• UNDP study reveals widespread indebtedness, especially for consumption
• Pawning, money lenders, and informal sources fuel debt cycle

About 20% of Sri Lankan households grappled with indebtedness in the 2022-23 period, borrowing an average of over four times annually for consumption, a UNDP study revealed.

According to the UNDP report on Addressing Household Debt-Induced Vulnerability in Sri Lanka, a study done between 2022 and 2023, based on the Multidimensional Vulnerability Index (MVI), 19.3% of households in Sri Lanka grapple with indebtedness, borrowing an average of 4.48 times annually for basic consumption.

The MVI methodology classifies a household as having a debt problem if members borrow to cover basic consumption, education, transport or medical treatments or resort to pawning jewellery or selling belongings to meet income needs.

The study revealed that 38.5% of households in Sri Lanka have reported accumulated debt from diverse sources.

The primary catalysts behind incurring debt include economic activities (42.5%), housing construction or repair (32.8%), and fundamental consumption needs such as food, fuel, and other household expenses (19.3%).

When analysing the borrowing landscape, the dominant sources are banks (38.5%, encompassing both state and private institutions), Samurdhi banks (19.2%), pawning (13.5%), money lenders (11.8%), and finance companies (11.2%).

According to this formulation, the percentage of households in debt encompasses both those confronting a “debt problem” or indebtedness and those that are not.

Moreover, it was revealed that for households seeking funds for consumption, the primary sources of debt include pawning (31.1%), money lenders (24%), and banks (23.5%).

“This pattern underscores a reliance on predominantly informal sources by households engaged in consumption borrowing, often susceptible to exploitative practices,” the report said.

Both urban and rural areas in Sri Lanka seem to have a high proportion of households (37% and 38% respectively) that are indebted.

However, a higher proportion of urban households borrow for basic consumption (26.2%) than rural areas (17.9%).

Also, pawning is the second highest source of borrowing (18.7%) in urban areas as opposed to rural locations (12.5%).

Among the provinces, the Eastern province records the highest proportion of households borrowing for basic consumption (54.7%), followed by the Western (21.3%) and Sabaragamuwa provinces (19.3%).