Urgent Need to Address Debt Caused by MFIs

Organizations have united to urge the German government and microfinance donors to take firm action to address over-indebtedness that plagues Cambodia, triggering an “unacceptable” amount of land sales
A person carries riel notes at a market in Phnom Penh. Kiripost/Siv Channa
A person carries riel notes at a market in Phnom Penh. Kiripost/Siv Channa

German NGO FIAN, LICADHO, and Equitable Cambodia (EC) have 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 a 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.

Based on these findings, the study 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.

The statement said this would significantly ease pressure from households and reduce the number of forced land sales.

The study recommends that the German development cooperation, which continues to support the microfinance sector directly (by DEG development bank) and indirectly (by KfW development bank and BMZ) via microfinance funds, use its existing leverage to persuade its partner MFIs and banks to implement such key recommendations, and to end its support for Cambodia’s microfinance sector in the medium term.

“The German development banks and supported microfinance funds have without doubt failed to uphold their diligence obligations in Cambodia,” said Mathias Pfeifer, program officer at FIAN.

“Since at least 2017, the German government and other donors have been well aware of the severe over-indebtedness levels in Cambodia, yet they have done next to nothing to address this problem, and continue to pump millions of Euros into the sector to this day,” Pfeifer said.

The statement said the microfinance fund MEF for instance, where KfW and BMZ are both key shareholders, funneled nearly $20 million in new investments to Cambodian microcredit providers in 2021. That same year, the income on MEF’s total investments amounted to $49.9 million.

“The German development banks and other donors should use the profits that were squeezed out of over-indebted Cambodian borrowers over many years for debt relief and provide effective remedy for victims of human rights violations now,” said Naly Pilorge, outreach director of LICADHO.

Conducted by researchers at the Institute for Development and Peace (INEF), the study, entitled "'Micro' Finance in Cambodia: Development, Challenges and Recommendations", consisted of a large household survey, group discussions with villagers, and interviews with local authorities in 24 villages across Cambodia.

The study found very high average loan sizes of $5,183 among the indebted households, many of whom are very poor, with annual interest rates of 18 percent plus fees for microcredits. Almost half of the indebted households quizzed face repayment difficulties.

Among those households with repayment difficulties, 13 percent reported selling land to repay loans over the past five years. Extrapolated to all borrowers, this would mean 33,480 debt-driven land sales annually, or the equivalent of roughly one sale every 16 minutes, the study found.

It added that in a number of cases borrowers suffered from human rights violations; reduction of food consumption “is frequently used” to cope with debt burden; and participants in the group discussions stated that children are taken out of school in order to work to repay loans, as was similarly asserted by local authorities.

Jost Kadel, deputy head of mission at the German Embassy in Cambodia, did not reply to Kiripost’s request for comment on Thursday.

Heng Koy, General Manager at the Association of Banks in Cambodia, said he is currently unable to comment on the study.

“We saw the statement and the report of Dr. Bliss,” Koy said in an email to Kiripost. “We are under further exploration of the above mentioned.”