Fighting indebtedness and co-operative alternatives

Household indebtedness is now a critical factor in disrupting social life. Furthermore, rising and unsustainable household indebtedness has also contributed to national economic crises, including the global economic crisis of 2008. The global crisis was triggered by financial instability linked to subprime mortgage lending in the US, particularly to low-income communities that drastically increased household debt and defaults. 
High levels of global household debt are linked to falling real incomes – wages adjusted for inflation and cost of living – and increasing lack of job security, characterised by precarious employment practices including contract work. 

Furthermore, cuts to social welfare services, such as in healthcare and education, have led to higher social burdens, and thrown people into indebtedness. 
While high levels of global household debt are a consequence of Neoliberal policies over the last four decades, the Neoliberal project itself emerged with the dominance of finance capital—massive profits accrue to the financial sector with high financial and interest earnings. 
In Sri Lanka, as in many other developing countries, predatory lending including through microfinance schemes have led to tremendous levels of rural indebtedness.
In the war-torn regions of Sri Lanka in particular, these loan sharks called microfinance companies have targeted women, leading to tremendous hardship. Debt collectors, who are in effect thugs are abusive towards rural women, and the devastating debt trap has led to a number of suicides by debtors. In this column, I address some of the recent initiatives that are relieving the rural indebtedness situation and point to some emerging alternatives for sustainable rural credit and livelihoods by the northern co-operative movement.   

Devastating microfinance

Microfinance programs initiated in the 1990s by well-meaning NGOs providing low-interest credit to women was a flawed concept, to begin with as rural economies and livelihoods cannot be built on credit alone. 
Rather than the State providing the necessary social welfare services and investment in the rural sectors to expand livelihoods and employment, Neoliberal policies seek to address the rural economic crisis through microfinance schemes. 
Hence the State was relieved of its responsibilities to its economically deprived citizenry, and the do-gooder NGOs were called to step in with their meagre targeted programs. This approach was masked for some time by a global Neoliberal campaign promoting microfinance and self-employment as the solution for rural women. The Nobel Prize for Muhammad Yunus in Bangladesh was part of that campaign, but the recent struggles and the movement against microfinance in Bangladesh itself reflects the failure of the microfinance model.

"Household indebtedness is now a critical factor in disrupting social life"

In the war-torn regions of Sri Lanka, microfinance schemes for rural women initiated by NGOs eventually became a broad profit-making strategy of ruthless finance companies over the last six years. During the early years after the war, the war-torn people lost much of their assets, including their emergency asset in the form of gold jewellery through pawning as livelihood problems mounted without a viable reconstruction strategy by the state. With banks refusing to lend, the number of finance companies providing credit without collateral mushroomed. These microfinance companies, many of them registered under the Central Bank and a whole range of other companies merely registered under the Companies Act, provided microfinance loans for weekly and even daily instalment payments, with effective annual interest rates ranging from 40% to 220%.  
The proliferation of such predatory loan schemes created a debt trap, where rural women had to take one loan or borrow from informal sources to pay previous loans. While such predatory lending by microfinance schemes was prevalent in all parts of the country, the war-torn communities were particularly vulnerable as their rural livelihoods had not been rebuilt and women traumatised by the war took desperate steps to make loan payments when intimidated and abused by debt collectors. 

As the indebtedness crisis mounted – characterised by families being torn apart, women going into hiding and even suicides – women’s groups in the North and the East took the lead in the fight against this social menace. They demanded that government officials intervene and spoke out in the media and other forums about the horrendous practices of microfinance companies. As national attention focused on the struggles of these women, the culture of blaming the victims propagated by the finance companies, NGOs and many economists – claiming it is luxurious consumption and lack of financial literacy that led to this crisis – began to crumble. The exorbitant interest rates, the mounting and unsustainable levels of rural debt, and the cases of abuse documented by the District Secretariats clearly pointed to the flaw in the microfinance model and the culpability of the exploitative finance companies.  

Official turn

With the continuing struggles, research and campaigns by women’s groups and activists, the break came in 2017 when the Central Bank finally took notice of the indebtedness crisis. During the latter half of 2017, the Central Bank Governor and former President Chandrika Kumaratunga travelled to the North and consulted various actors including women’s groups, local officials and the co-operatives. The President and the Finance Minister expressed their deep concern, and further fact-finding visits to the North and the East by political leaders and senior officials took place.

"Predatory lending have led to tremendous levels of rural indebtedness"

In 2018, massive protests by the co-operative movement in Jaffna and women’s groups in the Vanni Districts and Batticaloa District, coupled with the political leadership of the country openly advocating against the rural onslaught of microfinance, led to a national consensus on the need for a solution. A multi-pronged initiative by the Finance Ministry consisting of relief measures and broad advocacy against predatory lending was undertaken. The Prime Minister and Finance Minister announced a one-time write off of microfinance loans of up to Rs. 100,000 by women who had defaulted on three payments by June 2018 in the twelve drought-affected districts; 45,000 women were to be given relief with an allocation of Rs. 1.4 billion. The Central Bank announced an interest rate cap on microfinance of 35%, which is now flushing out many of the unscrupulous lenders. In the North, credit co-operatives placed their funds along with a government grant of Rs. 500 million towards a broad rural credit scheme of reaching distressed households to keep them away from predatory lenders. 
A rapid assessment in recent weeks by co-operative researchers in the North is now pointing to a significant improvement in the situation of rural credit. Most district officials who found the indebtedness problem to be the most significant challenge have much fewer complaints of abusive lending practices. Rural women are avoiding microfinance companies where possible and are increasingly conscious of their high-interest rates. Microfinance companies themselves are withdrawing due to the implementation of the interest rate cap. Finally, the new co-operative credit scheme during its first nine months itself has reached 8% of the households in the Northern Province and is likely to reach 25% to 30% of the households over the next year. 

Co-operative alternatives

In the North, the slow and promising shift in the indebtedness situation is a glimmer of hope for the people who have suffered from a decade of crippling economic life after the war. Indeed, the struggles of the people, the commitment of the co-operative movement and the political will on the part of the national leadership, in this case, are reflective of the possibilities for addressing national problems. Even though this shift may be tentative and the post-war economic situation in the North remains precarious, I register this shift and the contribution of various actors because I believe it is important to recognise every small victory and build on such successes. However, the continuation of this positive change depends on the commitment of the various actors within the State and society. 

The work over the last two years to address rural indebtedness has put forward the possibility of a promising alternative in the form of a revived co-operative movement in the North. The credit co-operatives have reached tens of thousands of new members and provided over 19,000 small loans of Rs. 20,000 each at the interest rate of 14%, with excellent recovery rates on the range of 98%. This year the co-operative movement will be providing Rs. 50,000 loans; the amount needed to cultivate an acre of paddy, or grow a quarter acre of vegetables or purchase fishing nets for a season. However, indebtedness cannot be solved by credit alone and requires investment to expand livelihoods and increase incomes, and much of the success of credit co-operatives will depend on a broader strategy of investment to increase rural production.
I would like to end by drawing from a recent visit to the Madhu region in Mannar District. 

"High levels of global household debt are a consequence of Neoliberal policies"

While many of us have heard of the famous Madhu Church drawing massive crowds of pilgrims, the other side of the Madhu region is its isolated villages, war-time devastation and lack of economic opportunities. 
There is not even one small industry, it has only one State bank branch, it is educationally lagging and is characterised by crippling poverty. In the Madhu Divisional Secretariat of the close to 4,000 households, over twelve percent of the population have got loans over the last nine months from the two Co-operative Rural Bank branches and few village level Thrift and Credit Co-operative Societies. 
The Multi-Purpose Co-operative Society (MPCS) in Madhu is about to initiate the first small industry for fruit processing of juices and jams, built with a Rs. 14 million grant as part of the Finance Ministry’s Fifty Co-operative Industries Scheme in the Northern Province. 

This small factory is expected to create demand and purchase the abundantly available fruits in the Madhu region. With plans underway to build a third co-operative rural bank branch, the co-operatives are hoping to provide credit for example to farmers who produce gingelly (Sesame). 
Such gingelly can be sold to another MPCS about to produce gingelly oil in a co-operative factory in the Manthai region of Mannar District. 
As with these small initiatives in Madhu, the advantage of the co-operative movement is that they are present in isolated regions where private actors are unwilling to invest and even State institutions are marginal. Furthermore, any accumulation by the co-operatives will remains with the local communities and will be reinvested in the region, as opposed to being siphoned off by external investors. 
Even though the Tamil political leadership and the Tamil elite have paid little attention to the indebtedness crisis and for that matter, the emerging initiatives by the co-operative movement, the rural communities in the North are turning to the co-operatives for relief from indebtedness and economic rejuvenation. 
Are you ready to bet on such co-operative alternatives?