Last week a bill to regulate all lending, including microfinance, moved to the voting stage in parliament. The bill requires all those regularly lending money on interest to first obtain a license from a new microfinance and credit regulatory authority.
Parliament is scheduled to vote on the bill in the first week of March. It exempts lenders covered under other laws, like banks.
The law has been in the works since 2018, when pressure grew to protect vulnerable people from predatory lenders. Lakmali Hemachandra, government MP and chair of the sectoral oversight committee considering the bill, says that it intends to protect microfinance borrowers.
But the bill itself doesn’t regulate much. Instead, it creates an authority with broad powers to regulate lending, grant licenses, set interest rate caps, and fine those who violate its directives.
Requiring little documentation from low-income households, microfinance grew rapidly during the post-war years in the north-east, and again, during the 2022 polycrisis. According to the UN, 38.5 percent of households suffer from accumulated debt. The Northern, Eastern, and North Central provinces are the worst affected.
Poor consumer protection
The bill includes a few consumer protection clauses; like that cumulative interest cannot exceed the principal and that lenders cannot harass customers. But, these aren’t accompanied by specific fines or penalties.
“The consumer protection aspect is what needs to be addressed, not mere formalisation [of lending],” says Ermiza Tegal, a human rights lawyer, adding that the bill’s focus is wrong. She argues that informal lending should not be equated with predation, nor should formality assume fairness.
Parliament’s sectoral oversight committee considered amendments drafted by representatives of community-based lenders and microfinance victims. Among others, they suggest capping interest rates, banning home visits, and limiting a company to one loan per borrower.
Arutha, a think tank, also made submissions. They call for prohibiting collective liability on individual defaults and instituting temporary loan suspensions during natural disasters.
Confusion persists about whether large finance companies with microfinance verticals, like LOLC and HNB Finance, will be regulated by this bill.
In a 2023 draft they were explicitly exempted, on the basis that unlike small microfinance businesses, large finance companies are regulated by the Central Bank under existing laws. But the Supreme Court found this to be unconstitutional, determining that regulations must be equally applied to all. The parliament’s public finance committee thinks the new bill addresses the court’s concerns.
But Tegal and Ranil Angunawela, a corporate lawyer, disagree. In practice, they think the new bill will exempt companies like LOLC which are already regulated under other acts. They will only have to get licensed with the microfinance authority if they qualify under the definition of a “microfinance business”, explained Tegal. The bill defines microfinance as loans “mainly to low income persons and micro enterprises with the primary objective of social empowerment.”
“That is an easy definition to avoid,” said Tegal.
On the other hand, Aruna Logus, assistant general manager at LOLC Microfinance, plans to register as he believes the company will fall under the act. “We are happy with the bill as there are many unregulated companies that make our work challenging.”
Yet, for Suneth Aruna Kumara, heading a microfinance victims’ collective, these large companies are the biggest offenders in the debt crisis. Responsibility is often misplaced on village-level moneylenders, but ninety percent of victims point the finger at large, established companies like LOLC, Berendina, and Bimputh, says Kumara.
Overkill
Among others, poli mudalalis, village-level lenders who charge interest, microfinance companies, and death donation societies will need licensing under the new bill. The bill’s definitions are broad, including almost any lending with interest — so long as it isn’t performed by a lender already regulated by the Central Bank.
