Reducing indebtness

The Government over the weekend rolled out a microfinance relief campaign that aims to repay billions worth of loans and waive expensive interest payments to reduce indebtedness in the north. Successive governments from time to time have resorted to such measures, especially when elections are on the horizon, to boost their popularity and improve living standards. But such steps come at a cost to taxpayers and underline the need to have a comprehensive, reliable and competitive microfinance system to support sustainable development.

Microfinance in an important and indispensable component of poverty alleviation. When done right there are many examples around the world, including in neighbouring Bangladesh, where wide access to microfinance has resulted in stronger entrepreneurship, skills development, market access and financial growth. Microfinance is also critical for women because most women are employed in the informal sector and as such cannot be reached by the formal banking sector but as much as 80% of microfinance lending is done to women.

Microfinance in Sri Lanka has had a strong State presence in recent years with programs like ‘Divi Neguma’ and Samurdhi taking microfinance to the masses. However, it recently emerged that the Samurdhi Bank needs better management with transparent and accountable systems to provide microfinance to villages so that the masses have the choice not to resort to unscrupulous lenders. 

Microfinance has received a bad rap because it has been confused with hire purchase schemes, largely practiced after the end of the war in the north and east, and because of shady companies which may charge compound interest and rarely provide knowledge and expertise that legitimate microfinance companies do. Nonetheless, the value of genuine microfinance companies should not be dismissed because of this.

Writing off debt is just one aspect of what needs to be done to make the microfinance sector more transparent and accountable. The Central Bank has said it is taking action to draft necessary regulation to make it compulsory to report financial operations of licensed microfinance companies to the Credit Information Bureau or CRIB to maintain customer records of clients attached to microfinance companies, similar to the banks and finance companies. The Central Bank expects this information to streamline the analysis of creditworthiness of borrowers and minimise indebtedness currently seen as a serious problem in some parts of the country.

To safeguard depositors, a depositor insurance scheme, similar to banks and finance companies, is expected to be activated to cover microfinance companies in the future. The insurance scheme begun for banks and finance companies about a decade ago is now a Rs. 44 billion fund and grows by about Rs. 10 billion each year. This allows the regulator to meet any shocks in the financial market and a similar arrangement will be introduced to microfinance companies. These measures need to be implemented as soon as possible.            

Ultimately, it is the Central Bank’s view that organisations that obtain deposits need to be regulated similar to banks and finance companies. However, microfinance institutions that do not take public deposits but only lend need not be under strict prudential regulations, which still leaves a loophole that can only be bridged through better awareness and education.

Ultimately, the public has to take responsibility as well. As sympathetic as many are to the plight of indebted people, it is important to improve financial literacy so public money is not spent on private activities.