Finance Sector Rejects Study Claiming MFIs Cause Over-indebtedness

Banks and microfinance institutions have rejected a recent study about widespread over-indebtedness forcing land sales nationwide
Banks in Phnom Penh, September 19, 2022. Kiripost/Siv Channa
Banks in Phnom Penh, September 19, 2022. Kiripost/Siv Channa

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Banks and microfinance institutions have slammed a recent study about widespread over-indebtedness in Cambodia, claiming it does not reflect the whole sector and accusing groups of highlighting negative aspects while disregarding the full context of the report to mislead the public.

German NGO FIAN, LICADHO, and Equitable Cambodia (EC) called on the German government and donors in the microfinance sector to take immediate action to address widespread over-indebtedness that has triggered an “alarmingly high” and “unacceptable” number of distressed land sales.

In a statement on Wednesday, LICADHO said the study commissioned by the German Federal Ministry for Economic Cooperation and Development (BMZ) has provided further evidence of widespread over-indebtedness in Cambodia and indicated that more than 167,000 Cambodian households have been forced to sell land to repay loans during the past five years.

In a responding statement on Friday, the Association of Banks in Cambodia (ABC) and Cambodia Microfinance Association (CMA) said that the study stated microfinance contributes greatly and has a positive impact on borrowers’ livelihoods, especially increasing their income and land ownership.

ABC and CMA added that the study found that the majority of respondents responded positively to their current loan and the study clearly illustrates that the majority of loans have positive to very positive effects from the borrowers’ perspective.

They said the study also confirmed credit was almost never the main cause for child labor or migration. In contrast, the majority of borrowers experienced positive impacts from their credit facilities, increase in personal income and increase in land ownership.

The statement added that the study has also pinned some negative cases on loan assessments, aggressive marketing, and land sales. However, the author clearly states that not all land sales represent a profound economic and social collapse for the household, partly due to the progression of land prices in Cambodia.

“The associations understand and respect concerns raised in the study, but we believe that the limitation of the study does not reflect the whole sector and that they could be caused by the different definitions of “over indebtedness” or the different context of microfinance in Cambodia,” they said in the statement.

“We regret that some stakeholders have solely drawn attention to negative points, disregarding the full context of the report, to amplify their statement, which is very misleading to the public.”

ACLEDA Bank’s president and group managing director, In Channy, said on Monday that the majority of borrowers have used loans properly and become successful in their business, thus improving their living conditions. But, the minority of them, Channy added, have used loans for business to buy modern items for their own use. For example, buying a motorbike or a car.

“The loan for SMEs was supposed to be for income generation, but if you use it the wrong way, the loan will become a bad debt,” Channy told reporters when asked by Kiripost.

“But there are indeed clients who genuinely suffer loss due to acts of God, and for them, we look into the cases carefully and we reschedule the debt payment or, in some cases, we even issue them new loans,” he added.

Channy also commented on a suggestion that those who cannot pay debt should be totally freed from paying back.

“We would like to ask if the borrowers do not pay, where does the bank get the money to give to the depositors? The bank is just like a worker, not an owner. We can only lend when there are people depositing their money with us. And if someone deposits $1,000, we can’t just lend back all this amount, we need to keep some for reserve capital.”

Jost Kadel, deputy head of mission at the German Embassy in Cambodia, said on Monday that he was unable to comment because he had not received guidance from Berlin.

Kadel provided Kiripost with past comments he had already given to the Southeast Asia Globe.

In the publication, Kadel said that while only a small proportion of borrowers lost everything, there were “definitely thousands” of borrowers who experienced “intolerable” consequences resulting from microloans.

“The study says, in short, we have an oversaturation of the market,” Kadel told the Globe. “We have the situation of overindebtedness here in Cambodia.”

Kadel added that some sales are “harmless” as owners are only forced to sell portions of their land.

Germany has invested more than $180 million in multiple MFIs and funds, Kadel said, adding that he personally doubted there would be further investment from Germany.

The German study also puts forward a range of recommendations. These include scrapping general debts for very poor households, terminating contracts and compensation for households who were forced to sell land in cases involving gross negligence by credit institutions, and limiting the use of land titles as collateral for loans.

LICADHO, EC and FIAN have also reiterated their call for the hundreds of thousands of land titles currently held by microfinance institutions and banks to immediately be returned to microcredit borrowers.

Am Sam Ath, Operations Director at LICADHO, said on Monday that he stood by the study and some of the negativity and human rights violations in this report are not different from what the group had discovered and has issued multiple reports on since 2017.

“Those include the sales of land to pay off debts, the threat and force to sell land to pay off debts, the force to take up loans from private institutions to pay off debts, and some credit officers acting and using inappropriate words, affecting the dignity of the clients,” Sam Ath said.

“Some customers cut back on their food so that they can pay debts, some customers were forced to have their children drop out of school to help earn debt repayments, some customers migrate the country to earn money to pay off debts,” he added.