A policy choice to address the microfinance epidemic
The Sri Lankan economy revealed a principal contradiction during the last two weeks. The Colombo Stock Market was becoming one of the best-performing stock markets in the world. In parallel, the real Sri Lankan economy is collapsing. A suicide of a young woman of 24 years of age, Kumari (name changed to protect identity), trapped in debt along with her five-year-old child, was the premonition.
The soaring stock market represents a minute fraction of the population, whereas Kumari and her child embody the circumstances of the majority of the country. What does this contradiction reveal? Should the finance fetish be allowed to prey on more lives? If not, what should be done? Favoured industry treatment to banking and finance, embedded in the politics and policy of Sri Lanka, has driven a majority of the population – a great number of them being women – into unjust and unpayable debts. The only way to thwart a humanitarian crisis as the real economy goes into a long recession is to alleviate the debt burden and emancipate the people’s capacity for development.
Financial inclusion is an inadequate measure to facilitate women and the poor. In contrast, radical interventions should be made to eliminate structural inequalities and overcome capital academic industrial complexes which legitimise and normalise the claims of the banking and financial lobby. Social security or development cannot be loaned, as contemporary policymakers seem to believe. It is a dangerous policy which would consolidate structural violence that forces people to premature deaths.
The years 2016/17 record the beginning of a rising wave of suicides among women – in some cases, entire families along with small children. Similar to an earlier wave of suicides among farmers in the 1990s, suicides of women were associated with debt – to be specific, microfinance loans. It was equivalent to the suicide epidemic in Andhra Pradesh, India in early 2010.
Women victimised by microfinance in the Northern, Eastern, and North Central Provinces in Sri Lanka, with the support of co-operatives and women’s groups, started protesting against usurious lending practices by microfinance institutions as well as harassment – both verbal and sexual – women undergo at the hands of loan collection officers. Unlike in the case of Andhra Pradesh which overhauled the microfinance market, the suicides in Sri Lanka have only received nominal attention.
Apart from a partial debt waiver and an interest rate cap (as high as 35%), demands of the microfinance victims have gone unnoticed and reduced to election promises. Microfinance companies, on the other hand, have strengthened their foothold and maintain that protests are engineered by a group of people with ulterior motives to tarnish the image of microfinance institutions as sources of poverty alleviation.
The suicide of Kumari along with her child takes place in this context. The Department of Police records that economic hardships, poverty, and indebtedness are regular causes for suicides in Sri Lanka. According to Police Department statistics, around 200 or more suicides, annually associated with economic hardships, poverty, and debt, have become a recurrent phenomenon. This evidence surpasses the numbers that microfinance victims have been quoting. It is just the tip of the iceberg.
The microfinance landscape in Sri Lanka
Irrespective of the surge of complaints and protests, the microfinance industry continues to be seen as a “helpful” financial mechanism to the poor. Multilateral and bilateral donors express more concern in the financial sustenance of the microfinance market than the predicament of indebted low-income men and women who are facing economic fallout and the loss of income.
The leading politicians from the Government who ran elections on the promise of cancelling all microfinance debt argue that private sector financial markets should be protected. The mood in politics and policy was revealed when the Lanka Microfinance Practitioners’ Association (LMPA) hosted a Zoom meeting with State Minister of Samurdhi, Household Economy, Microfinance, Self-Employment, and Business Development Shehan Semasinghe and the Central Bank of Sri Lanka (CBSL) to restore the image of microfinance institutions and demand cheap bulk funds.
According to their narrative, only a handful of lenders engage in dangerous lending, and their biggest problem is with reckless borrowers who have borrowed from multiple companies and haven’t used borrowed credit for entrepreneurial purposes. The industry at large is not to be blamed as they serve a productive function to the Sri Lankan people.
However, the everyday experiences of microfinance borrowers, combined with empirical studies on the microfinance industry in Sri Lanka, narrate a different story. The promotion of the commercialisation of microlending to encourage “innovations” and attract foreign capital in the 2000s has had a transformative effect on the traditional microlenders like co-operatives and community-based organisations. For example, a report by the Asian Development Bank (ADB) in 2002, titled “Commercialisation of Microfinance: Sri Lanka”, actively criticises the proactive role of the government in providing subsidised credit.
According to ADB, state-driven subsidised credit and welfare-oriented credit provided by co-operatives and community-based organisations impede the growth of the microfinance industry and enhance its productivity through commercialisation. The report is prescriptive in the manner in which the approach of the Government and the CBSL should change to allocate space for pro-profit lenders in the private sector.
The ideological push towards pro-profit lending, in combination with the incursion of foreign capital in line with disaster capitalism in the aftermath of the tsunami in 2004 and the end of the war in 2009, exploded the microfinance market in Sri Lanka. For example, the microfinance market expanded from 200 microfinance institutions in the early 2000s to 14,000 by 2015. Lending became a profitable business. The multiplication of lending institutes in the formal and semi-formal sectors led to multiple borrowing.
Another study indicates a high density of microlenders in a grama niladhari division as a cause for multiple borrowing. My fieldwork in Polonnaruwa, Welioya (Manalaru), Gampola, and Nawalapitiya indicates that 57% of people from a sample of 813 people facing difficulties to pay back their debt had more than three loans.
I documented 21 finance companies and 19 microfinance institutions in five divisional secretariats in Polonnaruwa, lending to low-income households apart from Samurdhi, co-operatives, Grameeya, and Rural Development Banks. The transformation of welfarism to debtfarism – forcing the poor to rely on private and costly finance to support social reproduction, under the influence of ADB-like thinking – led the government to gradually withdraw from its social welfare functions. According to the people in debt, the main cause of their indebtedness is disinvestments on co-operatives and state-sponsored credit schemes, as well as the pro-profit shift in community-based organisations.
As much as lending has become a profitable business during the last 20 years, finance companies from the formal sector have had an advantage over commercialisation. Women’s groups engaged in microlending in Hambantota complained that big finance companies are to be blamed for the suicide epidemic and the rural debt crisis. Access to a vast range of foreign capital from multilateral and bilateral donors, venture capital, investment banks, pension funds, as well as asset-backed securitisation has boosted the lending capacity of the big financiers and enabled them to leverage against community-based organisations engaged in the microfinance business.
Despite access to cheap credit, microfinanciers provide the costliest debt in Sri Lanka, even at the regulated interest of 35%. Even though loan rates of the finance and banking sector have drastically gone down in the face of the Covid-19-induced economic disaster, microfinance institutions have not reduced their rates. Apart from the explosion in the lending market, sourcing capital through “innovative ways” such as asset-backed securitisation, also increases the pressure on borrowing companies to increase lending.
Performance targets given to loan officers to issue loans and inducing borrowers to upgrade to higher-value loans are an expression of these practices. Stringent loan conditions which offer little to no space to negotiate or restructure loan agreements push borrowers against the wall, with human and institutional violence forcing them to comply with debt payments. The fear of financial disenfranchisement, which would deny people’s access to formal credit, holds the indebted hostage to microfinance companies. The violence inherent to the microlending mechanism has made poor women the most credible borrowers.
The suicide epidemic as well as concrete evidence for multiple borrowing indicate that the microfinance market in Sri Lanka is exceeding the saturation point. Addressing problems of an overcrowded market that predates on economically vulnerable groups demands more than a Credit Regulatory Act and financial literacy that the Government, the CBSL, and the LMPA advocate for.
A recent action by the Human Rights Watch (HRW) in Cambodia illustrates a case in point. In the face of debt-driven land grabs, harassments, and rights abuses related to microfinance lending, the HRW demanded clarification from the International Finance Corporation (IFC) of the World Bank (WB) on their practice of continuing to lend to an abusive industry.
A way out
People who have fallen prey to the profiteering practices of the microfinance industry have for years now been exposing systemic issues in the microfinance industry, as well as structural issues in the Sri Lankan economy. However, politicians, bureaucrats, and lobbyists more attuned to the requests of the industry have turned a blind eye. Instead of addressing the concerns of the people, the government has been proactively transforming social security mechanisms in a way that it nurtures the private debt market. The state-business nexus has replaced the social contract between the state and the people.
According to CBSL statistics, the micro, small, and medium sectors in the economy accounts for the bulk of value addition to the Sri Lankan economy. The CBSL Annual Report of 2019 documents that household and non-profit institutions serving households account for 48.8% of the gross value addition (GVA). Their contribution exceeds value addition by the government, non-finance sector, and finance sector to the economy combined.
Working women and men from low-income backgrounds play the most crucial role in terms of injecting the economy with remittance and foreign currency. Sri Lanka is a smallholder economy in which women perform a major role. However, disbursement of unpayable debt and other socioeconomic indicators show that these economically productive people are marginalised when it comes to the distribution of wealth.
According to a United Nations (UN) study which calculates household income based on the Household Income and Expenditure Survey (HIES) of 2016, 74% of the population has been living on only Rs. 613 per day before the Covid-19 crisis. The HIES of 2016 itself indicates an acute mismatch between the household income and expenditure for the poorest 50% of the population. Women explaining the everyday struggle with debt say “we forego meals to pay our debt”.
Poor women and men work hard to keep the economy rolling forward. Yet, their hard work takes place in a highly unequal economic system. It is a system that has been systematically dispossessing their meagre assets and wealth. The commercialisation of agriculture under the guidance of the World Bank has destroyed the autonomy of smallholders. Capital intensive agriculture, running parallel to the withdrawal of state investments, has created a private sector monopoly in producing seeds and providing fertiliser, chemicals, equipment and machinery. A few companies, some of them part of finance-led conglomerates, dominate the production chain. This situation is replicated in the supply chain as well.
Instead of creating equitable growth, private sector monopolies in agricultural inputs, technology, and credit have laid the foundation to the development of underdevelopment for the smallholders. Indebtedness and poverty are built into the system despite their hard work. The way out is by breaking the vicious cycle. Active state intervention through investments in agriculture should be made to eliminate private monopolies and democratise production and supply chains. Seed autonomy, guaranteed prices, proper irrigation facilities, storage facilities, and assistance with market access are mandatory to facilitate the way out. Strengthening credit and producer co-operatives along with other community-owned credit mechanisms should accompany the agrarian reinvigoration policy. This is a long-time demand that people in debt have been making.
Structural inequalities will not go away with half-hearted interventions. Living wages, decent housing, strong workplace-based rights, coupled with public education and healthcare will democratise the economy and enhance people’s capabilities. These will help people overcome the precarious conditions in which they are living. Politicians, as well as the business class who want to bring about a qualitative transformation in the Sri Lankan economy, must question why the plantation workers who have been working in the plantations for over 200 years cannot have a living wage, decent housing, and a land of their own. What kind of economic development could be made possible when a substantial portion of the working population is kept in debt bondage?
Debt has long been stifling the development potential of the working people. And above all, it has proven anti-people, and particularly dangerous for women. The informalisation of the economy, accompanied by state-sanctioned entrepreneurial projects, has trapped women into participating in low-waged, unprotected, and vulnerable economic activity. A recent report by Oxfam points out that women in South Asia have faced the highest unemployment rates at 20.4% due to Covid-19 disruptions. It also states that the poor will take more than a decade to recover from the damages.
In light of this, debt cancellation is fundamental to an inclusive development policy. People in debt argue that they have already paid back in full the debt they borrowed. Punitive lending oriented towards the enrichment of finance companies should be held accountable for the household debt crisis. A debt audit would expose the degree of excessive extraction microfinance and finance companies are engaged in. Dumping new loans on top of a pile of old debt will not lead to meaningful investments. New Samurdhi Enterprise Development Loan Schemes which propose to lend loans of up to Rs. 1-2 million, at a 7% interest rate, looms negatively, as it can end up transferring people’s savings to finance companies as debt repayments, instead of making a meaningful impact on development. It could end up further weakening the Samurdhi social security programme.
Everyone aspiring for real development in Sri Lanka should join hands with the victims of microfinance and others from the middle class to rally against predatory lending practices such as leasing, hire-purchase, and housing loans. An examination of the top 30 businesses in Sri Lanka, over two decades, demonstrates how the economy has been skewing towards the finance, insurance, and real estate (FIRE) sectors by concentrating wealth in the hands of financiers. Acquisitions and major expansions by some leading finance companies, over the last couple of years, explains how the productive industrial economic sector has become subordinate to the banking and finance sectors.
An assessment of these proposals would prove to be more people-friendly, cost-effective, and sustainable than expensive financial inclusion measures hyped up by the World Bank, ADB, and pro-finance lobbyists. Women saying “no” to microfinance have been tabling these proposals. Grappling with debt in their everyday life, they have been imagining and developing the alternatives that would liberate them from debtfarism and perpetual dependency that is pushed upon them. It is high time that the Government listens to them.
(The writer is a doctoral candidate at the University of Hawai’I at Manoa, USA and a member of the Liberation Movement)