Microfinance in Cambodia, a trap or a development tool?

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The banking and microfinance sector is booming, with lending increasing despite the COVID crisis. Loans can be a good solution for those who lack capital to expand their business. However, their misuse can also create over-indebtedness and even lead to the loss of personal property.

Preliminary studies, a precise plan and innovative ideas are some of the elements that will allow companies to develop.

Lon Savuth is a market gardener from Siem Reap province. He owns four greenhouses where he grows vegetables and develops a business strategy different from that of other farmers in his village, who continue to use traditional techniques.

With a long-term vision, Savuth took out loans from a bank to develop his business idea. He declares :

Without these loans, it would have been impossible to support our family because my three children are studying at university. It is therefore difficult for us to earn enough money to continue the education of our children.

In 2017, ACLEDA Bank gave Savuth a $15,000 loan so he could expand his vegetable farm. At the time, the 59-year-old farmer was convinced that this capital could increase his family’s income. And he already knew how.

He used the money to fill in the land next to his house, then built greenhouses, on what had previously been an ordinary field, to grow vegetables.

“We used to grow vegetables, like cabbage, lettuce or broccoli, but on a small scale. But when the rainy season came, we couldn’t grow anything. [parce que la pluie détruisait nos récoltes] and we had no more money”, explains Savuth. “But the greenhouses now protect our crops from heavy rains, allowing us to plant and harvest all year round.”

By having a clear plan in mind and committing to building a business he believed in, Lon Savuth succeeded as he expected.

Lon Savuth is a market gardener in Siem Reap province Photo: Isa Rohany

Shortly after building his greenhouses, his business brought in enough to pay back $300 a month. However, Lon Savuth knows from experience that loans can also lead to financial hardship. “In the past, we borrowed a small amount of money for our children’s education and lost some properties. Indeed we did not earn enough money to repay our creditor. So we thought it would be better to borrow a lot of money to invest in something profitable.“, he says, adding that he advises people not to take out loans without a business plan, otherwise they will run out of money and have their assets seized by the lender.

Credit, a possibility to “recover”

Heng Chakriya certainly agrees with him. She lost everything in 2015 when a gas explosion in her neighborhood set her house and phone shop on fire. She was devastated and depressed for two years.

“But one day at a trade workshop I attended, they said a $1 bill is still a $1 bill even after we stomp it on the floor. We can still buy a cup of coffee with this 1 dollar bill”she recalls.

I realized that even though I lost everything, I had knowledge within me waiting to be used again.

As a result of this workshop, this 38-year-old woman, who was once a teacher, decided to pick herself up. His family took out a $20,000 loan from a bank to rebuild their house and start a smoothie business at Phsar Chas in central Phnom Penh.

Although it was a small business, its smoothies quickly gained some fame and Chakriya began to open outlets in several locations. With such growth, the bank grew confident in his business skills and eventually granted him an additional $50,000 loan.

“Bank loans have been very important to me. Without them, I don’t know how much money I could have used to start a business“, she says. “But you need to be sure that you will be able to repay more than $300 [par mois] if you take out a $20,000 loan. At the time, I was sure I could do it.”

Seven years after losing everything, Chakriya finally got back on her feet and started various businesses ranging from the sale of local natural rice, palm sugar, and many other processed products which, at the end of the month, ensure a good income for the family of this entrepreneur.

With tanned skin and a smile on her face, Chakriya says the current growth of her business would not have been possible without the help of these loans. “Everything that has grown in this business has been through bank loans,” she says.

When a loan leads to an accumulation of debts

Unfortunately, not all loans lead to such successes. In June 2021, Equitable Cambodia and LICADHO, two local NGOs, published a report entitled “Right to Relief: Indebted Land Communities Speak Out” – on debt in Cambodia. It shows the case of 14 families involved in land disputes who are in fact faced with over-indebtedness, in particular because of microcredits.

According to the report, these families have taken out loans to pay their medical bills, their children’s education or to ensure their daily subsistence. They do not have access to adequate public services such as health care and education, which should be one of the government’s priorities.

When asked, LICADHO Vice President Am Sam Ath said that in 2021, the average household debt per capita was more than $4,000, twice the annual income, which stands at $4,000. around $2,000 on average.

For fragile settings, large debts can lead to the sale of land, houses and other assets to pay off bank or microfinance debts, he added.

Sam Ath added that the debt problem leads to an increase in illegal migration, a reduction in diet and an increase in the rate of school dropouts for young people, who have to find a job to pay off their debts.

Civil society groups believe crippling debts are due to misuse of loans: Instead of using the money to start small or medium-sized businesses, people tend to spend it on housing, buying land , motorbikes or get medical treatment. All of these reasons run counter to microfinance policies, which state that loans are intended to improve people’s living conditions.

Whose fault is it ? To lenders or borrowers?

So who is to blame ? lenders or borrowers? Sam Ath explains: “From my point of view, both parties are at fault, but the most serious fault comes from the lack of professional ethics of certain loan officers.”

“We know that in the principles of microfinance, loans are intended to develop business and income, so that borrowers can repay and have a prosperous life. But this is not always the case. For example, in this with regard to agriculture, the contracting parties must be trained [car elles peuvent être sans instruction] : Farmers need to understand that after the yield, they may not be able to sell all their crops if there is insufficient demand. Therefore, it will affect their income and the reimbursement process.” explains Sam Ath. “Unfortunately, some loan officers do not provide [cette formation]”.

Banking Association of Cambodia (ABC) chairman In Channy has denied allegations that banks are giving people unprofitable loans that put them in deep debt.

He explains that all banks train their staff to provide good services and select customers correctly, not to choose them rashly. He adds that banks do not want to see their customers fail because their growth, as well as that of microfinance institutions, is linked to that of their customers.

Opposing the perception of loans as debt, the ABC chairman said that the banking sector contributes significantly to the development of the national economy, adding that the loans have contributed to the development of infrastructure across the country. countries, which help improve people’s lives.

According to the National Bank of Cambodia’s 2021 annual report, total lending in the Kingdom stood at $45.3 billion at the end of last year, including $36.8 billion lent by banks and $8.5 billion by microfinance institutions. In 12 months, total loans increased by 21.2%.

Channy added that the banking sector has helped to help people, especially during the COVID-19 crisis, with part of the loans being reserved for the most vulnerable people.

Also, the way to refund depends on the internal policy of each bank. “Banks do not force customers to pay, but they judge the real possibility of repayment, including its possible delay. In 2021, the total arrears were 2.5%, including those that are agreed and those that are not. are unable to pay,” Channy said.

Am Sam Ath of LICADHO did not deny the impact of bank or microfinance loans on socio-economic growth. He just wants banks and microfinance to strengthen their lending policies or ethics in the lending process because some people can be heavily affected by the misuse of loans.

Despite the economic downturn caused by COVID-19, the Cambodian banking sector continues to grow. According to the National Bank of Cambodia, the kingdom had 12.1 million deposit accounts and 3.3 million credit accounts at the end of last year. An increase of 36% and 3.1% respectively compared to 2020.

Translated by Keav Moro Kort

This article was produced as part of a report competition organized by banking and microfinance institutions, originally published on Cambodianess. Translated with their kind authorization so that the French-speaking public can have access to it.

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