In Sri Lanka, Resistance to Private Indebtedness Is a Strategic Issue

3 March by Nathan Legrand


Demonstration against microfinance held in Colombo, Sri Lanka, on February 27, 2020

In Sri Lanka, the issue of private indebtedness — in particular in the form of microcredit — is a major problem that negatively affects borrowers and their families, but also society as a whole. [1] The influence of microfinance in Sri Lanka is such that there is little doubt that a strong movement of resistance to this model could contribute to the emergence of a social majority in favor of an anti-capitalist type of society — alongside movements fighting on the issues of precarious employment, low wages and rural issues. Indeed, peasant and fishing communities face immense difficulties due to a mode of production that aims at competitiveness on the international market and destroys their livelihoods through the unlimited exploitation of nature.

The failure of the neoliberal economic model pushes Sri Lanka into a spiral of public indebtedness to multilateral and bilateral creditors, and drives households themselves into debt in an attempt to compensate for their low incomes. As in many other so-called dependent economies, microfinance has found in Sri Lanka a fertile ground to grow and accumulate large profits on the backs of poor people, pushing them into a debt trap and further worsening their living conditions.

 A brief history of microcredit in Sri Lanka.

In Sri Lanka, the liberalization of the economy began as early as 1978. Among other things, this was characterized by the abolition of guaranteed minimum prices for agricultural products and the removal of subsidies on fertilizers needed for agricultural production. While import substitution development policies had allowed agricultural production to expand in the 1960s and 1970s, the direct consequence of neoliberal policies was the impoverishment of rural populations. They were thus forced to turn to credit schemes, especially those of the private sector, which then had fertile ground for development. From the end of the 1990s onwards, these transformations encouraged the emergence of microfinance as we know it nowadays in Sri Lanka.

The civil war that began between armed Tamil factions fighting for the right to self-determination and the government dominated by the majority Sinhalese Buddhist community slowed down the economy from 1983 onwards, severely affecting the country until the bloody crushing of the last pockets of resistance of the Tamil Tigers in 2009. The North and East of the country, whose populations are predominantly Tamil, were the most affected. The toll is estimated at 100,000 dead, 800,000 forcibly displaced at the height of the conflict, and areas completely destroyed. Government grants to civilian populations to rebuild their homes and livelihoods after the war were too small. Private microfinance institutions, whose activity was very limited in the Northern and Eastern provinces during the armed conflict, did not miss the opportunity: from 2009 onwards, they took advantage of the distress of the populations, and in particular the multitude of widowed women heading households, to set up and multiply loans in these devastated areas. The consequences were not long in coming: the North and East of Sri Lanka are nowadays in the grip of massive over-indebtedness and a crisis in the rural economy [2].

Likewise, microfinance companies took advantage of the 2004 tsunami disaster (Sri Lanka was the second most affected country after Indonesia, with more than 35,000 deaths and over 500,000 displaced persons) to expand in the country by presenting themselves as indispensable actors in the reconstruction process. This is how BRAC, the main private microcredit agency in Bangladesh (which presents itself as a development aid NGO), entered the Sri Lankan market. In 2016, after its acquisition by LOLC (Sri Lanka’s leading microfinance company) in 2014, BRAC Lanka boasted that in less than ten years it had reached a customer base of as many as 200,000 debtors (all of whom were women borrowers), [3] while in 2012 it estimated that it had had an (allegedly positive) impact on the lives of 527,000 Sri Lankans, both borrowers and non-borrowers. [4]

 Microcredit borrowers are condemned to overexploitation.

Far from being a way out of poverty, in the overwhelming majority of cases microcredit becomes a debt trap for borrowers. While they are presented as credits aimed at launching small “income-generating” entrepreneurial activities, the loans — which target the most vulnerable populations (the vast majority of whom are women) — are in fact often taken out by people in distress who use them as meagre consumer loans for the simple purpose of survival. Even if they were used to create remunerative activities, the conditions attached to the loans condemn from the outset those who take them: the interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
are exorbitant (the rates announced by the agencies may start at around 20%, but the real annualized rates can be around 60% and more — a press report from April 2018 revealed an existing rate of 220% [5]), the maturities are short term (repayment starts as early as the first month, or even the first week) and the penalties for late payment are heavy. As a result, victims of these practices are often pushed into a spiral of over-indebtedness as they take out new loans to repay old ones, either from other microcredit agencies or from local informal loan sharks.

This over-indebtedness maintains — or aggravates — the vulnerable position of the borrowers. It hinders the right to a decent life and has serious consequences in terms of social bonds, dislocating families and local solidarities, pushing borrowers to commit suicide or flee in an attempt to escape from creditors and the shame felt in front of their relatives and friends. Creditors relentlessly harass their victims, especially women: intimidation, verbal and physical violence, including sexual violence, are common. In order to obtain the means to repay, households may deprive themselves of food or take their children out of school so that they can work and contribute to the family income. Some women are forced into prostitution. Cases of organ sales have been reported.

Finally, over-indebtedness contributes to the phenomenon of massive forced migration of workers (whose remittances are Sri Lanka’s main source of foreign currency income), particularly to the Gulf countries, South Korea and Malaysia. This migrant labor force is often overexploited. This is particularly the case in the Arabian Peninsula, where workers’ passports are usually confiscated on arrival and during the entire working period, wages may remain unpaid for several months or be illegally reduced, and many women domestic workers are sexually assaulted and raped by their employers. The case of Rizana Nafeek has tragically illustrated the arbitrary treatment of foreign workers under the ultra-reactionary Saudi regime. This young Sri Lankan woman, who arrived in Saudi Arabia in 2005, was sentenced to death and executed after the death of her employers’ infant under her care. She was a minor and her date of birth had been falsified in order to be legally allowed to work abroad to help her family survive during Sri Lanka’s civil war.

The victims of microfinance are thus subjected to terrible overexploitation, characterized not only by the working conditions of those who are forced to migrate for work, but also by deprivation (of adequate rest, food, health care, etc.), child labor, forced sex work, the mortgaging of the few possessions they have, and psychological distress due to the permanent uncertainty about the short-term future.

 Microfinance as a new field for the accumulation of capital.

If there is overexploitation, it is because there is a “primitive” accumulation of capital, that is criminal and limitless, on the other end of the chain of this relatively recent field that is microfinance. Indeed, the work provided by the victims of microcredit to repay their creditors is at the origin of indecent profits for microfinance companies, their managers and their shareholders. In Sri Lanka, one notable criminal seems to have more blood on its hands than any other: LOLC Holdings PLC, founded in 1980, whose microfinance operations for Sri Lanka are now grouped together in the subsidiary LOLC Finance (which also provides leasing and other loans to small and medium-sized enterprises, while declaring itself a non-banking financial institution in order to escape regulation of banks).

In 2019, LOLC Finance recovered Rs. 43 billion (about €220 million) in interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. , and proudly reported a net profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. after tax of Rs. 5.9 billion (about €30 million). [6]. Since 2007, LOLC Holdings PLC has been able to begin and expand overseas operations with the profits accumulated in Sri Lanka (and with the active assistance of “development aid” agencies as discussed below). It now has subsidiaries specialized in microcredit in Cambodia, Myanmar, Pakistan, Indonesia, the Philippines, Nigeria and Zambia, and has announced plans to expand further in Asia, Africa and Latin America in 2020. [7]. Finally, LOLC is beginning to expand its activities to many sectors: agriculture and plantations, tourism, manufacturing industries, renewable energy, information technology, etc. The multinational company thus claims 1.6 million customers (almost all of them still being financial services customers in 2019) in the various countries where it is active, and a net profit after tax of Rs. 19.6 billion (about €100 million). [8]. So much so that the group’s equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. shares exceeded the value of $1 billion in 2019, and its main shareholder and director, Ishara Nanayakkara, is reported to have recently become the richest man in Sri Lanka.

 Women enter the resistance.

This organized theft of the poor by microfinance eventually encountered resistance in the country, especially from 2017-2018. Women victims of microcredit in the Northern and Eastern provinces, where these problems are most acute, have been at the forefront of this new wave of collective struggles. But the movement has spread to many other parts of Sri Lanka. Several demonstrations by thousands of indebted women across the country (supported by their communities as well as by activists and researchers documenting the abuse of microcredit to provide alternatives) denounced the situation they found themselves in, demanding a moratorium on the payment of their debts, a cap on interest rates at 25% (which remains high), other measures to regulate microcredit agencies (including an end to harassment by collectors), and alternative financing schemes. [9].

Demonstration of microcredit victims in Jaffna, Sri Lanka, in February 2018

As it was put under popular pressure, the Sri Lankan government had to concede a first partial victory to the struggling women: 45,139 loans were written off. The very particular conditions of eligibility for debt forgiveness decided by the government (having a debt of Rs. 100,000 — about 500 euros — and having defaulted three times), and the fact that this forgiveness was limited to the 12 districts of the Northern Province that were most affected by the drought (which has negative impacts on agriculture) left many over-indebted people out in the cold. In addition, creditors benefited from a bail-out scheme, i.e. the government took over their losses, to the detriment of public finances. [10]. The write-off, however, is a real relief for all the women who benefited from it, and it has rightly been interpreted as a victory for all the victims of microcredit. As a result, thousands of debtors across the country have felt that their debts should also be cancelled, and have stopped repayments since 2018.

The central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
was also forced to set an interest rate cap on microcredit loans. While the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, with which Sri Lanka currently has a financing program, was opposed to the adoption of a cap (which it recalled during its visit to the country in early February 2020, citing risks of “unintended distortions and inefficiencies in financial intermediation” — or what they might as well have called a “disruption of the smooth functioning of the market”), [11] and while the microfinance agencies, themselves under pressure, demanded the highest possible rate (40%), the limit was set at 35%. This is still too high, and still far from the 30% initially promised and the 25% demanded by the protest movement. Nevertheless, it is an additional signal to the women in the struggle: they can achieve partial victories that should lead them to continue the fight.

 We need to expand the struggle.

In Sri Lanka, the co-operative sector, which emerged in the first half of the 20th century and whose growth was actively encouraged by government strategies for independent rural development in the late 1950s, seems to have withstood the neoliberal tide better than in other countries of the Global South (where co-operatives have often been either diverted from their original objectives — a phenomenon which also partly exists in Sri Lanka — or simply liquidated). The long civil war, on the other hand, has considerably weakened this sector, especially in the North and East of the country.

Since 2018, cooperatives in the North are experiencing a new revival, again as a result of the attention paid to the crisis in the region through the mobilization of indebted women, researchers and cooperatives alerting the public to the dangerous economic situation in these rural areas. Indeed, the Government has been pushed to allocate funds to the cooperative sector for the distribution of credit. Similarly, also in the Northern Province, funds have been allocated for the development of agriculture and small industry through the cooperative sector.

Co-operative rural bank in Pachchilapalli, Northern Province, Sri Lanka

“Multi-purposes co-operative societies” have thus been able to revive their rural credit activities on a relatively ethical basis thanks to the funds allocated by the government and the mobilization of their own resources. They offer loans of similar amounts to the smaller loans offered by microfinance (Rs. 20,000 and Rs. 50,000, or about €100 and €250 respectively), and charge an effective annual rate of 14%, which is much lower than the practices of microfinance enterprises. This figure may still seem high in absolute terms, but it is related to inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. , which stood at 7.6% between January 2019 and January 2020.

Furthermore, loan collection practices are radically different from those of other financial institutions: there is no harassment in case of non-repayment, but contacts that may not be successful if the borrower decides not to respond. If, after the end of the term (12 months for loans of Rs. 20,000), the debt has not been repaid, mediation takes place between the debtor and the administration of the co-operative in order to find a solution within the co-operative rather than through legal action.

This new financing scheme, launched at the end of summer 2018, seems to be a success after eighteen months of implementation, so that the cooperative movement appears as an important point of support in the fight against microfinance. Indeed, the loans distributed to households through cooperatives have led to a decline in the activities of microfinance enterprises. The main challenge lies in the limited funds available to cooperatives compared to the large capital accumulated by microfinance.
For the whole of the Northern Province, the new cooperative financing scheme has benefited from the disbursement of just under Rs. 300 million (about €1.5 million) by the ministry of Finance, to which the cooperative sector added about Rs. 150 million of their own funds. The Rs. 300 million allocated is far from the target: the government had announced the release of Rs. 750 million in total. The unallocated amounts will probably never be received by the cooperatives. While cooperatives encourage their members to save as a way of building the capacity of cooperative credit, progress is obviously slow. Because of this lack of funding, the number of loans and the amounts that can be disbursed to cooperative borrowers are bound to be less than what microfinance is capable of providing (e.g. loan contracts of Rs. 100,000 and above).

Despite its setbacks, the microfinance sector in Northern Sri Lanka is therefore far from extinct. It maintains abusive interest rates, keeping the maximum rate of 35% only as advertised, and in reality charging higher effective rates and using aggressive collection methods. As mentioned above, the IMF supports the sector and opposes interest rate caps. The sector’s accumulated profits and the diversification of its activities give it an increasingly important role in the economy. There is no doubt that microfinance has ample means to continue its offensive despite its setbacks since 2018.

Therefore, the need to organize against this sector remains more relevant than ever. Especially since the thousands of borrowers who stopped repaying after the announcement of partial debt write-offs in 2018 even though they were not entitled to it, will quickly face the multiplication of legal actions by microfinance companies. The demonstration of 27 February 2020 in Colombo, which brought together a thousand victims demanding the abolition of microcredit and targeting LOLC in particular, is a source of hope for the continuation of the struggle. It is now a matter of multiplying initiatives, encouraging the collective organization of hundreds of thousands of victims at all levels (from the local to the national level) in order to prevent collectors from entering villages to threaten and attack borrowers, to demand the right to a decent life, to uncover and denounce the practices of the authorities (police, judicial, administrative) that protect microfinance institutions.

In Sri Lanka, microcredit and private over-indebtedness concern all the toiling masses: precarious workers as well as those in the formal sectors, peasant and fishing communities, micro and small entrepreneurs. Private indebtedness is indicative of the lack of quality public services, the precariousness of the labor market, the low wages and the economic and environmental crisis threatening peasant and fishing communities. Mobilization against microcredit and over-indebtedness must necessarily address these issues in order to provide structural solutions to the crisis. Broad campaigns uniting trade unions from the private and public sectors, women’s associations, organizations defending the interests of peasants and fisherfolk, and other organizations representing the exploited and oppressed are on the agenda. Moreover, this genuine class struggle goes beyond the communal divisions fueled by the dominant classes and reactionary organizations. If it succeeds in becoming a massive and organized movement, resistance to private over-indebtedness will bring forward radical proposals for a society based on solidarity.

 What kind of international solidarity should we put forward?

While the extremely positive media coverage of the phenomenon is no longer as sustained as it was a few years ago (Muhammad Yunus and his Grameen Bank shamelessly won the Nobel Peace Prize in 2006), microcredit continues to receive unfailing support from the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

(which has made “financial inclusion” — i.e. the banking of the poor — its main objective) and the development agencies of countries from the Global North. It is still presented as a solution to poverty and a factor in strengthening human rights. The financing of microcredit agencies remains an important means of “development aid”.

We refuse to be satisfied with alleged politics of international solidarity that consist in distributing funds to millionaire companies on the pretext that they would be in the best position to redistribute these funds throughout society. We refuse to turn a blind eye to the fact that this “development aid” enriches ever more powerful companies through practices that plunge precarious and poor populations into over-indebtedness, depriving them of the right to a decent life.

We resolutely call for international solidarity based on support for popular struggles against exploitation and oppression. These struggles are the bearers of alternatives to capitalism, which it is increasingly urgent to advance in both the Global South and the Global North. In the North, a real campaign of international solidarity with the victims of microcredit in Sri Lanka and elsewhere must begin with the public indictment of these so-called benefactors who in reality participate in sowing misery, destroying social ties and contributing to the overexploitation of those condemned to repay by all possible means, including the sale of organs, forced prostitution or the renunciation of an education for children.

Let us highlight the origin of the funds of microfinance companies. Take the case of the main microfinance company in Sri Lanka, LOLC. LOLC was able to expand into Cambodia in 2007 because the FMO, a Dutch development aid agency, approached it directly. In addition to the FMO, the LOLC group is today financed by development agencies in France (Proparco, a subsidiary of the French Development Agency), Belgium (Belgian Investment Company for Developing Countries — BIO), Germany (KfW Development Bank), Austria (Oesterreichische Entwicklungsbank — OeEB), Sweden (Swedfund), Finland (Finnfund), Norway and Denmark (Nordic Microfinance Initiative — NMI), Canada (Export Development Canada — EDC), Japan (Japan Bank for International Cooperation — JBIC), as well as the European Investment Bank (EIB) and the World Bank. [12]. In the coming months, we will seek to document the abuses suffered by LOLC debtors and other microfinance companies, and hold accountable those actors who are complicit in human rights abuses by supporting this type of financing.



Footnotes

[1This article was written following several discussions with activists from trade unions, political groups and other progressive associations, as well as with researchers and microcredit borrowers in Colombo and the districts of Jaffna, Kilinochchi and Polonnaruwa in Sri Lanka in February 2020. Thanks to all these people. CADTM held its 8th South Asia Regional Workshop in Colombo on February 18-19, 2020. See: http://www.cadtm.org/Unitedly-we-fight-against-debt-and-all-other-oppressions

[2See Economic Development Framework For a Northern Master Plan, August 2018.

[3See “BRAC Lanka Finance now serves from new corporate office”, DailyFT, 9 February 2016. URL: http://www.ft.lk/article/523994/BRAC-Lanka-Finance-now-serves-from-new-corporate-office

[4See BRAC Lanka (Guarantee) Limited, 2012 Annual Report. URL: http://www.brac.net/sites/default/files/ar2012/BRAC%20Sri%20Lanka.pdf

[5Bernard Smith, “Sri Lankan communities struggling to pay debts”, AlJazeera, 3 April 2018. URL : https://www.aljazeera.com/news/2018/04/sri-lankan-communities-struggling-pay-debts-180403113424957.html

[6LOLC Holdings PLC, Annual Report 2018/19. URL : https://www.lolc.com/report/Annual-Report-2018-2019_new.pdf

[7“Unravelling LOLC’s mega success with Ishara and Kapila”, DailyFT, 8 January 2020. URL : http://www.ft.lk/business/Unravelling-LOLC-s-mega-success-with-Ishara-and-Kapila/34-693259

[8LOLC Holdings PLC, Annual Report 2018/19.

[9See Ahilan Kadirgamar et Niyanthini Kadirgamar, “Microfinance has been a nightmare for the global south. Sri Lanka shows that there is an alternative”, cadtm.org, 12 September 2019. URL : https://www.cadtm.org/Microfinance-has-been-a-nightmare-for-the-global-south-Sri-Lanka-shows-that

[10See Amali Wadegadera, “No quick fixes to solve household debt crisis!”, cadtm.org, 22 December 2019. URL : https://www.cadtm.org/No-quick-fixes-to-solve-household-debt-crisis

[11See Éric Toussaint, “IMF: Inhuman at the micro and macro levels”, cadtm.org, 27 February 2020. URL : http://www.cadtm.org/IMF-Inhuman-at-the-micro-and-macro-levels

[12See the full list of funding partners in LOLC Holdings PLC, Annual Report 2018/19, p.14-15.

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