Stop blaming the victims of the microfinance crisis!

24 May by Amali Wedagedara , Nedha de Silva

The exponential growth of the microfinance industry in Sri Lanka does not correspond with its contribution to reducing poverty. Instead, it has escalated indebtedness among women, pushed them below subsistence and made victims of both personal and structural violence. The Satyagraha which commenced on March 8 by the Collective of Women Affected by Microfinance in Hingurakgoda, Polonnaruwa, was the latest manifestation of the microfinance crisis. The female victims were exposing the failure of the government, the Central Bank, and the microfinance service providers to address fallouts in lending.

 Magic Bullet or Vicious Debt Trap?

Microfinance was initially recognised as a magic bullet empowering women and reducing poverty. However, as is the case elsewhere, the model has failed to contribute towards poverty alleviation 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 underpinnings of microfinance.

Spillovers of exploitative microfinance lending in Sri Lanka became visible around 2017. Suicides and people’s outcry against violence exerted on women borrowers by loan collectors revealed that microfinance lending is practised at usurious rates as high as 220 percent. It was also evident that the state regulatory bodies and registered and long-term microfinance providers have failed in their implementation, monitoring and supervision mechanisms. Lack of financial literacy among the women borrowers from rural areas without access to alternative credit has enabled the profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. -driven microfinance lenders to trap them in a cycle of predatory microfinance and multiple borrowing.

 Did 2018 solve the microfinance issue at all?

Repeated protests against microfinance lending compelled government intervention in 2018. This included a partial debt waiver, an interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. cap of 35 percent and a revolving fund to strengthen cooperatives as an alternative to microfinance in North and North-Central Provinces.

Microfinance providers complain that the government intervention destabilised their industry and protests that mobilised government intervention have tarnished their good reputation. For the victims of microfinance, government intervention brought hope of a systematic address of the microfinance crisis. Expectations were renewed in 2019 with the election promise to cancel all microfinance debts. The debt waiver in 2018 could only touch the tip of the iceberg. The microfinance problem since then has multiplied. The Easter attack and the Covid-19 pandemic have crippled the livelihoods of microfinance borrowers. The obligation to pay the unpayable debt has intensified as the microfinance lenders retaliate with legal action to recover the money through the judiciary mechanism.

During our interactions with female victims of microfinance, it was evident that none of the promises made during elections in 2019 has materialised. Shedding light on their plight, the women explained that even though microfinance loans were primarily disbursed for entrepreneurial activities, the structure of these loans negates the objective. Loan recovery commences immediately without a grace period to permit the borrower to generate income from the livelihood. Companies still violate the interest rate cap of 35 percent by charging higher interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
. Accumulative of the annual punitive interest rate of 48 percent, microfinance offers the most expensive debt, forcing the borrowers to depend on loans and not income from livelihoods as means of debt repayment. Instead of facilitating an exit to people finding it difficult to repay, the microfinanciers have chosen to augment the crisis by issuing personal loans to pay the remaining microfinance debt. With land held as collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. to personal loans, microfinance companies are aiming to expropriate the land of the indebted in the name of recovering money as has been in other countries such as Cambodia.

 Debtors’ protests, a health check

Contrary to the perception of the Lanka Microfinance Practitioners Association (LMFPA), the Hingurakgoda Satyagraha and associated reporting provide a health check to the ailing microfinance industry. Protests offer the microfinanciers an opportunity to reflect, reassess and relaunch their industry rather than blaming the victims.

Protestors are accused of providing false evidence when they point out that approximately 2.8 million people are trapped in the microfinance debt trap. Their claims on the figures of suicide are also deemed incorrect. LMFPA as an authoritative body with a long-standing since 2006, more than a decade before indebted women started protesting, speaking on behalf of the microfinanciers 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 subsequent increase in loan value and high interest rates are at the root of the problem. Women were forced to take more loans to pay older loans. When asked whether the microfinance loans were beneficial from an elderly man in Lankapura, he said: “We took loans and paid back. It was a cycle of debt payments. I even used Rs. 5000 given by the government to help with the kidney disease”. Many people we met narrated stories of what they lost rather than what they gained out of microfinance. There is a mass of evidence to prove that microfinance has been an instrument of dispossession rather than economic advancement. Hard-working people in the villages are forced to depend on debt as microfinance providers extract all their wealth.

Apart from making poverty a thing of history, microfinance also envisaged eliminating the usurious money lenders in the village. However, microfinance borrowers from Hatton and Matale recounted visits from local money lenders when weekly and monthly microfinance instalments are due. The microfinance industry co-exists amicably with local money lenders and that obligation to repay drives people between microfinanciers and local money lenders. With the entry of daily lenders, the informal money markets in the village have acquired greater complexity.

Even though indebted women have been voicing their concerns for years, the larger society only feels their plight when a suicide occurs. Even then, interpretations related to family disputes, husbands’ alcoholism, extra-marital affairs often dominate the narrative of death. Debt as a cause of death is often lost in the interpretation. Apart from media reports, the national police records on suicides are the only source of evidence to understand how debt causes deaths. According to police records, ‘economic problems, poverty and indebtedness’ is quoted as the reason for more than 170 suicides annually. Harassment by husbands and family disputes account for more than 500 suicides annually. For people closely observing lived experiences of indebted people, its common knowledge that most of the family disputes are related to debt. Rather than a debate over the exact number of suicides related to microfinance, a responsible leadership would adopt a socio-economic evaluation to understand the social and human impact of debt they disburse. Such an approach is crucial for an industry like microfinance which markets its services through the altruistic jargon of empowerment, sustainable development, and human rights.

Amali Wedagedara

is PhD student in the University of Hawaii, Manoa, focusing on low income household debt problem in Sri Lanka.

Nedha de Silva

is a PhD candidate at Monash University, Australia



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