Western microfinance investors concerned about Cambodia’s debt overhang are losing the ability to shape the practices of an industry whose rapid growth they helped foster.
Microfinance in Cambodia began in the 1990s as a form of foreign aid to help rebuild a country recovering from war. Since then, it has become a profitable industry, with the number of microfinance borrowers increasing from 175,000 in 2000 to 2.6 million in 2020. The country now has one of the highest microfinance debt ratios in the world relative to with personal income.
In Cambodia and elsewhere, microfinance lenders commonly present anecdotal evidence about relatively well-established small businesses benefiting from credit as proof of their “impact”. Academics argue that there is no strong statistical evidence that microfinance lending is good overall. To be fair, it is difficult for anyone to prove whether or not the success stories would have happened without microfinance. But focusing on the successes ignores the failures and the human costs for those struggling to repay their loans.
The average size of microfinance loans in Cambodia reached $4,213 in December 2021, according to Research from the University of London, approximately double the country’s annual GDP per capita. Instead of helping people escape poverty, the research argues, loans are often the catalyst for harmful “survival strategies” that are necessary to ensure repayment. These include borrowing and/or working more, eating less, selling assets, and leaving agriculture to work in brick kilns or as low-skilled migrant laborers in Thailand.
“Most impact investors are concerned about the situation in Cambodia,” says Patrick Goodman, co-founding partner of Innpact, a Luxembourg-based firm that provides third-party management and advisory services to microfinance investors. “Not all microfinance institutions (MFIs) in Cambodia have Client Protection Principles (CPPs) that ensure that lending is done responsibly. This is something we are particularly sensitive to.”
Innpact’s largest client is the Microfinance Enhancement Facility (MEF), created in 2009 by the World Bank’s International Finance Corporation and the German state development bank KfW. The MEF reduced its exposure to Cambodia from 11.3 percent of its portfolio in September 2019 to 6.2 percent as of September 2022.
The MEF’s largest investment in the country is in LOLC Cambodia, which represents 2.5 percent of the portfolio. LOLC Cambodia, established in 1994 by the nonprofit Catholic Relief Service, now has assets of $1.5 billion. It had net income of $53.3 million in 2021, an increase of 17 percent from 2020, even as Cambodians struggled under COVID-19 lockdown restrictions.
Netherlands-based microfinance investor Oikocredit is among those coming under fire for its track record. In December, three NGOs (LICADHO, Equitable Cambodia and FIAN Germany) filed a complaint against Oikocredit with the Dutch government, arguing that the company failed to carry out adequate due diligence on its investments in Cambodia, despite evidence of harm caused . .
An Oikocredit spokesman who declined to be named said they are cooperating with the Dutch government’s investigation. Oikocredit, the spokesperson said, works with nine of Cambodia’s 84 microfinance institutions and “cannot speak for the entire sector. We know that microcredit is not a panacea and microfinance cannot replace public social services”.
But the spokesman did not answer the question why Cambodian loans are so high relative to income. They also did not address the question of whether the loans are being used for productive purposes or simply to meet immediate needs.
Annual growth rates of the loan portfolio in Cambodia have slowed since 2018 and have since been around 22-24 percent, says Sanjay Sinha, managing director of M-CRIL in Gurgaon, India. M-CRIL is currently carrying out an impact assessment study on microfinance in Cambodia which will be published in mid-March.
Investor sentiment has been hit by research and analysis that “have resulted in dovishness,” Sinha says. Concern about possible debt overhang in Cambodia among industry observers in 2016 led to the setting of lending guidelines for the Cambodian market, she says. Belgium-based impact investment manager Inconfin takes credit for “pioneering” the initiative. An Inconfin spokesperson said the organization is “convinced of the positive impact of responsible microfinance and financial inclusion,” but declined to explain why in an interview.
The fact that these guidelines were only created after the magnitude of Cambodia’s debt overhang came to light is a sobering thought. For any future countries on the microfinance impact agenda, the industry may want to decide what constitutes responsible lending before debt distress emerges. In Cambodia, “the market will have to go through a period of stabilization” and MFIs “will have to pay off some debt to clear the market,” says Innpact’s Goodman. Sinha argues that the investors who initially backed Cambodian microfinance will not be able to shape the future direction of the industry. “Western investors themselves no longer exercise significant control of Cambodian microfinance,” and sources of investment have shifted to Japan, Taiwan, Singapore and Thailand, he says.
The Asian Infrastructure Investment Bank approved $175 million in financing for Cambodia’s microfinance sector in April. Sinha says that Cambodian MFIs can now also generate resources from client deposits and are “not dependent on substantial injections of funds from investors or international loans to finance their growth.” All of that may be in line with the microfinance industry’s growth script, but there is still no evidence that Cambodian borrowers will be among the beneficiaries.