W Nathan Green
On March 13, the National Bank of Cambodia (NBC) announced that it will cap interest rates on microfinance loans at 18 percent per year starting April 1 in order to help growing numbers of Cambodians struggling with over-indebtedness. After this announcement, leaders and experts of the microfinance industry responded that this government intervention is merely a political gesture that will backfire and hurt the rural poor even more.
Citing an economic researcher at the NBC, they argued that many small microfinance institutions (MFIs) will not be able to afford their high operating costs if the government imposes an interest rate cap. These MFIs will be forced to reduce their services and potentially stop providing the rural poor with the small loans that they rely upon for basic needs like health care and food. These borrowers will have no other option but to seek out loans from unregulated local moneylenders, which will further drive them into debt and poverty.
Ranging from 20 percent – 30 percent per annum, there is no doubt that interest rates on microloans are an important concern. But the larger problem is how narrowly both the government and the microfinance industry have framed the debate about microfinance and poverty.
With both sides focusing almost solely on interest rates, there is no discussion about the systemic problems of poverty within Cambodia, let alone a debate about whether microfinance debt itself is the source of problems for the poorest of the poor. Such a narrow focus on interest rates impedes our understanding of the challenges that many rural poor confront, which may lead to policy decisions that exacerbate the situation faced by the poorest borrowers of microfinance.
It is my view that we must expand the frame in which microfinance is debated in order to better address poverty in Cambodia. The first step is to place microfinance and debt within a historical context, and then do away with the oversimplified picture of Cambodian farmers and household economics that pervade the microfinance debate about rural development.
Nearly all of the country’s biggest banks and MFIs (eg Acleda and Prasac) can trace their roots to small nonprofit organisations in the 1990s that were originally funded by foreign donors who wanted to rebuild the social and economic fabric of the country after decades of civil war.
However, following international trends in the microfinance industry over the past two decades, these organisations have made a dramatic shift in their banking structure by becoming for-profit, commercial ventures not dependent upon donors and that can provide their services to more people.
While Cambodia’s commercial MFIs still claim to be social lenders concerned with poverty alleviation, they are increasingly beholden to their shareholders at the potential expense of their borrowers. Many of the largest MFIs are now owned by international banks and rely upon global investments for their operations. Just last year, the fourth-largest MFI, Hattha Kaksekar, was purchased by Thailand’s Bank of Ayudhya, and this month Sri Lanka’s leasing firm LOLC and Hong Kong’s the Bank of East Asia took majority ownership in Cambodia’s largest MFI, Prasac.
Such takeovers of MFIs are considered to be natural evolutions within the development of Cambodia’s microfinance sector. Yet this growth makes it harder for MFIs to work for their borrowers as pressure increases to provide profits for shareholders and investors. For example, credit officers are required to meet monthly targets for provisioning loans to borrowers.
If they fail to do so, credit officers are either penalised or fired. Many borrowers are thus frequently encouraged to take out loans that they cannot repay. Although MFIs always point towards the success rate of repayment in their annual reports, these statistics overlook the fact that many families borrow from other MFIs and unregulated lenders to repay their debts. This cross-borrowing often further entrenches borrowers in a cycle of indebtedness.
Beyond this historical transformation of the microfinance industry, the frame of microfinance also tends to exclude the complexities of rural development in ways that reinforce the idea that all farmers benefit equally from credit.
For a large-scale cassava farmer in Battambang who has access to the technology and infrastructure to compete on international commodity markets, a medium-size business loan from an MFI may indeed help give him a leg up over his competitors. But for a young couple in Kampong Cham who must rely on rain-fed rice agriculture as their only source of agricultural income, there is a high risk of defaulting on a loan used to pay for seeds, fertiliser, and biocides if the crop fails during a drought.
For these more vulnerable farmers, the risk of default on a loan might entail the loss of land because borrowers provide their land titles as loan collateral. This raises a fact that does not fit into the current frame of microfinance. The growth of microfinance in Cambodia has gone hand-in-hand with national land-titling programs designed to provide farmers with collateral to access microcredit. Without the social safety nets to protect indebted farmers, many borrowers are compelled to repay their debts by selling land in the country’s rapidly growing land market.
The current framing of microfinance also fails to capture the economics and mobility of rural households. Although MFIs often insist that Cambodia is still a rural and agricultural-based economy, young adults throughout the country frequently migrate to find work in national and international labour markets.
Such migration has important, yet rarely mentioned, ties to the microfinance industry. Microfinance has placed many households into positions of debt that cannot be repaid from within the village because there are few rural jobs and insufficient land to farm. Parents often take out additional microfinance loans for their adult children to help them find work, either by purchasing motos for transportation in Phnom Penh or to pay for the high costs to migrate to Thailand.
Certainly many of these jobs are welcomed by the young Cambodian. But with new mobility, Cambodia’s rural citizens must confront challenges that microfinance alone cannot resolve. Migration to Thailand continues to pose risks for migrants who can face jail time and exploitation by local authorities and traffickers. And in Cambodia, the terms of inclusion in new labour markets are far from equitable. Not only is the minimum wage for unskilled workers too little to pay back debts and meet daily needs, new labour laws are increasingly restricting workers’ rights to even negotiate over better wages.
It is time to open up the frame of microfinance and begin to debate the role that credit can play in alleviating poverty in Cambodia. Credit can be an important tool for those individuals and families who have the security, knowledge, and luck to gain greater wealth through investments in business and agriculture.
But in the context of a rapidly changing rural economy and the rise of a landless young generation, framing a debate about microfinance solely in terms of the rate of interest may actually be causing more harm than good.
The drop in interest rates will likely provide short-term relief for families living day to day on credit, but debating the interest rate is a poor alternative to focusing on investments in better employment opportunities and social welfare programs for the country’s rural poor. Unfortunately, such a reframing of the debate will attract few supporters from either side because it implies that MFIs cannot do as much to alleviate poverty as they claim, and that the government must do a great deal more.
W Nathan Green is a PhD candidate in the Department of Geography at the University of Wisconsin-Madison, USA. He is currently conducting ethnographic research in Cambodia about issues related to microfinance and rural development.