by Piyumi Fonseka
Sometimes a loan obtained to save a life can end up taking another life, in the debt-stricken villages of Sri Lanka. A 24-year-old mother killed her child and committed suicide two months ago due to her inability to repay a loan of Rs. 400, 000 to a micro-finance company. It is just one story out of millions of borrowers. Like more than 2.5 million other people in Sri Lanka, most of them were women; she had turned to micro credit in an effort to lift herself out of poverty.
Despite microfinance loans represent only 3% of the total loan portfolio of the sector, the impact it has made on low-income families is immense. According to Movement for Land and Agricultural Reform (MONLAR), more than 200 people had committed suicide, during the last three years or so for issues related to micro-finance loans.
Chinthaka Rajapakshe, Convener of the MONLAR revealed that women are pressured by thugs and debt collectors who come to villagers, utilizing all types of recovery methods including sexual favours. He also revealed there are cases of borrowers who tried to sell their kidneys to repay the loans. “Some of whom had no option, have committed suicide.”
The majority of women, trapped in this cycle are from more impoverished and war-affected areas including North and East provinces where a large proportion of the population still live below the poverty line. The dire situations in their lives force them to turn to these micro-finance organizations which charge their loans with up to 220% interest rate and apply compound interest.
While almost every sector of the economy is bearing the brunt caused by Covid-19 pandemic, low-income households, and small businesses have been disproportionately affected as they enjoy little savings or assets to help them cope. In Sri Lanka, as in many other developing countries, Microfinance Institutions (MFIs) are at the forefront of providing financial services to the low-income population.
MFIs gained attraction as a strategy for economic survival in the life of impoverished women. The main purpose was to empower them by generating income for themselves or their households. However, it hasn’t been the same in many parts of Sri Lanka. Although the MFIs can play a significant role in terms of uplifting the lives of poor families, issues such as lack of national data on microfinance, high interest, weak legislative framework, weak coordination, and illegal methods of recovery have thrown the lives of many borrowers from frying pan to the fire.
As the source of income of the majority of MFI clients are under the informal sector, loan repayments of MFIs have been affected. Farmers are unable to sell their products. They are forced to sell at a very low price as the supply chain is disrupted due to the pandemic. Many small enterprises are also unable to operate their businesses with uncertainty on when they can reopen.
Many Sri Lankan migrant workers have lost their jobs, causing a reduction in remittance.
This has affected the repayment of loans to MFIs as remittances are a key source of funds for many low-income households. According to Financial System Stability Review 2020, Central Bank stated that the NPL ratio of microfinance loans continued to increase from 2017 and reached 30% at the end of September 2020 from 17.3% at the end of September 2019. The NPL, i.e. non-performing loan is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full.
MONLAR held a demonstration on International Women’s Day, demanding the government fulfill President Gotabaya Rajapaksa’s election pledge to scrap micro-credit loans. In parallel to the demonstration, the Collective of Women Victimized by Microfinance had started a Sathyagraha from March 8 onwards. Chinthaka said “In October 2019, then-presidential candidate Rajapaksa promised to scrap the micro-credit loans, which are causing acute problems to people. However, he is now silent on the matter.”
Their demands are as follows:
- All microfinance debt be abolished.
- All microfinance debt collection be forthwith ceased until a debt audit is conducted.
- All legal action against microfinance borrowers be stopped.
- Delist all microfinance borrowers from the Credit Information Bureau of Sri Lanka.
- A bank system should be established dedicated to women in Sri Lanka.
The Central Bank is currently involved in drafting a New Credit Regulatory Authority Act for Sri Lanka which was approved by the Cabinet of Ministers in 2019. This proposed Act will replace the present Microfinance Act, No. 06 of 2016 and will introduce a new regulatory framework applicable for persons who engage in the business of money lending in Sri Lanka and provide for new legal requirements relating to consumer protection as well.
Speaking to the Daily Mirror, Economist Dr. Chandana Aluthge stressed that the matter regarding micro-finance has to be given careful attention and priority by the government because human lives are involved.
“Microfinance offers small loans to people who do not normally qualify for traditional banking credit, to encourage self-employment or small businesses. For many recipients, it is a lifeline, and very often it is the only way for them to establish a business. Microfinance is expected to expand and improve income generation activities of low-income persons. Therefore, it is expected that through microfinance the living conditions of low-income persons would improve,” he explained.
“However, all of these problems started because micro-finance organizations are not very well integrated into the formal sector. One of the worst affected groups due to the pandemic was those who do self-employment. Because of the lack of demand, lack of facilities, and lack of cash flow, they faced the worse. As a country, even the government is struggling to repay loans. Even microfinance companies are also in the problem; their cash flow is also distributed.It is important for the government to understand the problem on both sides and provide a feasible solution. We should not forget the majority of micro credit borrowers are under the poverty line in society. This year is a transition, as I believe. By 2022, expectantly, the economic situation will become more favourable. The government has to look into the grievances of these poor people. There are many unnecessary expenses on the part of the government. This matter has to be given careful attention and priority because human lives are involved.
The government should not play the role of Santa Claus all the time. But, the authorities have to realise the gravity of the problem. When it comes to micro-finance organisations, they also have a social responsibility beyond financial targets. It is best if they can discuss with the government to provide the borrowers a grace period of six months or one year.”
Another problem is many of the borrowers who are from low-income families most often have no sophisticated financial management knowledge. Dr. Aluthge opined that during the suggested grace period, the government should be able to support the borrowers by educating them on how to manage their finances in a better manner. “Many of these families do not know what to do when large sums of money come to their hands.”
Source: Daily Mirror