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Lanka’s tryst with microfinance creates high-interest monster
For years, activists have warned that “microfinance” in Sri Lanka is not really “microfinance” at all — just high interest loans being hawked like merchandise to poor villagers, whose financial literacy was, at best, minimal.
Now, researchers are providing evidence to prove Sri Lanka went in the path of other countries that experimented with–and failed at–microfinance but is doing far less than those jurisdictions to stem the crisis.
Many sellers of microloans are not even specialised in microfinance, said Chandima Arambepola, Senior Researcher at the Centre for Poverty Alleviation (CEPA). They are driven by earnings. All around the country, microloans have been hawked like merchandise.
Together with Kulasbanathan Romeshun, Ms Arambepola recently released a study on microfinance practices in Sri Lanka and their impact on women. They believe that discussion must expand from the high interest rates imposed by lenders to the entire system of lending. While much focus has been on the debt situation in the North and East, the problem is more widespread and serious.
The study was carried out in Batticaloa, Mullaitivu and Moneragala. Women were embarrassed by the stigma of unsettled debt and men frequenting their homes to extract repayment. To get over difficulties questioning them about the number of loans they had taken, researchers asked them their weekly routines. They found that women are often paying off some instalment or the other four days out of five.
The stories are harrowing but have not caught the attention of the elite as they have crippled the poor and lower middle classes. Nalani Wickremesinghe, a 44-year-old mother-of-one spoke this month at a forum on microfinance organised by the National Committee on Women.
Before long, her voice broke.
“My husband is not well,” the woman from Baduraliya, Kalutara, related. “He was in a mental institution for about six months. Then he fell at work. They said at the general hospital that he isn’t even likely to survive. He was transferred from hospital to hospital. At one of them, he got an injection and became better. But he’s still bedridden and we can’t afford his treatment.”
Ms Wickremesighe borrowed between Rs 500,000 and Rs 600,000 from microcredit lenders for treatment. About Rs 300,000 to 400,000 worth of gold jewellery was pawned and seized by the bank. “The gold chain my sister gifted my daughter was also till recently in the bank till my sister redeemed it for me,” she said.
“I have a grocery store which was passed on to me by my mother after my father died,” she continued. “But there was an economic slump and the business fell, pushing me further into debt. My husband’s accident happened at the same time.”
Ms Wickremesinghe reeled off the names of eleven microcredit institutions she has borrowed from. Only two were registered with the Central Bank of Sri Lanka (CBSL). To one lender, she still owes Rs 19,000 of a loan of Rs 30,000. She borrowed Rs 25,000 from another but the collector has just told her she had Rs 26,000 left to pay. And there are more.
“The collectors come even at 9pm to our house,” she said, her voice wobbling. “They tell me to pay, but how? So I tell them, ‘Sir, it’s true we borrowed from you. But you also gave us’. I know so many other women who are in the grips of microfinance companies and are suffering.”
Last year, the Government introduced a scheme to write off non-consumption loans up to Rs 100,000 given to women by all registered finance companies in 12 drought-affected districts. But like thousands and thousands of others, Ms Wickremesinghe isn’t in the right district and hasn’t taken the right type of loan from the right type of company.
“Women with loans from unregistered companies received no relief,” says Z.A.F. Wazniya, a lawyer from the Secretariat for Coordinating Reconciliation Mechanisms (SCRM). She also studied microfinance practices. “It was just a one-off payment last year. And only a single loan per person was written off. Thus, a woman with 12 loans received relief only for the largest one, not the rest.”
The Government introduced an interest rate cap of 35 percent last year in a desperate bid to force ethical behaviour. But the borrowers were left to enforce it and many simply did not know. Again, companies not registered with CBSL were not bound by the circular.
Lawyer Radhika Gunaratne gives free legal representation to women victimised by finance companies. The interest rate cap is effective from April this year, she pointed out. It is not retrospective.
“To an extent, we accept that it’s not possible to apply it to past loans,” she told the CBSL representatives at a seminar. “But most companies, both registered and unregistered, grant what are known as re-loans. When a loan is partly settled, they disburse a fresh loan against that. It’s a loan upon a loan. The interest rate cap is only for new loans. There are no laws to prevent this.”
The CBSL, Ms Gunaratne insisted, had a duty to expand its oversight to regulate more than just deposit-institutions. This is what it does now.
“There is not a single proposal now to address the issues of women who are already in trouble,” she said. “Stop giving loans for basic needs. And if you can’t walk in the shoes of these victims and look at it from their perspective, you will not solve the problem.”
Some women are migrating to settle debt. Others are taking loans to send their menfolk abroad. When they return in about three or four months after facing issues, the women are saddled with debt without expected income.
Private microcredit entities, some based in specific areas of the country, have mushroomed. In Moneragala, for instance, there are companies registered only to that district, Ms Arambepola said. A little out of town there is a slew of small, private entities vying for business from the same pool of women.
Borrowers are mostly married without permanent employment. Of more than 100 women interviewed for the CEPA study, fewer than five were formally employed.
The loans do not go towards enterprise creation. They are for consumption. Illness in the family sent women running to microcredit. In Moneragala, one mother said that, while health was free, it cost money to transport her sick child to the Badulla General Hospital. Women also borrow to problem-solve for their families and for social obligations like funerals and age-attaining ceremonies.
Lenders have now started asking women for their husband or oldest son’s identity card details or a letter from the husband saying he knows a loan is being taken, Ms Arambepola said. In Moneragala, researchers were told many women borrow without telling the husband and this creates family strife.
There is no review after loans are granted. There are no background checks before they are approved. A few CBSL-registered businesses consult the Credit Information Bureau (CRIB). Apart from that, a borrower’s ability to repay is never assessed.
The women have no information about interest rates. They knew only how much they borrowed and what their weekly instalment was. This is not their fault, researchers pointed out. It is how the loan officers have couched it. They do not explain the interest rate. It’s easier to cite amounts.
The loan application form is sometimes not in the language of the borrower. In Moneragala, Sinhala forms were given to Tamils and they had to pay someone else to get it filled. Others reported having had to sign an English form. They did not ask why or what they were signing because of fear the loan would be withheld.
Traditional microfinance includes skills development. If these women received any entrepreneurship or financial management training at all, it was only when they applied for credit from an NGO, Ms Arambepola said.
Private entities do not engage in capacity building and did not in any way encourage savings. Women sometimes have to open accounts to receive the cheques. The companies then deduct a fee and they do not even know why, although some were told it’s an insurance premium.
In Mullaitivu, there was something called “meter loans” where interest piled up even faster on loans that are taken by women mostly to meet instalment payments on other borrowings. In Moneragala, a woman whose husband’s monthly income was Rs 30,000 was paying Rs 10,000 a week towards loans.
With no earnings, women borrow from others to repay the loans, starting with family member. This snowballs as the women always try to keep ahead of the next instalment.
While most loans are taken to help their families, when repayment becomes a problem, they sacrifice daily needs–including food–to save money because the loan collectors will come in the evening and scold if the instalment is not ready. They do whatever they can to survive the day.
“The merits of microfinance and how it helps female entrepreneurship and empowerment is widely extolled, but the opposite has happened,” Ms Arambepola said. “Women are now in group debt and harmony in villages is heavily eroded.”