This blog has often highlighted the fact that microfinance is no solution to poverty. Recently, 700 women in Sri Lanka from 14 districts came to Colombo on February 27 to protest against government inaction on the microfinance debt crisis. Recalling a popular election slogan during the last Presidential election they demanded that the promise be kept, and microfinance debt be cancelled. Calling out on the exploitative practices of lending by microfinance companies (MFIs), the victims of microfinance loans demanded that the MFIs be substituted with co-operatives. The victims of microfinance loans welcome a co-operative style intervention. They demanded that MFIs be replaced by Co-Ops. The Co-Operative movement in the Northern Province has been able to push back against the microfinance companies and address immediate credit needs of the people. However, in south co-operatives have deteriorated due to long neglect. Instead of addressing and organising the village level economy, co-operatives in the south have ended up being political platforms.
“Be an entrepreneur. Contribute to development” people were told. The assumption that the supply of credit to self-relying and disciplined individuals will pave them an opportunity to discover the hidden entrepreneur within themselves is also at the heart of microfinance business. The Microfinance programmes, premised on the assumption that everyone is a natural entrepreneur, cater to the credit needs of the ‘unbanked’ or the ‘risky’ kind who are without a regular income or assets. The risks in lending justify dumping risks on the borrowers. So, the MFIs charge extremely high interests which are now capped at 35% after a series of protests by microfinance loan victims. Even at the capped rate, it is the highest interest rate for any loan disbursed by banks and finance companies in Sri Lanka and it is also the highest by South Asian standards. Even though the effective rate is capped at 35%, some companies continue to charge interest rates exceeding 35%.
Some microfinance companies start recovery immediately after disbursing the loan. How could one expect to generate a turnover within two weeks time? And what type of investment could generate a turnover higher than 35%, so the borrower would not be forced into multiple loans? I also found that almost all the microfinance lenders deduct the first payment when they disburse the loan. For example, a woman who applies for a loan of 100, 000/= only receives Rs. 100, 000 minus the first monthly/ weekly payment. In some cases, borrowers meet with unexpected accidents. In one of the villages in Jaffna, a woman bought two cows, but the cows had died after about six months. In many other cases, family members, especially husbands have met with accidents. Even though these loans are insured, the benefits of the insurance are limited to the company and do not cover the vulnerabilities of the borrower. Therefore, microfinance lending is structured to force borrowers to rely on multiple loans, not only from other microfinance companies but also from lenders in the informal market such as money lenders.
Working people had to bear the brunt of the economic crisis by themselves. Despite the lack of protection, these small people make the biggest contribution to the Sri Lankan economy. The fact that the garment workers (US$ 5 billions), housemaids in the Middle East (US$ 3.6 billion) Tea plantation workers (US$ 1.4 billion) are among the most productive contributors to the economy has escaped the attention of the policymakers. The smallholding farmers and fishers contribute about 80% of the total agricultural production. Yet, many of them are over-indebted and lead precarious lives.
The Household Income and Expenditure Survey produced by the Department of Census and Statistics provides some sense to the nature of household expenses across districts. Housing, transport, health care and education features prominently among the household expenditures. Leave alone tuition classes, parents have started to incur substantial costs from public schools, even for those activities such as renovation and infrastructure development that should be funded either by the government or provincial councils. The same thing applies to health care. As one goes away from the urban or semi-urban areas, three wheels have replaced bus transport. Either one chooses to walk, cycle or use three wheels. In the outskirts of the urban areas such as Maharagama and Negambo people without steady incomes get into debt just to meet housing advances. Then there are new expenses. A large number of people in the Dry Zone relies on filtered water. An average family of 04 has to spend about Rs. 1000 per month if we price 1 litre of water at Rs. 1.75. It could also go up to Rs. 2/=. Crop damages due to floods, droughts and pests is another problem that these people face.
The problem is that lives also get more precarious when one moves away from the big cities. People who live on bare minimum without a permanent income are forced to shoulder spread effects from national budget cuts on education, health care and public transport.
“Be an entrepreneur. Contribute to development” people were told. The assumption that the supply of credit to self-relying and disciplined individuals will pave them an opportunity to discover the hidden entrepreneur within themselves is also at the heart of microfinance business. The Microfinance programmes, premised on the assumption that everyone is a natural entrepreneur, cater to the credit needs of the ‘unbanked’ or the ‘risky’ kind who are without a regular income or assets. The risks in lending justify dumping risks on the borrowers. So, the MFIs charge extremely high interests which are now capped at 35% after a series of protests by microfinance loan victims. Even at the capped rate, it is the highest interest rate for any loan disbursed by banks and finance companies in Sri Lanka and it is also the highest by South Asian standards. Even though the effective rate is capped at 35%, some companies continue to charge interest rates exceeding 35%.
Some microfinance companies start recovery immediately after disbursing the loan. How could one expect to generate a turnover within two weeks time? And what type of investment could generate a turnover higher than 35%, so the borrower would not be forced into multiple loans? I also found that almost all the microfinance lenders deduct the first payment when they disburse the loan. For example, a woman who applies for a loan of 100, 000/= only receives Rs. 100, 000 minus the first monthly/ weekly payment. In some cases, borrowers meet with unexpected accidents. In one of the villages in Jaffna, a woman bought two cows, but the cows had died after about six months. In many other cases, family members, especially husbands have met with accidents. Even though these loans are insured, the benefits of the insurance are limited to the company and do not cover the vulnerabilities of the borrower. Therefore, microfinance lending is structured to force borrowers to rely on multiple loans, not only from other microfinance companies but also from lenders in the informal market such as money lenders.
Working people had to bear the brunt of the economic crisis by themselves. Despite the lack of protection, these small people make the biggest contribution to the Sri Lankan economy. The fact that the garment workers (US$ 5 billions), housemaids in the Middle East (US$ 3.6 billion) Tea plantation workers (US$ 1.4 billion) are among the most productive contributors to the economy has escaped the attention of the policymakers. The smallholding farmers and fishers contribute about 80% of the total agricultural production. Yet, many of them are over-indebted and lead precarious lives.
The Household Income and Expenditure Survey produced by the Department of Census and Statistics provides some sense to the nature of household expenses across districts. Housing, transport, health care and education features prominently among the household expenditures. Leave alone tuition classes, parents have started to incur substantial costs from public schools, even for those activities such as renovation and infrastructure development that should be funded either by the government or provincial councils. The same thing applies to health care. As one goes away from the urban or semi-urban areas, three wheels have replaced bus transport. Either one chooses to walk, cycle or use three wheels. In the outskirts of the urban areas such as Maharagama and Negambo people without steady incomes get into debt just to meet housing advances. Then there are new expenses. A large number of people in the Dry Zone relies on filtered water. An average family of 04 has to spend about Rs. 1000 per month if we price 1 litre of water at Rs. 1.75. It could also go up to Rs. 2/=. Crop damages due to floods, droughts and pests is another problem that these people face.
The problem is that lives also get more precarious when one moves away from the big cities. People who live on bare minimum without a permanent income are forced to shoulder spread effects from national budget cuts on education, health care and public transport.
Even though no one knows the scale of the crisis frequent suicides related to microfinance loans indicate the depth of the problem. Two women from Jaffna committed suicide in 2020 alone. The total number of deaths related to microfinance is estimated to be more than 200. A majority in low-income households are in the CRIB (The Central Information Bureau) unable to access their credit needs from the formal financial markets, therefore are exposed to be exploited by the money lenders and other predatory lenders in the informal market. Many of the borrowers who are unable to pay are charged with legal action by finance companies and these money recovery cases are flooding district courts all around Sri Lanka.
We are now in a situation that cannot be remedied through further loans. These debts have to be waived off. At least, there has to be a long-term moratorium, so these people would have space to breathe and restart.
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