Microfinance loans – Ongoing crisis in the North

  • Indebtedness pushes rural communities further down the poverty line
By Sarah Hannan

The northern peninsula is still scattered with partially built houses that have been abandoned, and within one of those compounds, there is a temporary shelter which houses a small family.

Eleven years since the civil war ended, one might presume that the region would have experienced some form of development as was promised to the people by three governments since then that were tasked to uplift the livelihoods of those who survived the war and wanted to start a fresh life in their homes.

However, what they have been left with is projects that were abandoned by the various government entities that turned the region into a ground for failed development work. In came the financial institutions that convinced these people to borrow from them, noting that the way to rapid development was to take microfinance loans.

Today, these very microfinance loans have turned into the biggest burden in their lives, as the lender had not read to them the fine print before offering the loans. The piling of microfinance loans is not a new phenomenon in the region as the financial institutions that facilitate it have been operating in the region since the civil war ended in 2009.

S. Yogeswaree, a widow from Oddusuddan, lives with her son while her daughter is married and lives separately. Her husband and a son died during the war while another son went missing during the war in 2006. As part of a female-headed household, Yogeswaree received a cash grant, from which she purchased a cow and a calf and built a cattle shelter.

We then proceeded towards the partially built house for which the family received funds from the Indian Housing Project. A framed photo of Yogeswaree’s dead son and the ID of her dead husband were placed on top of an altar for remembrance.

When asked as to why the house is not completely built, Yogeswaree stated that the funders would only release the next tranche of the loans once the previous stage is completed. The continued economic downfall over the past years has left Yogeswaree in a fix where she had been lured in to taking microfinance loans to keep her household fed and to purchase the seeds and fertiliser for her vegetable patch and the animal feed for the cow that they obtain fresh milk from.

N. Alahamma, an estranged woman from Anandapuram, was busy shredding areca nuts with the assistance of her daughter. In a female-headed household, she supports four members of her family where two sons, one daughter, and a grandson live, in the land owned by them where a partially built house stands covered by a tarp.

Their original home, which was damaged by the heavy shelling, stands in a sorry state, which they still use as their kitchen; a bed was in the hallway and bags of shredded areca nuts were stocked.

The partially built house was part of a foreign housing project which had not seen completion. When asked as to what happened to the project, Alahamma said that they could not complete the first stage of the house on time and therefore, didn’t qualify for the next tranche of the housing loan.

Their financial status had deteriorated over the years and today, they have fallen victim to the multiple microfinance loans they took to ensure the upkeep of their family and to purchase areca nuts which she cleans and pounds to be sold for beeda.

“We are only able to earn enough to put food on our table and send these children to school. Now, we have several loans to pay and are struggling to find enough money to settle them,” Alahamma informed us.

Like Yogeswaree and Alahamma, there are many such stories in the Northern Province that are untold.

Their current economic plight seems to have been caused by their mismanaged finances and the microfinance institutions offering them loan over loan and trapping them under massive debts.

The Sunday Morning got in touch with Nelumyaya Director and Attorney-at-Law Radika Gunaratne, who works closely with these communities, to understand the situation and how it has changed over the years.

“Microfinancing loan defaulting is not a Northern Province-specific issue, but is an issue that many areas that are poverty ridden in Sri Lanka face. The matter has come to a point where it is now turning into a debt crisis, which the people in power are not paying attention to fix.

“The debt crisis over microfinance loans came to light when the female-headed households in the Northern and Eastern Provinces took to the streets in 2017-2018 to out the many irregularities of the lending institutions.

“Despite the announced partial write-offs in 2018, the Government failed to enact the legalities that entailing the said interest rate reductions and had continued to allow these microfinance institutions to function without proper regulation.

“They (microfinance companies) finally filed legal action against the borrowers and started intimidating them by sending contract killers to make death threats, especially to activists that were working with these communities in the Northern Province,” Gunaratne elaborated.

Attention of the legal framework

While Sri Lanka’s legal framework sees many company lawyers that are willing to represent the financial institution, not many lawyers would willingly appear to defend these poor communities that are facing litigation over collection of loans.

Nelumyaya therefore, is looking at holding discussions with the Legal Aid Commission to inquire as to why these cases cannot be handled by them. “Their mandate is to provide legal assistance to people who come from low-income backgrounds. On one hand, people are not aware that they are entitled to have free legal representation and on the other hand, the lawyers too are not willing to take up cases that would be complex to represent,” Gunaratne explained.

She added that these lawyers are paid a salary by the Government and therefore can easily represent these poor people that are caught in this debt trap.

During a hearing at the Human Rights Commission of Sri Lanka (HRCSL), the Central Bank of Sri Lanka (CBSL), when questioned as to why they cannot regulate these microfinance loan schemes and their institutions, had informed them that they do not have the power to do so.

“How can the CBSL say such a thing if they are the financial regulator of the country? Shouldn’t they look at creating the environment to acquire such powers to regulate non-banking institutions? The previous Government finally drafted a Credit Regulatory Authority Act, but unfortunately it was never taken up by the Cabinet of Ministers for approval. The draft is still with the Legal Draftsman, and we urge the incumbent Government to take it up at the next Cabinet discussion and enact it.”

Once the Act is gazetted, the CBSL will have the powers to ban illegal financiers and put an end to the unethical lending practices that are followed by these microfinance institutions and enforce the provisions stated under the Microfinance Act No. 6 of 2016.

During the drafting of the Credit Regulatory Authority Act, activists and the team from Nelumyaya had pointed out the shortcomings of the said Microfinance Act.

Gunaratne believes that this matter can easily be solved by the people in power, as all it takes is just issuing one circular or a matter of tabling the draft Credit Regulatory Authority Act at the next cabinet discussion and approving it.

Abolish microfinance loans

“We are requesting the authorities to abolish these loans. When we compare the monies that the Government is wasting on unnecessary activities and the amount of foreign loans that the country is receiving, this matter of 2.8 million people can be easily written off.”

When asked about the situation where some of these people have been offered more loans on top of the loan that they have to repay to the microfinance institutions, Gunaratne stated that companies are tricking people into taking a larger loan, saying that they can assist them to pay off the multiple loans they have already taken.

“At this point, it no longer becomes a microfinance loan and becomes a re-loan, where the financial institution compounds all the loans and interest rates together, creating a regular loan with a big instalment payment. The debtor now has to look at settling one large instalment instead of the small instalments that were set out in their microfinance loans, and they don’t even get any credit allowance from the said loan.”

When matters pertaining to these types of loans are taken up in court, their lawyers are no longer representing them over a microfinance loan but rather a massive financial loan. It is a tactic that the financial institutions use to avoid paying compensation.

“We have so far completed 12 such cases, where the victim did not have to pay back a cent to the financial institution. Ideally, when it comes to litigation over defaulted loans, the court would set an instalment amount that the victim could pay if a court order will be issued over that amount. Most of these microfinance loan-related cases were won without charge.”

For instance, when legal action is called on recoveries for microfinance loan amounts of Rs. 20,000, Gunaratne et al. continue to furnish written submissions until it is filed. When this happens, that company has to pay more to their company lawyer than the amount that is to be recovered.

However, when the sum to recover is larger than Rs. 50,000, it becomes a regular loan recovery case. Gunaratne noted that most of the cases that they won were all based on the irregularities she found in the loan agreement. She noted that the technicalities in the agreement was proof enough to win the cases, where the institution had failed to read out the terms of the agreement to the borrower and had also forged their signatures in pages that they have to countersign, stating that they read and understood the agreement.

National Policy Framework

Viyathmaga, the intellectual and professional lobby that creates policies for President Gotabaya Rajapaksa and the ninth Parliament that will be appointed in the coming days, has proposed to release 25% of all Samurdhi balances to the account holders to enhance their purchasing power. Also, they are proposing to introduce a moratorium on capital repayment.

Meanwhile, President Rajapaksa, in Chapter 10 of his National Policy Framework which focuses on transitioning isolated villages to fully integrated economy centres with all facilities, is set to launch the “Punarjeewana Fund” to uplift the economic standards and livelihoods of the people. This is set to grant government-sponsored concessionary loan schemes and agricultural loans to female entrepreneurs trapped under various microfinance schemes and to ensure relief for village women falling victim to unregulated microfinance schemes.

N.B.: CBSL officers were out of reach for comment for this article at the time the paper went for press.

Government action over microfinance debt crisis

(Source: Committee for the Abolition of Illegitimate Debt)

In 2017, government officials and the central bank governor consulted women’s groups, local officials and the co-operatives during a fact finding missions. During this research effort the co-operative movement suggested four steps to address the crisis: decreasing the debt stock through a moratorium on loan payments or debt write off; an interest rate cap to end the exponential increase in debt; alternative avenues for affordable rural credit including through the co-operatives; and policies to increase income streams through collective production as opposed to self-employment.

In response, a one-time partial write off of loans in twelve drought-affected districts and a national interest rate cap on microfinance of 35% were announced. The interest rate cap was instituted in December 2018 after a year of lobbying, and amid objections from the economic establishment that it would be interference in the market.

Following which the Sri Lankan government had to allow a first partial victory to the struggling women: by writing off 45,139 loans. The very particular conditions of eligibility for debt forgiveness decided by the government (having a debt of Rs. 100,000 and having defaulted three times), and the fact that this forgiveness was limited to the 12 districts that were most affected by the drought (which has negative impacts on agriculture) left many over-indebted people out.

“Multi-purposes co-operative societies” were able to revive their rural credit activities on somewhat ethical basis, as funds were allocated by the government and through mobilization of their own resources. They offer loans of similar amounts to the smaller loans offered by microfinance (Rs. 20,000 and Rs. 50,000 respectively), and charge an effective annual rate of 14%, which is much lower than the practices of microfinance enterprises. This figure may still seem high but it is related to inflation, which stood at 7.6% between January 2019 and January 2020.

In the North, credit co-operatives combined their funds with government budget allocations in 2018 and 2019 totalling Rs. 750 million, for a broad credit scheme reaching distressed households to keep them away from predatory lenders. A further allocation of Rs. 1,750 million during the same period is building one hundred small co-operative industries throughout the war-torn Northern Province with the aim of increasing rural employment and livelihoods.

These measures are starting to show some results with fewer complaints of abusive lending practices and rural women avoiding microfinance companies due to greater social awareness. The new co-operative credit scheme during its first year has reached 10% of households in the Northern Province and is likely to reach 25% to 30% of households over the next year if the government’s promised funds are disbursed.