yasawathi could reap the harvest only for a few years, as her cultivation was destroyed due to the prolonged drought many years ago. Since then, she was not in a position to repay her loan, but the microfinance institutions continue to collect the instalments.

Having no other option, Yasawathi obtained another loan from a similar institution to repay her first loan, and then another from some other to repay the second. This continued until she ended up losing her own land and her husband’s motorcycle – the only movable property her family had.

Like Yasawathi, there are many other villagers, especially women, going through the same vicious cycle without having any hope of getting freed from the microfinance debt trap.

A cycle of debt

Microfinance – a new approach of providing financial services to the poor who are excluded from the services of formal financial institutions – is a term that came into existence in relation to the financial market, especially after the mid-1980s with the wide expansion of financial services that were accessible to the poor throughout the world, according to the Hector Kobbekaduwa Agrarian Research and Training Institute.

It offers small loans to people who do not normally qualify for traditional banking credit in order to encourage entrepreneurship. Many argue that people who obtain microcredit quickly sink into an endless cycle of debt, with many lenders charging exorbitant rates of interest or compelling borrowers to pay regardless of the circumstances. Women, who are the main borrowers, were attracted to microcredit as they could obtain the loans easily and quickly.

Nevertheless, the microfinance concept has been a failure in Sri Lanka, as there is no regulatory mechanism or authority to monitor its operations.

Activists, however, blamed the Central Bank of Sri Lanka (CBSL) for not taking any action against the microfinance institutions or to regularise the industry.

Women’s rights activist Attorney-at-Law Radika Gunaratne, who is representing many women across the country in court, as they file cases against predatory microfinance companies, told The Sunday Morning that the institutions were now urging the victims to sign new contracts with the illegal companies.

“This is a new trend; in previous court cases, it has been proven that these companies cannot take any legal action against the victims, as they haven’t signed a proper legally binding agreement. Therefore, they are now signing new agreements,” she stressed. 

Gunaratne stressed that CBSL’s inaction was the main reason for today’s situation of microfinance institutions, as it has always ignored the issue, claiming they did not have the necessary powers to regularise the industry.

“If CBSL doesn’t have the powers, it should get the necessary powers and take action. It is the apex financial body in the country and it should control the financial institutions,” she stressed.

According to her, 99% of microfinance victims are women and the majority of the suicides resulting from the situation has also been committed by women. “That is because the industry targets women; they obtain loans and the loan collectors go behind them, threatening and harassing them, asking for repayments,” Gunaratne added.

Effects on rural economy

“This is a very serious issue which has badly affected the rural economy, and there are thousands of stories involving human rights violations as well as sexual abuse due to the lack of a proper monitoring mechanism,” she noted.

As she explained, the suspension of loans would not help the victims or the rural economy, unless there was a proper mechanism to monitor all microfinancing institutions.

“There was no argument that the victims should pay back their loans, but the problem is that they have paid a lot more than they have obtained. And the interest rates are much higher than the usual. Therefore, they need some kind of relief like rescheduling their loans by cutting down the interest,” she noted.

Continuing her discussion on microfinance, Gunaratne stressed that the Government suspended the loans obtained from banks, which was totally different from what the microfinance institutions are practising.

“The majority of these institutions are not registered with the CBSL or under any government authority. As a result, they are playing in an open market which has no restrictions whatsoever,” she stressed.

Accordingly, out of around 15,000 institutions lending money for poor women at a very high interest rate, only around 100 companies have been registered.

The only two registered banks giving away microfinance loans are Regional Development Bank (RBD) and Hatton National Bank (HNB), Gunaratne said, pointing out that except for a few registered institutions, all others are illegal.

“We’ve been canvassing this illegality for several years, but the authorities have failed to provide a concrete solution,” she continued.

Taking a toll

Microfinancing has been an extremely sensitive issue prevailing in rural areas, claiming at least 170 lives during the past few years.

According to statistics, 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 enjoyed the benefits given by the Government on several occasions. However, according to the CBSL website, only four institutions have been registered with the Central Bank.

The Microfinance Act No. 6 of 2016 provides for the licensing, regulation, and supervision of companies carrying on microfinance business, which are called licensed microfinance companies (LMFCs). LMFCs would be directly regulated by the Monetary Board of the Central Bank.

However, according to CBSL, the Act provides for the registration of Microfinance Non-Governmental Organisations (MNGOs) registered under the Voluntary Social Services Organisations (Registration and Supervision) Act, No. 31 of 1980 (VSSO Act) by the Registrar of VSSO.

According to the Act, a microfinance business is one which accepts deposits and provides (a) financial accommodation in any form, (b) other financial services, or (c) financial accommodation in any form and other financial services mainly to low-income persons and microenterprises.

Accordingly, there are no laws applicable to microfinance institutions which do not accept deposits.

A sigh of relief?

Meanwhile, the Government has implemented a special programme using the existing Samurdhi banking system to provide relief for microfinance victims. Accordingly, the pilot project was recently launched in Anuradhapura and under the new programme, a loan up to Rs. 300,000 will be provided to those forced to settle their debts.

Explaining further, State Minister of Samurdhi, Household Economy, Microfinance, Self-Employment, Business Development, and Underutilised State Resources Development Shehan Semasinghe said that based on the performance of the new programme, the amount would be increased gradually.

“At the beginning, we are planning to issue them an amount of up to Rs. 300,000 so that they can spare that amount in their financial needs. There will be a revolving fund working with the Samurdhi Bank. While giving this option, somebody could say this amount is not enough, but initially, we don’t want to give a lump sum amount. However, if they perform well, we can show that the need is there and that it has been managed well, and we can increase the amount on the instruction of Prime Minister Mahinda Rajapaksa. In the meantime, we are in the process of giving them financial literacy,” he added.

However, when asked about the total allocations, he stressed that the microfinance issue is not prevalent in all districts but only in the Uva, Northern, and North Central Provinces and part of the Central Province, especially the estates. Therefore, the initial amount would be released to the Samurdhi banks and the system would be monitored.

“The 7% low interest scheme loans from Samurdhi banks can also be amalgamated with the system,” he added.

Furthermore, the State Minister stressed that the necessary laws would also be amended and steps have already been taken together with the Attorney General’s (AG) Department.

“We want to have a regulation up to a certain extent. When we have a tough system, we further pave the way for unlawful money lending. We are trying to control the organised companies and people who can be identified, who are in the system,” he added.