According to one report, the “microfinance” industry — long touted as a way to help poor rural communities in developing countries — is driving tens of thousands of farming families into debt traps as they try to adapt to a changing climate.
The study, conducted by researchers at a group of UK universities, looked at a range of case studies in Cambodia, finding that easy-access loans had created an “excessive debt emergency” that undermined long-term borrowers’ ability to deal with their needs. new environment.
Modern microfinance institutions (MFIs), which are generally small, locally run organizations with a variety of funding sources such as international investors, banks, and development agencies, emerged in the 1970s and grew rapidly in the early 2000s. It has been promoted as a way to offer financial services, usually small loans for working capital but also savings accounts and insurance, to the traditionally unbanked – such as women and people on very low incomes.
In Cambodia, about 61% of people live in rural areas, and 77% of rural households depend on agriculture, fisheries and forestry for their livelihoods, according to USAID.
Many have seen these traditional livelihoods affected by a combination of climate change, over-development, illegal logging and fishing, with increasing droughts, wildfires and unpredictable rainfall patterns causing crop losses and damaging the ecosystem of the vital Tonle Sap lake. in Cambodia.
The report, published in September, found that the establishment of hundreds of MFI branches since early 2010, which can be seen serving advertisements along roadsides across the country of 17 million people, has often harmed rather than benefited those affected. help them.
In its survey of about 1,800 borrowers, about half mentioned feeding their family as their primary motivation.
But the authors say that loans are increasingly being taken out to service existing debt from a mixture of formal and informal sources, rather than being channeled toward climate-resilient investments. loans He also sees farmers putting assets, including their land, as collateral, even when the loans are high-interest and have short repayment periods.
Maxima microfinance branch in Kandal Province, Cambodia, in July 2018. A report found that the establishment of hundreds of local branches of MFIs since early 2010 has harmed rather than helped those affected.
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NGOs estimate that about 167,000 Cambodians have sold their land to pay microfinance loans over the past five years.
The level of microfinance indebtedness in Cambodia at the end of 2021 was $4,213 per capita, more than double the per capita GDP. About 2.6 million people have received microcredit.
said Ian Fry, the UN Special Rapporteur on human rights in the context of climate change, who also acknowledged that microfinance has 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 required institutions to improve the “quality, efficiency and affordability” of their services. In 2017, it set interest rates on microloans at 18% per annum.
The Cambodia Microfinance Association, a trade body, asserts that MFI loans have an overall positive effect in increasing income and land ownership, and has issued lending guidelines to “reduce the risk of excessive debt” to consumers. It also responded to criticism of the industry by NGOs and in previous reports. NBC and CMA did not respond to requests for comment.
Sound the alarm
The issues surrounding MFIs in Cambodia—and around the world, from South Africa to India to Mexico—have been highlighted by NGOs and journalists for nearly a decade.
The total loan portfolio of MFIs worldwide was $124 billion in 2019.
In some cases it has been found to have positive effects. A 2016 book by the World Bank argued that microfinance loans have reduced poverty and increased incomes in Bangladesh, and banking giant HSBC continues to tout its microfinance financing in the country.
But the World Bank, an early and longtime advocate of microfinance, has also been warning for years of risks including excessive debt and the industry’s growing commercialization.
Farmer in the rice field. hat. Cambodia. (Photo: Pascal Delouche/Godong/Universal Images Group via Getty Images)
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In the Cambodian human rights NGO Likadu’s 30 years of advocacy, land grabbing has been one of the most common problems it tackles on the ground, its director, Nali Belorg, told CNBC by phone.
This is partly a legacy of the murderous Khmer Rouge regime, which outlawed private land ownership when it ran the country from 1975 to 1979 and left survivors without deeds in the turbulent years that followed.
“We started noticing that in rural communities, workers were losing their land to another problem even when they got titles to their land — they were losing it to MFIs,” Belorg said. “How can a farmer without land?”
Likadu found that people were forced to migrate and look for alternative work, and that was difficult in the Cambodian economy, where agriculture makes up about a fifth of GDP, and the largest employer is the garment industry, 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 an all-time high of $4.9 billion in 2019 to just over $184 million in 2021, according to government figures.
Likado has undertaken four research projects into the issues surrounding microfinance to highlight its risks, including one in 2021.
Motorists drive past a branch of Sonatra Microfinance Corporation in Phnom Penh, Cambodia, on Friday, July 31, 2018.
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“The numbers didn’t make sense,” Belorg said. “In a country that is seen as developing, and has had tourism problems due to Covid, the MFI sector was still growing at 30% each year, and the average loan went from about $3,000 to $4,000.” “. .
“Some of the people who’ve been offered those sums have never seen $500 in cash, let alone $4,000, so when someone comes along and offers it for their land as collateral, it’s tempting.” Cambodia uses both the Cambodian riel and U.S. dollar.
She added that loan forms are complex for the average person, but “a large portion is given to ethnic minorities who neither write nor read Khmer. People sign with a thumbprint.”
She added that in the capital, Phnom Penh, she usually meets people who work seven days a week to pay off loans from mounting MFIs.
The 2022 report added its support to previous calls for the creation of debt relief and interest suspension programs. This should coincide with efforts to cancel and restructure the national debts of countries in developing countries, He Said.
He also said that the international development community should redirect support away from MFIs to more targeted projects, and argued that there is a need for “stricter taxation and regulation of profits, profits and capital gains generated by foreign owners of Cambodian MFIs.”
Ian Fry of the United Nations called on the international financial community to “heed closely the recommendations in this report and seriously rethink its approach to microfinance”.
Belorg also targeted international governments, financial institutions, and investors who failed to prevent money from being channeled toward predatory activities.
“All these international investors, Asians, Europeans, Americans, etc., still look at MFIs as a positive thing because of the initial concept. It looks good, you get a high return, and everybody thinks they’re helping the poor. But there were red flags on all of them. The levels for 15 years have been ignored.”
“Investors are happy, they get interest, agents get basic salary and commission, and the people who suffer are the poorest.”