Bridging the Finance Gap for Women Entrepreneurs

32. Sri Lanka: Policy insights on microfinance

Dr. Nadeera Ranabahu
University of Canterbury

Background

In Sri Lanka, women who own and operate micro- and small-businesses use microfinance loans as one of their key financial sources (Ranabahu and Barrett, 2018[1]; Ranabahu and Barrett, 2020[2]). The microfinance landscape in the country is diverse with various types of institutions providing microfinance lending services (Tilakaratna and Hulme, 2015[3]). Non-banking finance institutions, microfinance companies, non-governmental organisations, and thrift and credit co-operative societies are the most common types of microfinance institutions (Centre for Equality and Justice, 2023[4]; Tilakaratna and Hulme, 2015[3]). Institutions such as non-banking finance institutions and co-operatives are regulated and/or supervised by the Central Bank of Sri Lanka or other authorities under the provisions of the Finance Companies Act, Finance Leasing Act or Cooperative Societies Ordinance (Centre for Equality and Justice, 2023[4]). Under the Micro Finance Act No. 6 of 2016, microfinance companies and non-governmental organisations that accept deposits must be registered with the Central Bank of Sri Lanka (Central Bank Sri Lanka, 2023[5]). However, registration is not mandatory for lending institutions, and there are only four microfinance companies registered at the Central Bank of Sri Lanka (Central Bank Sri Lanka, 2023[5]). The lack of a comprehensive policy framework for registration and/or oversight of microfinance lending institutions has led to some client protection issues at the grassroots level (Right to Life Human Rights Centre, 2021[6]; Wedagedara, 2023[7]).

Among the rural, low-income, or war-affected communities, microfinance loans are widely used for business purposes (Ranabahu and Barrett, 2020[2]; Centre for Equality and Justice, 2023[4]). Women entrepreneurs use microfinance loans for starting businesses or developing existing businesses by investing loan money in bulk buying raw materials, buying equipment, and implementing new sales or marketing strategies (Ranabahu and Barrett, 2020[2]; Centre for Equality and Justice, 2023[4]). Several microfinance institutions, in addition to lending, also offer non-financial activities such as enterprise training, financial literacy programmes, and skill development programmes (Centre for Equality and Justice, 2023[4]; Ranabahu and Barrett, 2018[1]). These financial and non-financial services facilitate women’s access to capital and information and enhance their entrepreneurial capacity and knowledge (Ranabahu and Barrett, 2018[1]; Ranabahu and Barrett, 2020[2]). However, the recent economic crisis, lack of entrepreneurial ecosystem support and COVID-19 pandemic have led to many business closures or women entrepreneurs abandoning their business ideas (Centre for Equality and Justice, 2023[4]; UN General Assembly, 2019[8]). Furthermore, women having multiple loans with high-interest rates, pushed by microfinance institutions beyond their repayment capacity, have led women to view microfinance as a debt trap, rather than a tool for entrepreneurial development (Centre for Policy Alternatives, 2023[9]).

Policy issue: Human rights and microfinance

There are reports of some microfinance loan providers violating the fundamental human rights of women in their lending and instalment collection practices (Right to Life Human Rights Centre, 2021[6]; UN General Assembly, 2019[8]). The most common violations are psychological and physical violence and undue pressure in debt collection. The staff of microfinance institutions visit villages for loan instalment collections. Generally, loan instalments are collected at village-level community meetings (Ranabahu and Barrett, 2018[1]). However, in case of a default or when women are unable to repay their loan instalments on time, staff of microfinance institutions use inappropriate language, visit women borrowers’ homes, sometimes daily, and stay for hours until the instalments are paid back (Right to Life Human Rights Centre, 2021[6]; UN General Assembly, 2019[8]). Such practices affect social trust and women’s reputation in the community. There are also instances of women subjected to domestic violence by their partners/husbands due to contract breach or losing the social trust among community members, suicides/suicidal attempts, sexual harassment, or women leaving their villages (Right to Life Human Rights Centre, 2021[6]; UN General Assembly, 2019[8]). The failure to address these types of institutional practices violates the Convention on the Elimination of All Forms of Discrimination against Women, ratified by the Sri Lankan government in 1981 (UN General Assembly, 2019[8]).

There are also reports of financial exploitation by microfinance institutions. The costs of microfinance loans (e.g. high loan interest rates, penalty fees) make it hard for women to recover when there is a sudden economic shock or a business failure (Centre for Equality and Justice, 2023[4]). In particular, when microfinance institutions take legal action for loan default, women lack the financial capacity to engage capable lawyers to represent themselves (Centre for Policy Alternatives, 2023[9]). There are power imbalances where companies “unduly pushed [sic] microcredit loan recipients to agree on ‘settlements’ in courts during litigation processes and link their responsibility of repayment to judicial orders” (Centre for Policy Alternatives, 2023[9]). There are also no appropriate grievance-handling mechanisms available (Centre for Equality and Justice, 2023[4]). These damage human dignity and further disfranchise women from accessing microfinance for entrepreneurial purposes.

Although a majority of the microfinance institutions provide local language loan documents (Lanka Microfinance Practitioners’ Association, 2023[10]), there are cases of not having local language loan agreements or documents (Right to Life Human Rights Centre, 2021[6]). A study conducted in four districts in the country (i.e. Polonnaruwa, Trincomalee, Batticalo, Nuwara Eliya) identified that either the whole document or parts of the documents are in English (Centre for Policy Alternatives, 2023[9]). In these cases, women have been compelled to sign documents that they are unable to read or understand (Centre for Policy Alternatives, 2023[9]). This practice violates the language rights of communities and the Official Language Policy of the country as stipulated in the Constitution of Sri Lanka (Centre for Policy Alternatives, 2023[9]).

Conclusions

The human rights issues associated with the microfinance sector in Sri Lanka demonstrate that institutions need to restore credibility and trust in microfinance as a tool for development in order to promote women’s entrepreneurship. The (re)introduction of the Credit Regulatory Authority Act, as the original Bill was challenged in the Supreme Court and withdrawn by the Ministry of Finance, could provide a foundation for addressing human rights violations (Parliament of Sri Lanka, 2024[11]; Transparency International Sri Lanka, 2024[12]). Getting the policy framework right, including the practicalities of enforcement, could enhance women’s access to finance sustainably and promote entrepreneurship in line with human rights and international standards. Policy measures could include effective monitoring, supervising, client protection even at regional levels, training of microfinance staff, and an effective microfinance grievance handling mechanism.

References

[5] Central Bank Sri Lanka (2023), Microfinance sector, https://www.cbsl.gov.lk/en/financial-system/financial-system-stability/microfinance-sector (accessed on 3 October 2024).

[4] Centre for Equality and Justice (2023), Burden Upon Burden: Report on Socio-Economic Impact of Micro Finance and COVID-19 on Women Affected by War and Political Violence and their Access to Reparations, https://cejsrilanka.org/wp-content/uploads/Burden-upon-Burden-A4-Digital.pdf (accessed on 3 October 2024).

[9] Centre for Policy Alternatives (2023), Brief commentary on the pressing need for regulatory mechanism for money lending including microfinance in Sri Lanka, https://citizenslanka.org/wp-content/uploads/2024/01/Micro-Finance-Policy-English.pdf (accessed on 3 October 2024).

[10] Lanka Microfinance Practitioners’ Association (2023), Annual Report 2022/2023, https://www.microfinance.lk/wp-content/uploads/2023/08/Annual-Report-2022-2023.pdf (accessed on 3 October 2024).

[11] Parliament of Sri Lanka (2024), CoPF Scores Major Win for Inclusive Policymaking on Microfinance Bill - MoF withdraws Micro-Finance Bill, https://www.parliament.lk/en/committee-news/view/3997?category=33 (accessed on 3 October 2024).

[2] Ranabahu, N. and M. Barrett (2020), “Does practice make micro-entrepreneurs perfect? An investigation of expertise acquisition using effectuation and causation”, Small Business Economics, Vol. 54/3, pp. 883-905, https://doi.org/10.1007/s11187-019-00157-6.

[1] Ranabahu, N. and M. Barrett (2018), “Effectuation thinking and the manifestation of socio-cultural complexities in Sri Lankan female entrepreneurs’ business decisions”, in Contextual Embeddedness of Women’s Entrepreneurship, Routledge, https://doi.org/10.4324/9781315574042-10.

[6] Right to Life Human Rights Centre (2021), Impact of providing microfinance loans on the economy and living quality of rural people in Sri Lanka, Human Rights Centre, https://www.right2lifelanka.org/wp-content/uploads/2021/12/2-2.pdf (accessed on 3 October 2024).

[3] Tilakaratna, G. and D. Hulme (2015), “Microfinance and Multiple Borrowing in Sri Lanka: Another Microcredit Bubble in South Asia?”, South Asia Economic Journal, Vol. 16/1, https://doi.org/10.1177/1391561415575127.

[12] Transparency International Sri Lanka (2024), Microfinance and Credit Regulatory Authority Bill: TISL Files Petition in the Supreme Court, https://www.tisrilanka.org/microfinance-and-credit-regulatory-authority-bill-tisl-files-petition-in-the-supreme-court/ (accessed on 3 October 2024).

[8] UN General Assembly (2019), Visit to Sri Lanka: Report of the 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, on his visit to Sri Lanka, UN Human Rights Council: Fortieth session, https://www.ohchr.org/en/documents/country-reports/ahrc4057add2-visit-sri-lanka-report-independent-expert-effects-foreign (accessed on 3 October 2024).

[7] Wedagedara, A. (2023), Microfinance and Credit Regulatory Authority – A fatal flaw, https://www.cadtm.org/Microfinance-and-Credit-Regulatory-Authority-A-fatal-flaw (accessed on 3 October 2024).