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Microcredit and impact on human rights in Sri Lanka – Juan Pablo Bohoslavsky, UN Special Rapporteur

A. Microfinance in Sri Lanka

71. Microcredit has a long history in Sri Lanka that dates back decades, though its use began to expand particularly during the 1990s. The goal of the system was to lift people out of poverty by enabling borrowers, who did not have systemically access to credit, to sustain their livelihoods through financial inclusion and economic empowerment. The projects put in place in this context also paid particular attention to women borrowers.

72. The Independent Expert is not aware of any study to assess the achievement of the above-mentioned goal in Sri Lanka over the years. This is crucial, given that there is no
evidence that microcredit actually helps to alleviate poverty in countries where it is broadly used, in particular when the private sector is deeply involved in lending the funds; on the contrary, microcredit has been associated with “anti-developmental” flaws.45

73. The microfinance landscape in Sri Lanka is wide and diverse. It comprises various types of financial institutions operating at different levels in both the formal and informal sectors. It includes, for instance, microfinance companies, non-governmental organizations, non-banking finance institutions, development banks, cooperatives, farmer organizations and other types of lenders, such as village banks and informal lenders. A large number of institutions offer microfinance. Given the diverse landscape and the coexistence of informal as well as formal institutions, it is difficult to know exactly how many actually operate in the country. The Lanka Microfinance Practitioners’ Association has 66 microfinance institutions as members.46

74. In addition, while private loan providers are numerous among microfinance actors, government-run institutions account for a significant number of microfinance entities. The Samurdhi programme, for example, oversees its own microcredit schemes. The international development assistance sector is also active in microfinance-related initiatives.

75. According to the performance report of the Department of Development Finance for 2017, Rs. 165 billion were disbursed in loans to the microfinance sector by the banking
sector in 2017. 47 The microfinance portfolio of the main government microfinance institutions accounted for a total of Rs. 263 billion in 2017. According to the Lanka
Microfinance Practitioners’ Association, its loan portfolio for 2017–2018 amounted to Rs. 94,415,629,796.00 for 39 of its members. 48 During the same period, 2,898,232 people
borrowed, of which 2,439,187 (84 per cent) were women.

Human rights impact of loan practices on borrowers

76. The Independent Expert learned that while the universe of borrowers is broad, women in poor or war-affected areas are specifically targeted by microfinance financial
institutions. While some institutions charge a maximum flat rate of 30 per cent in interest, some levy up to 220 per cent, and also apply compound interest. Given that lenders do not follow any particular guidelines to assess the credit risks of loans, combined with the usurious terms often applied, a very high number of women default on their debts and become trapped in an exploitative financial system.

77. Sri Lanka ratified the Convention on the Elimination of All Forms of Discrimination against Women in 1981, which includes the obligation to eliminate discrimination against women in economic and social life (art. 13). In 2017, the Committee on the Elimination of Discrimination against Women expressed its concern at the exploitation of women by private financial companies as a result of women’s limited access to credit (CEDAW/C/LKA/CO/8, para. 36 (d)). It recommended that Sri Lanka introduce low
interest or interest-free credit schemes for women heads of households and families living in poverty, with recovery plans adapted to their income-generation patterns (para. 37 (e)).

78. While the objective of the microfinance system has been to lift people out of poverty by allowing them credit to sustain their livelihoods, it has also been observed that, in actual fact, some institutions generate huge profits by putting enormous pressure on poor borrowers, and on women in particular. Although some women seek loans to build a
business, many of them do not succeed in their projects – which is not surprising, given the lack of an enabling environment for micro and small enterprises (such as extremely high interest rates), coupled with very modest economic growth. Other women seek loans to cover the basic consumption needs for their families. Others borrow to pay off previous loans. It is common to see women owing multiple loans to different lenders at the same time.49

79. Reportedly, collectors go to women’s houses to be paid, sometimes on a daily basis, and even stay for hours until they are. Women are at times exposed to psychological and
physical violence by collectors. It was also brought to the Independent Expert’s attention that, in some cases, women were pressured by collectors to exchange “sexual favours” for instalments (see CEDAW/C/LKA/CO/8), and that some women borrowers even offered to sell their kidneys to repay loans.

80. Reports also indicate that some women leave their villages, while others suffer domestic violence as a punishment for “contract breach”, or have to work much harder and
more hours to earn sufficient money to repay their debts. Cases of suicide have also been reported.50

C. Legislative framework and current initiatives to regulate the sector

81. In 2016, Sri Lanka adopted the Microfinance Act No. 6, which was aimed at regulating licensing requirements and establishing regulation for microfinance businesses.
Sections 3 and 4 of the Act specify the type of institutions eligible to apply for a license, and the specific requirements to do so. While it is a step in the right direction, the Independent Expert nevertheless emphasizes that licences are mandatory for any person conducting “microfinance business”, namely, accepting deposits and providing financial accommodation or other financial services. According to the Department of Development Finance, in 2017, 11 licence applications were received by the Central Bank.51 While also providing for the “registration of non-governmental organizations accepting limited savings deposits as microfinance non-governmental organizations”, the Act only covers a part of the broad microfinance landscape in Sri Lanka, as the Central Bank regulates and oversees financial institutions that receive and manage deposits from the public. The mandate holder notes that banks are also required to comply with (and public authorities to enforce) the
Banking Act Direction No. 8 of 2011 on the Customer Charter of Licensed Banks, which prohibits abusive debt collection.

82. As highlighted above, the Independent Expert learned during his mission about the number, frequency and seriousness of lender abuse. In his view, the current situation calls for urgent action by the State. The entire sector should be robustly regulated and closely monitored to ensure that all form of abuse come to an end expeditiously. It is also important to ensure effective remedies and reparation for the persons affected.

83. In Development Finance Circular No. 1/2018, the Department of Development Finance announced that a 35 per cent interest rate cap per annum would be applied in the
future to finance companies and microfinance institutions. Furthermore, relevant guidelines would be developed for the Central Bank’s regulatory body. Much of all microcredit
volume is, however, channelled through non-regulated lenders, which do not have any restriction with regard to the rates of interest they may charge. Private (profit-driven)
financial institutions are the most aggressive in loan pushing and the quickest in disbursing funds, which make them particularly pervasive in local communities.

84. The Independent Expert welcomes the Government’s current policy, as outlined in the above-mentioned circular, to write off the microdebts taken on by women in 12 regions
affected by droughts, providing they are not higher than 100,000 rupees and are at least three months in arrears as at 30 June 2018, from microfinance institutions registered with the Lanka Microfinance Practitioners’ Association and finance companies registered with the Central Bank of Sri Lanka. The mandate holder emphasizes, however, that given the pressure lenders that can place on debtors, collectors do not usually allow for long delays in payment; many women, particularly the most vulnerable, might therefore not find relief through the programme. Besides, the above-mentioned microcredit practices and abuses have not been limited to regions targeted by the programme; the scope of the policy should therefore be broadened.

85. In market economies, lenders should be responsible for the risks they take; otherwise, if they are always fully repaid regardless of the interest charged (which in the cases examined by the Independent Expert seem to cover a generous credit risk insurance), serious moral issues may arise. This is actually what has happened: thousands of women without repayment capacity have been granted loans with unfair conditions.

86. The current situation illustrates the importance of establishing a national plan of action on business and human rights in line with international standards, including for the financial sector, notably all types of institutions and organizations engaged in financial business, regardless of whether they are officially registered as such.

87. The Independent Expert furthermore urges the Government to set a cap on interest rates for all financial institutions and individual lenders operating in the microcredit
business. In the same vein, he also recommends that it adopt and implement a robust and strict regulatory framework, including guidelines on how microcredit lenders assess the
credit risk of their loans and the actions they can take to collect loans in accordance with international human rights norms and standards. Such a regulatory framework should
establish that usurious microcredits are void (or voidable), and provide victims the right to request the return of the money as compensation. He also urges the Government to declare a moratorium on repayments until such legislation is adopted in order to prevent groups at heightened risk – in particular women – from being exploited further by lenders.

88. The Independent Expert commends other initiatives aiming at providing a framework for microfinance actors, such as the code of conduct developed by the Lanka
Microfinance Practitioners’ Association for its members. Application of the code, which promotes a “do no harm” approach to microfinance operations, is now mandatory in order
to be eligible for membership in the Association. He therefore recommends that the code be expanded to other actors, and include explicit reference to corporate responsibility to respect human rights in microfinance operations.

89. The Independent Expert recognizes that borrowers have basic financial needs that need to be met. This is the State’s responsibility, because the poor cannot be forced to pay for public goods through private microcredit. On the one hand, public banks should expand their concessional credit lines to make them massively available for those most in need (even a normal interest rate would represent a dramatic improvement for poor borrowers); on the other, cooperative financial initiatives to improve the microcredit industry with a purely social goal should also be explored. The Independent Expert welcomes the Government’s decision to launch a pilot cooperative financial scheme in the North to provide credit to those in need and that charges reasonable interest rates. The scheme should be expanded to all regions in the country

VII. Conclusions and recommendations

95. The microfinance scheme introduced in Sri Lanka had the objective of lifting people out of poverty by enabling them to sustain their livelihoods. No study to assess whether this objective has indeed been reached has been conducted. In particular, women borrowers from (but not limited to) conflict-related areas have been affected in extreme ways, many becoming victims of reckless lending, over-indebtedness and outrageous exploitation, greed and abuses from a number of lenders. The seriousness of the situation highlights the importance of taking urgent governmental action regarding all types of lenders, regardless of whether they are officially registered as such.

96. The grave situation in the field of microcredit shows how relevant and timely the discussion around ensuring the justiciability of economic, social and cultural rights in Sri Lanka is. If a debtor in a desperate situation makes the case to a court and/or the Human Rights Commission of Sri Lanka that the principle of pacta sunt servanda has to be reconciled with her economic and social human rights, such as the right to food and adequate housing, how would the case be adjudicated in Sri Lanka?
The State must provide a human rights-sensitive response.

97. The Independent Expert recommends that the Government of Sri Lanka:

(k) Conduct a comprehensive survey to assess whether and to what extent the microcredit scheme has actually alleviated poverty in the country in the past decade, and to identify all the actors operating in the sector to better understand the role that each of them plays;

(l) Adopt and effectively implement a robust and comprehensive regulatory framework in the field of microfinance applicable to all types of microfinance service providers; it should include guidelines on assessing the credit risk of loans and interest rates, and regulate and restrict the actions that lenders can take for collection, in
accordance with international human rights norms and standards;

(m) Amend the legislative framework in place to ensure that usurious microcredits are void (or voidable), and afford victims the right to request the return
of money as compensation;

(n) Declare a moratorium on repayments until the laws and regulatory frameworks referred in section V of the present report are adopted and effectively implemented, in order to prevent groups at heightened risk – in particular women – from being further exploited by lenders;

(o) Enhance concessional credit lines and cooperative financial initiatives in the field of microcredit to boost sustainable development;

Excerpts from the Report of the Independent Expert Juan Pablo Bohoslavsky on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights, on his visit to Sri Lanka during  25 February–22 March 2019.

Full report:A-HRC-40-57-Add.2


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