Trapped in a cycle of debt

By Centre for Equality and Justice 

It’s mid-morning in a small village tucked away in the north of Sri Lanka. Everyone is out and about, getting on with their daily chores. A vegetable vendor shouts the names of vegetables in quick succession as he wheels his cart down the street, prompting a string of calls in return as occupants of the nearby houses emerge. One house however, remains silent. A woman holds her door open just a crack, peering through fearfully. She knows he’ll turn up any time now, and create a scene. 

Luckily, her kids have already set off for school so they will not witness the spectacle. She’s already warned Malar aunty next door to tell him she’s not home. She never thought it would come to this. Last month, she pawned her last gold necklace to pay off her loan instalment. This month, she has no options left. Suddenly she notices him, the dreaded debt collector turning a corner. She locks her door and slinks back into the depths of her small house. Maybe if she finds a corner dark enough to hide in, he’ll go away before the kids come home. 

The hidden cost

In developing countries across the globe, microfinance plays an important role in women’s economic empowerment. 

They enable women to access funds necessary to pursue income generating activities. In Sri Lanka, the use of microfinance schemes increased significantly post-war, due to hardships faced by those affected by the war. 

As these programs were far easier to access and benefit from compared to traditional bank loans, they grew in popularity among women in war-affected areas who became heads of their households and were struggling to provide for their families. As a result, microfinance companies too started focusing on vulnerable women in these areas, as they saw them as easy targets.

Though the loans themselves were made to look attractive, there were a number of consequences that came with borrowing that were not made clear at the outset. This is because there is little regulation by the government when it comes to microfinance companies. So, many women became burdened by these loans and the inability to pay them back. 

Research conducted by CEJ

To examine and understand the impact of microfinance programs on women borrowers, the Centre for Equality and Justice (CEJ) conducted a research study from November 2021 to March 2022 in three districts, Kilinochchi, Ampara and Hambantota. Data collection was in the form of interviews with women borrowers and stakeholders, and focus group discussions. 

In interviews conducted with women borrowers, 73.3% of the 30 women interviewed reported repayment as the most challenging aspect of microfinance loans. Many interviewees stated that high interest rates made it impossible to pay the loans back. According to some, the interest rates were so high that the amount paid in interest may have even exceeded the initial loan amount. 

Deceitful and aggressive behaviour by MFIs 

Several women reported not being fully aware of the repayment methods or the instalment collection structure used by the MFIs. Some women expressed that they were unaware of the myriad of consequences related to borrowing at the time of obtaining a loan. One woman explained, “They gave us a form, a format and asked us to sign in front of the terms and conditions. But they were not in Sinhala, they were in English. They would place an “X” in front of the numbers, and we would sign without knowing any of that. We needed money, no? It was actually like they threw money at us.” 

When repayments were not made on time, microfinance companies sent debt collectors to the homes of women borrowers. Sometimes aggression was used in the form of inappropriate language or gestures, causing great mental strain on the borrowers. One woman from the Ampara district stated, “Sometimes I have suicidal thoughts when the people from the groups come to our house and scold us.” Such instances caused many of them to resort to hiding when the debt collectors came looking for them. One woman shared tearfully, “When I couldn’t stay home and had to hide somewhere else, my children were without food for many days.”

Violence and the burden on women

This stress from repayment-related issues has also led to violence in the household. A woman from the Kilinochchi district shared, “There is domestic violence at home when these officers who come to collect the term payment come and stay in the house. My husband is continuously abusive.”

More than one woman expressed that even in non-female-headed households, the burden of repayment invariably fell on the woman. One woman stated, “Currently, I am making flower garlands for temples and weddings. I am repaying the loan through the income I receive there. Men are escaping cunningly. But I am forced to take responsibility.”

The ‘debt trap’ 

A major issue with microfinance is that it leads many borrowers to fall into a ‘debt trap’. Around 66% of the women interviewed said that they had taken out multiple loans to help with repayments. The number of loans per woman ranged from two loans to as many as 20 loans. When they were unable to repay their loan instalments, they took more loans to repay the first, leading to a cycle of never-ending debt. 

Though some stated that the microfinance loans had done them some good, many of the women interviewed stated that the loans mostly did more harm than good. One woman from the Ampara district explained, “I consider it to have caused harm. The hard-earned money of my husband and elder sister is all being spent on interest payments. Even if I don’t cook, it’s okay, or don’t eat, it’s okay, or starve, it’s okay. The interest has to be somehow paid.”