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Cambodia’s poor caught in microfinancing vise

Yon Sineat

As everyday Cambodians strive to improve their lot in the developing Southeast Asian nation, not everyone is comfortably navigating the journey to prosperity.
Tales have become commonplace of poor people falling prey to ruthless moneylenders, most recently focused on the business practices of microfinance institutions (MFIs).
Now those reports have been given substance by two human rights non-government organisations (NGO), LICADHO and Sahmakum Teang Tnaut (STT) in a report titled, Collateral damage, land loss and abuse in Cambodia by the microfinance sector.
The report found that almost 2.5 million Cambodians were currently contracted to MFI loans and expressed its shock that many were in danger of defaulting and losing their homes.
As the levels of debts have skyrocketed in recent years, so has the number of human rights abuses, including coercion, land sales, child labour and debt-driven migration, the report says.
The research spanned the capital, Phnom Penh, and several provinces. It detailed the case studies of 28 MFI clients whom it said had suffered human rights abuses.
Crushing burden of interest rates
One such woman in distress is Seak Hong, a 37-year-old garment factory worker since 2001. She has four family members who rely on her meager salary: her 12-year-old son at school, her 78-year-old father, an elder sister and brother.
From her countryside home in the central province of Kampong Chhnang, Hong recounted: “I took out a US$5,000 ($39,200) MFI loan to renovate my house and pay for my brother’s medical bills after he had a traffic accident.”
The loan came with several conditions, she said.
“First I had to have an asset (land title) to deposit with them. The value of the asset had to be double the total amount of the loan they gave me and I had to show my pay slip to prove that my income was more than the amount of my loan repayment.”
Hong’s job pays her just US$230 to US 240 ($1,800 to ($1880) per month, including overtime, not much more than the minimum wage that must be paid to garment workers of US$182 ($1,420) per month.
Her loan, repayable over five years, comes with monthly interest of 1.5 per cent, annualised at 18 per cent. Her monthly repayments therefore started at US$127 ($990) but have risen to such an extent that 10 months into her loan she cannot make ends meet.
Hong said many people in her village had taken out MFI loans that exceeded their ability to repay.
“One of my neighbour’s families escaped to Thailand and looked for a job over there, leaving their kids behind, because they had debts with two or three MFIs and couldn’t pay them back,” she said.
“In the meantime, those MFIs filed a claim with the court to confiscate the family’s assets, as they couldn’t afford to pay back the loan.
“The house and plot of land was then sold to another neighbour at under market price. Now the family has nothing left, so they have gone to work in Thailand to earn more money, so their kids can go to school.’’
According to the report, Cambodians were struggling under the world’s fastest-growing microfinance sector in December 2018, borrowing more than US$8 billion ($62.7 billion) in such loans at an average of US$3,370 ($26,400) per person. That represents an overbearing amount for many and far exceeds the country’s GDP per capita of just US$1,384 ($10,850) in 2017.
Sorry sums tell the story
Economist, Kim Sengty, said there can only be great concern when a person’s debt is more than double their income.
“The loan amount is much larger than GNI (gross national income) per capita—approximately US$1380 ($10,820) according to the World Development Indicator, 2018.
“I think that the ratio of debt to GNI per capita (3370/1380 = 2.44) is quite high), indicating the over-indebtedness of borrowers, especially farmers relying heavily on low-productivity agriculture and high farming costs. For sure, they cannot pay off their debts,” he said.
Sengty also questioned why so many people had been allowed to borrow sums they couldn’t repay and offered some suggestions as to how to overcome the problem.
To reduce growing household debt, in particular over-indebtedness, he suggested that “credit should be used by borrowers in productive ways.”  This also related to how loans were structured.
“This is partly due to the lenders,” Sengty pointed out. 
“The fact that borrowers are required to put up their assets, very often land, as collateral may give financial institutions an incentive to offer loans without caring how the loans are to be used,” he said.
“Consequently, indebtedness is one of the major causes of rural land loss in Cambodia, impoverishing disadvantaged borrowers and widening the disparity between the haves and the have-nots. In these cases, the poverty-reducing mission of microfinance turns into a nightmare,” Sengty said.
Seng Sueng, a 26-year-old  who works in a factory with his wife, also borrowed $5,000 ($39,200) from an MFI, with monthly repayments of US$250 ($1,960) over 36 months.
His mother had to act as surety by putting up her own land title as a guarantee and he had to prove his own financial worthiness. He is now worried that if they default on their repayments his mother will lose her house, just as his aunt did.
“My aunt got a $4,000 ($31,360) loan from ACLEDA Bank in order to expand her business of selling vegetables at the market. But it did not succeed, she kept losing money and could not afford to pay back the loan, Sueng recalled.
“She tried to hide when the MFI workers went to collect her payment. At the end the MFI filed a claim at the court to sell her house and land, and the court ordered that my aunt lose her house. In the end my sister didn’t want to give it away to someone else so she decided to pay the bank US$4,000 and she got the house and plot of land,” he said.
Sengty said, “Microcredit institutions should be more transparent so that the poor can make borrowing decisions more efficiently. They should encourage domestic savings and competition among money-lenders, so that interest rates on loans decrease.
“They should also promote financial literacy among borrowers and those in the next generation to improve the effectiveness of credit use in the long term. Loans should be offered with extension services (guidance on how to use them productively).”
Microfinance loans are often described as a way to help poor people get access to money in order to improve their lives.
However, Sengty says, “My recently published articles suggest that microloans do little to improve the lives of poor people because of their unproductive use of loans and limited financial literacy. Microfinance markets are sustainable only if they work for both lenders and borrowers.”
The success of borrowers is also the MFIs’ success but in the growing microfinance sector in Cambodia, they have become more commercial, and grown at the expense of needy households, not in tandem with them. 
This have too often becomes exploitative, epitomised by the lack of transparency when it comes to the actual price of the loans they offer. UCAN