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A senior UN official has urged the Government to declare a moratorium on repayments of loans obtained from microfinance companies, until it adopts and implements a robust and strict regulatory framework to order to prevent groups at heightened risk – in particular women – from being exploited further by lenders.
“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 organisations engaged in financial business, regardless of whether they are officially registered as such,” UN official Pablo Bohoslavsky said in his report, submitted to the 40th session of the United Nations Human Rights Council (UNHRC), which is in session in Geneva from 25 February to 22 March.
Bohoslavsky is an independent expert 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.
He visited Sri Lanka on an official visit from 3 to 11 September 2018, at the invitation of the Government, and his report is based on findings made during his visit.
In his report, he also urged the Government to set a cap on interest rates for all financial institutions and individual lenders operating in the microcredit business, and recommended 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 micro credits are void (or voidable), and provide victims the right to request the return of the money as compensation,” he said.
The independent expert commended 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 and recommended that the code be expanded to other actors, and include explicit reference to corporate responsibility to respect human rights in microfinance operations. While he recognised that borrowers have basic needs that need to be met, he said 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 report said.
The official noted that 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, and said 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.
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. 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. During the same period, 2,898,232 people borrowed, of which 2,439,187 (84%) were women.
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% in interest, some levy up to 220%, 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,” the report said.
The UN expert had learnt during his mission about the number, frequency and seriousness of lender abuse and said that 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.”
The aim of the UN official’s visit was to study the effects of public debt, structural adjustment, fiscal consolidation and other economic reform policies on the realisation of human rights and to assess the efforts made by the Government to curb illicit financial flows. It was also to analyse the effects of international development assistance for and lending to Sri Lanka from a human rights standpoint, and the efforts made by the Government to integrate human rights standards into the financial sector, with a particular focus on microfinance.
