MICROCAPITAL BRIEF: Suicides in Sri Lanka Blamed on Microfinance Loans, Regulation Criticized

At least 170 people in Sri Lanka reportedly took their own lives during 2018 after being unable to repay their microloan debt. Interest rates in the country have ranged up to 72 percent per year, and multiple lending is a problem. Nalani Wickremesinghe, a woman from Sri Lanka’s South Province, accepted loans totaling LKR 500,000 to LKR 600,000 (USD 2,800 to USD 3,400) from 11 companies – nine of which are not registered with the country’s central bank – to pay for her husband’s medical treatments. Lacking sufficient income to repay these debts, she expects to repay them by taking on additional loans.

Hema Bansal, a campaign manager at the US-based nonprofit Accion, said, “One-off measures will not do. Sri Lanka needs properly enforced rules that prevent over-indebtedness and ensure fair treatment of borrowers. Until then, microfinance will be a cause not for hope but for despair.”

Since December of 2018, the government of Sri Lanka has capped interest rates at 35 percent. In addition, the Lanka Microfinance Practioner’s Association, a group of 66 lenders in Sri Lanka, published a code of conduct under which its members must state their interest rates upfront and check how many loans a prospective borrower has outstanding. However, there are thousands of other lenders in the country that are not covered by this policy.

Suthaharan Perampalam and Mithula Guganeshan argue in a report on Next Billion that financial technology (fintech) could mitigate the problems in Sri Lanka if the government were to reduce restrictions on such innovations. Given the high rate of smartphone adoption in the country, the authors believe fintech could streamline microfinance operations, reduce costs, increase transparency, boost productivity gains and reduce theft.

The 14 microlenders in Sri Lanka that report to the US-based nonprofit Microfinance Information Exchange have an aggregate loan portfolio of USD 471 million outstanding to 321,000 borrowers.

By Anna Gravois, Research Associate

Sources and Additional Resources

The Economist article
“Microloans are driving borrowers, many of them women, to despair”

Groundviews article
https://groundviews.org/2019/04/10/repayment-and-relief-addressing-microfinance-debt-in-sri-lanka/

Next Billion article
https://nextbillion.net/whats-ailing-sri-lankas-microcredit-industry-and-could-fintech-provide-a-solution/

Lanka Microfinance Practitioners’ Association homepage
https://www.microfinance.lk

MIX profile on Sri Lanka
https://www.themix.org/mixmarket/countries-regions/sri-lanka

Central Bank of Sri Lanka Interest Loan Cap
https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/cdg/Finance_Leasing_Act_Direction_No_08_of_2018_Maximum_rate_of_interest_on_Microfinance_loans_e.pdf

MicroCapital article on microfinance downturn in Andhra Pradesh
https://www.microcapital.org/microcapital-brief-microfinance-institutions-mfis-in-indias-andhra-pradesh-face-difficulties-even-after-loan-restructuring-survival-of-mfis-said-to-hang-on-court-decision-regar/

MicroCapital article on Andhra Pradesh suicides
https://www.microcapital.org/microcapital-brief-government-of-indias-andhra-pradesh-considers-requiring-microfinance-institutions-mfis-to-compensate-families-of-suicide-victims/

MicroCapital article on multiple lending in Sri Lanka
https://www.microcapital.org/microcapital-brief-sri-lankans-urge-government-allow-microfinance-institutions-offer-microinsurance-access-credit-information-bureau/

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