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Microfinance: Helpless victims entangled in debt trap 

10 Jul 2022

  • Only 54 out of 15,000 institutions registered with Microfinance Association
  • Only 4 microfinance institutions registered with CBSL 
  • Govt. benefits reach only those who have obtained loans from registered companies
By Maheesha Mudugamuwa Kalyani, a 34-year-old resident from Elahara, Polonnaruwa, had recently sold a part of her one-acre land, where her partially-built house is situated, just to pay off a loan that she had obtained years ago from a microfinance institution functioning in the nearby town. “The land was a wedding gift I received from my family. I just wanted to stop them coming to my home every week. They even shout at my husband and my parents too. I borrowed just Rs. 60,000, that was many years ago. I have paid even more than what I borrowed,” she stressed. According to Kalyani, a victim of the microfinance debt trap, she had obtained a loan from one of the key microfinance institutions functioning in her area several years back to launch a small seed shop. During the first few months, she had seen a gradual increase in income but suddenly had to stop her business as she had been asked to return the shop that she was renting. Since then, she had been repaying the loan without a proper income. “My husband is a tenant farmer. We don’t get a fixed income. I have two children. These days we rarely eat three meals, and most days we just eat rice and spinach for lunch. We used to get a good income from paddy farming, but due to the fertiliser shortage, we lost our harvest,” she lamented. Microfinance trap Like Kalyani, many women in Polonnaruwa and across the country, especially in rural areas, are selling their valuables to pay off their debts to uncontrolled microfinance institutions. Many borrowers charged that they had paid twice the value of the money that they had borrowed before they stopped paying off the debts. The money collectors attached to these institutions frequent these villages to collect their interest or the money owed. While recently there has been a decline in these collectors coming to villages, the companies have however commenced filing litigation against these poor rural women. It is understood that there are about 15,000 microfinance institutions illegally operating in the country, out of which only 54 companies have been registered with the Lanka Microfinance Practitioners’ Association. Only those who obtained loans from these registered companies have enjoyed the benefits offered by the Government on several occasions. According to the Central Bank of Sri Lanka (CBSL), only four institutions have registered with it. Disturbing trend Social activist Radika Gunaratne, a lawyer actively participating in litigation processes of microfinance victims, stressed that many women had now turned to other ways of earning money due to the current economic crisis. “Many tend to engage as sex workers to earn money. This is a disturbing trend. Even their husbands are helpless. Many have been affected by the ongoing economic crisis. The majority of these villagers are farmers and they have seen a severe reduction in their cultivation recently due to the fertiliser shortage,” she stressed. Gunaratne explained that the microfinance sector had not seen any development over the past several years despite the demands to regulate the sector. There had been a serious public discussion earlier that these microfinance institutions should be brought under a proper set of laws and monitored by the CBSL, but as of now only a few such institutions have been registered with the CBSL. “We haven’t seen much difference over the past few years in this sector. Victims are getting pressurised and abused by these non-registered institutions daily. Most women face difficulties. Due to the ongoing fuel crisis, we have seen a reduction in the collectors going to the villages, but the companies have started to file litigations against these women instead,” she said, adding that litigation cases filed mostly under civil law had accumulated in courts and most of the victims were not getting proper legal representation. A matter of interest When asked about the interest charged by these institutions, Gunaratne stressed that different institutions charged differently and there was no information about the present rates, but with the recent developments in the country the interest rates too must have increased in parallel. She shared that many women around the country were now showing an increasing trend of approaching these institutions due to financial difficulties. In a backdrop where the country’s inflation rates have shot to an all-time high, Gunaratne warned that there was a possibility of an increasing number of suicides in the near future as the situation of these women, who were already in a debt trap, was now worsening due to the ongoing economic crisis. Microfinancing has been an extremely sensitive issue in rural areas, and has claimed some 170 lives over the past few years. According to Gunaratne, most of the victims are not borrowers of a single bank but of several banks as they have borrowed money to pay the loans that they borrowed previously. “This has now become a cycle,” she stressed. Microfinance business As per the law, 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 are directly regulated by the Monetary Board of the Central Bank of Sri Lanka.  The Act provides for the registration of Microfinance Non-Governmental Organisations (MNGOs) under the Voluntary Social Services Organisations (Registration and Supervision) Act No. 31 of 1980 (VSSO Act), by the Registrar of Voluntary Social Service Organisations, according to the CBSL. According to the legislation, a microfinance business is one which accepts deposits and provides financial accommodation in any form or other financial services mainly to low income persons and micro enterprises. However, there are no laws applicable for microfinance institutions which are not accepting deposits. Unregulated microfinance activities may lead to illegal deposit mobilisation, exploitation of customers through excessive interest rates, and unethical recovery methods. Furthermore, poor corporate governance in these institutions could lead to poor repayment rates, high transaction costs, and recurring losses, leading the organisations to distress. Deposit-taking institutions, if not regulated or supervised, pose a threat to financial system stability, as the safety of mobilised deposits is not ensured, according to the CBSL. The Central Bank has also identified that low confidence in the financial sector will adversely affect financial system stability, maintenance of which is one of the two main objectives of the Central Bank of Sri Lanka, as provided in the Monetary Law Act (Chapter 422) and therefore it is necessary to regulate and supervise the aforesaid unregulated entities engaged in microfinance business in Sri Lanka.  


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