World Bank-Linked Watchdog Accepts Complaint on ‘Reckless’ Microloans

7 min read
Bank and microfinance institution offices in Phnom Penh (Matt Surrusco)

The watchdog group within World Bank sister organization International Finance Corporation (IFC) will assess a wide swath of the Cambodian microfinance sector after accepting a complaint alleging these lenders’ practices have caused social harms, civil society groups announced today.

Cambodian civil rights organizations Licadho and Equitable Cambodia announced the development Tuesday morning in a joint statement, describing the complaint as perhaps the first-ever about the IFC’s investments in microfinance lending to be accepted by the watchdog. The rights groups said they filed the complaint on behalf of affected borrowers claiming the IFC, a World Bank partner organization, had not done its due diligence while financing lenders in Cambodia to ensure their compliance with its own performance standards.

Naly Pilorge, the director of Licadho, called for the IFC to be held accountable for what she described as “reckless” involvement with Cambodian microfinance.

“These complainants are taking a risk to share their experiences in order to expose the harms and abuses perpetrated by MFIs and banks in Cambodia,” Naly stated in the release. “The IFC’s reckless investments and lack of due diligence regarding its microfinance projects have destroyed lives and wrecked communities across Cambodia, and they must take steps to offer real relief to these borrowers.”

The complaint itself has not been made public at this time, nor have the identities of the borrowers behind the complaint. The Tuesday statement alleges projects funded with IFC-supported microloans in Cambodia break five of the financing organization’s standards, which include “involving child labour and violations of the land rights of Indigenous Peoples without full consent.”

The statement also names six microfinance institutions and banks that provide microloans. Those organizations are Acleda, Hattha Bank, Sathapana, Amret, LOLC and Prasac. According to the statement, these institutions hold about 75 percent of Cambodia’s microloans and have received a total of more than $400 million in IFC funding in the past five years.

Licadho has previously reported on social distress caused by microfinance debt in Cambodia. National Bank figures from December 2021 show MFI indebtedness at about $4,000 per borrower. Licadho has stated this is the highest average microloan debt-load in the world, a condition Licadho says has contributed to dispossession and migration, particularly in rural areas where villagers may sell their land to service their debts.

The IFC is based in Washington D.C. and is the partner organization of the World Bank. It provides development financing for private sector projects around the world. Its watchdog organization, the Office of the Compliance Advisor Ombudsman (CAO), fields complaints about IFC-backed initiatives but otherwise works independently of the larger organization.

CAO representative Emily Horgan said in a message to VOD that the office had received the microfinance complaint on February 10. After confirming it met its eligibility criteria, Horgan said the ombudsman group began an official assessment of the complaint.

“The purpose of the assessment is to work with the parties to clarify the issues raised in the complaint, to gather information on how the situation is perceived by other stakeholders, and to help the parties determine whether they wish to address the complaint through a CAO dispute resolution process or a CAO compliance process,” she said.

The office currently has one other complaint still undergoing assessment in Cambodia. Filed in June 2018, this complaint is aimed at the IFC’s stake in the Vietnamese ABBank, which the unnamed complainant said was implicated in social and environmental harms caused by the construction of the Lower Sesan II dam project. 

Given the potentially yearslong assessment period for ombudsman complaints, the outcome of the new MFI complaint is far from certain. Horgan noted that while her office is assessing the complaint, “this does not imply any judgment by CAO on the merit of the issues raised.”

The office is also not at this stage conducting an investigation or compliance review of the IFC or its financial intermediaries in Cambodia, Horgan said.

Of the lenders named in the complaint, the head of only one, Acleda, spoke with a VOD reporter. Messages to leaders of the other five went unanswered, though emails to some top LOLC and Prasac executives did not go through.

Acleda CEO In Channy said he thought IFC standards were “very good” at protecting the rights of borrowers, particularly those in minority communities.

Though he said hadn’t yet heard of the complaint until a reporter told him about it, Channy said Acleda is in regular contact with IFC as part of the international body’s due diligence.

He dismissed the complaint, as well as Licadho’s earlier critiques of the microfinance industry, as “baseless.” While Channy said the bank would communicate about the development with the IFC and its other shareholders, he emphasized there would be no sudden moves.

“There’s no immediate action to be done, because we’ve never violated such lending guidelines,” he said. “There’s no such activity, abuse by the institution, the bank. We don’t see what you have raised, and I haven’t seen the [complaint] but can confirm we haven’t done as they state.”

Others in the private sector have also expressed skepticism about the scale of the alleged issues nagging the microfinance sector.

Stephen Higgins, a founder and partner of the investment group Mekong Strategic Partners, holds that finance in Cambodia operates similarly as it does in other countries. Still, he thought the ombudsman review could be a positive step, if only to set the record straight.

“I think a public, third party review of these issues will be helpful in putting to bed some of the claims that have been made. They may find one or two players haven’t lived up to their commitments, but for the most part I’d expect them to find that the industry here operates in a pretty sensible manner.”

On the other hand, Licadho’s investigators aren’t the only ones to have found evidence of social issues, especially dispossession, caused by high microfinance debt.

Sango Mahanty, a researcher at the Australian National University who studies the impacts of microlending in Cambodia, said that the rights group’s findings align with her own in regards to land loss in rural areas. Mahanty believes the rapid growth of the microfinance sector has created a regulatory situation that is “a bit out of control” and said she’s interested to see how the CAO assessment unfolds.

“I think it’s important that it’s happening, because when you have to appeal to an international safeguard like this, basically what it’s telling us is that there’s a problem with the regulatory and policy space set up around MFIs on a national level,” she said. “Holding the IFC accountable is important, and so if there are problems with their investments in Cambodian MFIs, that needs to be raised.”

An IFC spokesperson acknowledged that there have been concerns about indebtedness in the microfinance sector in general, pointing to the size of the Cambodian financial services industry as a whole at the end of 2020. They counted 53 commercial banks, 14 specialized banks, six microfinance deposit-taking institutions (MDIs), and 75 licensed MFIs, all serving a population of less than 17 million people.

However, the spokesperson said the IFC is selective about the lenders it deals with, providing investment and advisory support to financial institutions it deems to be committed to responsible practices. The spokesperson also said the IFC has worked with the National Bank of Cambodia to establish its credit bureau in order to avoid unsustainable debt levels while eliminating aggressive lending practices.

“IFC works with microfinance institutions and stakeholders to incorporate responsible finance practices into all aspects of business operations, including training, capacity building, and risk management,” they said. “IFC conducts due diligence on its partner microfinance institutions, including to ensure they have know-your-customer (KYC) procedures in place.”

Kaing Tongngy, the spokesman for the industry group Cambodia Microfinance Association, had a similar message, stating that self-regulation among lenders is aimed at cutting back on excessive debt.

He had also not heard of the ombudsman complaint until reached by VOD, and though he began a statement about it by writing that “over-indebtedness has been a hot topic within the microfinance sector in Cambodia for almost a decade now,” he said that, overall, the industry was “in good health.”

“CMA cannot deny there are a few bad practices for which we have zero tolerance,” he stated. “But at an institutional level, CMA can ensure our members adhere to good standards and policies for their operations with client protection principles.”

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