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.
Related stories
Left: Microcredit goes awry: Microcredit appeared on the scene with great promise in the 1980s. Then the term was taken over by profit-focused businesses. Today, microcredit often feeds on the poor rather than helping them.
Right: The brain drain. Colonial relationships are about extraction — of many varieties. As the coronavirus pandemic spread, wealthier countries extracted a particularly crucial resource from the rest: Doctors.
Left: “Will they just spend it on beer?” Instead of aid funds going to governments and NGOs, why not give it directly to the poor? Here are answers to common questions about cash transfer programs.
Right: Aid for the richest and whitest: UK Aid has funneled hundreds of millions of dollars through AgDevCo, a UK “impact investor,” to help white European investors run agribusinesses in Africa.
How karma colonialism works
Left: Schooling for Colonialism. UNICEF claims it will “transform” lives through education. Instead, it pushes poor children into rote-based schools, transforming many into dutiful subjects for a neo-colonial world.
Right: Trojan Aid. The Trojans learned long ago that generous-looking gifts may just cause trouble. This 2-minute video shows how foreign aid pursues the same broad goals as colonialism of the past, but with a friendly-looking face.
Left: Groupthink has led to many disasters — from burning down ancient peat forests, to compelling children in the South to attend schools where they learn nothing. Groupthink helps the aid industry stay in business.
Right: “Free” sounds generous — until you look carefully. It’s a way that wealthier nations keep others poorer, and dependent.
Other stories about karma colonialism
Left: Bribes. UNICEF gave vehicles to Zimbabwean officials “to help review the school curriculum.” Nonsense. Thinly-disguised bribes ensure a warm welcome for foreign aid staff, who can then keep drawing big salaries.
Right: The new colonialism. Is the West really trying to impose a new form of colonialism? Many people have made the suggestion. Pope Francis, for example.
Left: “Sometimes I feel like a sign board.” A Kenyan professional, working at a Western NGO, tells what it’s like: Pointing the way for an ever-changing succession of ex-pats who are paid much more, but don’t know what to do.
Right: What would make a better future? There are ways that wealthier countries can genuinely help others, if they want to. Give the aid money directly to the poor, for example. Here are ideas.