Courtesy Centre for Poverty Analysis (CEPA)
A QUESTION OF LENDING
Questions are being raised about the advent of accessible loans for women
Concerns have been raised about the plethora of microfinance institutions and their practices, especially in relation to rising indebtedness among people in the north and east. Protest marches, a visit by the Governor of the Central Bank of Sri Lanka to the Northern Province and the subsequent introduction of a moratorium to ease the pressure of mounting debt all point to a matter that needs urgent attention.
In addition, there has been a strident demand for action by people affected by the vagaries of microfinance repayments.
Seeking loans to meet family or livelihood needs is not a new phenomenon in Sri Lanka. At the community level, people have sought credit lines through informal lenders or more formalised community based lenders such as death donation, and women’s and farmers’ societies.
Where the latter is concerned, the purpose of the loan is clear – the money is used as capital for paddy farming or other agricultural activities. Repayment of such loans while depending on harvests is serviceable mainly because of low interest rates. However, such regulated forms of credit seem to have disappeared since the entry of specialised microfinance institutions.
With the spread of the Grameen Bank concept, women have become the primary and only target group for microcredit lenders. NGOs with donor backing took the lead in popularising the concept in Sri Lanka and facilitating access to credit for marginalised groups – especially women.
At present, while NGO led microfinance institutions continue to be active on the ground, it is the private sector that has taken over. These lenders include financial services organisations currently under the regulatory framework of the Central Bank.
The entry of the private sector with its focus on meeting targets to maximise profits has meant that potential borrowers who are women gain access to credit facilities within a very short time frame. Information from a number of CEPA (Centre for Poverty Analysis) studies indicates that loans are provided within a week or two.
Whereas the Grameen concept inculcated the saving habit, this benefit has been circumvented by dint of women being provided easier access to loans. But the ease with which such credit is granted to them isn’t always sustainable especially when they lack a stable source of income that can service the weekly instalments set by the lender.
Under these circumstances, women often opt for multiple loans by seeking another tranche to settle the outstanding balance of a previous loan. Since there are few checks and balances, women are able to borrow from multiple financial institutions that visit the community. The impact of such borrowings on the family economy can be devastating – this has been noted by numerous media reports, and research conducted in the north and east.
The sudden proliferation of microfinance institutions and the multiple borrowings phenomenon also raises the question of whether such lenders will soon reach saturation point. All these lenders – those who are regulated by the Central Bank and others – are fighting to attract the same group of potential borrowers: a pool of women whose numbers may not necessarily grow sufficiently to sustain the practice.
Women can only service a finite number of loans especially in instances where the family is dependent on a single wage earner. Furthermore, as women wise up to high interest rates and the fact that settling the mandatory weekly payments is far more difficult than they anticipated, the popularity of borrowing in such a spontaneous manner may wane.
This is evident in Batticaloa where there is a mounting backlash against private lenders approaching women in the community. Whether such actions will become more commonplace is not yet clear but this could eventuate over time.
It is unclear how microfinance institutions will adapt to these changing dynamics. While the new Microfinance Act will help regulate some of the private institutions operating on the ground, an inability to regulate all of them means that such organisations will continue to act without supervision.
Although it is important that the government addresses this pressing concern, an equal share of responsibility must lie with institutions that offer credit to marginalised people. Inaction on their part to change the way they conduct business will result in people becoming wary of a sector that has already been painted as an unforgiving extractor from the poor.