Exorbitant interest rates under ‘microfinance’ name:

• Small private and public actors charging interest rates up to 200% the main problem

  The microfinance industry caters to the micro and small enterprises sectors of the economy, assisting them through the provision of credit, savings and microinsurance. In recent times, a number of social concerns have been raised due to the debt problems that are prevailing in Sri Lanka. This was further emphasised with the onset of the pandemic that resulted in people losing income-generating activities and being unable to pay off debts to the microfinance industry. The State Ministry of Samurdhi, Household Economy, Micro Finance, Self-Employment and Business Development has been in discussions with key industry stakeholders since November 2020 to address the problems in the industry and on how best to regulate it to benefit both the borrowers and the lenders. Anura Atapattu is the President of the Lanka Microfinance Practitioners Association and the Managing Director of Berendina Micro Investment Company, with over 33 years of experience in the field. The Morning spoke to Atapattu on the changes that the Association is proposing to the Microfinance Act No. 6 of 2016 and how to overcome the social problems that have arisen as a result of the sector.    The following are excerpts from the interview.    [caption id="attachment_117408" align="alignright" width="349"] Lanka Microfinance Practitioners’ Association President Anura Atapattu[/caption] What is the Lanka Microfinance Practitioners Association and what sort of services are provided by Microfinance Institutions (MFIs)?    The Lanka Microfinance Practitioners Association is the apex body of the MFIs in Sri Lanka. We started in 2006 and are represented by two different stakeholders: MFIs and service provision institutions (training, e-service providers). The MFIs are further divided into categories of regulated MFIs and Non-Governmental Organisations (NGOs) under the Microfinance Act No.6 of 2016, unregulated MFIs, cooperatives, finance companies, and banks.    We have a policy of accepting members with a minimum of one year of experience in the industry and a minimum number of 1000 borrowers.    Microfinance is a concept that has been evolved to help unbankable people. Bankable people are those who have wealth and assets because banks cannot lend money without a secured guarantee against their money. MFIs serve those who do not have assets and are thus excluded from the banking system. This means that the loan entails three key aspects:   

1. Collateral free - not physical but there are alternatives. Borrowers themselves are guarantors for others  
2. Small-sized loans (Rs. 25, 000 to Rs. 750, 000 under the act) 
3. Door to door service. This reduces the cost to the customers, who may otherwise not be able to go to centralised places of money lending. 

  Briefly, what is the process that is followed to obtain a loan from a MFI?    The clients have to approach the MFI and attend a few meetings. Through that process, the MFI will assess you, your background, your commitment and discipline to the process. For the application of the loan, the client has to find two or three guarantors and prove why the money is being borrowed - whether it is for an income generating activity or an asset building avidity. If it is a non-income generating activity, they have to prove that the loan can be paid back through a permanent income source. For agriculture loans, it is usually six months. Otherwise, the loans are either for 1 or 2 years.    What are the problems in the sector? There are many accusations of exploitation of borrowers within the sector. How do you see it?    If you take the sector 15 years ago, when we started the Association, the industry was mainly handled by the government sector actors, the NGOs, Central Bank programs, and smaller programmes by other banks as well. There was no prominence. When we started the Association, we raised awareness about the sector and showed that it is a service and a profitable sector. But, then the industry was seized by people who were only interested in profits. They came in with higher interest rates than what NGOs and the original institutions were providing. But the argument at that time was that the NGOs had subsidies from international actors and government institutions had government subsidiaries, so the interest rate by the new actors was justified. The other argument was that there was no other option for the poor people who needed money - the other option would be to go to money lenders who charge even a 120% interest rate per year. So this was justified to a certain extent. Therefore, in 2018, there was a large growth which was good to provide an adequate supply.    The three pillars of microfinance are credit, savings and microinsurance. In 2011, with the introduction of the Finance Business Act, savings services without having a license from a regulated authority became an offense. The MFIs who were taking deposits had to stop then. There was a vacuum in the supply so this new supply was useful. But, there was no control.    The multiple loan issue which was brought to light in 2017 and 2018 was due to that. Borrowers also are unaware and agree to multiple loans. In 2018, the previous government introduced a ‘Debt Write Off’ programme which was a disaster for everyone in the sector. This damaged the industry a lot and Rs. 1.4 billion was written off. The government is still giving the capital amount to the MFIs but the interest due was borne as a loss by the MFIs. During that period, other actors like small private and public actors came into the field who were using the term ‘microfinance’ but charging exorbitant interest rates of up to 200%. They still use the term ‘microcredit’ or ‘microfinance’. That is the main source of many of the problems in the industry today.    What is the usual maximum interest rate?    The Central Bank’s interest cap for the regulator is 35% and our Association recommends a maximum interest rate of about 40%. We calculate the interest rate according to the cost of funds and the operational costs, which is higher than that of the banks due to our doorstep service. We as an Association also understand that MFIs should decrease their costs. However, we are also requesting that low cost funds should be made available by the banks. We are sending a letter to the banks asking them to safeguard the funds for the microfinance industry. The other option is for the government to intervene and get low cost funding for the microfinance institutions.    Discussions are ongoing to amend the Microfinance Act. What recommendations is the Association proposing?    The Microfinance Act needs to be amended due to the credit providers who have come in and damaged the industry. So far the Act regulates the deposit component and not the credit side of it. There are a few credit-related regulations like maximum interest but it is not adequate. There needs to be a law saying that you cannot use the micro credit or microfinance terminology unless you are approved by the government.    Also, discussions have been going on to establish a Credit Regulatory Act which is to set up a Microcredit Regulatory Authority in Sri Lanka under the Finance Ministry. However, there are concerns over the cost of setting up an authority. That is a concern for the government. The State Minister of Samurdhi, Household Economy, Micro Finance, Self-Employment and Business Development Shehan Semasinghe said last week that he will appoint a Working Committee, with our recommendations to address the problems in the industry.    How do you propose solutions to the social problems that the industry has created?   One thing is, there are no shortcuts to the social problems that are there. The Debt Write Off programme was a shortcut and it created more problems than it solved. Firstly, there should be a consultative approach to create regulations. Secondly, a central database like a Crib that is used by the banks, should be created to stop people from taking multiple loans. Regulated MFIs should be in the crib or another alternative crib so that MFIs are held responsible for the loans they give to the clients. The MFIs must be responsible and assess the income and ensure they do not take multiple loans. We have proposed that we be linked to the existing crib in the new amendments to the Act.    We do not get any calls to the Association but we do address general problems that are raised over social media. For example, deaths and suicides due to microfinance loans. However, when we conduct our independent research, we see that these claims are unsubstantiated. If we have proof that our members are responsible for this, we would address it. I am not denying the problems that are there, however our members have not been proven to be involved in them. them. We admit that multiple loans are an issue, along with an inability to pay back the loans due to the economy and today, due to the pandemic.    Effective education is also needed. We recommend that television, which reaches the grassroot levels, must be used to educate people on the government regulations and the problems of taking multiple loans. In that way people can learn how to use MFIs to benefit themselves. Debt is a problem in our society but the problem is that if the debt cannot be repaid. Everyone takes debt, however, how debt is taken and used must be regulated. At the least, let the public know that the maximum interest rate authorised by the government is 35% so that people take loans only from those institutions.