In the last five years, the rapid growth of Cambodia’s microfinance sector has been accompanied by a sharp increase in over-indebtedness among rural Cambodians. According to the government’s Cambodia Socio-Economic Survey for 2019 and 2020, the average amount of debt per household rose by 85 percent year on year, from 9.6 million riels (around $2,400) to 17.7 million riels ($4,400).
For rural Cambodians, indebtedness is a complicated problem – and one that is often tangled up with land tenure security. The practice of collateralizing microloans with land titles has meant that for many families defaulting on a loan means losing their land. To these rural agricultural families, losing land not only means losing their property, it means losing their livelihood and income. Last week, two Cambodia-based civil society groups called attention to the “grave harm” caused by runaway debt levels, which they said “have destroyed lives and wrecked communities across Cambodia.”
In theory, microfinance institutions (MFIs) are meant to provide financial opportunities and risk-management tools for the poor. Due to lack of regulations and effective policies, however, MFIs in Cambodia are not meeting these goals. But the lack of critical policy isn’t the only issue. In terms of the policies that have been implemented, there is not nearly enough analysis assessing the on-the-ground impact of the interventions that the government has already made.
The Impact of Government Policies
Two of the most pressing issues in Cambodia’s microfinance operations are the requirement of land titles as collateral for microloans and the high-interest rates charged by MFIs, particularly when these factors are aimed at poor clients who are vulnerable to land loss.
In 2017, the government acknowledged the need to address these issues. In that year the National Bank of Cambodia (NBC) signed two Prakas, or ministerial decrees, on credit risk and interest rates on loans. The Prakas on Interest Rate Ceiling on Loans limited interest rates to 18 percent. The Prakas on Credit Risk Grading and Impairment Provisioning addressed the issue of collateral, focusing on how it should be calculated. The decree stipulated that collateral should be valued using local accounting standards by qualified internal and external appraisers. It also stated that collateral should usually be allocated to the market within 12 months, meaning that it should be placed and sold within a year of obtaining a price estimate from an expert.
It has now been more than four years since the signing of these agreements. Have these changes helped to protect Cambodia’s microfinance borrowers?
According to a 2021 working paper from the International Monetary Fund, the 2017 decision to place a ceiling on interest rates has resulted in MFIs increasing their administration fees and turning away smaller clients. Furthermore, after the interest rate ceiling was introduced in 2017, the number of borrowers has decreased, though the total value of microloans taken has continued to increase.
This information raises questions about what impact these governmental agreements have actually had, and whether, for instance, some households see lower interest rates as a reason to borrow less cautiously, while ignoring the rising fees related to MFI services.
Another impact that has been noted is that MFIs have reacted by rejecting smaller borrowers and shifting toward larger ones, which runs counter to the original purpose of MFIs: to give small borrowers access to financial services. A recent study on the impacts of the interest rate cap on financial inclusion in Cambodia indicates that with the current limited interest rate, focusing on larger clients helps MFIs to be more sustainable due to the higher administrative costs and higher risk loan categories these institutions are servicing.
It should be noted, however, that while MFIs do take on some risk, the risk of not getting paid altogether is not one they have to worry about, since borrowers have to provide collateral. Currently, Cambodia’s laws do not restrict MFIs from seizing collateral if borrowers default on repayments. The law only provides some guidance on how collateral should be assessed and the conditions of professional appraisal. The result is that MFIs are always able to secure and earn a profit, either by charging a higher interest rate or, if this is not possible, by charging more in service fees.
Moreover, in practice, it seems like there is not yet a firm mechanism or process for audits to ensure the fair practice of MFIs. For instance, underprivileged borrowers are not assured of getting adequate financial information from the MFIs prior to making their decision on a loan. One 2015 study of microcredit provided by Cambodian MFIs in 2015 offers empirical evidence that many borrowers have limited financial knowledge, and that many MFIs lack mechanisms for determining the purpose to which the loan will be put. As a result, many borrowers have used loans for a variety of non-productive purposes, which can make it even harder for them to eventually pay them off.
Policies During COVID-19
The economic fallout from the COVID-19 pandemic has threatened livelihoods in nearly every sector of the Cambodian economy. In order to limit the impact on vulnerable Cambodians, the government ordered the NBC to institute debt relief measures and policies, guiding MFIs to change the terms of their loan agreements, for instance, by restructuring their loans as many times as needed and waiving fees or penalties on a case-by-case basis to clients in areas cordoned off due to COVID-19 restrictions, thereby reducing borrowers’ debt burden.
However, once again, it appears this policy has not achieved the desired outcomes. According to research from the advocacy group Human Rights Watch, only a few MFIs endorsed the NBC’s circular and published information on the debt relief measures that they adopted. In addition, no new agency was created, and no existing institution was assigned to monitor the implementation of the loan restructuring policy. The NBC, as the responsible institution, seems to lack an implementation mechanism and the power to direct MFIs to follow the new policy. As a result, some of these MFIs have a debt relief process that has failed to alleviate the pressure on debtors even as the pandemic continues. With the given situation, the NBC recently decided to extend loan restructuring from until June 30, 2022, but it remains to be seen whether much will change about how this process has unfolded on the ground.
In reality, relief measures appear to have been implemented on an ad hoc, case-by-case basis, upon borrowers’ requests, without legitimate conditions set by the policy and proper procedure by loan providers to identify the level of borrowers’ indebtedness. It could be the case that some borrowers are not aware of the relief measures and have not made a request for the restructuring of their debt. Moreover, there is no clear information about how MFIs have disseminated this relief information to their clients or guided them on how the new policy works.
Most importantly, while there is yet to be a proper study on the implementation and outcome of this loan restructuring policy, it is likely that suspending debt collection was essentially just a token action to comfort borrowers rather than a comprehensive answer to the country’s debt problem. Correspondingly, many Cambodian families have continued to sell their properties to pay back debts, despite the current implementation of debt relief measures.
The current regulations and measures on MFI debt relief have clearly been ineffective in securing the livelihoods and property of impoverished Cambodians. The existing regulations do not have clear implementation and regulatory mechanisms and lack a uniform standard to ensure effectiveness and success. If there is no effective policy to resolve Cambodia’s debt crisis, there will be many future consequences, not the least of which is a widening gap between the rich and the poor.