“First, it was the tsunami that destroyed our community. Then came the war. Now, it’s microfinance.” — Jesudadan Rajitha, The Federation of Women’s Rural Development Societies.
As the COVID-19 pandemic charts its savage path around the world, it is predicted that millions have lost or will loose their income. Governments have announced various financial relief packages, including short-term debt moratoriums for the vulnerable. However, at the time of writing, there is a noticeable absence of widespread debt relief for a sector that is often characterized by its over-indebtedness: microfinance. In 2018, globally, there were approximately 139.9 borrowers with an estimated credit portfolio of US$124.1 billion. Of this, 80 percent of the borrowers were women. 65 percent were classified as rural borrowers.
While the impact of the pandemic is widely exacerbating economic insecurity, the case of microfinance clients stands out. Microfinance has already created a crisis in several countries, including Cambodia, Sri Lanka, and India. While some banks have extended debt moratoriums for microfinance borrowers, many borrowers are under stress as they consider how to repay loans as livelihoods stall or disappear in the face of national shut-downs.
In this blog post, co-authored with Nedha De Silva, we consider how microfinance is often treated as the panacea for crisis-induced economic insecurity for the poor, by examining the case of war-affected Sri Lanka. We conclude by considering how in the aftermath of the pandemic, microfinance should be delivered with careful planning, drawing on lessons from other crises. The question is, how can we remake finance models for the poor so that financial inclusion is genuinely empowering, without deepening existing inequalities?
Introducing an unregulated microfinance sector in post-war Sri Lanka
The civil war between Sri Lankan government and the Liberation of Tamil Tigers Eelam (LTTE) ended in 2009, after three decades of war primarily affecting the Northern and Eastern parts of the island. Post-war, microfinance was included as a post-conflict development and rebuilding strategy through government initiatives such as ‘Uthuru Wasanthaya’ (Northern Spring) and ‘Nagenahira Navodaya‘ (Eastern Re-Awakening). Historically in Sri Lanka, the provision of microfinance in various forms was introduced as a welfare provision. However, the growth of unregulated commercial providers within a broader context of neoliberal economic reform is a crucial feature of the post-war microfinance landscape.
Microfinance was mainly marketed as providing livelihood opportunities for women to encourage economic and gender empowerment. However, this has resulted in ‘empowerment debt’, where the focal attention on economic empowerment leads to the side-lining of social, political, and structural forms of empowerment. By 2017-18, it was estimated there were over 2.8 million active borrowers, of which 85 percent are women, with a total loan portfolio of Rs. 94 billion rupees (this is an underestimate as this figure is derived from 37 institutions, which omits potentially thousands of informal operators). In the immediate post-war period, a large number of the borrowers were war-affected minority Tamil and Muslim women in Northern Jaffna and Eastern Batticaloa. They have traditionally been denied any form of access to formal financial services due to the effects of war, gender stereotypes that position women outside of formal economic activity, and the lack of collateral such as land.
While microfinance practices aimed to break with gendered patterns of financial exclusion, they nonetheless reproduced gendered inequality. Loans are taken for everyday social reproduction rather than for investment or entrepreneurial ventures. Due to the impact of war and poverty (lack of fundamental infrastructure, training, and illiteracy), most entrepreneurial efforts become futile. Many continue to support their spouse’s economic generation activities. Processes such as collective loaning (‘group loans’) require spousal permission. Moreover, microfinance rests on the gendered assumption women are more prone to sharing their profit with the household, leading to the further feminization of responsibility and obligation. Also, it is assumed that women would continue her social reproductive and care roles alongside new economic activity. However, no social safety nets or welfare systems are introduced to help regenerate society in war-affected areas.
Predatory practices have pushed women into a vicious cycle of chronic insecurity. In Sri Lanka, there have been 172 suicides attributed to microfinance debt over the past three years. Predatory practices range from extreme interest rates up to 220 percent, a ‘fast track’ approach which ignores capacity to pay, lack of financial management training, weekly payments, and the use of gendered violence, shame, and outright harassment of recipients. Many take out cascading loans from multiple institutions to repay previous loans, making women more indebted at each instance. Some have reported rising tensions among family members, and among groups of women in the group loaning processes disrupting solidarity, social ties, and networks in communities. Moreover, it has caused tensions with local government officials, who often intervene in matters of conflict.
However, over the past three years, women have mobilized to reform microfinance in Sri Lanka. Some have attempted to move back to traditional forms of savings, such as collective savings groups. Others demand a welfare-based development strategy that would not compromise their economic, political, and social freedom. Some of the demands include a more efficient state-funded microfinance industry that has more lenient administrative practices and faster loan provisions, as well as a new economic plan that prioritizes the needs of the marginalized in the post-war rural community. Groups such as the Cooperatives Movement in war-affected areas such as Jaffna and Batticaloa have organized and supported victims of predatory institutions by directing them to different activist organizations for support. They also advocate for rejecting microfinance in particularly vulnerable villages. Coordinated actions by different groups across the country, including clients of microfinance institutions, academics, activist groups, have supported the local movements.
In response, the Sri Lankan government has issued a moratorium for different loan amounts, introduced an interest cap in 2018 of 35 percent with an installment plan. In addition, the Lanka Micro Finance Practitioners Association (LMFPA) has launched a Code of Conduct for members. However, it is voluntary nature, and only covers its relatively small membership.
Where do we go from here?
At the heart of the Sri Lankan mobilisation, is the assertion that a neoliberal microfinance model as a post-war development strategy is unsuitable. Protest has centered on the need for greater regulation of the microfinance sector. Ironically, the contestation against the microfinance industry by Sri Lankan women and their allies, and some of the solutions they present, depicts a form of empowerment and political revitalization that offers us insight into how we can ‘rebuild better.’ That is, by including the voices and preferences of those most affected.
As we are publishing this blog post at a time of the COVID-19 pandemic, the Sri Lanka government has introduced a raft of relief measures announced to address the economic fallout of COVID-19. Although it includes some debt moratoriums, it does not at the time of writing, include suspension of microfinance debt payments or interest. While the current pandemic will bring its own complex challenges, we can draw on lessons from past crises, including the Sri Lankan post-war context and lessons from the Ebola pandemic, particularly in Sierra Leone. The later also examine how microfinance institutions recovered and where they failed their debtors. We need to examine closely, what approaches we can take to make microfinance work for, not against, crisis or conflict-affected communities.
Nedha De Silva is a PhD student in the Monash Gender, Peace and Security Centre. Her research examines the role of the state in microfinance and its impact on women’s agency, security and everyday life. Her research interests include development and the role of women, post-colonial studies, economy and identity and sociology of religion.