58 Finance & economics The EconomistAugust 17th 2019
I
n parts ofSri Lanka’s north and east,
some women keep track of their micro-
loans by the day of the week the collectors
come. Others identify the lenders by the
colours of their collectors’ shirts. Monday
loan, Tuesday loan, blue shirt, yellow shirt:
small, unsecured loans promoted by the
government after the decades-long civil
war ended in 2009 have enmeshed many
women in hopeless debt. A central-bank
official says his employees have talked des-
perate borrowers out of killing themselves.
At least 170 committed suicide last year.
Nalani Wickremesinghe, from Badura-
liya in the south, has taken loans from 11
companies, only two of which are regis-
tered with the central bank. The first was to
pay for her husband’s medical treatment.
Then he fell at his workplace and is still
bedridden. She has borrowed 500,000-
600,000 rupees ($2,800-3,400) in total—
but has no idea of the interest rate. She has
already pawned, and lost, her gold jewel-
lery. Struggling to feed her family, she has
little option but to borrow again.
In Nachchikuda, a coastal village, Sri
Sundara Gowri sits in her front yard—not
far from the satellite dish she bought on
hire-purchase—and relates how she had
five loans, three of which have been at last
paid off. The first, of 25,000 rupees, was
taken ten years ago after she returned from
prolonged displacement to build a house.
Unable to live on her husband’s fishing in-
come, they borrowed more. One loan wenton a fishing net that was soon damaged.
Their property is now mortgaged to an in-
formal lender who frequently sends agents
to threaten them.
Researchers say these stories are typi-
cal. Borrowers know nothing about inter-
est rates—effective rates may be as high as
220%—only the capital and weekly instal-
ment. The finance ministry reckons big
microfinance institutions have lent out
282bn rupees ($1.6bn), but it has no data for
the many smaller lenders that operate. No
rules exist to prevent over-indebtedness.
Most borrowers took out their first loan to
consume rather than invest, and most new
loans are taken out to service old ones.
Giving poor people small loans without
collateral, albeit at higher interest rates
than on conventional loans, was meant to
spur entrepreneurship and allow people to
bootstrap their way out of poverty. In Sri
Lanka it seems to be burying many, partic-
ularly women, deeper in it.
Those areas in the north and the east
where civil war once raged hold 160,000
households headed by women. When the
war ended the government began a $26m
microloan programme called “Awakening
North” for agriculture and business. The
money was disbursed at 12% interest
through state-owned and private banks.
Then commercial lenders swarmed in.
These offered microloans at dearer inter-
est, and hire-purchase and leasing. Plac-
ards nailed to shrapnel-ridden coconutand palmyra trees advertised motorcycles,
tuk-tuks and tractors on lease. Kilinochchi,
the former rebel capital, bustles with banks
and microfinance companies.
Most borrowers are women with no
steady work. They buy consumer goods on
hire purchase, and take loans for coming-
of-age ceremonies or to cover family ill-
nesses. Some borrow to send their hus-
bands or sons abroad for work. If the job
fails to work out, the man returns and the
woman is saddled with debt.
Such problems seem more severe in Sri
Lanka than elsewhere, says Hema Bansal of
Accion, a global non-profit organisation.
Leasing and housing-finance companies
lend without assessing ability to repay. Few
have links with international donors. Irre-
sponsible lending carries no penalties. Last
year Mangala Samaraweera, Sri Lanka’s fi-
nance minister, accused microfinance
companies of ruining Sri Lanka’s financial
sector and of creating a “sadistic situation”
in which loan officers, when unable to ex-
tract repayment, solicit sexual favours.
There are strong echoes of the wave of
farmer suicides linked to predatory lend-
ing in the Indian state of Andhra Pradesh in
the 1990s and early 2000s. These caused In-
dia to pass laws preventing private microfi-
nance institutions from “exploiting” bor-
rowers through “usurious interest rates
and coercive means of recovery”. The mea-
sures led to borrowers becoming more
aware of the terms attached to their loans,
but they came at the cost of a sudden stop
in lending and squeezed consumption.
Last year the Lanka Microfinance Practi-
tioners’ Association, a group of established
lenders, published a code of conduct. This
covers basics, such as checking how many
loans a prospective borrower already has
and stating the interest rate upfront. But
the code is voluntary and covers only the
group’s 66 members; it thinks there are at
least 5,000 unregulated firms. Worried
about damage to its reputation from preda-
tory lending, it wants the authorities to
oversee all firms. A Microfinance Act, in-
troduced in 2016 after ten years of lobbying,
is weak, covering only deposit-taking lend-
ers. Just three are registered under it. A
Credit Regulatory Act is being written but
could take two years to pass.
Last year the government wrote off
business loans of up to 100,000 rupees giv-
en to women in drought-affected areas and
capped interest rates at 35%. But the relief
applied only to each person’s biggest loan
from a registered lender. Enforcing the cap
fell to borrowers, few of whom knew about,
let alone understood, the rule.
One-off measures will not do, says Ms
Bansal: Sri Lanka needs properly enforced
rules that prevent over-indebtedness and
ensure fair treatment of borrowers. Until
then, microfinance will be a cause not for
hope but for despair. 7COLOMBO AND NACHCHIKUDA
Microloans are driving borrowers, many of them women, to despairMicrofinance in Sri LankaDistress signals
Overburdened