Measures announced by Cambodia’s banks and microfinance lenders to help clients who are unable to repay because of COVID-19 are grossly inadequate. Debt relief, the only realistic way to help these stricken borrowers, is now essential.
This is the only way out which will not lead to widespread seizures of land and property from impoverished farmers. These people were in many cases rashly encouraged to borrow to generate profits for the banks and microfinance lenders in Cambodia over the last 20 years.
As I argued in The Brussels Times in July, Cambodia’s largest microfinance lender ACLEDA has betrayed its origins as a non-profit making organisation with the mission of helping post-war refugees and widows. The bank is now a predator that preys on the very people it was intended to help. The average size of microfinance loans in Cambodia at $3,804 is the largest in the world. Yet Prime Minister Hun Sen has simply encouraged to seize property from those who can’t pay.
Banks and microfinance lenders are currently offering their clients three possibilities. They must choose one to avoid the seizure of property given as security. They can make interest-only repayments for a renewable period of six months. If this isn’t possible, the interest is added to the capital due. The third choice is for the client to contract a new loan to replace the old one. This, of course, will be for a larger amount as it will include all the payments that weren’t made.
For each of the three choices, if the client does not respect their obligations, the bank or microfinance lender will seize the property given as security. For a poor farmer, the loss of a rice field condemns them to begging or the sale of their children to avoid starving to death.
According to the World Bank in 2019, the average loan size in Cambodia had increased more than tenfold over the previous five years, as had the proportion of loans used for consumption – as opposed to business – needs. Steps to protect the growing army of lenders have at best been only partially successful. The World Bank found that the capping of interest rates at 18% in 2017 led to a decline in average borrowing costs, though some lenders managed to claw back some of their lost profits by increasing fees charged to borrowers.
Hushed Up Evidence
Many loans were contracted during a property boom that is now grinding to a halt, leaving loan values even higher in relation to the collateral provided. Cambodia’s corrupt court system means there is no way for the evicted to contest the seizure of the property. Distressed land sales, meanwhile, are often carried out through informal channels, meaning that they do not show up in the MFI reports. And Human Rights Watch has found that some lenders are threatening to involve local authorities and the police in a bid to extract repayments.
The iniquity of microfinance lending in Cambodia has been demonstrated in a paper by the academics W. Nathan Green and Maryann Bylander. They obtained a copy of a report funded by microfinance investors and prepared by the Microfinance Center (MFC) and Good Return in 2017, based on nationwide data. The report, the academics say, was never published because of the anticipated public reaction in Cambodia.
The MFC research suggested that about 20% of Cambodia’s adult population held a microcredit loan in 2017. It found that 28% of borrowers were insolvent, with a further 21% classed as critical or at risk. If those figures are right, then something like 10% of Cambodia’s population was in 2017 already struggling to service a microfinance loan. Due to the continued growth of microfinance lending since 2017 and the economic impact of COVID-19, that proportion can only have increased since.
One of the academics who obtained the 2017 research also spent five weeks as an intern with the credit department of a district branch office of ACLEDA bank, the largest in Cambodia and now listed on the stock market. The internship gave an insight into the way in which the bank’s aggressive internal culture works. There is a stick and carrot approach to increase the size of the lending book. Bonuses are available for those who make new loans, while those who failed to do so risk being fired.
The “lack of financial literacy” often used by microfinance lenders to explain the fact that some borrowers get into trouble was found to be a red herring. The 2017 MFC report found no relationship between financial literacy and over-indebtedness: in fact, those with loans overdue were more likely to be financially literate than those who have been repaying on time. The reality is that Cambodians know the risks of what they are getting into, but do it anyway because they have no choice.
The result of the rapid expansion of microfinance in Cambodia is that borrowers have been saddled with loans which, even given a fair economic wind, would have been difficult to repay. Due to COVID-19, that burden has now become completely impossible to support. The only solution is for prompt and wide-ranging debt relief.
Sam Rainsy, former finance minister of Cambodia, lives in exile in Paris.