Microfinance Institutions Rake In Billions Through Unprofessional Practices
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”
Imbalanced information
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.
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”
