Predatory Face of Microlending Becoming Clearer

Ideas and Issues

New Orleans        ACORN International has done several reports over the years stating our position clearly:  microfinance is not a poverty reduction program.  Doing so, we knew we were running way outside the herd of the prevailing donor-based and donor-funded consensus, but facts are facts.  Debt doesn’t reduce poverty.  Maybe you buy a job for a bit, but it’s the exceptions that bust out, not the rule.  Furthermore, our reports argued, the collection system is relentless, abusive, and unsustainable.  The interest rates are usurious.  The more you look and listen, the harder it is to believe microfinance and microlending is a solution for anything.

All of which made me read a piece in The Economist on the microloan crisis in Sri Lanka very closely.  The Organizers’ Forum was originally slated to visit the island this year, but the political situation deteriorated and the terrorism was intimidating.  When we go, we’ll dig deeper on this issue, but these reports are shocking even though we were already prepared for the worst.

Sri Lanka’s finance minister has “accused microfinance companies of ruining Sri Lanka’s financial sector and of creating a ‘sadistic situation’ in which loan officers, when unable to extract repayment, solicit sexual favors.”  Whoa, nelly, how did it get this bad?!?

Part of the answer is what I’ve already stated.  The principal of weekly or in some cases daily collections forces the cost up even if the amounts in the loans are tiny.  These are loans, so covering the repayment, risk, and overhead means that interest rates are atmospheric with effective rates up to 220%, and we’ve seen higher.

In Sri Lanka, like so many other lower-income countries, the microfinance industry is virtually unregulated.  The industry’s association has 66 members according to the Economist, but there are 5000 others that are escaping regulation.  In fact, without the finances or infrastructure to offset the end of the civil war and natural disasters, the government had encouraged women to take the loans to rebuilt and help get families on their feet.  One of the tenets of microfinance is that women are best with small sums of money.  There had been no limit to the number of loans or companies that were lending largely to women.  The bottom line, “In Sri Lanka, …[the loans] seem to be burying many, particularly women…” in poverty.

The government acted, kind of, after a decade and passed the Microfinance Act in 2016, but it only covered lenders that take deposits, so only three companies are currently registered under the act. The government in 2018 wrote off business loans of up to 100,000 rupees given to women in areas impacted by drought and capped interest rates at 35%.  Unfortunately, as the Economist writes, “But the relief applied only to each person’s biggest loan from a registered lender.  Enforcing the cap fell to borrowers, few of whom knew about, let alone understood, the rule.”

The vicious cycle of microfinance and of poverty itself constantly repeated:  the poor made poorer, forced to pretend that loans are the solution, and then left to their own devices to solve the mess, once again, by themselves.


Please enjoy Interstate Love Song (Live at New Haven Veterans Memorial Coliseum New Haven CT 8/23/1994) from Purple (Super Deluxe Edition) by Stone Temple Pilots.

Thanks to KABF.