Exorbitant debts from loans provided by Microfinance institutions to failing businesses have pushed at least 170 people into suicide, islandwide,in the past year alone, with the highest suicide rates being reported among women, and area-wise in the Vavuniya, Jaffna and Batticaloa districts, Progressive Peasants’ Congress (PPC) shows. The suicide rates are just the tip of the iceberg of a much larger issue as unregulated microfinance companies continue to juggle with money and lives of the deprived.
The most recent suicide case related to Micro-financing is reported from Ela- Kimbulawala in the Polonnaruwa district where a 38-year-old father of one was driven to take his life despite his many futile attempts to pay off his debt.
The man had taken an initial loan of Rs. 80,000 and then a second amounting to Rs.30, 000, to pay off the former. In order to collect money to pay off the arrears, he has migrated to Colombo for masonry work. Failing in his endeavours, he returned to his village wherehe was confronted by debt collectors who has bombarded him in foul language, evidence given by his wife revealed. Later on February 28th, this year, he left his house, only for his body to be found hanging from a tree in a nearby forest, the next day.
Though, at a glance micro-financing seem to be problematic, it is not a new concept in Sri Lanka with its original form originating hundreds of years ago and still performed in most parts of the country known as seettu collection. Seettu is a mechanism villagers use to take part in an informal banking system when in need of funds.
Following the end of the war, the government resolved to introduce micro-financing, to improve the livelihood of war-affected communities, especially the women-headed households.
The micro-finance system opened an avenue for poverty-hit communities who did not have systematic access to credit , (otherwise normally taken from a bank), to borrow money to fund their businesses and thus be empowered. The system soon became popular among the target group because of its relaxed terms and regulations that enabled anyone to obtain a desired loan at any given time.
Still, with the lack regulation and a monitoring Body for microfinancing institutions the business has now reached crisis point, and activists and economists assert that the government has to immediately intervene before loan-sharks claim more lives, and the system has adverse affects on the entire country’s economy.
According to statistics by the National Economic Council (NEC) registered finance companies that provide microfinance credit have to recover roughly Rs. 60 billion (debt given through microfinancing), other formal institutions that had also given loans, are yet to recover Rs. 68 billion, while it assumes unregulated institutions have to collect another Rs. 30 billion.
For the poor
“What we have to understand is that microfinancing institutions play a vital role in the economic system. They go beyond what a regular bank with restrictions and regulations can do to elevate the livelihood of the poverty-hit communities,” Deputy Secretary General of Financial Affairs at the NEC Prof. Hareendra Dissabandara told the Sunday Observer.
He explained that the real essence of microfinancing was to aid the needy without putting much burden on them. Nevertheless, Prof. Dissabandara says, the plan to uplift hard-hit communities backfired when ‘greedy people’ entered the business.
Microfinancing was originally introduced with the institutions bearing the major risk, but now the role has reversed with the borrower having to bare the burden.
When the current Interest for a loan given by a bank varies between 15-20 per cent, a microfinance institution is providing loans at an Interest rate of between 20- 220 per cent, although the Central Bank has introduced an interest cap of 35 per cent. Microfinance institutions have found a way over the cap by simply renewing old loans as the said cap applies only to new loans.
The biggest issue facing this industry is the non-regulation and non-monitoring of lenders.. The NEC assumes there are at least 10,000 such entities. When the Central Bank introduced an Act to streamline the industry in 2016 it enabled the registration of microfinancing institutions in two groups. One for microfinance companies to be registered under the Central Bank, and the other for NGO-like organizations to be registered under the National Secretariat for Non-Governmental Organizations ,albeit with the supervision of the Central Bank.
Under the first category only 11 applications were obtained since the Act’s enactment in 2016, while only four of them could be registered under the Central Bank and in the second category close to 50 institutions were registered, while other entities are free to continue business as they please.
Prof. Dissabandara said that unregistered microfinance institutions are the problem as they provide loans to unsuspecting borrowers without considering their ability to pay back the loan.
The vicious cycle of multi-borrowing starts here. “When a borrower finds it hard to pay off a debt, that person will take another to settle it,” the professor explained.
Some borrowers obtain over four loans, and when the debts accumulate, they desperately sell their lands, paddy fields, the house or whatever property of value they possess, in order to settle the sum they owe.
When that too fails some resort to committing suicide, and in many cases the desperate borrower tries to pay off the debt in other ways such as providing sexual favours or working without pay.
This situation has catapulted deprived-families into a much larger social issue. In a concerted attempt to resolve the issue the current government introduced a ‘write-off’ system.
During a speech at the National Programme for Debt Relief in Drought Affected Areas mid last month Minister of Finance and Media Mangala Samaraweera said the government has taken the initiative to “write-off nearly Rs.1,400 million in capital and the Interest costs of more than 45,000 women borrowers.
Thus, those loans, whose capital costs were less than Rs.100,000 and were outstanding for more than three months were selected to be written off”. He acknowledged that the government realises that this is a short- term solution.
The Finance Ministry had previously suggested the write off the microfinance debts taken by women in the 12 regions affected by droughts, (providing they are not higher than Rs. 100,000 and are at least three months in arrears as at June 30th 2018), if registered with the Lanka Microfinance Practitioners’ Association or finance companies registered with the Central Bank.
President of the Association (LMPA) Anura Athapattu said writing-off of debt is not a solution at all. As a result of the government’s announcement many people, who can pay off their loan, had stopped making payments. About 70 per cent of borrowers in Polonnaruwa district had stopped payments.
He also said that there are ethical microfinance institutions mostly registered with the LMPA, with about 20,000 people are employed in them. He said the government has to carefully look at the issue as entities who are genuine will be impacted with the wrong decision. He stressed that there is a need for an ‘emergency Act’ to regulate the institutions and people involved in the industry.
The government is making substantial progress in the situation, with the suggested Act currently in its drafting process. Minister Samaraweera said “This would ensure more responsible lenders will be able to operate and consumers will have access to better credit. The new Act will also incorporate financial consumer protection measures.
Ongoing efforts to improve financial literacy, led by the Central Bank, will be expanded with renewed vigour”.
However, lawyer and Director Programmes of the Nelum Yaya Foundation, (that is focused on poverty eradication), Radhika Gunarathna, paints a grim picture of the situation.
She said the write-off of loans only applies to borrowers who failed to pay for three months by 30th June 2018.
“When the state has identified 45,000 such families for the write-off program, there are 2.4 million families who are trapped in the microfinance loan scheme,” she said. She also stressed that due to lack of regulation the lending business thrived, thus borrowing has reached a peak.
Through the Nelum Yaya Foundation women who have borrowed money and are unable to pay their debt are counselled as to how they can survive the crisis.
“During one such consultation I met a 45-year-old mother of two young girls who was on the brink of committing suicide,” she said.
The mother, from Polonnaruwa, had obtained loans up to Rs. 800,000 to fund her husband’s bakery. When the bakery went bankrupt and the family struggled to pay off their debt, the husband suggested – ‘close all doors and windows in the house and all four commit suicide’. “The situation is that bad. Committing suicide, for the victim, seems to be the most plausible solution,” she said.
Gunarathna said even the lenders are mentally stressed. Her organisation is counselling a lender who is currently on anti-depressants. “He is stressed because his managers want him to give Rs. 5 million to borrowers a month. After giving that he has to recover the debt.”
When borrowers do not pay, his boss puts pressure on him, and then he pressurises the borrowers (mostly women) into making the payment at all costs.
“The government is still promoting the loan-culture through various projects. This is not healthy,” she said.
The young lawyer also said the anticipated microfinance Act has flaws, and unregulated institutions can use the loop-holes to their advantage. She wants the government to instead focus on ‘Oppressive Loans’ (OPs). OPs are high interest loans, where lenders harass borrowers to obtain payments, loans given without considering the capacity of the borrower’s ability to pay back, and where lenders lure borrowers unethically into obtaining a loan.
For the country to get out of the crisis NEC recommends the implementation of a regulatory authority, and an introduction of a program where borrowers’ history of obtaining loans is recorded so that they will not fall victims of multiple borrowing.
It also proposes to establish a Body that will educate and create awareness among borrowers of how to be active economic players. Also setting up a Body to handle the grievances of both borrowers and lenders.
Borrowers offer to sell kidneys to settle ‘Shylock’ lenders
While the objective of the microfinance system has been to lift people out of poverty by allowing them credit to sustain their livelihoods, it has also been observed that, in actual fact, some institutions generate huge profits by putting enormous pressure on vulnerable borrowers, and on women in particular, UN Independent Expert Juan Pablo Bohoslavsky, highlights in his recent report.
He conducted an official visit to Sri Lanka from September 3 to 11 2018 at the invitation of the Government and produced the report that puts special emphasis on the country’s growing microfinance crisis.
He states “despite women seeking loans to fund their businesses, many of them do not succeed in their projects – unsurprising, given the lack of an enabling environment for micro and small enterprises (such as extremely high interest rates), coupled with very modest economic growth”.
The expert says that other women (women in poor or war-affected areas being the focal target for micro financing) take loans to cover their families’ basic consumption expenses, while some borrow to pay off previous loans leading to multiple loans from different lenders concurrently.
“Lenders do not follow any particular guidelines to assess the credit risks of loans, combined with the usurious terms often applied, a very high number of women default on their debts and become trapped in an exploitative financial system,” Bohoslavsky stresses.
He said that collectors, when the women fail to pay up, would go to the women’s houses on a daily basis and even harass them for hours demanding payment.
Women are at times exposed to psychological and physical violence by collectors, he says, and in some cases women were pressured by collectors to exchange “sexual favours” for instalments and some women borrowers have even offered to sell their kidneys to repay loans!
Among the recommendations is the establishment of a ‘national plan of action on business and human rights in line with international standards, including one for the financial sector, notably all types of institutions and organisations engaged in financial business, regardless of whether they are officially registered as such’, while setting a cap on Interest rates. He emphasized the importance of setting up a ‘robust and strict regulatory framework’ with ‘guidelines on how microcredit lenders assess the credit risk of their loans and the actions they are allowed to take, to collect loans in accordance with international human rights norms and standards’.
He also urged the Government to declare a moratorium on repayments until such legislation is adopted in order to prevent groups at heightened risk from being exploited further by lenders.