Sri Lanka’s household debt and the pound of flesh
The complexity of the agrarian debt problem and the attractiveness of the idea of debt abolition made the cancellation of microfinance debt a popular campaign slogan during the Sri Lankan presidential election in November 2019. Women affected by these predatory loans have been mobilising for debt cancellation for a few years now. One of the frequent questions raised, in Sri Lanka and elsewhere, is why such debt should be cancelled. People raising such questions reason out: “One should pay their debt!”, “debt cancellation is not practical! Demand something possible!”, and “debt cancellation should not happen, as it could destroy banks and finance companies.”
What happens when debt cannot be paid? Could the creditors take over all of the assets of the debtors? What happens when debt becomes a pound of flesh?
Debt is a structural issue
The traditional land tenure system in Sri Lanka functioned on the basis of debt – it is an age-old economic relation where peasants across generations were bound to the overlord or temple. Pressed with tenurial obligations, peasants lived at a low subsistence level. In the backdrop of the British land policies and the advent of the plantation economy, social relations based on the land tenure system underwent changes, transforming the landlord-tenant relationship to one of landowner-tenant. While the living conditions of the peasants and the poor did not change much, the commodification of land enhanced its exchangeability and created a landed class. The transformation of the traditional society into a plantation-based commercial economy benefited the higher-ups in the social ladder, who were often the traditional élite. Peasants were oppressed, and to them, debt was a perennial problem. The Kandyan Peasant Commission observes that being economically disadvantaged had broad consequences – “no land, no money; no money, no education; no education, no jobs; no jobs, no money for education or the purchase of cultivable land.”
Debt is parasitic
As much as debt is a perennial problem, what is alarming today is the return of pre-capitalist forms of debt. Garbed in modern terms such as microfinance, hire purchase, leasing, gold loans, mobile loans, or online loans, these new forms of debt instruments perform a similar function. As the financial sector expands, it has become profitable to invest in these markets rather than in productive sectors of the economy which generate jobs, raise people’s income, and expand people’s welfare.
Apart from divesting from the productive economy, financial markets have been performing an extractive role. For example, microfinance borrowers in Sri Lanka complain that every rupee earned is spent on meeting weekly or monthly debt repayments. A debt collector working in Kilinochchi employed by a local microfinance company states that he alone collects about Rs. 2-3 million per month from up to 500 customers in the area. On average, a microfinance borrower is in debt to at least three microfinance companies. In a given geographical area, more than 50 registered microfinance companies and finance companies are lending microfinance loans alone. The amount of wealth extracted from villages and the localities of the urban poor in the form of debt collection explains the substandard living conditions in low-income households across Sri Lanka.
Debt is a symptom
Increasing household debt could indicate failures in the provision of essential services and goods. For a country with free education and public healthcare, private household costs on education and healthcare are unusually high in Sri Lanka. To illustrate this, the Household Income and Expenditure Survey (HIES) in 2016 indicated that the average monthly household expenditure on education is Rs. 2,066 and that the average monthly medical expenditure per household in the same year totalled Rs. 2,529.
As one moves away from the metropolitan areas, disparities in the public education and healthcare system become visible. In a rural area in Polonnaruwa, a woman mentioned that schools collecting money for various purposes has become a recurrent phenomenon. As a single mother supporting her child, she had to somehow meet these expenses, as she did not want her child to feel uncomfortable and excluded by the other children.
The socialisation of increasing public debt as a result of various austerity policies pressured on governments by multilateral lending agencies like the International Monetary Fund (IMF), the World Bank (EB), and the Asian Development Bank (ADB) is in return met with increased individual borrowing at the household level. A narrowed focus on the morality of debt obscures problems in the big picture. Instead of evaluating the public policy and state failure, household debt relocates the complete responsibility on the individual and often along gender and ethnic lines. National statistics on household debt illustrate how it is unevenly distributed among women and working-class people from minority communities.
As much as it signals a failure of the public system, debt, particularly increasing debt among the low-income households, explains a stagnant economy. The economy over the years has not been productive for working-class people. As wages continue to stagnate vis-à-vis the cost of living, various debt instruments have come to sustain the subsistence of thousands of low-income and lower middle-income to middle-income households. According to household income and expenditure data in Sri Lanka, the household income of the poorest 50% has stagnated over the last decade. Debt has bridged the gap between stagnating income and rising expenditure.
Debt is not credit
It is assumed that a loan will contribute to creating wealth. This is the rationale advocated by ideologues of microcredit and microfinance like the Nobel Peace Prize laureate who founded the Grameen Bank, Muhammad Yunus, and those who push entrepreneurship as a model of poverty alleviation and development. As stories of Sri Lankan women caught in debt traps caused by microfinance loans tell us, loans alone are insufficient to nurture entrepreneurs. This has been the case in other South Asian and South-East Asian countries where microfinance has become the popular means of financing rural development. There is a plethora of literature providing primary evidence against the alleged empowerment and entrepreneurial capacities of microfinance. Given the precarious nature of low-income households, minor accidents in the family or a change in weather could push them below subsistence which inadvertently affects debt repayments. What happens when a loan becomes a bad debt?
A sovereign state has several options to deal with unsustainable public debt. A state could either opt for debt restructuring, request debt relief, or choose to default on the debt. However, households are left with no alternative but to increase borrowing, either from other microfinance companies, or from the informal money market. Unlike for states, for households, unsustainable debt has become punitive.
According to a woman from Polonnaruwa, the pressure of meeting debt payments was so intense that they had to forego meals to be able to make the payment. In another case, a debt collector demanded of a borrower that her child’s maintenance be given to cover the monthly debt repayment. Obligations to support unsustainable levels of debt have pushed people into more precarious forms of borrowing such as daily payments.
The latest effort by microfinance companies to recover the debt is to criminalise borrowers through the judiciary. Microfinance companies are effectively using the judiciary as debt collecting agencies. Around 200 persons have died by suicide owing to various and persistent forms of harassment by debt collectors. Using institutions of justice as a noose to coerce the debtors is bound to create another socioeconomic and humanitarian catastrophe.
Freedom from debt
Recognising that some debts cannot be paid is a part of prudent economic policy. Compelling debtors to repay by rendering them homeless, landless, and pushing people to destitution overlooks how such measures stifle the development potential of the masses. For example, the massive amount of extraction of wealth from the villages in the name of debt collection is evidence for usurious lending practices. After meeting debt payments, farmers, fisher folk, and small-scale producers at the grassroots level do not have anything left to invest in their livelihoods. On the other hand, finance companies do not contribute to productive economic sectors either. Their investments are primarily in the finance, insurance, and real estate sectors.
Apart from throttling the productive capacities of the people, debt forecloses on people’s future. In other words, debt not only hinders a person’s development capacities today, but tomorrow and in the years ahead as well, thereby closing down all kinds of future possibilities in a manner that is completely anti-democratic and unjust.
Debt cancellation remains the only way to restore the productive capacities of low-income households and to emancipate them from the modern bondage of debt. Policies to do so must accompany a system of regulation on the financial sector to ensure that they function as facilitators of productive elements rather than as rentiers.
On the other hand, governments should wake up from the entrepreneurial dream; it must certainly be an appealing dream for governments wishing burdens of poverty alleviation and rural development away from their economic priorities. Privatising the costs of development would seem like the most efficient and productive in the face of increasing public debt and debt servicing obligations. However, the multiple financial crises at the household level that have manifested in the forms of suicides of farmers and women across South Asia prove that it is only an illusion.
Development statistics for Sri Lanka recognise the vital role played by households and the non-profit sector serving households in making the highest gross value addition to the national economy. In other words, despite attempts to industrialise smallholder farmers, it is fisher folk and producers who still create most of the wealth. Apart from the creation of wealth, the informal sector is also the biggest employer in the country. Emancipating these essential sectors and the working people who sustain them should be a policy priority of a government envisioning inclusive development. It is a fundamental need today, as we grapple with the new moment created by a global pandemic. Debt cancellation for the working people should be a cornerstone in such a policy orientation.
(The author is a doctoral candidate at the University of Hawai’i, Manoa, US, and a member of the Liberation Movement. Having completed a Bachelor’s in Economics from the University of Peradeniya, Sri Lanka and Master’s in International Politics from the Jawaharlal Nehru University, New Delhi, she is exploring the dynamics of private debt on people’s political agency in Sri Lanka for her PhD in Political Science)