Logo of Phnom Penh Post newspaper Phnom Penh Post - Study questions benefits of microfinance for poor

Study questions benefits of microfinance for poor

Study questions benefits of microfinance for poor

With a controversial cap on microfinance interest rates set to go into effect on April 1, a new study argues Cambodian households would be better off by avoiding microcredit altogether, though experts this week were divided on the report’s findings.

The study, Rethinking the Effects of Microcredit on Household Welfare in Cambodia, published in the Journal of Development Studies a few days before the government announced the rate cap, is based on a statistical analysis intended to determine how microloans affect Cambodian households.

The findings suggest households that take up a formal or informal microloan may actually see a decrease in welfare because their household expenditure decreases, indicating that families are able to buy less.

Study author Dr Seng Kimty said in an email yesterday that “poor borrowers [are] trapped in a vicious cycle of high-interest indebtedness” by high interest rates and the use of loans for non-productive activities. He added that 58 percent of such loans were used for non-productive means – buying a house or car, for example – and of those, about 35 percent were simply used for routine day-to-day household purchases like food.

Mey Kalyan, senior adviser to the Supreme National Economic Council, said he largely agreed with the study. Many sectors, he argued, simply did not generate enough revenue to pay back loans – agriculture, for example, rarely produced more than a 15 percent return, he said.

Microfinance “could be useful” for some sectors, such as trading, he said, as long as it was in the form of short-term loans.

Carol Te, a consultant at Emerging Markets Asia, said that their research aligned with elements of the new study – for instance, that “the most common usage of loans was to pay for food consumption (39%) and for medical assistance (27%)”.

While many families have no choice, she added, using loans for such purposes creates a “risk of perpetuating indebtedness”.

Some experts, however, questioned elements of the findings.

Miguel Chanco, lead ASEAN analyst for the Economist Intelligence Unit, disagreed that microfinance did not benefit household welfare, maintaining that it “has proven very beneficial in uplifting many people out of poverty, especially in Asia”.

Stephen Higgins, managing partner of local investment firm Mekong Strategic Partners, said in an email that while the study was “certainly a worthwhile contribution”, he did not agree with all of its conclusions, and cautioned against conflating expenditures with household welfare.

“If I borrow money to buy a house, then my expenditure levels are probably going to fall significantly,” he said, adding that such loans have the effect of redistributing expenditures over time.

Microcredit, he added, was “unambiguously a good thing” if used for productive purposes by an informed client.

But despite any disagreements over the benefits of microfinance, almost all the experts agreed that whatever the dangers of over-indebtedness, capping interest rates was no solution.

Independent economist Daniel Rozas said the 18 percent cap announced this week was under the operating costs of institutions, and argued for a sliding scale or a cap on profit margins.

Higgins, meanwhile, said that for households that use loans for basic purchases, “An interest rate cap is not the solution . . . often they shouldn’t have been given the loan in the first place.”

MOST VIEWED

  • 12th Cambodia int’l film festival to see return of Hollywood star

    Phnom Penh is set to come alive with the magic of cinema as the highly anticipated 12th Cambodia International Film Festival (CIFF) takes centre stage. Boasting an impressive line-up of 188 films from 23 countries, including captivating shorts, feature films, documentaries and animation, the festival promises an

  • Brawl marrs football final as Indonesian take gold in seven goal thriller

    The Indonesian men's U22 men national football team were crowned champions of the 32nd SEA Games in Cambodia, defeating Thailand 5-2 in extra time on May 16 at Olympic National Stadium in Phnom Penh. The match was marred by an ugly incident that occured in the 91

  • Bareknuckle champion wants Kun Khmer fighter

    Dave Leduc, who is the current openweight Lethwei boxing champion in Myanmar, has announced that he will travel to Cambodia this year to challenge SEA Games gold medallist Prum Samnang any time that is convenient, after their planned match later this month in Slovakia was

  • Candlelight Party disqualified from July general election

    The National Election Committee (NEC) has disqualified the Candlelight Party (CP) from contesting the upcoming general election, citing a lack of valid documentation. NEC spokesman Khorn Keomono said the CP failed to fulfil one of the three main requirements: including original documentation proving their registration

  • 1.4 billion dollar Phnom Penh-Bavet expressway due in four years

    The Government, through the Ministry of Public Works and Transport, has officially signed a public-private partnership agreement with a private company for the construction of a Phnom Penh-Bavet Expressway project that will connect the capital to Svay Rieng province. The budget for the project is

  • New Law on Taxation comes into effect

    Cambodia has enacted the eagerly-awaited new Law on Taxation, which aims to improve the national tax regime’s compliance with present and future international standards and economic conditions; encourage accountability, effectiveness and transparency in the collection process; and promote investment in the Kingdom. King Norodom