Maduka (name changed), aged 26, set herself on fire in June last year after her microfinance debt led to trouble at home with her husband, as she was unable to pay a monthly instalment of Rs. 6,000 while dealing with the constant threats from officers of a Microfinance Institution (MFI). Fortunately, she survived and her infant girl was saved from having to grow up without a mother.
However, this is not the case for many other women who are involved in the microfinance debt trap. The United Nations (UN) in 2021 noted that over 200 women had committed suicide over the previous years due to their inability to pay their microfinance debt.
What is microfinance and who is impacted by it?
Speaking to The Sunday Morning, University of Kelaniya Department of Economics Senior Lecturer Dr. Prasansha Kumari said that the majority of microfinance loan borrowers were low-income families who were unable to access credit in the banking sector due to a lack of requirements such as guarantees and modes of fixed income that were needed for bank loans.
“In microfinance, lending takes place as group lendings in most cases, where individuals within the group become the surety,” she said, adding that this made it easy for low-income families to access microfinance credit.
She noted that loans were generally given for business purposes, but since most low-income families had higher expenses than incomes, the loans were used to repay other loans or for consumption.
She added that this inability to pay instalments due to a lack of proper income pushed individuals to sell their assets or take other loans to repay previous debt, which embroiled them further in the microfinance debt trap.
Dr. Kumari observed that the Grameen programme in Bangladesh founded by Muhammad Yunus provided microfinance loans to groups consisting of up to five women to help with their businesses or self-employment, lifting them out of poverty.
“However, that doesn’t happen in Sri Lanka and in most cases, these loans are taken for consumption, which leads to borrowers becoming trapped in debt,” she said.
Yunus won a Nobel Peace Prize for the Grameen programme and since 2000, it has helped to reduce the poverty in Bangladesh by half.
Dr. Kumari noted that MFIs usually targeted women as their borrowers under the tagline of women’s empowerment.
According to her, based on findings in recent years, most microfinance debtors have been observed in the Northern Province and the Monaragala District, where the lack of financial literacy and inability to read and write has entrapped them in debt.
Microfinance after economic crisis
Speaking to The Sunday Morning, Centre for Poverty Analysis (CEPA) Senior Researcher Gayathri Lokuge said that since the economic crisis in 2022, some MFIs had actually withdrawn from their aggressive lending practices, minimising their promotions given the difficulty in recovering loans.
“The reality was that they could not recover what they had lent,” she noted, however adding that some MFIs still continued their predatory lending practices.
She said that such MFIs went to the doorsteps of people in need of loans after targeting communities in rural areas and then provided loans in the name of business promotion or development.
However, she noted that at the repayment stage, individuals had appeared to have undertaken multiple loans to pay back the initial loans.
Lokuge said that the growing trend of multiple borrowings to repay previous loans had intensified last year and was likely on the rise given the ongoing economic crisis.
She pointed to a 2023 incident where a small estate community in Monaragala had been embroiled in a microfinance debt trap, with most of the families having borrowed from three to four different sources to repay previous loans.
“These loans are taken for business development and not for consumption, but they usually end up being used for consumption, which is when borrowers get into trouble when repaying,” she said.
Apart from giving rise to massive debt and poverty, the microfinance debt trap has also led to family disputes and social disharmony.
Dr. Kumari said that while the number of people applying for microfinance loans had increased during the economic crisis, the disbursement of loans had reduced as people had no way of repaying.
She attributed this to expenses having increased threefold due to inflation and exchange rate depreciation while income levels remained the same.
Although the income of those who take microfinance loans for business purposes increases, there is no significant increase in savings, as the extra income is used for expenses.
Borrowers kept in the dark
Lokuge’s research had uncovered that MFIs used various tactics to keep borrowers in the dark while safeguarding the institutions from any future legal action.
For example, when the interest rates drastically increased in 2022 and 2023, all that the borrowers had received from MFIs was an SMS asking them to contact a person to be informed about the new interest rates.
“Since the SMS was in English, most of the borrowers did not know what it said and those who called the number were unable to get any useful information,” Lokuge said.
The average interest rates charged on these loans had increased from 20% to 40%.
According to Lokuge, another tactic used by MFIs is providing a repayment receipt similar to a bus ticket, issued through a similar machine used by conductors, where the ink on the receipt fades away after a few weeks.
Therefore, these borrowers had no solid proof of repayment and these receipts could not be used in a financial dispute, she noted.
Microfinance Bill and lenders
Speaking to The Sunday Morning, Lanka Microfinance Practitioners’ Association (LMFPA) General Secretary Gnanasiri Abewardhana said that around 75-80% of the proposed Microfinance and Credit Regulatory Authority Bill was favourable for the industry and the people, although several shortcomings remained.
The LMFPA, which has a membership of 65 microfinance lenders, was also involved in sharing their input in the creation of the bill.
Some of the shortcomings listed by Abewardhana included high licensing fees (about Rs. 2 million per entity) and the exclusion of large-scale MFIs such as LOLC and Commercial Credit, which have the largest microfinance portfolio, from the purview of the authority.
Further, he noted that according to the bill, the authority had the power to influence not only an MFI but also its parent company.
Moreover, Abewardhana said that since interest rates of the MFIs would be decided by the authority, players who could maintain low margins would survive in the market.
He however noted that controlling interest rates was a welcome move as most lenders charged interest rates at will.
Last week, a protest organised by several microfinance borrowers’ groups took place before the Fort Railway Station against the bill, where protesters claimed that the bill would affect those already impacted by microfinance debts.
The protesters further claimed that the bill would limit the operation of community finance systems at the village level, as the authority would control the lending amounts and interest rates.
They said that the bill failed to regulate large finance companies such as LOLC, HNB Finance, Commercial Credit, and Nation Lanka, which had created the microfinance debt crisis, instead targeting only small-scale organisations at the village level.
However, Abewardhana said that the authority limiting the creation of new microfinance lenders was a favourable move, since anyone with Rs. 500,000 had started to issue microfinance loans at the village level.
According to State Minister of Finance Ranjith Siyambalapitiya, Sri Lanka has about 11,000 microfinance lenders, out of which only four are registered with the Central Bank of Sri Lanka.
New act to eliminate irregularities in microcredit
Speaking to The Sunday Morning, State Minister of Finance Shehan Semasinghe said that the main intention in introducing this act was to ensure that all the irregularities taking place in the microfinance sector were eliminated.
“Microfinance is very important, but unfortunately many don’t apply pressure when lending without any collateral, so it’s mostly women who become trapped,” he said.
He said that once the act was enacted, anyone engaged in lending activities outside the parameters of the act could be brought before the law.
“We will ensure that we protect the borrower as well as the lender, going forward,” Semasinghe said.
Moreover, he said that according to a survey conducted by the Anuradhapura District Samurdhi Department, 95% of borrowers struggling with microfinance debt were women while the majority of loans had been taken for consumption purposes.
He said the results of this survey were applicable to the situation across the country.
“If you are going to borrow, ensure that you are borrowing from a responsible party,” he urged.
As per the bill, some of the functions of the authority include conducting credit counselling, financial literacy, and awareness programmes on money lending and microfinance for the general public, establishing a complaint handling mechanism to handle the complaints of customers of licensed money lending and licensed microfinance institutions, and maintaining a database of such complaints.
It will also maintain a database of licensed money lenders and licensed microfinance institutions while conducting surveys and research on moneylending and microfinance activities.
Semasinghe said that both microfinance loans and online lending systems had similar issues but that the proposed act may not fully cover online lenders. However, he added that the Government would improve the act to include these lenders or introduce different legislation to ensure that online scams were monitored.
The Microfinance Bill has already been presented to Parliament and the Speaker has announced that there are two petitions challenging it at the Supreme Court. Semasinghe said that it would take 70 days to formulate the required regulations after passing the bill in Parliament following any addition from the Supreme Court determination, after which the authority would be established.