Cambodia’s microfinance disaster

The IFC climbdown on Cambodia microfinance lending comes too late to undo the pain of excessive debt

by David Whitehouse, PhD

A decision by the World Bank’s International Finance Corporation (IFC) to allow an investigation by its independent ombudsman into microfinance lending in Cambodia comes too late to repair the damage already caused.

The original complaint was filed in February 2022 by the Cambodian League for the Promotion and Defense of Human Rights (LICADHO) and Equitable Cambodia (EC) on behalf of a group of microfinance borrowers in the country. It alleges that six financial institutions in Cambodia have lending and collection practices that have resulted in harms including loss of land and livelihoods.

The complainants, who have kept their identities secret for fear of reprisals, allege that the lenders have forced them to sell land used as collateral, and claim other harms such as reduced food diets, having to take their children out of school, and having to migrate to find work.

The Cambodian financial institutions concerned by the complaint are Acleda, Amret, Hattha Bank, Prasac, LOLC, and Sathapana. The IFC has direct investments in the first three and indirect financial exposure to the rest. The initial response to the complaint by the IFC, as reported by the ombudsman, was not to deny the harms, but to claim that they were not their problem.

The IFC argued that consumers of a client’s products are not covered in its sustainability policy or performance standards, and claimed that it does not support microfinance lending itself, but the activity that results from the use of the loans by borrowers for small-scale business.

That line of reasoning was squarely rejected by the ombudsman. The IFC sustainability framework, the ombudsman found, applies to all IFC projects unless specifically excluded, with no such exclusion found for impacts on microfinance borrowers. There are “preliminary indications” that IFC may have failed to comply with its own environmental and social policies, it found. The IFC, after initially giving itself more time to decide, on July 28, 2023 finally allowed the investigation to proceed.

Hiding in Broad Daylight

Strictly speaking “microfinance” covers savings and insurance products for poor people as well as loans. Savings and insurance are harder work and less profitable than lending to the very poor, but leave them with a tangible benefit: a savings balance or insurance cover.

The term “microfinance” is also widely used as a synonym for “microcredit”. The Cambodian complaint says the IFC was aware of publicly available information on social harms associated with Cambodia’s microfinance sector, yet carried on regardless with approving new financing. Anyone with an interest in Cambodia or microfinance will have long been aware of the controversy surrounding lending practices in the country. At the start of 2019, according to LICADHO, around 2.4 million Cambodians out of a population of 16 million had at least $8 billion in microloans. The average loan was around $3,400, the highest level in the world.

An earlier article on Karma Colonialism highlighted the dangers back in April 2021. Since then, a growing body of academic research has painted a dark picture. A group of University of London researchers in September 2022 found that microfinance loans were leading to an “over-indebtedness emergency” in Cambodia and undermining borrowers’ capacity to adapt to climate change.

Research funded by the National University of Singapore and published in June this year found that during the 2010s, between 25% and 50% of Cambodian microfinance borrowers had to make monthly loan payments which exceeded their incomes. High repayment rates, which the industry uses as justification, depend on “coercive peer pressure, social shaming and various forms of gendered exploitation.”

Meanwhile, research commissioned by the Cambodia Microfinance Association from M-CRIL, an India-based agency which aims to provide “standardized assessment of governance, management and financial performance” in microfinance, has yet to appear, despite an earlier publication target of end March 2023.

M-CRIL’s managing director Sanjay Sinha says that his study covers over 3,000 clients in 10 Cambodian provinces. He says that the LICADHO figures are “sensational, but methodologically flawed . . . The findings of my team are equivocal and have to be explained as fully as possible. It is the provision of empirical evidence for what we say that takes time. Whatever conclusions we present will be criticized from all sides but that is the nature of our work.”

Time works against, not for, the indebted poor. The ombudsman’s draft investigation report will take up to 18 months to complete. The whole process has already taken far too long for Cambodian borrowers who have sustained well-documented harms. The winners, if there are any, will be in other poor countries who may be spared the build-up of excessive lending levels if microfinance investors take heed of the evidence of the damage that the industry has caused.

The author: David Whitehouse, PhD is a freelance journalist in Paris. His free-to-read Substack on post-colonial development and democracy can be found here.

Published under Creative Commons CC-BY-SA 4.0 license. You may reprint this, without further permission. Please credit the author. A link to the site is welcome, but not required.

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