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Microfinance: Macro burden on the vulnerable

01 Jan 2022

By Vinu Opanayake Amidst fully packed streets, malls, wine stores, and supermarkets, long queues were also seen in front of finance companies, microcredit companies, and pawning centres last year, particularly in rural parts of the country. While people flocking to these finance and microcredit companies for financial assistance has become a regular occurrence in Sri Lanka, the queues are usually lengthier during festive times or just before the beginning of new school terms.  The Sunday Morning spoke to a number of people to determine the reasons behind why each of them seek financial assistance from these companies. Nishantha, a 55-year-old male from Puttalam, stated that his daughter has been asking for a new laptop for some time now, but he is unable to purchase it at the moment. Since electronic shops only permit either credit card-based instalments or a monthly instalment plan following the submission of two people as collateral along with utility bills in Nishantha’s name, he remains unable to do either one. Nishantha said borrowing the required amount of money from a microcredit company gives him less hassle, providing a swift process.  Kanthi, a 37-year-old female from Chilaw, has now for years been borrowing money from individuals who lend at an ad hoc interest rate. She said she initially borrowed money to add another room to her house, which earlier had no rooms but only a living room where she and her two children live, eat, and sleep. She is unable to pay the Rs. 0.5 million capital and now for about three years has been paying only the interest rate. The cumulative interest she has paid so far stood at around Rs. 0.25 million for three years, as of December 2021. She is now hoping to put a “Seettuwa” and repay the money at least in the next two years.  The mushrooming of unauthorised lending institutions and an increasing reliance on microfinance by the vulnerable of the community has become an issue that requires long-term solutions in the country. According to a policy paper prepared by the Promotion of Microfinance Sector in Sri Lanka, a programme implemented by the German Technical Corporation, the demand for microfinance exceeds the supply, particularly in the northern and eastern parts of the country. Rising living costs, an increased production for its proper local markets, and the need to expand and rebuild businesses lead to higher demand for loans.  Further supporting its point that the microfinance supply is lower than the demand, the policy paper notes that the supply of microfinance in the North-Eastern region is not sufficient. In Batticaloa, Trincomalee, and Mannar predominantly, non-governmental organisations (NGOs) play a vital role, since only a few co-operatives or commercial banks offer microfinance facilities in these districts.  “Although national-level NGO microfinance institutions (MFIs) such as Sewa Finance, SEEDS, Agro Micro Finance, and several others operate in the North and East, the total contribution of NGOs in the conflict-affected areas is comparatively small,” the policy paper noted.  Meanwhile, an Institute of Policy Studies (IPS) Sri Lanka paper on the microfinance sector of the country stated that despite the large number of institutions involved in providing microfinance facilities in Sri Lanka, their impact on reducing poverty or improving household welfare is not very clear.  “Only a few studies have been undertaken to assess how microfinance has impacted on poverty and living conditions of the households in Sri Lanka. Even these studies, in general, are confined to one or few MFIs/programmes, or to limited geographical locations,” the study noted.  As a result, after obtaining assistance from informal microfinance institutions, many are unable to pay them back, thereby trapping themselves in debt. Mostly, it is women who are the victims of microfinance debt traps.  During a previous occasion, we spoke to two such affected women: Yasawathi Bandara, a chena cultivator from Kebithigollewa in the Anuradhapura District, turned to microcredit to lift herself out of poverty. Unfortunately, Yasawathi was only able to reap the harvest from her land for a few years, as her cultivation was destroyed due to the prolonged drought many years ago. Since then, she has not been in a position to repay her loan, but the microfinance institutions continued to collect the instalments. Having no other option, Yasawathi obtained another loan from a similar institution to repay her first loan, and then yet another from some other institution 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. Another incident was reported from Uduvil, Jaffna. Speaking to us, an individual who wished to remain anonymous, stated that they suffered after taking a loan from a microfinance company in order to complete a house. The absence of sufficient funds resulted in them not just being unable to finish the house, but also caused them to lose all their jewellery and other belongings in the process, as the repayment value of the loan exceeded the loan they had initially taken.  There have also been incidents where women take their own lives. Reliance on microfinance has now apparently aggravated with the economic crisis the country is in. According to local studies done on microfinance, increasing cost of living is considered a primary reason as to why people turn towards microfinance institutions for assistance. Currently, as the cost of living is rising along with inflation, The Sunday Morning spoke to a few people to determine how Sri Lanka could address this issue in the long-term and formalise the sector.  Although we contacted the Central Bank of Sri Lanka (CBSL) for comment last week, most officials were on leave.  Central Bank projects needed However, we were able to reach former Central Bank Deputy Governor Dr. W.A. Wijewardena, who stated that microfinance is a critical issue in Sri Lanka and people are trying to take advantage by exploiting this sector in the country.  “Certain people are exploiting the vulnerable of the community. This exploitation happens all around the world, including in Sri Lanka,” Dr. Wijewardena stated.  Dr. Wijewardena said that during his tenure at the CBSL, he was the director of the first-ever microfinance project in Sri Lanka implemented by the bank; the Small Farmers and Landless Credit Project. He added that it was introduced in four districts in the country with the support of the International Fund for Agriculture Development (IFAD) and the Government of Sri Lanka (GoSL) in 1989.  The project was titled “Isuru”, and the Central Bank adopted a credit plus approach in the implementation of the project in association with Regional Rural Development Banks (RRDBs). The project was instrumental to make the rural bankers aware of many low-cost innovative approaches developed in line with the Grameen model (Bangladesh) Self-Help Group (SHG) methodology.  Isuru became a popular rural finance programme of the relevant RRDBs during the 1990s, and was able to provide financial assistance to over 250,000 beneficiaries in four districts. “Under this project, we recruited a few people as our beneficiaries and took them in for a social mobilisation programme for six months. Once they became bankable and good customers, we began providing them with funds. This is the strategy we have to use in order to avoid mushrooming informal financial institutions taking advantage of the people,” Dr. Wijewardena added.  A paper released by the Central Bank on its 60th anniversary, while highlighting the projects Wijewardena disclosed, stated that the bank was able to bring approximately 600,000 low-income families into the formal financial sector under the microfinance poverty alleviation programmes during the last two decades, and impact evaluation studies have confirmed that 65% of beneficiaries under microfinance programmes were able to cross the poverty line within a three-to-five year period. Speaking further on the microfinance issues, Dr. Wijewardena noted that Sri Lanka’s Samurdhi programme is completely politicised, and that the finance granted to people is more or less equal to the administration cost of their project, which is not sustainable.  Strengthening the microfinance sector We also spoke to the State Minister of Samurdhi, Household Economy, Micro Finance, Self Employment, and Business Development Shehan Semasinghe. When asked about the measures that are taken by the Government to address this long-standing issue, he stated that they have already launched a programme at the Grama Niladhari level to empower 25,000 women entrepreneurs who are also Samurdhi recipients.  The State Minister noted that people require microfinancing on different matters, and most of the time it is for consumption purposes.  “We cannot stop lending for consumption purposes, but we are hoping to discourage borrowing and lending for consumption purposes. We have almost 28,000 community-based organisations that are mostly led by women. We are now planning to use the most active community-based organisation in the villages to act as a local bank. We will start by issuing a sum of Rs. 300,000 for borrowers, and depending on how they perform and manage we can increase the amount. This is given at a monthly interest rate of 1%,” Semasinghe noted.  According to him, government microfinance programmes have a variety of loans with an interest rate ranging from 4-7%. Further, he noted that they have increased the minimum lending amount of Samurdhi and with the collaboration of private sector organisations in the microfinancing field, a helpline for microfinance beneficiaries has been launched.  “Most of the complaints received through this hotline are against microfinance or microcredit companies that are not registered and are not members of the Practitioners’ Association. We can now identify these unregistered businesses that charge higher interest rates from people,” he stated.  Speaking on the informal aspect of the microfinance sector where individuals with money lend at a higher interest rate, Semasinghe noted that an Act addressing these issues is being drafted at the moment, and that it is with the Attorney General. He added that once this Act is passed, the Government should be able to control unauthorised money-lenders.  “Once the Act is passed in the Parliament, we will know who these lenders are. But on the other hand, we also do not want to put a complete stop to private organisations in the microfinance business. But we will discourage them. Too much legalisation will lead to a different issue and it will have a negative impact on society, as people will be lured in by other illegal ways of money lending,” Semasinghe further explained.  When asked whether this microfinance dilemma can be addressed in the long-term, he stated that Samurdhi officials have not been able to reach the public these past two years due to Covid-19, but noted that there will be campaigns this year to make people aware of microfinance facilities made available to them by the Government.  In August last year, the Samurdhi Arunalu Livelihood Development Programme was launched with the aim of strengthening Sri Lanka’s rural economy, and financial assistance worth Rs. 50,000 to Rs. 100,000 was said to be provided to each of these selected families along with the necessary facilities to obtain the equipment they need.  However, the microfinance burden on the vulnerable of the community continues.


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