Updated: Communities’ Debt Struggles Highlighted, but Investors Largely Silent

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Bank and microfinance institution offices in Phnom Penh (Matt Surrusco)
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A new NGO report on debt struggles in 14 communities — including reports of pressured land sales and threats — has been met with renewed objections from the local microfinance industry and largely a lack of response from its international development funders.

The report, “Right to Relief” by rights group Licadho and housing rights NGO Equitable Cambodia, features the experiences of 14 communities dealing with mounting debt.

“I’m happy that our sadness is finally being publicised. We have kept it hidden for so long. The way [the MFIs] act is the opposite of the way they speak. Debt is the biggest problem faced by communities across the country,” one respondent is quoted as saying in the report.

The report variously highlights alleged unethical behaviors by credit officers, such as aggressive collection practices, pressured land sales and threats; and negative consequences of microloans, including eating less food, selling possessions and child labor.

It says the average size of microloans has grown to $4,280, or higher than 95 percent of Cambodians’ annual income, and calls for an independent investigation into the sector, the return of all land titles held as collateral, debt relief, law enforcement and suspension of interest accrual for distressed borrowers.

“Without the right to relief, borrowers will continue to face debt-driven hunger, child labour, migration, coerced land sales, and many other human rights abuses,” the report says.

Licadho has been part of a series of reports produced since August 2019 about alleged human rights abuses in the sector — a series that has been met with apparent hostility from the industry.

“These baseless and incomplete reports provide the opportunity to some badly-intended people to take this opportunity to publish and share in an inciting manner, provoking social chaos and affects the reputation and dignity of financial institutions, which is the backbone of the national economy,” the Cambodian Microfinance Association said last year, according to a translation of the Khmer statement provided by spokesman Kaing Tongngy.

The phrase “inciting manner, provoking social chaos” seems to echo the criminal charge of “incitement to disturb social security,” which has been used against dozens of government critics in recent years and carries a jail term of six months to two years.

Tongngy said on Monday that the association still questions the NGOs’ “real motives and integrity.”

“So far, legal action is NOT a choice for CMA and ABC yet,” Tongngy said, referring to the microfinance association and the Association of Banks in Cambodia.

Triodos Investment Management, a shareholder in Acleda, was the only investor institution to answer questions about the NGO reports.

[Update: KfW replied on June 30 and FMO on July 2.]

Spokesperson Sandra Bergsteijn said human rights violations “should of course never be the case” in the industry, and Triodos would look into how international investors could help improve the local situation.

“We do not have the answer to that question yet and of course our influence as a single investor is also limited,” Bergsteijn said late last week. “We will look into the new report when available and take it from there, potentially in alignment with other likeminded investors.”

Nevertheless, the company’s position had not changed that access to finance was “vital for driving economic and social development, and personal development,” she said.

Dutch development bank FMO, an investor in Amret via the Advans Group, said it wanted to comment, but had not seen the new report and could not respond at short notice. [Full reply below.]

Japan’s Orix group said it was only a minority shareholder in Acleda and “doesn’t manage it directly,” so was not in a position to comment.

Others — the World Bank’s International Finance Corporation, Agence Francaise de Development, German state-owned development bank KfW and nine further investor groups and shareholders — did not respond.

[Updated on June 30 with comment from KfW.]

KfW said data collection and a study “is about to be prepared,” and could lead to potential changes in policies.

KfW said it “cannot comment” on whether legal action should be taken against the NGO researchers, “as it relates to ongoing discussions among Cambodian institutions in which KfW is not a part of.”

KfW continues to view that “microfinance and its contribution to financial literacy and responsible finance is beneficial for Cambodians,” and added that questions of profitability do not apply to KfW as “KfW is acting as a implementing agency on behalf of the German government, and is not focused on profitability.”

[Updated on July 5 with comment from FMO.]

FMO said the potential risk of over-indebtedness in Cambodia has been long recognized, but “in our view, the Cambodian MFIs we support, work in a responsible and sustainable manner.”

FMO in particular noted the large shift in recent years from informal to formal lending sources, especially among the poor, as a benefit for the population.

However, when asked about the CMA’s comments about the NGO reports, FMO said the ability of local communities and civil society to engage freely with the microfinance sector was an important part of respecting human rights.

“We recognize their role in optimizing the development outcomes of our activities, including the expression of concerns and dissenting voices,” it said. “We do not tolerate any activity by our clients that amounts to the oppression of, violence towards, or any other violation of the human rights of those who voice their opinion in relation to FMO activities and the activities of our clients.”

The issue of debt has also emerged in other recent surveys amid households’ losses of income due to Covid-19 disruptions. A World Vision survey from earlier this year found only 28 percent of respondents saying they could cover their loan repayments, and 37 percent saying they were taking on more debt as a response to loss of income.

A U.N. survey of garment workers in May found that job losses and reduced income pushed many workers to take loans “as a coping strategy.”

The microfinance industry has restructured more than $1.4 billion in loans to 280,000 customers since the Covid-19 outbreak, the sector association has previously said.

Updated on June 30 with comment from KfW.

Updated on July 5 with comment from FMO.

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