The unfolding microcredit scandal in Cambodia involves two well-respected European banks, BRED in France and Triodos Bank in the Netherlands.
Both subscribe to the concept of “ethical banking.” But each has a stake of 12.5% in ACLEDA, Cambodia’s biggest commercial bank and the local leader in microcredit.
ACLEDA, which stands for “Association of Cambodian Local Economic Development Agencies” is not just any bank. It has undergone a horrible metamorphosis since its origins. It was established in 1993 as a non-profit making, non-government organization, financed and supported by the United Nations Development Programme and the International Labour Organization, with the aim of helping refugees, widows and other victims of war to escape from poverty.
Over the years it has become Cambodia’s most usurious bank and its most ferocious predator. It seizes the land and homes of poor farmers who are up to their eyeballs in debt and can’t make their payments.
Perversion of Microcredit
ACLEDA symbolizes the perversion of microcredit in a poor, corrupt country like Cambodia, where the law of the jungle, not the rule of law, rules over a false “market economy.” Ten years ago, ACLEDA shifted course and has since recorded growth at a breakneck pace. The search for profit has been the only driver of this growth. The mission to help the poor has been forgotten.
Like its competitors in the microcredit sector, ACLEDA has sent an army of salesmen out to the provinces in search of highly profitable new lending contracts. They needed to create needs for cash and consumption among rural families who had until then practised self-sufficient subsistence agriculture. The salesmen knew how to tempt their targets with the promise of new material goods and new consumption habits. They neglected to establish careful repayment schedules based on predictable incomes. But the loans were always based on a form of security, usually the farmers’ land.
The borrowers were easier to convince given the high levels of illiteracy and innumeracy in the countryside. They signed contracts for loans which gave their land as security without realising the possible consequences. The profitability for the banks was assured and even potentially increased by the prospect of seizing land from defaulters. Rising land prices driven by speculation make the final margins even more enticing for the banks. The fact that the land was the farmers’ sole and vital asset didn’t enter into the calculations.
The game changed suddenly with the arrival of COVID-19. The four fragile pillars of Cambodia’s economy, tourism, export textiles, construction and agriculture, were simultaneously demolished.
Even before COVID-19, the respected Cambodian League for the Promotion and Defense of Human Rights (Licadho) had exposed the causal relationship between the exponential growth of the microcredit sector and the increase in forced land sales, child labour, economic migration and human trafficking under the weight of accumulated debt. (1)
In 2009, loans in the sector totalled just $300 million, shared between a relatively small number of borrowers. At the end of 2019, more than 2.6 million Cambodians had accumulated more than $10 billion of debt from microcredit establishments. Between 2015 and 2017, the average loan size jumped by 80%. The average "microcredit" in Cambodia is by now, by far, the highest in the world at $3,804 dollars. That’s more than double GDP per head, which is also a world record.
Frenetic headlong growth
It wouldn’t take a genius to predict the outcome of this frenetic pace of growth over the last decade: financial, social and human catastrophe. The number of banks and microcredit establishments has been continually growing. In this new dynamic of consumer credit, customers often juggled several lenders, borrowing from one to pay off the other. This was like digging when stuck in a hole, but there was no choice.
The situation is worsened by the fact that the Cambodian economy is still 80%-90% dollarized with the riel, the national currency which does not inspire confidence, used only for small expenses. Dollarization means local authorities have no autonomy and little responsibility in managing the country's money supply and currency exchange rates, which has made it easier for local banks to charge usurious rates of interest.
For a long time, interest rates were freely set at up to 2% or 3% per month, before being legally limited at 18% per year in 2017. These rates are in contrast to rates of 2% to 3% per year that would be charged in the US: the difference between them effectively reflects usury.
Cambodian microcredit’s harmful drift from its original not-for-profit aims led the sector to dress itself in the finest capitalist garb. International and “shrewd” investors from Europe, Australia and Japan rushed in search of profit from the new frontier markets prized in New York, London and Paris.
The transformation of Cambodian microcredit into a red-blooded capitalist enterprise was completed with the listing of ACLEDA on the Phnom Penh stock exchange in May 2020. No need to worry about COVID-19, more urgent was to bring new "international investors” to the table.
Eating less to repay the loans
Who is really paying for this party? The answer is given by an enquiry published jointly in June by Licadho and a group of local trade unions on the impact of microcredit on the lives of the borrowers. Almost all of them, 96%, answered that life had become harder for them since borrowing (“a lot harder” for 80% and "a little harder" for 16%). That’s not surprising when the cost of food combined with the debt repayments starts to exceed the salaries of most workers. This means that daily food intake has to be reduced to be able to pay back the banks.
In contrast to responsible Western banks which take into account the ability of their customers to repay, and who often help their clients to plan and execute their projects, Cambodian banks have no scruples. All they want is signatures on loan contracts. These are in general used to finance consumption and are rarely part of a wealth-creation strategy, for which Cambodia’s business environment is hardly conducive.
Cambodia is a country which is undermined by the corruption and fecklessness of its leaders. One of the main victims is agriculture, which employs 70% of the population. The incomes of farmers have collapsed and the sector is virtually bankrupt, in the absence of any kind of agricultural policy. Almost all farmers have had to borrow to survive as their operations are losing money every year. In such an economic context, nothing can justify the recent explosion of Cambodian microcredit, which can only lead to a severe crash.
A Prime Minister who supports the banks, not the farmers
In the face of the desperation of numerous small borrowers who find it impossible to repay their debts, the authorities have not taken any social protection measures. On the contrary, Prime Minister Hun Sen hasn’t hesitated to encourage the banks to seize assets from defaulting borrowers.
A profound malaise which was already widespread has been brought to a head by COVID-19. This crisis has struck the over-indebted population head on. With revenues being reduced or eliminated over an extended period, borrowers are more than ever being forced to sell their land and houses. Some also have to go and sell their labour in Thailand, where they are among the most exploited migrant populations.
Slogans like “helping the poor to escape from poverty” have been used to secure the backing of international investors like BRED and Triodos, the Dutch “ethical bank.” In reality, unscrupulous microcredit is driving Cambodians further into misery.
Former Cambodian finance minister; interim leader of the opposition Cambodia National Rescue Party (CNRP) in exile in Paris.