The future of one of Cambodia’s largest microcredit companies appears grim, with experts warning of its potential collapse as the market contracts and risks escalate while default rates sharply rise.
Cambodia has seen a rapid expansion of microcredit, resulting in debt levels relative to incomes that have reached world-record proportions. This has resulted in increasingly severe human and social costs as families struggle to meet their loan obligations. Experts predict that within the next six months to a year, at least two major microcredit firms in the country could face collapse.
For years, human rights organizations have been documenting widespread and systematic land-grabbing in Cambodia, often occurring under the patronage of politically connected tycoons and foreign companies. This has led to the dispossession of land from countless Cambodians. In 2008, a human rights group recorded over 16,000 households newly affected by land grabs in a single year, prompting calls for the prosecution of those responsible for land-grabbing crimes.
Cambodia’s microfinance sector is now considered one of the most overindebted in the world. By the end of 2020, the average microloan in Cambodia was nearly four times the median annual income. Over 2.7 million microloans are dispersed among Cambodia’s 4 million households, with many of these loans collateralized by borrowers’ land titles, putting land ownership at risk.
While Cambodia has a legal mechanism for foreclosure, reports indicate that it is seldom used. Instead, credit officers from microfinance institutions and banks resort to pressuring borrowers who fall behind on repayments, sometimes with the assistance of local authorities, to sell their land to settle their debts. This practice threatens hundreds of thousands of families with land loss, even if only a small percentage of loans lead to such sales.
A study commissioned by the German government’s Federal Ministry for Economic Cooperation and Development revealed that an “alarmingly high” number of Cambodians have had to sell their homes to repay credit card and small loan debt. The study estimated that, when extrapolated nationwide, this would result in approximately 33,480 debt-driven land sales each year, or roughly one sale every 16 minutes.
The situation has forced some borrowers to reduce their food consumption, withdraw their children from school to work and help repay debts, and even endure food insecurity and inhumane working conditions, amounting to human rights abuses.
Eang Vuthy, executive director at the Phnom Penh-based Equitable Cambodia NGO, has called for the government and microfinance firms to forgive the debts of impoverished individuals who are unlikely to ever earn enough to repay their loans. He stressed the need for a national policy that allows people time to pay off their debts without forcing them to sell their land.
Last year, a report by Radio Free Asia revealed that an alarmingly high number of Cambodians had to sell their homes to repay credit card and small loan debts. A study commissioned by the German government’s Federal Ministry for Economic Cooperation and Development (BMZ) found that households who had taken out small loans at an 18 percent interest rate faced difficulties repaying them. Among these households, 13 percent reported having to sell their homes in the past five years. When extrapolated to the entire borrower population, this would mean approximately 33,480 debt-driven land sales per year, or roughly one sale every 16 minutes.
Some borrowers resorted to reducing their food intake, withdrawing their children from school to work and help repay family debts, and even experienced food insecurity or engaged in inhumane working conditions. In some cases, these practices amounted to human rights abuses.
Cambodian experts emphasize that microfinance institutions must take into account borrowers’ income levels rather than relying solely on land and house titles when setting interest rates. They call on the government and microfinance companies to forgive the debts of impoverished individuals who have no realistic means of repayment.
While some representatives from microfinance institutions argue that the 18 percent interest rates are relatively low compared to those in other countries and that some borrowers misuse loans, critics contend that the interest rates do not align with borrowers’ income levels.
Microfinance companies have been encouraged to provide more training to loan officers and encourage borrowers to discuss their circumstances to find solutions that alleviate tension and prevent land loss.
Despite these discussions, Cambodians are left with few options for repaying their debts other than selling their homes. Many have faced threats of foreclosure if they fail to make timely payments, compelling them to borrow more money, often at higher interest rates, and ultimately leading to land sales at a fraction of their actual value.
Commenting on the situation, Professor Milford Bateman noted that one of Cambodia’s largest microfinance companies is at serious risk of collapse. However, it is likely that the collapse will be averted through acquisition by another microfinance institution, as this is a common approach to managing downsizing in the sector.
Microcredit was originally intended to aid the poor but has devolved into a means for unscrupulous financial institutions to exploit vulnerable segments of society under the guise of “financial inclusion”. Aggressive door-to-door sales tactics are employed by microcredit lenders to meet sales targets. Critics argue that, in Cambodia, the industry has exacerbated poverty and distress among the population.
Despite claims from some microfinance officials that interest rates in Cambodia are relatively low compared to those in other countries, the impact on borrowers can be dire. The crisis highlights the need for Cambodia to address these financial challenges and protect vulnerable individuals from losing their land and livelihoods.
