The Macro Challenges in Cambodia’s Microfinance Sector

A closer look at an alarming trend.

David Hutt

By David Hutt

October 03, 2019

The Macro Challenges in Cambodia’s Microfinance Sector

Credit: Pixabay

In August, two local Cambodian organizations, Licadho and Sahmakum Teang Tnaut (STT) published Collateral Damage: Land Loss and Abuses in Cambodia’s Microfinance Sector, a report about the dangerous growth of the country’s microfinance sector. It spotlighted an issue that researchers have been warning about for years.

A report like this wouldn’t ordinarily stir up the Cambodian government, but it is increasingly sensitive to claims that Cambodians are over-indebted, and to suggestions that its poverty-reduction record may, in fact, be exaggerated.

The government response that followed was no surprise. For instance, Council of Ministers spokesman Phay Siphan called it “fake news,” and “not professional and objective because they only surveyed 28 families.”

Granted, the report is narrow in scope. It includes testimony from only 28 households across just four provinces. Yet it never pretended to be an expansive, quantitative survey. Yet on September 4, Phay Siphan summoned staff of the NGOs to an unprecedented meeting and reportedly ordered them to retract the report. “They were asked to make a public statement to the public saying that the report does not reflect the general situation,” he stated.

Naturally, the groups declined. “Of course, Licadho and STT refused to sign this joint statement… So most of the meeting was to push, to coerce, to threaten both organizations to sign on,” Licadho’s director stated. They also declined to attend a second meeting called by the cabinet spokesman.

It didn’t stop there. Chea Serey, the central bank’s director-general, alleged that journalists had believed “hearsay” and did not engage in “fact-checking,” while also claiming that newspapers were in “coordination” because they released articles about the report on the same day.

Despite the government’s attacks on the report’s methodology, what it argues is hardly new. Journalists, myself included, have been writing about the same problems in Cambodia’s microfinance sector for years. Academics have also produced countless reports, many with sizeable samples which Phay Siphan seemingly desired. An unpublished report, conducted in 2017 by the German development agencies, surveyed 1,660 borrowers and found half reported being over-indebted.

Indeed, almost all studies come to similar conclusions as the Licadho and STT study. A report in December 2018 by Future Forum, a think tank, was as foreboding. It found, for instance, that only one-third of household debt is spent on “economic activities;” the rest goes on non-profitable spending, often emergency medical bills and consumer goods. This is the opposite of what microfinance loans are intended for. The likes of the World Bank and IMF have also issued countless warnings about the microfinance industry, albeit caged in the language of international institutions with a dog in the fight.

Andrew Nachemson, a journalist, has done some fine work on this subject of late, especially an article for Al Jazeera on August 7 in which he quotes a former employee of LOLC, a microfinance institution (MFI), who quit because he thought the lender had lost its focus on social improvement and had become all about profit. “At LOLC there was a big culture of making money and showing off wealth. The CEO had a massive jewel ring,” he told Nachemson. “If you got promoted you got a bigger ring.”

Separately, sources familiar with the situation have told me that international backers are very concerned about the state of the Cambodian microfinance sector but are wary of taking action in case it affects microfinance sectors in other countries, which aren’t having as many problems as Cambodia. People have also spent their entire careers believing that microfinance is the magic free-market solution to global poverty, and admitting faults in one’s world view is difficult.

The problem for the Cambodian government, however, is that there isn’t too much it can do about the problem, short of intervention in the industry, which could cause some panic within the industry and also involve a colossal sum of public money if it was to guarantee some of the debt. The Licadho and STT report recommends the prohibitions of land titles from being used as collateral and end up-front fees. But these won’t help current borrowers, and one ought to be wary of rocking the industry now that so much credit has been extended.

Moreover, the government’s previous attempt at intervention — in March 2017 to impose an 18 percent interest rate ceiling, when rates had previously been as high as 30 percent — wasn’t that well thought-out. Bringing down interest rates allowed more people to extend their credit lines. And the World Bank reported that “in most institutions, the decline in interest rates has been partly offset by a substantial increase in [up-front] fees.”

It begs the question: In the worst-case scenario, can the government bail out microfinance lenders? Some, probably. But many have been bought out over the last two years except international firms, chiefly Japanese and Korean banks, and this certainly complicates the matter. Bailing out foreign banks won’t look good for the ruling party’s nationalist claims, either.

What about baling out borrowers? Given that there is almost $8 billion in outstanding debt, again it could probably only do a little. All this might appear Cassandra-like at the moment, but surely, given the numerous warnings, the Cambodian government should at least consider the worst-case scenario – and perhaps even have some contingencies for it – rather than trying to hush them up through intimidation.

Thinking back, there is antecedent for this recent dispute. Late last year, the United Nations Development Program (UNDP) and the Oxford Poverty and Human Development Initiative published a report looking at poverty levels across the world through a new metric of “multidimensional poverty,” which takes into consideration health, education, and living standards, as well as the stats normally used. Through this measure, Cambodia’s poverty rate was more than double (35 percent) the government’s own estimate.

Little wonder, then, that the Planning Minister Chhay Than threw a fit, lambasting the UNDP for not informing him before the report went public. A bizarre, though unveiling, claim was also made that “the release of this information may have a detrimental effect on the [government’s] success in reducing poverty in Cambodia.”

In actual fact, it made the government’s narrative that it has rid Cambodia of poverty harder to believe. (Poverty statistics are always suggestive, anyway, since they are dependent on arbitrary monetary definition of what is and isn’t poverty: the World Bank reported in May that reduction in consumption per capital of just $0.50 per day would double Cambodia’s poverty rate, and that’s for the current liberal estimate figure of 13.5 percent.)

Perhaps, though, these two incidents are not separate. If the loss of just $0.50 a day could throw hundreds of thousands back into poverty, what would a similar reduction of earnings mean to those who mounting debts? Indeed, what reports about the overextended microfinance industry insinuate is that the government’s poverty reduction “miracle” isn’t as assured or substantive as hoped. What is actually separating hundreds of thousands from poverty and relatively stability is debt – and debt that many are warning is not sustainable.