Now that it is generally agreed that Cambodia’s microfinance sector has utterly failed to achieve its original, honorable goals – and, worse still, has produced a debt crisis that risks driving tens of thousands into poverty and landlessness – attention is turning to possible solutions.
In a recent article, four senior members of Cambodia’s civil society, associated with the Center for Alliance of Labor and Human Rights, argued that “what is needed is relief in the form of debt forgiveness and write-offs, in significant numbers, to prevent borrowers from losing their land en masse.” A fine suggestion, but some of the intricacies must be discussed. First, debt forgiveness for whom? If we assume that not every borrower can have their debts wiped out – given outstanding microfinance debt now exceeds $10 billion, just under a third of GDP – then some criteria must be established. Will debt forgiveness only be extended to the poorest of borrowers, or those most at risk of losing their land or homes put up as collateral, or those most likely to fall further into poverty if they are forced to make repayments?
Should one also examine the reasons for their indebtedness? Put differently, should there be bailouts for unscrupulous debtors who invested unwisely or selfishly, as well as for debtors who genuinely tried to use their loans sensibly but now cannot make repayments, either because of the economic downturn, or because they had no choice in taking on such debt, such as by having to pay for essential medical care?
A report published in December 2018 by Lor Samnang, a researcher at the local think-tank Future Forum, asserted that only one-third of microloans surveyed went towards financing “economic activities,” like opening or expanding businesses, the main purpose of microfinance to begin with. The remainder went on either essential services, such as unexpected medical bills, or on non-profitable spending like consumer goods. Between 2009 and 2017, household consumption more than doubled in Cambodia, from $7.92 billion to $16.78 billion.
One doesn’t like to resurrect the “deserving poor” versus “undeserving poor” trope, but if the reasons for the individual debt aren’t going to be factored into potential write-offs, then the situation could get messy. For starters, blanket, no-questions-asked write-offs are hardly useful for solving problems of financial illiteracy in Cambodia, which must be factored in as at least one reason for the current situation.
I appreciate that it is a controversial argument, but at some point we must ask how it was that some individuals took on debt they must have known they couldn’t afford, to such an extent that the average microloan is now double GDP per capita. Clearly, many indebted people are victims of the system. But to assume victimhood in all cases doesn’t really help us answer the important questions of what went so terribly wrong, especially if we want to avoid a similar scenario in the future. Another challenge is the social problems that are likely in the event of a selective debt amnesty. Anger would be a natural response if your neighbor had their debt written-off because they couldn’t repay a loan they took out to buy a motorbike while your family was left repaying a loan taken to start a now-failing business.
The second major query is who makes these decisions. The MFIs, perhaps through the Cambodia Microfinance Association, could take the decision themselves to write-off, say, a tenth of all debts – though a tenth may still be too small a percentage to make much difference. Outstanding microloans are estimated to sit at around $10 billion, so wiping out a tenth of debts would see MFIs lose around $1 billion. Such losses would be easier to absorb for the large, more profitable and generally foreign-owned MFIs (especially those that stick to rules on capitalization) compared to the smaller, less-profitable ones. Yet such an agreement is optimistic: if MFIs are so unscrupulous as to have created this problem, as many critics claim, then why think they will suddenly become beacons of altruism when their own bottom lines are affected?
The same international development agencies that once promised a microfinance utopia for Cambodia might also play some part in the decision-making. But between them and the MFIs, any meaningful decision might not be made until well into next year, whereas the crisis calls for immediate solutions. Indeed, the debt mounts every day that Cambodia endures the present COVID-19-induced economic crisis, and pre-pandemic levels of employment and growth are not likely to return until at latest the middle of 2021, if not later.
A more worrying outcome is government intervention, especially given the precarious situation of the ruling Cambodian People’s Party, which is facing a significant economic crisis for the first time in decades. The government has already shown itself as less than stellar when intervening in the microfinance sector. After its imposition in 2017 of an annual interest rate cap of 18 percent for microloans, MFIs argued this meant they could only profit on loans exceeding $2,000. So, naturally, the number of loans of $500 or less declined by 48 percent afterwards, which may have led to greater pressure on borrowers to take on higher sums of debt.
Some form of debt forgiveness and write-offs will most likely be necessary. An alternative (or additional) option would be a moratorium on interest repayments – giving borrowers a certain period in which they only have to repay their initial loan, allowing MFIs recoup their money even if not making a profit – as well as a much longer delayed period for repayments, perhaps up to a year. A radical overhaul of microfinance practices could come later.
I’ll add one last concern: We still do not fully know how interrelated the microfinance sector is with the rest of the banking sector. There is scant data about lending from formal banks to MFIs, about the investment portfolio of deposits saved in MFIs by clients, or how many microfinance borrowers are also indebted in formal banks. In other words, if MFIs start failing because they cannot cope with losses or even write-offs, what will be the impact on the financial sector as a whole?
It has been the tendency by we hacks to focus on the microfinance problem in Cambodia without looking at the wider debt problem. Yet the World Bank reported last year that outstanding loans provided by the nation’s banking and microfinance sectors were for the first time worth more than 100 percent of GDP – or just over $25 billion. “The growth of domestic credit in Cambodia has been faster than any other country in East Asia – increasing nine-fold in 12 years,” it stated last year in a separate report. Moreover, bank credit as a percentage of GDP is now higher in Cambodia than in Indonesia, one of the region’s largest economies.
Scratching the surface of the microfinance debt crisis, one fears, might reveal a far more worrying problem.