Microfinance: Addressing a Social Disaster
Photo courtesy of Global Press Journal
Microfinance is an essential aspect of the economy where low income people often lack access to structured, formal financial services. Improved access to financial services among the low income population assists in poverty reduction enabling the underprivileged to build assets, increase their income and reduce their vulnerability to economic recessions. The Consultative Group to Assist the Poor has defined microfinance as the provision of financial services to low income people and states that microfinance services help people fight poverty on their own terms, in a sustainable way.
The argument that microfinance is essential in the given country context of Sri Lanka in particular where access to finance is very stringent is well accepted. But establishing and effectively implementing robust regulatory and supervisory mechanisms is essential to prevent consumers from being exploited by unauthorized financial businesses.
In this context, as far as the microcredit facilities provided by various financial institutions are concerned, poor and marginalized communities with little or no assets are the core target audience of those initiatives providing access to finance. In many local areas, the overwhelming majority who have received credit facilities from a range of financial institutions and have, in turn, faced potential rights violations, are women and members of women’s groups.
This article highlights the critical issues faced by communities in the Polonnaruwa, Trincomalee, Batticaloa and Nuwara Eliya districts. The crux of the problems emerged from the lack of implementation of regulatory and supervisory mechanisms, lack of knowledge and understanding on the part of loan recipients and lack of know how in relation to legal frameworks and referral system through which victims of unauthorized financial businesses can seek remedies are more or less the same in other parts of the country.
Due to a range of issues faced by communities involved in or access to either microfinance or microcredit services, a substantial number of people, women mainly, are struggling to maintain their minimum standards of well-being. In many cases, various human rights are also at risk. People who have envisaged rebuilding their livelihoods through easy access to microfinance or microcredit services are seen to have lost their human dignity in addition to losing their assets. It is important to examine how the right to livelihood can be recognized as an integral element of the right to life in the context of social debates on the rights of people and the Constitutional reform discussions in which many demand meaningful accountability in all aspects of life. Despite not being explicitly recognized as fundamental human rights by the Constitution, they can be safeguarded while ensuring that low income communities who lack personal assets, nevertheless have access to well regulated financial services.
When observing judicial interpretations regarding the right to livelihood in other jurisdictions, the Indian Supreme Court, known for setting examples for broader and meaningful interpretations of human rights of people, has decided in the pavement dwellers case (Olga Tellis v. Bombay Municipal Corporation) that the right to livelihood is borne out of the right to life as no person can live without the means of living, that is, the means of livelihood. Therefore, it is pivotal to look at the issues and challenges communities face due to unauthorized financial business services and activities being operated to support low income groups in to fight against poverty, which in turn has primarily led to further suppression of poor people.
Laws governing microfinance and microcredit
The Microfinance Act, No. 6 of 2016 is the key piece of legislation that provides provisions for the licensing, regulation and supervision of companies carrying on microfinance business. The Monetary Board of the Central Bank may issue directions to licensed microfinance companies on any aspect of a company’s business and corporate affairs. Under sub-section (1) and (2) of section 12 of the Act, the Board may issue guidelines on monitoring compliance. In case of failure to adhere, it may cancel the license of said microfinance company under the provisions of Section 17, respectively.
In 2019 there was an effort to introduce a piece of legislation to regulate the money lending business and the microfinance business, including the protection of customers. Even after a few years the bill is stagnant in the Attorney General’s Department and is yet to be tabled in parliament. What is significant is that before being tabled in the parliament, this bill requires a comprehensive review to ensure the most recent developments in relation to the money lending business and the microfinance business amid the COVID-9 pandemic and the economic crisis are adequately addressed.
According to the Central Bank as of June 30, 2021, there are only four licensed microfinance companies – Berendina Micro Investments Company Limited, Lak Jaya Micro Finance Limited, Dumbara Micro Credit Limited and Sejaya Micro Credit Limited.
There are other institutions not registered as Licensed Microfinance Companies (LMFCs) but registered as Licensed Finance Companies (LFCs) that provide small scale loan facilities for a range of purposes. Such LFCs are regulated and supervised under the Financial Business Act No. 42 of 2011. One of the core objectives of introducing the Financial Business Act in place of the previously operated Finance Companies Act No. 78 of 1998 was to strengthen the regulation and supervision of unregulated, illegal and unauthorized financial businesses. This shows that even a decade ago, unauthorized financial businesses had created issues that adversely affected people who accessed their services.
However, many institutions delivering microfinance related, microcredit and/or money lending services are part of the Lanka Microfinance Practitioners’ Association (LMFPA) under two categories: ordinary members and associate members. LMFPA has been recognized by the Central Bank the coordinating body for microf inance institutions.
The absence of a national policy on all aspects connected to microfinance, including all kinds of credit services provided by licensed finance companies, licensed microfinance companies and any other institution or individual engaged in microcredit related activities, is recognized to be one of the core policy issues. The repercussions arising due to the absence of such a national policy are further exacerbated due to the lack of awareness among communities, as the service recipients, on money lending criteria, method of interest calculation and legal repercussions of defaulting that result in additional charges for delays. There is no information concerning the functions and legitimacy of institutions providing microfinance loans and lack of knowledge on referral systems from which they can seek remedies when injustices have occurred.
Social impact of unregulated and illegal activities
This grid summarizes experiences of many people who have received microfinance or microcredit related services and have been subjected to injustices, particularly in the context of the COVID-19 pandemic and the economic crisis.Issues faced by people as a result of unregulated money lending/microfinance business activities Loan agreements are not in languages understood by loan recipients, violating language rights (Agreements are mainly in the English language) Sexual harassment/demanding sexual bribes when unable to repay loan instalments Copies of loan agreements are not provided to loan recipients Violating privacy rights of women Unjust interest rates charged Lack of knowledge of loan recipients on financial management and available redress mechanisms Money collectors verbally harass/intimidate loan recipients Forced to provide deeds/vehicle books as securities Loan recipients are threatened with taking legal action Defaulting instances linked with previous transactions Lack of access to information about legal or referral systems of loan related matters Unjust loan rescheduling and lack of complaint mechanisms Non-provision of long lasting receipts for payments No follow up/supervision of the effective use of financial services received Lack of follow up/supervision by authorities at district and divisional levels Adverse impact on loan receipeint’s children’s education and development Adverse consequences on the right to a dignified life The mental trauma of loan recipients leads to deteriorating overall social well-being
While the fact that the lack of knowledge and understanding of communities to effectively manage financial resources gained through microfinance and microcredit facilities has also assisted in exacerbating these issues, the gaps in weak regulatory systems can be recognized as the core challenge. This regulation challenge requires practice and policy level reforms in the sector of microfinance and other financial services that target low income segments of society. Women, traditionally having less property ownership, are the majority among persons accessing such financial assistance. Thus the consequences of these issues are easily reflected not only on the individual women but also on their broader family setups. It inevitably translates the initial economic problem into a very complex irreversible social disaster making the primary objectives of microfinance null and void.
A female loan recipient from Kantalai stated, “We had taken a loan of Rs. 300,000 from a financial institution against our land deed of which my husband is the legal owner. That loan was in the names of both of us because to apply for the loan, the respective financial institution wanted my husband to open a joint account at the financial institution to receive the loan. We repaid the loan properly and in between, I took a separate loan from the financial institution and it was a group loan with two other women in my community. That had no link at all with our loan against the deed. However, once we completed the repayment, we asked the financial institution to return the deed to us. Surprisingly they refused to say that I was supposed to repay the full amount of the subsequent group loan too. So, we took money from another money lender and settled the group loan too. The financial institution continues to refuse to return the deed and now says that two other women in the said group loan are also expected to complete their repayments to release the deed and until such time, the financial institution will keep my deed as security even for another 10 years.
“They came with a big document and we were asked to sign a number of places and we could not even read and understand because it was in English but as we wanted to build our livelihoods, we were compelled to sign to a document that was in an alien language,” she said.
The approach of the microfinance company raises concerns in terms of the human rights of loan recipients. One problem is whether the loan agreement related to the group loan of women contained a provision, term or condition referring to the possibility of taking a moveable or immovable property as security for a loan of another person who has defaulted. The challenge of offering legal assistance to such victims who have faced these injustices is that there are no loan agreements with these affected women and they are unable to understand the terms and conditions thereof until they appear before a court of law for litigation.
Agreeing in a language that is not understandable to one party but is compelled to sign as read and understood is a violation of the contract law and an infringement of the language rights of a citizen too. There should be policy changes that regulate illegal practices adopted in providing microfinance services to poor communities.
A female farmer from Kantalai stated, “I took a loan of Rs. 400,000 for cultivation. But due to the Corona virus issue and unexpected health matters, I could not repay loan installments for some time. Sadly, officials of the financial company came with two persons, said to be a lawyer and a surveyor, and threatened me that if I did not pay the loan, they would survey a part of my land and that I must transfer it to the company. When I refused to transfer a part of my land, they compelled me to hand over the trishaw we have that has no link with the loan.”
She said the officials of the finance company had rescheduled the loan and had asked her to repay a much higher amount, which in her opinion is unreasonable, to settle the matter. She does not have proper documentation of how much she had already repaid and the receipts of the payments to prove her case. These financial companies do not provide a proper receipt when loan recipients repay. Instead they issue a receipt similar to supermarket receipts which fade after a few hours. Loan recipients believe that microfinance companies purposely do so to exploit them, leaving no proof with them.
A civil activist working in Trincomalee stated, “Women who actually wanted to build their livelihoods with the support of microfinance support have now come to a situation where they have even given up their right to life. Some have already committed suicide. The microcredit loan trap is a terrifying issue in many areas. When women get trapped in this issue, they do not even pay sufficient attention to giving education to their children. There are cases of sexual harassment allegations by persons representing microfinance companies and coming to villages to collect loan instalments from women. We need to support these women to seek legal support and link with authorities to find solutions.”
The Centre for Policy Alternatives (CPA) has engaged in advocacy efforts to address the issues including interventions in capacity building of affected communities to understand their human rights, making legal and policy analyses and creating advocacy dialogues.
As part of the broader advocacy strategy, it is expected to bring this matter to parliament, particularly the Committee on Public Finance and the Women Parliamentarians’ Caucus, to influence policymakers to act immediately while building public pressure and pushing authorities enact the Credit Regulator Authority Act. Authorities will be influenced to establish a national policy that facilitates both service providers and service recipients of microfinance/microcredit services to realize their ideal objectives and assist low income communities in the fight against poverty.
Recommendations to address the issues:Designing a national policy framework with an action plan which entails all activities connected to microfinance, microcredit and other means of money lending. Expediting the process of finalizing the proposed Credit Regulatory Authority Act with consultation processes with victimized communities. Such legislation should include provisions on implementing a regulatory mechanism that standardizes the functions of the microfinance sector to prevent individuals or institutions from exploiting underprivileged communities. The criteria for regulations through the Microfinance Act, Finance Business Act or any future legislation should include guidelines to respect the language rights of service recipients of microfinance institutions enabling money lending. The Central Bank and other government institutions should conduct an investigation of the debt relief facilitation process and identify the gaps, challenges and lessons learned. Action should be taken to rectify the injustices faced particularly by rural and marginalized self-employed women. District administrations should conduct an assessment of people trapped in microcredit loan issues and collect data of affected communities. Assigning district level and divisional level focal point officials to observe, monitor, evaluate and advise poor and marginalized communities seeking microfinancial support. An assessment to be conducted on financial assistance communities need to rebuild their livelihoods through self-employment and various entrepreneurship. Officials in charge of small enterprise development, Samurdhi, social development, women and child affairs and social integration at district and divisional levels to ensure more proactive engagement with and supervision of the rural and poor communities. Officials of District and Divisional administration to enhance their collaborations with the officials of the regional office of the HRCSL and the Legal Aid Commission in taking action against alleged violations of rights such as language rights, unfair contract terms, illegal methods of collecting loan installments, women’s rights and right to privacy.