Leasing reforms

The Central Bank has extended the leasing moratorium given to support businesses affected by the COVID-19 pandemic by another six months. As laudable as this is to assist entrepreneurs, especially in the tourism sector, this needs to be underpinned by efforts to reform the industry and protect the public.  

Sri Lanka has a large informal economy, which encompasses a large part of the population. Despite the wide network of licensed banking and non-bank institutions operating in the country, those who exist in the informal or semi-formal economy frequently prefer to deal with smaller unregulated companies. This is for a variety of reasons, including better access and lower interest rates. Those who use these sources are at times people who are excluded from the formal finance systems. This is certainly true of microfinance companies that have been guilty of unethical and fraudulent practices for a long time. 

Unfortunately, these questionable grey areas overlap with larger financial, economic and regulatory weaknesses. For example, most formal institutions are very strict about giving loans, but in Sri Lanka savings rates are typically low and many people struggle with liquidity and collateral issues. Formal or licensed organisations therefore prefer to avoid lending to such people as they are seen as high-risk. The well-entrenched companies already have a solid base of clients they seldom stray from. 

Poorer customers have effectively no demand. Other groups in this category may not have access due to discrimination, lack of information, shortcomings in contract enforcement, information environment, shortcomings in product features that may make a product inappropriate for some customer groups or price barriers due to market imperfections. 

If high prices exclude large parts of the population, this may be a symptom of underdeveloped physical or institutional infrastructures, regulatory barriers or lack of competition. Financial exclusion deserves policy action when it is driven by barriers that restrict access for individuals for whom the marginal benefit of using a given financial service would otherwise be greater than the marginal cost of providing that service. 

The global financial crisis has highlighted that extending access at the expense of reduced screening and monitoring standards can have severely negative implications both for consumers and for financial stability. Therefore, in the case of credit, it is generally preferable to promote financial inclusion through interventions that increase supply by removing market imperfections. Examples are new lending technologies that reduce transaction costs, or improved borrower identification that can mitigate (even if not fully eradicate) problems of asymmetric information and accountability. 

Individuals, families and indeed entire communities are sometimes swept up in these networks of debt. There are serious socioeconomic impacts from these people slipping deeper and deeper into financial insecurity and being unable to get out from under the heel of debt. This often places disproportionate consequences on women and other vulnerable communities and reduces their space for social mobility. 

Given Sri Lanka’s long-standing macroeconomic issues, policy measures need to be holistic, incremental, innovative and sustainable. Without these core principles, ad hoc and top-down measures may do more damage in the long run. The previous Government attempted to write off some debt, but barely made a dent in the problem. Therefore, a transparent and consultative effort is needed.