Rise and decline of micro finance in Sri Lanka

Micro finance was then considered a powerful tool to reduce poverty. Indeed it was. I knew of women who took our loan and managed to pay off the 10% per month loans taken against jewellery as security – Pic by Shehan Gunasekara 

By Dulan De Silva 

The poor as much as the rich need access to capital to start micro businesses and for personal needs. However till Prof. Yunus commenced modern best practice micro finance, this was denied and they had to pay at least 10% per month to access capital. 

I joined Sarvodaya in June 1986. The key task assigned to me was to bring about economic development of members of Sarvodaya village societies. I only knew finance and accounting, not NGOs, rural development or how to bring about economic prosperity to the poor. 

For our good fortune, CARE offered me a scholarship to travel to study such work in Bangladesh. This was a time no organisation in Sri Lanka was doing best practice micro finance with group security. This opportunity helped me to learn from the leading development practitioners in Bangladesh, especially from BRAC – known as the largest NGO in the world, Grameen and ASA. 

What I learned in Bangladesh was more useful than my learnings at Florida State University. BRAC's main strengths were:

1) Micro finance complemented with micro enterprise development .This is called ‘credit plus’ approach.

2) Group and centres approach – BRAC had small groups of five each combined to create centres of 30. This we could not implement in Sarvodaya as its model was based on the village society. (However, this learning was applied when we started Berendina, now a leading microfinance institute in Sri Lanka.) This was also the format in ASA and Grameen and is much stronger way to do micro finance. On the contrary Sarvodaya model had key village society office bearers who often dominate the members, get benefits to them and put their finger in the till if possible!

3) Action backed by field based evidence through research for years.

The main lessons from ASA were:

1) To reduce dependence on donors but stress on savings for capital. In Sarvodaya savings was an important part (but this was not possible in Berendina as we did not work through village societies). 

2) How to reduce costs – Their focus on cost, through standardised process to increase efficiency and decentralisation of management.  This visit was a turning point in my life as I learned modern micro finance/micro business.

I must thank Sarvodaya and its leader Dr. Ariyaratne for this opportunity. Dr. Ari wanted us to assist all 9,000 villages which he claimed had Sarvodaya societies. As this was impossible, we piloted with 25 best societies in five districts. Societies are graded by how active they are and we selected the supposedly most active ones. 

However, they were not as active as we imagined. Many have not had mandatory monthly meetings for long periods. They were active when head office sent money for ‘sharmadana’ work or other project work. However, we went to them and shared with them the plan to start savings and credit. Initially we wanted them to save a small fixed amount monthly for six months and then be eligible for a loan based on a study of the economic activity they were doing. 

A powerful tool to reduce poverty

During this era in 1986 the main sources of credit for a very poor person was money lenders or village shops. Over 90% of the people depended on this source and interest rates were at least 10% per month sometimes with jewellery or crops as security. To farmers, traders give credit and the borrower has to give his crops for a price dictated by the trader. Only people who owned a substantial piece of land with irrigation could get loans from the State banks after much hassle visiting the bank two to three times with various documents. This was the also the time Sanasa was just being revived by Kiriwandeniya.

So SEEDS became popular fast. We had drawbacks in Moneragala/Hambantota where absence of rain made it difficult for members to repay on time. But still we had around a 90% repayment rate.

Our credit plus division Rural Enterprise Division started providing training in aspects of business management (accounting, costing, marketing, etc.) in technical matters (agriculture crops, small industries like how to make sweetmeats, bites, dress making , slipper making, etc., and finally in soft skills like leadership and motivation. 

Modern best practice micro finance now was becoming very popular. It was then considered a powerful tool to reduce poverty. Indeed it was. I knew of women who took our loan and managed to pay off the 10% per month loans taken against jewellery as security. Such people found our credit initially at 5% a year and later at 10% per annum such a huge relief. Some women and men who took Rs. 5,000 loans to start micro business now have business assets and employ a large number in middle-sized businesses. 

Biggest initial boost for micro finance

The biggest initial boost for micro finance in the island came when the Premadasa Government started the Janasaviya Trust Fund (JTF) in 1990. This was funded by the World Banka/IDA. They initiated a scheme to promote local NGOs to commence and expand micro finance work by providing loans to NGOs.

Some 50+ NGOs took loans and started micro finance work. SEEDS also took loans from JTF. Though NGO micro finance has now ‘gone to the dogs’ in Sri Lanka, one success story thanks partly to JTF Fund is Hambantota Women's Federation – a NGO managed by borrower women. Later JTF became National Development Trust Fund (NDTF), just a name change with a change in Government. Initially it carried out the same function as JTF giving loans to NGOs, etc., for micro finance. However as usual our politicians smelled the money in the trust and closed it and put into yet another savings bank named Sri Lanka Savings Bank. This diluted the lending to NGOs. This basically was one of the key reasons to kill NGO MF in Sri Lanka. 

In contrast, Bangladesh also had such an agency named PKSF created by same agencies which survived and has grown to work with over 250 NGOs giving over BDT 40 billion and outstanding amount of loan reaching at BDT 53 billion ($ 0.64 billion) as of June 2019 benefitting nearly 14 million people.

The government has given this entity the autonomy and thanks to this Bangladesh remains one of the few countries where low interest micro finance loans are given by NGOs. This is a major contribution to poverty alleviation in the nation. I think governments and international organisations such as WB and ADB should have ensured that poor had access to capital at reasonable rates rather than allow the capitalist system to swallow them.

Micro finance turned into a business

The world's capitalist system smelled "money" and made micro finance into a business. Rich investors in Europe and US found this is a good source to invest in as they got only 1% or so when depositing money in banks. They started investment funds to on-lend to finance companies and NGOs in the Third World. NGOs became profit making entities all over the world by changing legal statues. The change started in Latin America and took over the rest of the world. Loans were given at 40 to 60% per annum and everyone but the poor were getting rich! 

In India over 150 women committed suicide in Andhra Pradesh, stopping delivery of high interest rate MF for some time. In Sri Lanka especially in the north east immediately after the end of war in 2009 finance companies swept in with branches all over and high interest rate loans. This caused widespread anger. 

In the Eastern Province, the GA of Batticaloa took the law into her own hands and put interest rate clamps. This was a good thing though an illegal action! Finally the last Government moved in and introduced legal interest rate clamps, making most finance companies and private profit making MFIs leave the sector, but the poor left with very little access to credit as there were few NGOs left with capital to support them, thanks again to Government policy. Money lenders to the poor are back in business!

(The writer is a retired International Rural Development Consultant and former Head of SEEDS and Berendina.)