Phnom Penh: two NGOs denounce 'reckless' microloans

The aim of microfinance should be to guarantee access to financial services even for the poorest people. In Cambodia, however, the lack of control policies has led to a debt crisis in rural areas.



Phnom Penh (AsiaNews/Agencies) - Last week, two Cambodian civil society groups denounced the "serious damage" committed by microfinance institutions in the country. Licadho and Equitable Cambodia allege that the International Finance Corporation (Ifc), the Central Bank's private investment arm, has failed to carry out the necessary due diligence on microcredit projects in Cambodia, leading families into extreme debt and the consequent violation of a number of human rights. According to the two NGOs, six Ifc-financed lending institutions hold about 75 per cent of Cambodian microloans. 

This would not be a problem if lending was not also extended to those who cannot afford it: the growth of the microfinance sector (promoted over the past two decades as a solution to rural underdevelopment) has brought with it a disproportionate increase in indebtedness. According to a government survey for 2019 and 2020, the average amount of debt per household has increased by 85% year-on-year, from 9.6 million riel (about EUR 2,200) to 17.7 million (EUR 4,185). 

In rural areas, debt is intertwined with land ownership because microloans are usually collateralised with land titles, meaning that defaulting on a payment results in the loss of land, often the only source of income and livelihood for Cambodian families. In addition to the forced sale of land, high debts generate child and forced labour and migration, Licadho and Equitable Cambodia explain. The Ifc has indicated that it will examine the observations made by the NGOs.

In 2017, the Cambodian government had recognised the need to intervene with regulations that would revise the obligation to use land titles as collateral and put a cap on excessively high interest rates. The changes implemented by two ministerial decrees, however, did not have the desired effects. According to surveys last year, the decision to cap interest rates - set at 18% - led lenders to increase administration fees and turn away smaller customers. This, however, distorts the original purpose of microfinance, which is to provide access to financial services even to those in lower income brackets.

At the moment, Cambodian laws do not restrict the seizure of collateral if borrowers default, and there is no mechanism to ensure fairness. Loan applicants often do not obtain adequate financial information and many lenders do not ensure that loans are used for productive purposes.