Stop blaming the victims of the microfinance crisis!

Magic bullet or vicious debt trap?

Microfinance was initially recognized as a silver bullet to empower women and reduce poverty. However, as is the case elsewhere, the model has not contributed to poverty reduction in Sri Lanka. A growing body of global research highlighting the failure of microfinance as a development strategy and its negative socio-economic impacts has exposed the neoliberal foundations of microfinance.

The fallout from the exploitation of microfinance loans in Sri Lanka became visible around 2017. Suicides and public outcry over violence against women borrowers by debt collectors have revealed that microfinance loans are practiced at usurious rates of up to 220%. It was also evident that state regulators and registered and long-term microfinance providers had failed in their implementation, monitoring and oversight mechanisms. The lack of financial literacy among women borrowers in rural areas without access to alternative credit has enabled the profit
Profit
The positive gain resulting from the activity of a company. Net profit is profit after tax. Distributable profit is the part of net profit that can be distributed to shareholders.
– encouraged microfinance lenders to trap them in a cycle of predatory microfinance and multiple borrowing.

Did 2018 solve the problem of microfinance?

Repeated protests against microfinance loans forced the government to intervene in 2018. This included partial debt cancellation, interest
Interest
An amount paid as remuneration for an investment or received by a lender. Interest is calculated on the amount of capital invested or borrowed, the duration of the transaction and the rate that has been set.
35 percent cap and a revolving fund to strengthen cooperatives as an alternative to microfinance in the northern and north-central provinces.

Microfinance providers complain that government intervention has destabilized their industry and the protests that mobilized government intervention have tarnished their good reputation. For the victims of microfinance, government intervention has brought hope for a systematic resolution of the microfinance crisis. Expectations were renewed in 2019 with the electoral promise to cancel all microfinance debts. Debt cancellation in 2018 could only touch the tip of the iceberg. The problem of microfinance has since multiplied. The Easter attack and the Covid-19 pandemic crippled the livelihoods of microfinance borrowers. The obligation to pay non-repayable debt has intensified as microfinance lenders retaliate with lawsuits to recover the money through the legal mechanism.

In our interactions with women victims of microfinance, it was evident that none of the promises made in the 2019 elections had come true. Shedding light on their plight, the women explained that although microfinance loans were mainly disbursed for entrepreneurial activities, the structure of these loans negates the purpose. Loan recovery begins immediately with no grace period to enable the borrower to generate income from their livelihood. Companies still break the 35% interest rate cap by charging higher interest rate
Interest rate
When A lends money to B, B repays the amount lent by A (the capital) as well as an additional sum called interest, so that A has an interest in agreeing to this financial transaction. Interest is determined by the interest rate, which can be high or low. To take a very simple example: if A borrows $ 100 million for 10 years at a fixed interest rate of 5%, in the first year he will repay one-tenth of the capital initially borrowed ($ 10 million) plus 5% of the capital. owed, or $ 5 million, for a total of $ 15 million. In the second year, it will repay 10% of the borrowed capital again, but the 5% only applies to the remaining $ 90 million still due, or $ 4.5 million, for a total of $ 14.5 million. of dollars. And so on, until the tenth year he pays back the last $ 10 million, plus 5% of the remaining $ 10 million, or $ 0.5 million, for a total of $ 10.5 million. Over 10 years, the total amount repaid will be $ 127.5 million. The repayment of capital is generally not made in equal installments. In the early years, the repayment mainly concerns the interest, and the share of the repaid capital increases over the years. In this case, if the repayments are interrupted, the outstanding capital is higher …

The nominal interest rate is the rate at which the loan is taken out. The real interest rate is the nominal rate less the rate of inflation. . By accumulating the punitive annual interest rate of 48%, microfinance offers the most expensive debt, forcing borrowers to depend on loans and not on livelihood income as a means of debt repayment. Instead of making it easier for people who have difficulty repaying to exit, microfinancers have chosen to worsen the crisis by issuing personal loans to pay off the remaining microfinance debt. With land held as collateral
Collateral
Transferable property or collateral used as collateral against the repayment of a loan, in the event of default by the borrower.
to personal loans, microfinance companies aim to expropriate the land of the indebted in the name of recovering the money as has been the case in other countries such as Cambodia.

Debtors’ manifestations, health check

Contrary to the perception of the Lanka Microfinance Practitioners Association (LMFPA), the Hingurakgoda Satyagraha and associated reports provide a health check for the struggling microfinance industry. The protests provide an opportunity for microfinancers to reflect, reassess and revive their industry rather than blaming the victims.

Protesters are accused of providing false evidence when they point out that around 2.8 million people are trapped in the microfinance debt trap. Their claims about suicide numbers are also considered incorrect. LMFPA as an authoritative body since 2006, more than a decade before women in debt started protesting, speaking on behalf of microfinancers should be able to shed more light on the microfinance industry. However, the content reported in their annual reports or their conduct over the years proves that LMFPA has failed to provide insight into the industry they represent.

Protesters argue that the proliferation of microfinance companies, the resulting increase in loan values ​​and high interest rates are at the root of the problem. Women were forced to take out more loans to pay off older loans. When asked if microfinance loans were beneficial to an elderly man in Lankapura, he replied, “We took out loans and repaid. It was a cycle of debt repayment. I even used Rs. 5000 donated by the government to help fight kidney disease ”. Many people we met told stories of what they lost rather than what they gained from microfinance. There is a body of evidence to prove that microfinance has been an instrument of dispossession rather than economic progress. The hard-working people in the villages are forced to depend on debt as microfinance providers extract all their wealth.

In addition to making poverty history, microfinance also envisioned eliminating loan sharks from the village. However, microfinance borrowers in Hatton and Matale recounted visits to local lenders when weekly and monthly microfinance payments are due. The microfinance industry coexists amicably with local lenders and this repayment obligation pushes people between microfinance and local lenders. With the arrival of daily lenders, the village’s informal money markets have become more complex.

Even though women in debt have voiced their concerns for years, society as a whole does not feel their plight until a suicide occurs. Even so, interpretations related to family conflicts, husband alcoholism, extramarital affairs often dominate the death tale. Debt as a cause of death is often lost in interpretation. Aside from media reports, National Police suicide records are the only source of evidence to understand how debt causes death. According to police records, “economic problems, poverty and debt” are the cause of more than 170 suicides per year. Harassment of husbands and family conflicts account for more than 500 suicides per year. For those who closely observe the lived experiences of those in debt, he knows that most family disputes are debt related. Rather than a debate on the exact number of microfinance-related suicides, responsible leadership would adopt a socio-economic assessment to understand the social and human impact of the debt they disburse. Such an approach is crucial for a sector like microfinance which markets its services through altruistic jargon of empowerment, sustainable development and human rights.


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