The rapid expansion of micro-credit in Cambodia has left debt levels relative to incomes at world record levels, and is leading to ever-higher human and social costs as families try to keep servicing their loans.
Micro-credit was originally designed as a way to help the poor. It has turned into a way for unscrupulous financial institutions to prey on the weakest in society using the alibi of “financial inclusion.” Aggressive door-to-door canvassing by micro-credit lenders is carried out to hit sales targets. All that the industry can claim to have achieved in Cambodia is to have worsened the poverty and distress of the population.
Proponents of micro-credit claim that it can be effective in all impoverished societies. This ignores the central importance of the political and institutional contexts of different countries. In Cambodia, micro-credit has been rolled out against a backdrop of a profoundly weak and corrupt state. This has led to the population being left to defend itself against voracious and unprincipled lenders.
The bankruptcy of the state in Cambodia shows itself in the failure or complete absence of public services, notably in health care, where the population is often obliged to borrow from micro-credit lenders to get treatment. There is also an absence of agricultural policy, a lamentable failure in a country where 75 percent of the population lives from the land. An essential part of agricultural policy would have been a support price mechanism to guarantee a minimum income for farmers.
State failure is evident at every stage of the agricultural production cycle, where farmers are often abandoned to fend for themselves. Farmers lack help in areas such as choosing products to match national and international market demand, and in irrigation, equipment and technical assistance, fertilizers, and crop protection. Cambodia’s rampant deforestation under Prime Minister Hun Sen’s regime and the depletion of its fishing reserves make it harder for farmers to find complementary revenue sources than in the past: deforestation in addition aggravates the effects of climate change and makes productive farming more unpredictable.
In the context of competitive international markets, these state failures leave Cambodian farmers unable to make a living as in the past. Farmers have been making losses rather than profits year after year, forcing them to borrow from micro-credit lenders. Millions of small farmers need loans, not to expand their businesses as the micro-credit lenders claim, but simply to survive.
This often involves emigrating to neighboring countries to sell their labor in highly precarious conditions. Child labor, modern forms of slavery, and food insecurity are often the result. Loan repayments must be made whatever the human cost. For the very poor, becoming ineligible to borrow due to failure to repay is a disaster, in the context of very limited options for accessing cash.
Western development funders and commercial lenders are part of the problem. An investigative story published by Bloomberg News in May of this year found that J.P. Morgan in 2019 sold a collateralized loan backed by micro-credit repayments in Cambodia. The World Bank said this month that rising inflation disproportionately hurts Cambodia’s poorest families and that more direct cash transfers are needed to alleviate suffering. Yet the World Bank is reported to have avoided questions on whether cash transfers should be combined with debt relief for micro-loans.
One of Cambodia’s biggest microfinance lenders is LOLC Cambodia, which was originally set up by the U.S. charity Catholic Relief Services in the 1990s. LOLC Holdings, which is majority owned by Ishara Nanayakkara, Sri Lanka’s richest man, bought the operation in 2014. According to Bloomberg, LOLC Holdings has received more than $500 million in loans and guarantees from development banks. LOLC Cambodia made record profits in 2020. Bloomberg reported that LOLC agents would turn up at night on motorbikes pressuring people to pay. One woman told Bloomberg she was forced to sell her land at well below fair value to repay an LOLC loan.
There are also lenders who are not officially registered, charging exorbitant interest rates of up to 2 percent or 3 percent per month, adding up to a brutal annual burden. Some people take new loans just to partly repay old ones. The poorest are left trapped in a cycle of despair. Cambodia is unusual among countries where micro-credit is practiced in that, even for small loan amounts, land ownership or land use titles are usually used to secure the loan. The country lacks any kind of social safety net. There is no form of redistribution of wealth to try and protect the most vulnerable. Well over four decades after the Khmer Rouge fell from power, and nearly 38 years since Hun Sen became prime minister in 1985, the Cambodian state continues to avoid the suggestion that the population is entitled to any kind of a welfare state.
Loan sizes in Cambodia of between $2,500 and $4,000 have become much bigger than the “micro” loans originally intended, but the label is still used to retain investment from foreign banks and development financiers. Over the last 20 years, micro-credit lenders in Cambodia have made colossal profits due to their exorbitant interest rates, which have been limited to 18 percent. The lenders have also been able to seize and resell real estate given as collateral for the loans. Micro-credit has become a machine for stripping small farmers of their land and property and turning them into unskilled laborers who must accept any proposal to try to feed their families. An explosion in pawn shops reflects the problem. These were legalized in 2010, but in 2012 there were only about 100 operating legally. Research funded by the German Federal Ministry for Economic Cooperation and Development estimates that this has now increased to at least 1,800.
The lack of safety nets means that money has to be borrowed quickly when a family emergency strikes, with little regard for the cost. No wonder micro-credit in Cambodia is so profitable. Micro-credit profits surged from $130 million in 2017 to $453 million in the COVID-19 year of 2020. That counts only Cambodia’s 81 official micro-credit lenders and excludes banks that are active in the microfinance sector.
Borrowing more can cover a family’s problems temporarily but only at greater future cost. The failure of the Cambodian state likewise cannot be hidden indefinitely. Its overhaul is essential for the creation of a modern economy where agricultural borrowing is productive and related to the ability to repay.