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Sri Lanka to slam price controls on micro-finance

Jul 22, 2018 18:37 PM GMT+0530 | 1 Comment(s)

ECONOMYNEXT - Sri Lanka is planning to bring law to control interest rates on micro-finance to 30 percent, the finance ministry said, raising concerns that the sector may die and unbankable poorer borrowers will only have illegal money lenders as the remaining alternative.

Finance Minister Mangala Samaraweera intends to bring a proposal to place a ceiling interest rate of micro-finance loans of 30-percent a year, when current rates range between 40 to 220 percent a year, a statement aid.

He had made the statement at a ceremony in Jaffna in the Northern Province.

Concern over micro-finance has risen after a large number of borrowers in former war torn in areas ended up in debt traps after taking too many loans.

Unlike in the rest of the island, many borrowers in the North and East have not been used to easy lending, including hire purchase schemes and had taken consumer loans without caution, economists who studied the problem has said.

Minister Mangala Samaraweera had said a recent drought had put many farming families in debt in 13 districts.

The finance ministry said a debt relief program will be implemented for borrowers of less than 100,000 rupees and a new law to regulate micro-finance institutions a price ceiling on 30 percent a year will be placed.

Micro finance however has relatively high administration and collection expenses, which require somewhat higher rates than large loans.

Unlike banks, which take assets as security, micro-finance is loaned without security, usually to people who cannot access the formal banking system.

A 30-percent rate is around the same rate charged by the formal banking system for their micro-loans, which are called credit card lending. But customers usually need a steady job with a salary to get a credit card.

Analysts say if the 30-percent rate is too low, many formal micro-finance businesses may stop lending, leaving only village money lenders (polee mudalali) who employ mafia-style tactics for recovering loans as the only available alternative.

Sri Lanka has high interest rates generally partly due to unsound money, with the central bank permanently depreciating the currency creating higher levels of inflation than the US Fed to which the rupee is loosely pegged. (Colombo/July22/2018)


 

1 Comments

  1. N Perera July 23, 01:08 AM

    It is very sad. But basically people should be careful about taking loans. They need credit counseling.This is a hard lesson.
    However problems with drought related loans cannot be fixed by price controls.There has to be crop insurance.
    But crop insurance is also a cost, as much as high interest is.Basically these miro-finance lenders also have to take the hit if they loaned at high rates.
    The rates have balance the risk such as lack of crop insurance.What needs to be examined is whether there was any kind of predatory lending, where loans were pushed to people who had no knowledge.In that case the lenders should take the hit.

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