Microloans: Boon or Bane for Cambodia's Rural Poor?
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Cambodia, December, 28 2017 - A recent rate cap of 18 per cent imposed by the government has stirred debate about whether it would halt the spiral of rural debt, or force people to rely on worse sources of credit.
All Ms Chhim Soy knew was that her brother needed a US$5,000 (S$6,700) loan to buy a motorcycle. The dutiful sister agreed to be his guarantor and when he went into hiding, the microfinance firm came knocking.
With her land title in hand, the 59-year-old noodle seller turned to her village's informal lender in Cambodia's Kampong Cham province to borrow money to repay the microfinance firm. But she couldn't repay him either, so now her son has taken out a microloan to help her.
"We lived for many generations without microcredit and did all right," she lamented by the wooden stilt house which no longer belongs to her. "Now, look at me."
Microfinance evokes both wariness and optimism here in the Cambodian countryside, where low incomes and savings mean farmers often borrow small sums at high interest rates to fertilise their plots.
A recent rate cap of 18 per cent imposed by the government has stirred debate about whether it would halt the spiral of rural debt, or force people to rely on worse sources of credit.
In theory, microfinance boosts borrowers' future earnings by giving people who otherwise will not be given loans a means to start small businesses. But the interest rates are higher than typical loans.
Cambodia's microfinance sector has grown rapidly, with a loan portfolio that has roughly doubled since 2014 to reach 16.2 trillion riel (S$5 billion) in September. That same month, there were 76 institutions, up from 39 at the end of 2014.
According to National Bank of Cambodia's 2016 annual report, increasing competition and efficiency helped slash microcredit interest rates from 70 per cent in 2001 to 36 per cent last year. But some researchers are worried that these microloans are worsening spirals of debt in the countryside.
In April, Cambodian economics lecturer Kimty Seng argued that microloans are often used for non-productive activities like buying vehicles or household items rather than generating income to help borrowers pay off debt.
"The fact that borrowers are required to put up their assets as collateral may give financial institutions incentive to offer loans without caring how the loans are to be used," he wrote in an article on the Policy Forum website.
"Consequently, indebtedness is one of the major causes of rural land loss in Cambodia, impoverishing low-income borrowers and widening the disparity between the haves and the have-nots."
In August, a report on human trafficking into Thailand by the United Nations Office on Drugs and Crime, and the Thailand Institute of Justice flagged "the rapidly increasing microfinance debt" faced by rural Cambodians and urged greater study on "the nexus between microfinance debt, migration and trafficking in persons".
But proponents say microfinance is an important component of Cambodia's economy, which has sustained an average growth rate of over 7 per cent in the past two decades.
"It is like the blood of the human body," said Mr Hout Ieng Tong, president of the Cambodia Microfinance Association. "It goes everywhere, it circulates the liquidity all over the country."
The National Bank of Cambodia imposed an 18 per cent cap on interest rates for new microloans in March. Rates dropped from the 24.5 per cent to 41 per cent band in March, to the 17.5 per cent to 30.3 per cent band in September, according to the regulator's data.
Some argue that the better solution is public education so that rural borrowers can understand the true costs of their loans and learn to avoid predatory lenders.
For now, the cap has had little effect on the 10 biggest microfinance firms responsible for some 90 per cent of such loans, said Mr Hout Ieng Tong. He stressed that the sector does not need more regulations.
Analysts expect some firms to go bust in the longer run.
"It will speed up the pace of consolidation in the industry as the lenders who aren't able to extend credit at such rates go out of business," said Mr Miguel Chanco, the lead Asean analyst at the Economist Intelligence Unit.
"The risk is that many future borrowers will have to go back to informal sources of credit as a segment of microfinance lenders go bust."
Such informal lenders typically charge higher rates than microcredit firms. This could spell uncertainty for communities where microloans are wedded into economic life.
In Kampong Cham's Khnaor Dambang commune, some 60 per cent of the 8,000 people in the community have outstanding microloans, reveals former commune chief Neth Nao. "Every month, I see two or three farmers who can't repay their loans. They lock their houses and run away from lenders."
For villager Ren Ruon, a US$1,000 microloan has allowed her to buy bigger batches of fruit to sell at a nearby factory, and double her daily income to 40,000 riel.
She admitted she loses sleep sometimes thinking about the land that she could lose as collateral if she ever defaults on repayment, which comes at the additional cost of 3 per cent a month - or 36 per cent a year. She said: 'If we don't take the loan, we can't do business."