Cambodia Microfinance Should be Taxed to Address Climate Change Impact, Research Says

New research from Cambodia challenges the microfinance industry’s claims that its loans help farmers withstand the impacts of climate change.

In fact, the research argues, microfinance undermines farmers’ ability to respond to unstable weather conditions. Cambodian profits generated by foreign-owned microfinance institutions should be taxed and the proceeds should be used to establish funds to address the impacts of climate change in Cambodia, the report says.

the reportwhich was published by UK-based academics at the Universities of London, Reading and Greenwich, is based on research carried out in three villages in Prey Veng, Kampong Cham and Battambang provinces between October 2020 and February 2022. The villages are not identified to protect the anonymity of the respondents.

If taxes sound like a prescription for slowing industry growth, then that’s exactly the intent. Cambodia has one of the highest microfinance debt ratios in the world, with an average debt per capita of $4,213 at the end of 2021, more than double the country’s GDP per capita. The market is “very oversaturated,” says Vincent Guermond, one of the report’s authors.

Time works not for, but against, the typical Cambodian microfinance borrower. The loans are “difficult, if not impossible, to repay over the long term,” the report says, so the indebtedness persists and deepens over time. The report found that 12.5 percent of those surveyed had borrowed from a microfinance institution in part to pay off another loan, while 5 percent of indebted households had sold farmland to pay off loans in the past 10 years. . Although some borrowers may gain a temporary benefit from being able to borrow, “these loans tend to do more harm than good,” says Guermond.

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Microfinance in the last five to ten years has fueled the claim that farmers are becoming more resilient to climate shocks, packaged under labels like “climate adaptation finance.” Cambodia is one of the world’s most vulnerable countries to climate change, with rice farmers especially vulnerable due to reliance on fluctuating rainfall patterns, the report says.

The evidence is that paying down debt simply compounds the other problems households face, says Guermond, a microfinance specialist who has researched the issue in West Africa. There is, he says, no solid statistical evidence anywhere that microfinance benefits poor countries.

The “microfinance” category includes other financial products such as savings and insurance, which are less profitable than loans, but result in the client having credit or insurance, rather than taking on debt. Loans as a form of microfinance, or microcredit, were pioneered by Nobel Peace Prize winner Muhammad Yunus in Bangladesh in the 1980s. Microcredit has transformed from helping a financial services industry to big scale. Yunus argued that “’every human being, even one barefoot and begging in the street, is a potential entrepreneur”.

However, most people in the West are not entrepreneurs and have never tried to become one. There is no reason to think that the proportion of people in poor countries with an entrepreneurial skill set is higher than elsewhere. In Cambodia, says Guermond, tensions have been heightened by the withdrawal of government farm subsidies and safety nets over the past decade. At the same time, agriculture in Cambodia has become more capital intensive as more machinery, chemicals and fertilizers are needed to make farmers competitive. In contrast to the industry claim that microfinance allows borrowers to expand their small businesses, says Guermond, the reality is that “people have no choice but to borrow to make ends meet.”

Cambodia has more than 3 million microfinance borrowers in a population of 17 million. The role of foreign aid organizations in Cambodia’s post-Khmer Rouge reconstruction in the 1990s is one reason the scale of lending dwarfs that of other poor countries. ACLEDA, the Association of Cambodian Local Economic Development Agencies, was established in 1993 as a non-profit organization, funded by the United Nations Development Program and the International Labor Organization. It went on to offer microfinance on a commercial basis and is now the largest bank in the country. Shareholders include Triodos in the Netherlands, French bank BRED and Japan’s Sumitomo Mitsui Banking Corp.

It’s unusual for a microfinance lender to be a full-fledged bank, let alone the largest in a country, says Guermond. Funding from the international development community provided to microfinance lenders should be reallocated to support credit unions, financial cooperatives and community development banks, the report recommends. The cancellation of household debt must be combined with the replacement of microfinance loans with unconditional cash transfers and the strengthening of social security.

Microfinance lenders in Cambodia point to its low levels of non-performing loans (NPLs) to argue that the model is sustainable. Lenders and those who fund them should dig deeper to understand why those NPLs were achieved, says Guermond. Low NPL levels mean nothing if people use “harmful coping strategies” to pay. These include selling land, cutting food, and sending family members to work in brick kilns or abroad in Thailand to make payments. “The industry should recognize the sacrifices that are made to pay,” she says.

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