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OPINION: It's time to fix Cambodia's broken microfinance system

by Tharo Khun, Saran Soeung, Mora Sar and Naly Pilorge | Center for Alliance of Labor and Human Rights (CENTRAL)
Monday, 5 October 2020 08:38 GMT

A farm laborer walks to their next job, in Pouk district, Siem Reap, Cambodia, July 3, 2020. Thomson Reuters Foundation/Matt Blomberg

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* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

Microfinance is supposed to relieve poverty, but with investors now profiting from land loss, somewhere along the way things went wrong

By Tharo Khun, Program Manager at the Center for Alliance of Labor and Human Rights (CENTRAL), Saran Soeung, Executive Director at Sahmakum Teang Tnaut (STT), Mora Sar, Program Manager at the Cambodian Alliance of Trade Unions (CATU), Naly Pilorge, Director of the Cambodian League for the Promotion and Defense of Human Rights (LICADHO)

A recent Thomson Reuters Foundation report about an ongoing debt crisis in Cambodia laid bare a truth that many of us who work to defend land, labour and human rights in Cambodia have known for a while now: Cambodia’s microfinance sector is broken.

The banks and microfinance institutions that have provided 2.6 million microloans to Cambodian borrowers claim they are lifting people out of poverty. But too many of the farmers, migrant labourers and factory workers who we work with share stories of how their microloans lead them into debt traps, dangerous migration, and landlessness.

We know this may come as a surprise. Microfinance is supposed to relieve poverty by providing poor borrowers access to capital to start business and increase incomes. And Cambodia has one of the world’s largest and most developed microloan sectors, with its roots stretching back to the early 1990s as development money poured in to rebuild the country after decades of war.

But somewhere along the way, things went wrong. Loan sizes skyrocketed to the highest in the world as growing profits attracted international shareholders with bigger coffers, but consumer protection has consistently ranked near the bottom of the world. Attempts at self-regulation failed, as they have in other markets. Microfinance consultants and experts who warned the sector to slow its reckless growth went unheeded for years. And now, civil society organisations like ours who have begun to raise concerns about human rights abuses throughout the sector are accused of lying and threatened with legal action, while the very real suffering faced by borrowers goes largely ignored.

Silencing critics won’t solve the sector’s problems. Cambodians now sit atop a $10 billion time-bomb of outstanding microloans – more than one-third of the country’s GDP. The average microloan has ballooned to more than double the country’s GDP per capita. Even reports commissioned by microfinance investors themselves find that the market is over-saturated and borrowers are over-indebted.

This unsustainable growth was made possible by Cambodian lenders’ reliance on land titles as collateral, a practice that is not used as widely anywhere else in the world - effectively turning what should have been a poverty relief mechanism into a mortgage scheme with exorbitant interest rates.

With the economic devastation wrought by COVID-19, most borrowers continue to live under the pressure to repay their microloans, while also facing a sharp decrease in incomes. Inadequate relief offered by microloan providers has left many borrowers with no option but to sell their land to repay debts, a concern raised to the UN Human Rights Council by the Special Rapporteur on Human Rights to Cambodia earlier this month. Other borrowers are forced into taking more loans from loan sharks or other MFIs to repay existing debts, increasing their debt burdens.

But even though we speak with people facing these problems every day, the truth is we are largely helpless to address this systemic issue. Real change will only occur when the sector’s supporters – people within the MFI community, and in particular investors – begin to learn more and speak out about this issue. 

It is not too late to act.

Microfinance in Cambodia was the brainchild of Western development agencies, and these institutions continue to invest or loan hundreds of millions of dollars to Cambodian microloan providers each year. This year alone, tens of millions of dollars have poured into Cambodian MFIs through funds and direct loans backed by the UN, the German state development bank, and the World Bank’s International Finance Corporation. These investors have largely turned a blind eye to the realities of Cambodia’s microfinance sector, but the COVID-19 pandemic provides them an opportunity to protect the rights and livelihoods of all borrowers.

The global pandemic has wrought havoc on microfinance sectors across the globe, and microloan providers need money to weather this pandemic. Cambodian borrowers need this money to be tied to debt relief for the most distressed borrowers, as well as structural reform to protect borrowers’ land tenure security.

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. This must be acknowledged and planned for by long-term investors.

The root cause of reckless lending and rapid growth in Cambodia has been the widespread use of land as collateral. Microloan providers often take borrowers’ land titles before distributing a loan, enabling bad actors to use this power imbalance to threaten and bully borrowers into later selling land outside of the legal process. We’ve seen this happen again and again, and the economic stresses caused by the COVID-19 pandemic have only made it worse.

The only way to ensure the microfinance sector in Cambodia returns to its original vision of providing relief to the poor and vulnerable is for microloan providers to return the millions of land titles they currently hold to their rightful owners, and to stop accepting any borrowers’ land titles as collateral in the future.