According to a report, the “microfinance” industry – long touted as a way to help poor rural communities in developing countries – is pushing tens of thousands of farming families into a debt trap as they are trying to adapt to climate change.
The study, conducted by researchers from a group of British universities, examined a series of case studies in Cambodia, where it found that easy-to-access loans had caused an “over-indebtedness emergency” that undermined the ability to long-term borrowers to cope with their new environment.
Modern microfinance institutions (MFIs), which are typically small, locally-run organizations with a variety of funding sources such as international investors, banks, and development agencies, originated in the 1970s and have grown rapidly in the early 2000s. They were promoted as a means of providing financial services, typically small working capital loans, but also savings accounts and insurance, to traditionally unbanked people, such as women and people with very low incomes.
In Cambodia, about 61% of the population lives in rural areas and 77% of rural households depend on agriculture, fishing and forestry for their livelihoods, according to development agency USAID.
Many have seen these traditional livelihoods affected by a mix of climate change, overdevelopment and illegal logging and fishing, with droughts, wildfires and unpredictable rainfall causing crop losses and ecosystem damage. of Cambodia’s Vital Tonle Sap Lake.
The establishment of hundreds of MFI branches since the early 2010s, which can be seen advertising departments along roads across the country of 17 million people, has often hurt rather than helped people affected, according to the report published in September.
In its survey of about 1,800 borrowers, about half cited feeding their families as their main motivation.
But the authors say loans are increasingly being used to pay off existing debt from a mix of formal and informal sources, rather than being earmarked for climate-smart investments. The loans are also see farmers putting up assets, including their land, as collateral, even when loans are high interest and have short repayment windows.
A branch of Maxima Microfinance in Kandal Province, Cambodia, in July 2018. The establishment of hundreds of branches of local MFIs since the early 2010s has often hurt rather than helped those affected, according to a report.
Taylor Weidman | Bloomberg | Getty Images
NGOs estimate that around 167,000 Cambodians have sold their land to pay for microfinance loans over the past five years.
Cambodia’s microfinance debt level at the end of 2021 was $4,213 per capita, more than double the gross domestic product per capita. Around 2.6 million people have taken out microloans.
“The debt burden created by the link between climate change and microfinance is creating enormous challenges for many people and communities, causing physical and emotional stress,” said Ian Fry, UN Special Rapporteur on Human Rights. rights in the context of climate change, who also acknowledged that microfinance had been promoted. by the UN, the World Bank and other international agencies.
There is some industry oversight. MFIs are required to register with the National Bank of Cambodia, the country’s central bank, which in December 2021 stopped issuing new licenses and told institutions to improve “quality, efficiency and affordability”. of their services. In 2017, it capped microloan interest rates at 18% per year.
The Cambodian Microfinance Association, a trade body, maintains that MFI lending has an overall positive impact on increasing income and land ownership, and has published lending guidelines to “reduce the risk excessive indebtedness” for consumers. He also hit back at criticism of the industry by NGOs and in previous reports. NBC and AMC did not respond to requests for comment.
Sound the alarm
The challenges facing microfinance institutions in Cambodia—and around the world, from South Africa to India to Mexico—have been highlighted by NGOs and journalists for nearly a decade.
Microfinance institutions around the world had an estimated gross loan portfolio of $124 billion in 2019.
In some cases, it has been found to have positive effects. A 2016 book published by the World Bank argued that microfinance loans had reduced poverty and increased incomes in Bangladesh, and banking giant HSBC is still promoting its financing of microfinance in the country.
But the World Bank, an early and longtime advocate of microfinance, has also been warning for years of risks, including over-indebtedness and the growing commercialization of the industry.
Farmer in a rice field. Keep. Cambodia. (Photo by: Pascal Deloche/Godong/Universal Images Group via Getty Images)
Godong | Universal Image Group | Getty Images
In Cambodian human rights NGO Licadho’s 30 years of advocacy, land grabbing has been one of the most prolific issues it tackles on the ground, said its director, Naly Pilorge, to CNBC by phone.
This is partly a legacy of the murderous Khmer Rouge regime, which banned private land ownership when it ruled the country from 1975 to 1979 and left survivors without title deeds in the tumultuous years that followed.
“We started noticing that in rural communities, workers were losing their land because of another problem even when they got their land titles – they were losing them to MFIs,” Pilorge said. “How can a farmer farm without land? »
People were forced to migrate and seek alternative work, Licadho found, which was difficult in Cambodia’s economy, where agriculture accounts for around a fifth of GDP and the largest employer is the garment factory sector, which has been hit hard by the Covid-19 pandemic and EU sanctions.
Cambodia has been hit hard by the pandemic, with tourism revenue falling from its all-time high of $4.9 billion in 2019 to just over $184 million in 2021, according to government figures.
Licadho has conducted four research projects on microfinance issues to highlight its risks, including one in 2021.
Motorists drive past a branch of Sonatra Microfinance Institution Plc in Phnom Penh, Cambodia, Friday, July 31, 2018.
Bloomberg | Bloomberg | Getty Images
“The numbers made no sense. In a country perceived as developing, which was struggling with tourism because of Covid, the MFI sector was still growing by 30% every year, and the average loan went from around $3,000 to $4,000,” Pilorge said. . .
“Some of the people who have been offered these amounts have never seen $500 cash, let alone $4,000, so when someone comes along and offers them in exchange for their land as collateral, it’s tempting.” Cambodia uses both the Cambodian riel and the American dollars.
Loan forms are complicated for the average person, she added, but “a significant part is given to ethnic minorities who do not write or read Khmer. People sign with their thumbprint”.
In the capital Phnom Penh, she added, she often encounters people working seven days a week to repay spiraling loans from MFIs.
The 2022 report added support for earlier calls for debt relief and interest suspension programs. This should go hand in hand with efforts to cancel and restructure the public debt of developing countries, It said.
He also said the international development community should redirect support from microfinance institutions to more targeted projects, and argued that there was a need for “stronger taxation and regulation of profits, dividends and capital gains”. generated by foreign owners of Cambodian microfinance institutions”. “
Ian Fry, of the UN, called on the international financial community to “take full account of the recommendations contained in this report and to seriously rethink its approach to microfinance”.
Pilorge has also targeted international governments, financial institutions and investors who fail to prevent funds from being funneled into predatory activities.
“All these international investors, Asian, European, American, etc., still perceive MFIs as a positive thing because of the initial concept. Looks good, you get a high return, everyone thinks they are helping the poor. But there have been red flags at all levels for 15 years and they have been ignored,” she said.
“Investors are happy, they get interest, agents get base salary and commission, and the people who are hurting are the poorest.”