Over-indebted Cambodian Farmers Rely on Microfinance Amid Climate Change

A UK study has found that climate change has led to farmers having to take on loans to subsist, and recommends debt relief and climate debt repayment
Chham Chhop drying up his rice in Thmor Kol district, Battambang province. Kiripost via Meas Da
Chham Chhop drying up his rice in Thmor Kol district, Battambang province. Kiripost via Meas Da

Intense reliance on microcredit for agriculture has pushed many farmers to become over-indebted as a way of coping with adversities due to a domino effect resulting from climate change, a joint study by five universities in the UK reveals.

The Cambodia-centric study titled ‘Microfinance, over-indebtedness and climate adaptation’ said microfinance levels stood at $4,213 per capita at the end of 2021, which is more than double gross domestic product (GDP) per capita.

The study began with the aim of finding a solution to ways of adapting to climate change as rising temperatures and unpredictable weather reshaped the global environment.

Scaling up microfinance to poorer and environmentally vulnerable regions, was among the answers as it was a favourable platform for investment from major donors such as the World Bank and the UN’s Green Climate Fund, as well as private actors and institutions. Globally, the estimated microfinance institutions’ (MFI) gross loan portfolio has expanded from $5.5 billion in 2003 to $124 billion in 2019.

However, the research in Cambodia instead showed that the “vast increase in credit provision has not been associated with greater capacity to adapt to climate shocks”.

“On the contrary, microfinance loans are leading to an over-indebtedness emergency as rural households are needing to adopt harmful coping strategies and make health sacrifices to repay these mounting debts,” the study said.

Dr Ian Fry, UN Special Rapporteur for the Promotion and Protection of Human Rights in the Context of Climate Change, said microfinance is linked to the Clean Development Mechanism under the Kyoto Protocol.

“This is not simply a financial system for advancing profits, for many Cambodian farmers, microfinance is being used to cover the costs of crop losses due to climate change.

“This is a tragic story of indebtedness as farmers are bearing the costs of greenhouse gas pollution from the developed world. This is a losing battle as farmers are forced to confront the double burden of indebtedness and climate change,” he said.

Cambodia Microfinance Association spokesman Kaing Tongngy did not respond immediately to questions.

Failed, bad debts

Financed by the UK Research and Innovation’s Global Challenges Research Fund, the study was conducted by University of London’s Royal Holloway University, King’s College and University College London, as well as the University of Reading and University of Greenwich.

The research was carried out in three villages in the Mekong River floodplains, on the outskirts of Phnom Penh and on the intersection of the Tonle Sap floodplains and local river catchment area.

Two key findings on the relationship between climate change, microfinance loans, and over-indebtedness in rural Cambodia is that farmers are not able to escape from microfinance debt and are over-indebted as a coping strategy.

“Market and ecological pressures, combined with labour shortages, led many farmers to shift to rice species which necessitated more debt-driven investment. Farmers therefore increasingly rely upon formal credit, and microcredit in particular, for agricultural production,” it said.

Some 64 percent of farmers reported an increase in their use of chemicals and fertilisers compared to five years ago, while 45 percent reported a major increase in their use of fertilisers compared to just one year ago.

“Failed or bad harvests due to increasingly erratic weather patterns push many farmers into even more debt. Farming households were found to be significantly more indebted than non-farming households.

“Sixty one percent of participants in farming-only households reported a major increase in their use of credit for agriculture compared to 10 years ago,” it said.

Four recommendations

The study made four recommendations: debt relief and climate debt repayment, reallocation of financial support, taxation and community-owned fintechs.

Under the first recommendation, it said the transformative relief programs, including debt forgiveness, should be established at the household level to allow borrowers to be better positioned to mitigate and adapt to the impacts of climate and environmental change.

Such programmes should run in tandem with the replacement of commercialised microfinance loans with unconditional cash transfers, combined with the expansion of not only strong systems of social provisions but also community-owned and – controlled institutions for climate adaptation and a just ecological transition.

“These would be financed by the transfer of flows from the Global North (back) to the Global South at a much bigger magnitude than the current, insufficient, and unfulfilled pledges of $100 billion a year,” it added.

On the reallocation of financial support, the study suggests that a large part of the “very significant” international development community financial support, “generously awarded” to hugely profitable and largely foreign investor-owned MFIs should be reallocated into support for credit unions, financial cooperatives, and community development banks, which are community-based institutions that are far more incentivised and also adept at introducing the measures required to address the climate emergency.

On taxation, it points out that the massive outflow of value from Cambodia generated by the leading foreign-owned microfinance institutions should be taxed.

“The proceeds should be used to endow a set of local and national funds specifically designed to address the climate emergency. This measure would also slow down the breakneck lending- driven growth of the microfinance sector in Cambodia,” the study said.

Additionally, a range of community-owned fintech platforms capable of “exploiting” this new technological breakthrough by helping facilitate at lower costs a range of

more substantive local responses to the climate emergency should be introduced.