With more people than ever being driven below the poverty line amidst a volatile economic situation, predatory microfinance loans have become a rising concern for the more vulnerable segments of the population.
According to a World Bank projection, Sri Lanka’s economy is estimated to contract 4.2% this year, primarily owing to ongoing foreign currency shortages, the effects of higher inflation, and policy measures designed to restore macroeconomic stability. Ordinary people, who are finding it challenging to sustain livelihoods in such a backdrop are now mired in accumulating loans with high interest, driving them further into poverty.
According to the Central Bank of Sri Lanka (CBSL), microfinance is defined as “provision of financial services to low-income people” by the Consultative Group to Assist the Poor (CGAP). Microfinance is expected to expand and improve income-generation activities and capacities of low-income persons by bringing credit, savings, and other essential financial services to people who are too poor to be served by regular banks.
However, despite its longstanding use in Sri Lanka, the efficacy of microfinance as an instrument of poverty alleviation and improving the living conditions of low-income persons remains questionable, especially given the lack of regulation, which has enabled a culture where many microfinance companies exploit vulnerable people, mostly women from needy households.
Harassment and intimidation
According to an incident related by Nelumyaya Foundation Director and Attorney-at-Law Radika Gunaratne, a loan agent who had been unable to confront a woman at her home over repayment had followed her child to school and even met with the school principal, knowing that the mother would have no choice but to meet him. Later, the mother had reported that around 20 vehicles belonging to the agency had visited her rural Polonnaruwa village ostensibly to make inquiries.
As Gunaratne noted, with the worsening economic crisis, the inability of such debtors to repay the loans had intensified, leading to harassment by these microfinance lenders, as unregulated microfinance activities had led to the exploitation of customers through excessive interest rates and unethical recovery methods. The harassment ranges from verbal to sexual abuse and goes largely unreported.
“Victims pay these loans somehow because otherwise they can’t continue to live in their villages,” she said, describing the situation as an endless, vicious cycle. “We have had to file Police complaints against microfinance agents for harassing people during the Covid period,” she added.
Describing some of the typical situations that led to loan sharks entering the picture, Gunaratne explained that housing projects initiated by the National Housing Development Authority (NHDA) required the people to invest personally, which meant they had to repay the loan. This enabled loan sharks to enter the scene by offering funds for this purpose. Accordingly, borrowers then have to take out multiple loans, one for the authority and the other for the microfinance company.
Thus, those who are compelled to engage in multiple borrowings are pulled into a vicious cycle, since if one loan is in arrears, they will have to take out another loan to settle the previous loan, trapping them in debt.
In addition, the widespread kidney diseases in the North Central Province also led to people falling victim to loan sharks, Gunaratne noted. Once people spend money on hospitalisation and treatment, they find themselves unable to fund their businesses, leading them to engage with microfinance companies.
Cost of living
Meanwhile, Political Analyst and Jaffna-based Economist Dr. Ahilan Kadirgamar noted that with the rising cost of living, many were becoming increasingly desperate with the falling of their real income adjusted for inflation. “People are trying to get credit through whatever means and many of these microfinance companies are exploiting the situation,” he said.
He further noted that the predatory nature of microfinance lending disrupted rural economies and societies: “Some of these interest rates are extremely high; if you look at the annual interest rates, they can be around 200-300%. Therefore, all the effort of rural folk, particularly women who try to create a livelihood, is syphoned out of the rural areas, leaving a wasteland behind.
“Internationally, microfinance was pushed as a solution about 20 years ago, under the belief that giving credit to rural women could lead to improving their livelihood. However, now, internationally as well, including in Bangladesh where Muhammad Yunus won the Nobel Prize for his work with the Grameen Bank, there is now a lot of criticism of the microfinance model, since it has been found to be exploitative and gruelling for women everywhere.”
According to Kadirgamar, in the absence of other avenues, people turn to microfinance, which allows microfinance companies to exploit them by facilitating easy access to credit at much higher interest rates. Under these circumstances, systems such as Samurdhi can be useful only if they release funds as per the needs of the borrowers, he noted. “However, Samurdhi being a State system is not that participatory as other cooperative forms of credit services.”
As borrowers fail to realise how high and exploitative the interest rates are, microfinance agencies resort to devious methods of exploiting rural women, he stressed. “While certain microfinance loans are required to be paid on a monthly basis, the more exploitative ones require the borrowers to pay weekly instalments. They deduct the principal and the interest from the first week itself, so the borrower doesn’t really get to use the interest for the entire period,” Kadirgamar explained.
Kadirgamar however noted that alternatives to microfinance existed: “In northern Sri Lanka we have found an alternative to provide credit at low interest through the cooperative system. When the cooperative system provides credit, even any small profits that are accrued remains within the community and they are used for the members, who have taken the credit.”
Speaking to The Sunday Morning, Northern Provincial Council Department of Cooperative Development Commissioner Thevanthini Babu noted that loans were being provided through the cooperative fund for members. “We have advertised our loan scheme to all areas in the Northern Province to every Grama Niladhari office, instructing them to join the cooperative,” she said.
As per the data provided, until 2022, approximately 47,466 revolving loans have been issued in the Northern Province through cooperative rural banks and thrift and credit cooperative societies as ordinary loans, self-employment loans, agricultural loans, loans against fixed deposits, loans for Government staff, loans for cooperative employees, property loans, and others.
Three funds named ‘Koodravin Aravanaippu’ (cooperative care), ‘Mahaleer Mahudam’ (women’s crown), and ‘Adharam’ (aid) offer an annual interest rate of 6%, 4%, and 4%, respectively.
Legal quagmire
Gunaratne stressed that loan sharks made the process of repayment difficult for the borrowers: “There should be contracts and there should be a mutual understanding, but most of the time this does not happen. Contracts are sometimes drafted in English when some people are unable to even read Sinhala. Borrowers sometimes are unaware of the interest rates; the agent simply comes to them, collects the money, and gets their signatures.”
As Gunaratne noted, the economic crisis had worsened the situation, with many debtors being unable to repay the loans they had borrowed. “When people are unable to repay their loans, loan companies keep re-loaning, meaning they will offer another loan, sometimes without any documents, so while the interest reduces the amount to be paid doubles,” she explained.
She also pointed out that some victims lacked proof of their loan transactions as they had been given pieces of paper instead of proper documentation.
Gunaratne expressed concerns on how the legal system could resolve this crisis of predatory microfinance loans, as most cases regarding this matter were rendered ex parte. “Most of the time, around 90% of the cases are ex parte, as victims have no means of going to courts and they don’t receive free legal support because there aren’t enough pro bono lawyers,” she said, also criticising the Legal Aid Commission over the lack of support to victims.
She also noted that the blame had to be redirected away from the victims. “These are the poorest of the poor. You have to assess repayment capacities before offering loans. Can we blame them for not being able to pay? On this basis, we have asked that loans be written off, although this has not happened.”
Addressing the legal framework available for victims of microfinance loans, Gunaratne noted that the CBSL had been inactive on the matter of microfinance, with the Credit Regulatory Authority Act being drafted in 2019 but no subsequent action being taken to pass it in Parliament. “If this regulatory act comes into force, illegal lending will be banned in Sri Lanka,” she said, noting that Sri Lanka required some kind of legal framework to protect customers.
While the Microfinance Act, No. 6 of 2016 has several provisions for consumer protection, this act has not been made compulsory and only four companies have been registered under the act while all other microfinance companies conduct business under Civil Law. As such, the vast majority of microfinance companies have to be dealt with in courts through civil procedure, thus rendering the justice system unable to differentiate between normal money lending and microfinance, Gunaratne explained.
“Microfinance always comes with social responsibility, and that is lacking here, so we miss that context,” she stressed, noting that the social context involved suicide, sexual bribery, and women being driven to sex work, with even relevant Government officials not being sufficiently sensitive to this context, denying State responsibility in the matter.
When contacted, Police Spokesperson SSP Nihal Thalduwa said that when it came to complaints against microfinance companies, the Police did not have a separate category for these complaints as complaints were recorded as fraud, etc., instead.
He further noted that it would not be practical to maintain a separate record for microfinance-related complaints, as it would require an islandwide effort to compile all the data.