High risk borrowing a dilemma for Northern residents, study says
View(s):Northern residents have access to an abundance of formal credit offered by banks, finance companies and microfinance institutions that have recently entered that market, a new study on borrowing and ‘financial counselling (advice)” in Sri Lanka’s north has shown. Offering attractively packaged loans, banks entice people to borrow without much hassle. Even though borrowers are well aware of high interests rates associated with such institutions, they choose easy ‘access to credit’ over financial costs, the study titled ‘No Silver Bullet – An Assessment of the Effects of Financial Counselling on Decision Making Behaviour of Housing Beneficiaries in Jaffna and Kilinochchi” has said.
It said high risk borrowing from finance companies and banks is also related to the difficulties that beneficiaries face in obtaining housing loans from formal banking institutions.The study was undertaken by Vagisha Gunasekara, Nadhiya Najab and Mohamed Munas, researchers from the Centre for Poverty Analysis (CEPA) in September 2015 and commissioned by the Swiss Development Cooperation (SDC) dealing with housing beneficiaries under the SDC programmes.
In the executive summary of the report released by CEPA at a public function in Colombo recently, it was stated that the SDC had supported an owner-driven house reconstruction programme in the North which provides funds in the form of a staggered grant-scheme, to selected returnee families for the reconstruction of their destroyed houses. A CEPA study conducted in 2014 found that approximately 85 per cent of housing beneficiaries had unmanageable debt and over 50 per cent of them lacked knowledge about managing finances.
As a response to this evidence, in May 2014, SDC implemented a financial counselling module, specific to the housing process, as a way of maintaining low housing-related debt levels. “This action by SDC shapes the main objective of this study, which is to understand the extent to which SDC’s financial counselling intervention shaped behavioural changes in housing beneficiaries in relation to the housing (re)construction process,” the CEPA report said.It said the average cost of building a standard size house was Rs. 819,615, whereas the average cost of building a slightly larger structure was Rs. 1,090,760. Those who received financial counselling, and built a standard house, spent an average of Rs. 829,426, whereas beneficiaries who did not receive financial counselling but built standard houses spent an average of Rs. 795,162 on construction.
“A significant number of households in both groups did not adhere to the standard features, which may have driven up the costs of construction. Even households that adhered to the standard sizes and features had difficulty in staying within the budget allocated for construction for each stage. This could be attributed to a number of unavoidable costs such as the impact of inflation on building material, increasing labour costs due to the shortage of construction labour that were beyond the beneficiaries’ control and should be factored into budgeting for housing programmes in the future. As such, the quantitative data of this study does not indicate a statistically significant relationship between financial counselling and construction costs,” the report said.
In line with the findings on the ineffectiveness of financial counselling on house size and features, the survey found that an overwhelming proportion of respondents, regardless of whether they participated in financial counselling, borrowed funds for housing. On average, households that did not receive financial counselling have slightly higher amounts of debt (Rs. 171,264), borrow at slightly higher interest rates (12.05 per cent) and have comparable, but marginally higher number of unmanageable loans (1.27) in comparison to the households in the treatment group in which the average loan amount was Rs. 159,712; the average interest rate was 8.20 per cent and the number of unmanageable loans was 1.25, CEPA said.
According to the survey data, households that received financial counselling had more financial assets in comparison to those that did not, whereas the latter had relatively more physical assets. The report said high risk borrowing from finance companies and banks is also related to the difficulties that beneficiaries face in obtaining housing loans from formal banking institutions. Requirements of a standard loan application, such as getting two signatories/guarantors, showing sufficient collateral and a steady stream of income, were not feasible for most beneficiaries, who are trying to adjust to life after war. “Though through financial counselling SDC discourages beneficiaries from borrowing at high interest rates, their options of financing house construction are few given their low and inconsistent income streams. The desperate situation of people in war-affected areas pushes them to borrow despite their awareness of interest rates and consequences of defaulting on loans. The overall consensus among beneficiaries is that house construction left them with no option but to borrow,” the report said.
The study found that owner driven housing assistance invariably puts a double burden on the housing beneficiaries – the expectation of households’ own contribution, both in terms of funds as well as labour. While some beneficiaries preferred hired labour, others who contributed their own labour stated there is an opportunity cost of Rs. 993 for each day that they spent on construction work.“The finding that financial counselling has not made a difference in addressing housing beneficiaries’ indebtedness – underlines the reality that well-intentioned interventions such as the SDC initiative can do little to address circumstances that are deeply linked to the broader structural issues of the political economy of the North. In other words the indebtedness of housing beneficiaries as observed by SDC and other implementing agencies is intrinsically linked to the broader political economy of the North, which characterises big infrastructure, the ravages of the market logic, faltering incomes and the expansion of rural debt,” it said.
The recommendations (for government authorities and donors) that are stemming from this study include technical approaches to solving issues related to the indebtedness of housing beneficiaries, context-specific approaches in addressing most vulnerable groups and a prescriptive policy measure that goes beyond housing reconstruction and applies to post-war development in general:
Technical Recommendations
• Encourage implementing agencies to introduce financial counselling to housing beneficiaries as it is a useful process to identify vulnerable households, their financial difficulties, and tailor housing support accordingly.
• Encourage implementing agencies to assess and estimate all unavoidable costs associated with the housing process, paying specially attention to price increases in building material due to inflation, transportation costs and overall costs of labour (including meals for labourers) prior to implementing housing programme and financial counselling;
• Renegotiate with the Government of Sri Lanka to revise the maximum stipulated grant amount for housing, based on the aforementioned assessment of the revised cost structure.
Context-specific
Recommendations
• With the support of state institutions and the private sector, launch a systematic financial awareness campaign in war-affected areas to promote better financial management and responsibility among people;
• Convene government and formal private lending institutions to discuss interest-free loan schemes as a reparation mechanism for the people in war-affected areas;
• Consult government (both national and local), private sector and other development organisations about creating sustainable livelihoods, an initiative that should move in parallel to the construction process, according to the CEPA report.