By Mithula Guganeshan –
Financial institution’s high-rise buildings with magnificent bill boards trying to portray an image of success and trust is an awfully common sight in Sri Lanka. In the meantime while the financial institutions basks in glory, 84% of Sri Lankan’s are either financially struggling or suffering according to the survey done by Gallup Healthways in 2014.
An ex-employee from a financial institution located in Jaffna says “We offered loans even when we doubted about the repayment capacity of the customer due to the high competition from other players in the region”. He states only around 5% of the customers were able to settle the loan and interest repayments without difficulty on time, whilst the remaining 95% are struggling. The ex-loan officer mentioned that he resigned from his job due to the guilt associated with engaging in work misleading and trapping people into debt in order to meet the sales target set by the financial institution.
Debt levels are shooting up within different segments of the society ending up as victims to opportunistic strategies designed by financial service providers “selling happiness and freedom”
Financial institution are shrewdly exploiting and benefiting from the existing information asymmetry. Bankers chose not to reveal certain important information to their customers. Most of us would have had the experience of being taken aback some of the financial institution’s gimmicks in the form of extra charges, late payment fees and extra charges even when one decides to settle the loan early. Some banks even charges fees for closing bank accounts, well the excuse was to recover the set up costs even when the account was closed, after 15 years of use.
Financial institutions have been able to get their way with everyone from educated and financially literate customers to the poor and uneducated.
Microfinance institution’s exists to empower the poor or the financial institutions?
90% of microfinance loan borrowers are women according to information published on Lanka Microfinance Practitioner’s Association. Around 77 microfinance institutions are registered with the organization, however only 26 MFI’s have provided data thus, compromising a loan portfolio of 7.4 billion rupees. Microfinance loan portfolio is even higher as the data provided does not compromise information on other large MFI players posting profit in billions. [If microfinance institutions are so effectively working towards stimulating production and alleviating poverty, it is impossible for MFI’s to earn profit in billions?]
Mainstream media’s silence
Mainstream media could easily contribute towards creating awareness about the unethical practices used by the financial institutions. However, the number of financial institutions advertisements on the papers, TV’s and radio channels would validate why media chooses to hide the elephant in the room. Ironically, majority of the content published about financial institutions is in the form of a paid advertisement about products/services and the number of meaningless awards won by each financial institution.
Advertising extravagance by the financial institutions is to mask the truth about the core functions of modern banking system “encourage and misguide financially illiterate customers to get into unnecessary and excessive debts”
Discriminate poor women with unprofessional business practices
Women with low income from low – access areas are targeted as they have limited exposure to formal finance, have fewer options with limited awareness and knowledge etc. Most importantly these excessive loans are obtained by people for their day to day consumption thus; the borrowed money is hardly being used for any economically viable activity resulting in difficulties to repay.
Technically, microfinance is promoted amongst the poorest people as it’s recognized as a medium to reduce poverty (lack of evidence on countries that alleviated poverty with loans) by engaging in small businesses and gaining an income. Only a small % of women are able to invest the money into businesses and earn whilst the others have used it for consumption. Poor, uneducated women earning low wages are handed with easy credit at high interest rates with the excuse of empowering women. Even though the microfinance may charge lower than loan sharks, the MFI’s still charge high interest rates from those borrowing to survive on a daily basis. For example for a micro loan of Rs.25, 000, weekly payment of Rs.1000 for 10 months needs to be paid which results in an interest rate of over 50%.
The women spend the money and are looking for alternative options to repay when the agent arrives for weekly/monthly payments through pawning jewels and taking additional loan to repay. In the past, Sri Lankan women possessed golden jewels as a symbol reflecting their wealth; however the recent trend is women claiming about the amounts of debts that they hold.
Lack of regulation accommodate financial institution’s unprofessional business practices
The irregularities within the microfinance system in Sri Lanka that needs to be stopped/ regulated immediately to benefit the people
- Door-door aggressive sales/marketing of the microfinance loans
- Employing women to increase customers, without payment
- Unregulated and high interest rates
- Inadequate documentation, the sales personnel refuses to provide any document/contracts
- Lack of understanding and awareness about the total cost that they eventually need to incur. Overcharges are included.
- Deceptive advertisements and complicated terms (If the borrower request for information, the inadequately trained staff are not able to answer and says that they don’t need to know as these loans are offered by reputed banks/institutions)
- Consumers don’t have a proper channel to complain about the issues and errors faced, majority doesn’t even know that they have the right to complain
- Savings are lost in group loans, if the other party defaults their payments
- Subject to insult, abuse and humiliation when the staff arrives at their homes every month to collect payments.
Excessive marketing by financial service providers
Financial institutions in general are engaging in excessive and aggressive marketing of their products. MFI institutions employ (without payment/salary) women within the low access communities, those bringing customers from the neighborhood are compensated with easy access to credit and leasing opportunities.
Quite similar to banks forcefully promoting credit facilities even when the customer is not actively looking for such options. Most of us had faced an incident where bank officers called us repeatedly to desperately push off an unnecessary credit card. Unprofessional business practices are common in the financial sector, and not limited to microfinance institutions.
Urgent need for financial consumer protection
Financial system is a complex and sophisticated system, rarely understood by ordinary citizens. It is unacceptable to expect that financially illiterates are expected to be aware and vigilant from the malpractice used by the financial institutions. Interestingly, despite the rising debt levels there is a lack of crucial and proper regulations to provide the people with financial consumer protection. Regulation is compulsory to bridge the information imbalance between the consumers and the financial institutions.
Sri Lanka only has a general consumer protection law without any explicit reference to financial services. The financial institutions are growing richer and powerful by the day at the expense of the people. Government’s efforts are directed towards providing more access to credit within the rural areas, instead of protecting the consumer’s rights. There are talks on funding with foreign money to facilitate the need to set up rural branches.
Officials could have different agenda; however, if people’s welfare is a priority first protects the citizens from the financial institutions. At this moment, the country needs immediate regulations in place to provide financial consumer protection before taking measures to prepare for additional loans.
Enough loopholes in the legal system to benefit the institutions and wealthy
Commercially focused business and social focused businesses have entirely two different objectives. There needs to be clear boundaries that commercially focused businesses should not target the vulnerable segments, without a clear set of laws and legislations.
If microfinance is an avenue to uplift the poor then the terms and conditions need to be favorable to the poor. Currently, microfinance is used to enormously uplift the CEO’s and directors of MFI’s while poor get the crumbs left.
However, to stop the growing inequality, we are in desperate need for financial education and financial consumer protection for the long term stability of the financial system and the people.