This article is based on the opinions expressed by State Minister of Finance Eran Wickremeratne on the microfinance crisis during Sanwadaya live program telecasted on Independent Television Network (ITN).
Microfinance institutions between banks and Poli Mudalalis?!
The State Minister kept on emphasizing that the abolition of microfinance institutions may result in reappearance of ‘Game Poli Mudalalis’ (local lenders).
“Poli Mudalali issues loans without an annual interest rate, either for daily interest rates or monthly interest rates. Banks, depending on the risk, may impose interest rates from 12 per cent to 20 per cent. When people can’t obtain a loan from a bank, they seek the service of Poli Mudalali. If Poli Mudalali’s monthly interest rate is 10 per cent, borrowers have to pay an interest of 120 per cent annually. If we abolish microfinance institutions, people would go to Poli Mudalali. Therefore, we need microfinance institutions.”
“Something wrong may have happened, for instance, they may have given a loan when the borrowers were not able to pay a previous loan. It puts the borrowers in a difficult situation. These types of things might also have happened..!,” the minister said when he was questioned about unethical practices of microfinance institutions.
However, Nelumyaya Foundation (NyF) says 90 per cent of victims of microfinance in Sri Lanka have become hostages of a number of institutions and loans. NyF emphasized that this issue is not so simple and one cannot get away saying “These types of things might also have happened.”
“Tax payers’ money is used to write off debts. But there were special reasons, such as war and draughts. So far we have written off debts of 45,139 people. The government has already spent more than Rs 1.2 billion, more than Rs 120 crores. We have written off debts of institutions under microfinance associations in all twelve draught-affected districts. It’s done. It’s completed. We have no intention of doing the same in future. We did it once, and created a way to resolve this issue..!
If you can't repay, deal with institutions!
When the minister was questioned about circulating false information about ‘writing off debts’ without declaring the relevant criteria and microfinance institutions filing court cases, the he stated, “We, as financial experts, are against writing off debts. But we decided to write off debts for the sake of humanity. This program is concluded. Not a single more loan would be written off. Therefore, is one has obtained a loan, they have to repay it, and if they don’t, there are procedures with that regard. There is a law in this country. The judiciary system will take action. We could have refrain from doing this, but it would have led to more suicides increasing the already reported number of suicides by two or three times. If someone believes they can refrain from repaying money, remember, the government will not intervene. They have to deal with the institutions they took loans from.”
Tell the police!
When the minister was questioned as to whether the government is in a position to intervene to control harassments and abuse that take place when loan installments are being recollected, the minister said: “If women face such issues, the law will certainly be implemented. There are special women’s bureaus in police stations. We first have to raise awareness, then the police will do their duty through these women’s bureaus.”
However, what Minister Eran Wickremeratne didn’t know, is that complaints pertaining to financial matters are usually filed at the ‘various complaints’ unit in the police, not the women’s bureau. During a discussion held last week, between several activists representing victims of microfinance loans and the Ministry of Finance, they had presented a suggestion to appoint a special female police officer at police stations to accept complaints regarding aforementioned types of harassments against women. It was reported recently that when a foreign woman went to a police station to lodge a complaint, after facing harassment in Mirissa area, there were no female police officers at the police station.
NyF Program Director Radika Gunaratne (Attorney-at-Law), who joined the conversation via telephone, asked the minister for his opinion on several matters including harassments done by registered and permit-holding institutions engaged in the microfinance industry and unethical means of persuading women to obtain microfinance loans without giving them a financial literacy or market knowledge, first. She also emphasized microfinance loans have been issued even for people’s ‘basic needs’ and, supporting people’s basic needs is a responsibility of the government and for that, loans cannot be issued.
Punishments must be imposed!
State Minister of Finance stated: “If these institutions harass or press people, it’s absolutely wrong. I think, if they do so, actions must be taken against responsible institutions. If these organizations are member institutions of the Lanka Microfinance Practitioners’ Association (LMFPA), we will intervene and investigate. After investigations, we will tell relevant parties that these things happen, and this must be stopped and penalized. In addition, responsible persons must be penalized, such actions must be stopped, and relevant microfinance institutions must take the responsibility. If such things happen, there is no excuse. If we get to know about these matters, we too can investigate. We can even inform the Central Bank to investigate into these problems, and implement the law. We are certain about it.”
However, as stated by State Minister of Finance, only 64 institutions have obtained the membership of the LMFPA, and among them, only 40 member institutions have agreed to adhere to its code of conduct. If a member is found to have violated two guidelines, their membership will be revoked – that’s the maximum punishment that can be given to a member institution. (Read code of conduct here)
“When issuing a loan, these institutions assess how they can make profits out of it. No profits, no loans – that is the fundamental theory,” the minister said, adding that Central Bank regulations will be further tightened in future.
However, as Lanka News Web (LNW) revealed earlier, even the Central Bank doesn’t have an adequate legal framework to regulate microfinance institutions properly. Currently, it can only intervene when commercial banks and financial institutions that issue loans out of depositors’ money are involved, and the number of institutions that fall under these categories, is no more than 100. However, the number of institutions currently engaged in the microfinance industry is between 10,000 and 15,000.
Microfinance Act will not be abolished! But a new act will be introduced!
When the minister was questioned, during this particular program, whether the Microfinance Act No 6 of 2016 will be abolished, he said: “No, there is such proposal.”
“Will a new act called Credit Regulatory Authority Act be introduced?”
“There is a discussion about that but there is no proposal to abolish the Microfinance Act.”
However, according to Lanka News Web, Credit Regulatory Authority Act is being prepared, and has already been drafted. Finance Minister Mangala Samaraweera and Finance Ministry Advisor Mano Thiththawella said suggestions can be presented from the victims’ side, and upon implementation of this new act, the Microfinance Act will automatically be abolished. Therefore, aforementioned statement begs the question of whether the State Minister of Finance is unaware of this move.
Read the article here: Microfinance Act to be abolished – new act already drafted!
Attorney Radika Gunaratne says that in the proposed act, even the term ‘microfinance’ is not included, and the Microfinance Act No 6 of 2016 must be made a mandatory law.
“After this act was introduced in 2016, only two institutions registered under the act. If financial institutions engage in microfinance industry within the country, they must act in accordance with this act. But authorities paid no attention whatsoever. As a consequence, all microfinance cases heard in District Courts throughout the country are heard as regular financial cases, not as microfinance cases. This is misleading. It is apparent that these institutions, throughout the past few decades, have been engaged in a totally different business under the guise of microfinance loan industry. The Microfinance Act, therefore, must be made a mandatory law, and a new regulatory framework must be established in the country. Currently there is no methodical legal framework to control these loans. The Central Bank can intervene in this issue only to a certain extent.”
“We are not saying that microfinance institutions must be closed down, or issuing of microfinance loans must be stopped. We demand that all unregulated and unethical financial affairs be tackled. We must put an end to oppressive culture of debts and the microfinance trap,” she opined.