The Danger of Microfinance
Small loans in Cambodia drown the poor and buoy the rich.
MAY 30, 2023
This article is co-published with The New York Review of Books.
PHOTO: Khun Salat, sits in her house in Siem Reap, Cambodia. Having taken out a microloan, Salat is currently in debt. She can't afford to own land, so instead lives on a neighbor's property. Credit: Roun Ry.
On her bank’s loan sheets Ban Sophear looks like an ideal borrower. At forty-seven, she runs a small business buying fish on the southern edge of Cambodia’s Tonle Sap Lake and also owns some farmland. In the past Sophear borrowed a small amount of money—a microloan—to build up her business. She managed to pay it back in full, qualifying her for larger microloans, which are issued by banks that have turned lending to the poor into a lucrative business. In 2022 Sophear borrowed $3,000. She used the money for her business and to pay her son’s school fees. The interest rate is 18 percent—standard for microloans in Cambodia.
We met Sophear in July 2022 at her home in the floating village of Chhnuk Trou in Kampong Chhnang province. A plank connects her shop-house to a pair of large wooden platforms covered with scales, baskets, and ice-filled coolers. Sophear sleeps in the back of the shop-house and runs a store from the front, selling everything from aspirin and eggs to gasoline and nail polish. Bags of candy and potted plants hang from the rafters. Despite her business acumen, Sophear was finding it difficult to make her payments of about $150 a month. To repay the loan, she would have to keep making them without fail every month for two years—a daunting prospect amid her financial insecurity.
For those who make a living on the Tonle Sap Lake, one of the largest freshwater fisheries in the world, it has never been harder to get by. A generation ago, fish were so abundant here that they could be scooped from the water with a basket. But crucial fish migration pathways to the lake, which sits on a tributary of the Mekong River, have been blocked by upstream hydropower dams that also change how water flows in and out. And now that more people than ever live on the Tonle Sap, the pressures on its diminishing number of fish have grown. Global warming, meanwhile, has caused worsening floods and droughts, with effects both on fish habitat and the lake’s hydrology. “Before, I could make $25 to $50 a day,” Sophear told us. “Now it’s about $12. It’s really impacted my family and my financial situation too.”
If her business continues to suffer, Sophear may take out an informal private loan to make her monthly payments. Issued by a local moneylender rather than a bank, these loans have higher interest rates, driving borrowers even deeper into debt. She might pull her younger son from high school to save on fees. Her older son might leave university to work in an overheated garment factory or on a dangerous construction site—or cross the Thai border illegally to work on a plantation, where he would likely arrive already in debt to his smuggler. If Sophear becomes very desperate she may even sell some or all of her land, an irretrievable loss of the small wealth she hopes to pass on to her children.
Kimty Seng, an independent economist in Cambodia who studies how borrowers repay debt, has found that such sacrifices are common. Parents with microloans, he determined in a 2020 paper, are more likely to pull their children out of school or put them to work. In a 2018 study, he discovered that families with microdebt—even if they are not particularly poor—eat less, having taken money from their food budget to repay loans. Seng’s research drew on 2014 and 2017 nationwide socioeconomic surveys by the Cambodian government, but little appears to have changed since then. Rather, a growing body of analytical research is corroborating what rights groups, academics, and journalists have long documented: microfinance in Cambodia—and elsewhere—is driving many borrowers into deeper poverty. Instead of pushing poor people up the economic chain, it appears for the most part to have become a form of de facto wealth transfer from the poor to the rich.
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Developed by the Bangladeshi economist Muhammad Yunus in the 1970s, microfinance was originally pitched as a way for the rural poor to invest in small businesses and livestock. Its early proponents were NGOs, which believed issuing small loans to people who lacked access to traditional lines of credit could promote upward mobility. But in the 1990s, when donor countries like the United States began pushing a neoliberal “trade not aid” model onto so-called developing countries—one that prioritized economic growth as a means of combatting poverty—microloans became a lucrative instrument for banks hoping to access new markets.
Over time, the rhetoric of microfinance changed, too. Rather than advocating microloans as a way for the poor to develop small businesses, banks began talking about “financial inclusion,” introducing banking concepts to new populations. Helping poor people access financial services became an end in itself for development organizations as varied as the World Bank and United Nations. By 2026 the world microfinance market is projected to top $300 billion.
Microloans have increased rates of hunger among adults and the likelihood of children dropping out of school to join the workforce, driven up distressed property sales, strained social ties, and resulted in rural Cambodians leaving family farms en masse to take on risky migrant labor and poorly paid factory work.
Globally, the effects of this shift have been varied and notoriously difficult to study. Evaluations of the sector as a whole have struggled to determine whether microloans alleviate poverty or whether flawed methodology overestimates their benefits. Meanwhile there have been countless anecdotal examples of microfinance’s strain on the poor. In 2011 GlobalPost reported that borrowers in Bangladesh had sold organs to repay their debts. A UN envoy to Sri Lanka revealed in 2021 that over two hundred people had died by suicide in recent years over microfinance-linked debt stress. In April a Nigerian woman was arrested for selling her baby; under questioning, she said she did so to repay a microloan.
In Cambodia, microloan programs have been repeatedly found to exacerbate poverty. Academic studies, NGO reports, and media investigations reveal that as overindebted families struggle to make their repayments, microloans have increased rates of hunger among adults and the likelihood of children dropping out of school to join the workforce, driven up distressed property sales, strained social ties, and resulted in rural Cambodians leaving family farms en masse to take on risky migrant labor and poorly paid factory work.
A distinctive combination of light regulation, a dollarized economy, and an enormous development sector in Cambodia has allowed microfinance institutions (MFIs) to bloom here in a manner seen in few other nations. Today the country is home to nearly ninety MFIs, which as of December 2022 had issued some $9.4 billion in loans to over two million borrowers, according to the National Bank of Cambodia. In 2004, by comparison, $98 million in loans were issued to just 420,000 borrowers. The size of the loans has also exploded. Two decades ago, the average microloan in Cambodia was $233. Today the average exceeds $4,000, making it the highest in the world and more than double the country’s per capita income of $1,842. Barring a truly unforeseen occurrence, loan size will continue to rise. As the loans grow, so too will the number of Cambodians struggling to repay them.
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In late October hundreds of Cambodian bank executives, government officials, and economists gathered at the luxury Sokha Hotel, in the northwestern province of Siem Reap, for a daylong conference on microfinance. Speakers at the hotel, which is owned by one of the country’s most powerful tycoons, gave presentations about financial literacy and “responsible growth.” At roundtable discussions, participants discussed inclusive finance and economic recovery. Outside the conference room, young women staffed booths offering thermoses, notebooks, and plush toys.
The pandemic, which led many factories to close and migrant workers to return home in droves, forced microfinance institutions in 2021 to briefly suspend repayments and restructure some $1.7 billion in loans for over 300,000 borrowers. But while an estimated 460,000 Cambodians have fallen into poverty since 2020, the microfinance sector is booming. Despite the sober title of the 2022 meeting—“Strengthening Responsible Growth in the Context of the Post-Covid-19 Economic Recovery”—the conferencegoers at the Sokha Hotel had plenty to celebrate. According to the Cambodian Microfinance Association (CMA), a nonprofit professional group for the country’s microlenders, the industry “issued a record amount of loans yet again.”
Given the ease with which loans are issued, that’s hardly surprising. To obtain a microloan in Cambodia requires little more than being home when a credit officer comes calling. An oversaturated market means that these officers, typically young men, are constantly hunting for new borrowers and face their own financial pressure to ensure their clients repay. Chan, a loan officer from Banteay Meanchey province who asked to be referred to only by his nickname to avoid repercussions from his employer, earns about $220 a month from his eighty clients through bonuses and commissions. Chan’s income is scarcely better than the $200 minimum wage that garment workers make. The more clients he can take on, the more he earns—but only if they repay their loans.
Each month the same credit officer who issued the loan stops by to collect payment. Ethical violations around those payments abound. Borrowers routinely speak about credit officers who wait at their homes for hours, call their cosigners incessantly, direct them to private moneylenders, and coax them to sell land to repay. Since Cambodia’s judiciary is notoriously corrupt and local authorities have a close part in the lending process, few borrowers can push back.
To understand the effects of such debt, you need not go far beyond the Sokha Hotel. Siem Reap, famed for its Angkorian temples, was last year home to just over 210,400 borrowers holding $1.073 billion in debt. Hundreds of those borrowers live in the village of Kampong Khleang, which sits on the Tonle Sap’s northern shore. Lining its red dirt roads are stilt houses that rise twenty feet above the ground. In the rainy season, when the lake expands miles inland, these roadways become canals passable only by boat. As in almost any rural village in Cambodia, most residents here hold debt.
Following a dismal fishing season in 2015, Kay Oeun and her husband Chum Kear borrowed $4,000 from ACLEDA Bank; they were expected to pay the loan back in installments of about $200 a month over two years. Their twenty-eight-year-old daughter quit school to work in a garment factory in Phnom Penh and sent money back to her parents. “Some people who live here don’t have enough to eat,” Kear said in a 2016 interview. “Many owe money to the MFIs. We borrowed to make our business, but our business doesn’t work.” A year later their concerns were much the same. Their sons were working as laborers. Their second-youngest daughter was planning to drop out of eleventh grade despite excelling in school. “She says she wants to stop,” Oeun said in 2017. “I asked why, and she says because we don’t have any money.”
Despite mounting evidence that they do damage, Cambodian MFIs continue to receive significant sums from international financial institutions. Last year Bloomberg reported that five of the world’s largest development banks—the United States International Development Finance Corporation (DFC), the World Bank’s International Finance Corporation (IFC), the Dutch Entrepreneurial Development Bank, the European Investment Bank, and France’s Proparco—provided more than $500 million in loans to Cambodian MFIs over the past decade. In that period the IFC alone approved some $400 million in loans and investments to the six biggest MFIs in the country—Hattha Bank, Sathapana, AmRET, LOLC, PRASAC, and ACLEDA.
In practice development banks do virtually no due diligence before making investments, according to NGOs and researchers, and it is extremely rare for people affected by those investments to get remedy.
In principle, multilateral development banks are supposed to follow a “do no harm” approach to their investments and oblige their clients to obey a raft of social and environmental guidelines. Accountability mechanisms such as the IFC’s Office of the Compliance Advisor/Ombudsman or the DFC’s Office of Accountability are meant to review complaints from harmed communities and recommend mitigation measures. But in practice development banks do virtually no due diligence before making investments, according to NGOs and researchers, and it is extremely rare for people affected by those investments to get remedy.
In May 2022 two prominent local rights groups, Equitable Cambodia and the Cambodian League for the Promotion and Defense of Human Rights (LICADHO), filed a complaint on behalf of borrowers to the IFC’s watchdog, accusing the financial institution of causing grievous harm. By funding microlenders with abusive practices, the groups argue, the IFC effectively promoted predatory lending and drove up rates of child labor and land sales. (The two groups, along with a German NGO, filed a similar complaint to the Dutch government late last year against the social impact investor Oikocredit, claiming their microfinance investments had led to human rights violations.) Development banks are funneling vast sums of money to MFIs but making no effort to speak with borrowers, Naly Pilorge, LICADHO’s outreach director, told us. “They rely on self-regulation, industry-driven ‘certifications,’ and other broken tools.”
The Cambodian Microfinance Association offers its own slate of rules and regulations: loan officers are forbidden from pressuring or threatening borrowers to repay, and loan size must be based on cash flow rather than collateral such as land titles. The industry has insisted that these regulations work well. In 2020, ACLEDA accused LICADHO and two other organizations of defamation after the NGOs issued a report on overindebtedness among factory workers. Pointing to the small sample size of the report, the CMA likewise called it “biased.” In an email, the CMA’s spokesman, Kaing Tongngy, told us that while there are “a few” instances of unethical practices by loan officers, “CMA found NO systematic abuses committed by MFI members.” He insisted that Cambodia’s laws and CMA’s regulations ensure the safety of borrowers and that “the sector is crucial to fuel economic growth and poverty reduction.” The ratio of per capita income to loans is an inaccurate measure of overindebtedness among individual clients, he argued, because MFIs issue loans ranging from a few hundred dollars to one million.
Debtors are often forced to reduce the quality of their food and in very rare cases turn to “child labor or forced labor migration” to make repayments.
We also reached out for comment to the six biggest microfinance lenders in Cambodia, as well as to the IFC and the Asian Development Bank. In a statement, an IFC spokesperson said that the corporation conducts due diligence on partner institutions and “is committed to continue to work with microfinance institutions and stakeholders in Cambodia to incorporate responsible finance practices into all aspects of business operations, including training, capacity building, and risk management.” ADB did not respond to questions. Among the financial institutions, only LOLC responded. Its CEO, Sok Voeun, wrote in an email that the bank does “not tolerate unethical lending practices and has strict and regular internal controls to monitor adherence to our Code of Conduct and Customer Protection Principles.”
Seng, the independent economist, stressed that regulatory improvements, particularly an 18 percent interest rate cap set by the National Bank of Cambodia in 2017, have had some positive effects since he conducted his study, which relied on census data collected before those reforms went into effect. But more recent research shows that the problems are persisting. Last year the development anthropologist Frank Bliss issued a landmark report carried out at the behest of Germany’s federal ministry for economic cooperation and development, which found that nearly half of all MFI borrowers surveyed in Cambodia struggled to repay microloans. Echoing the findings of other studies, Bliss reported that debtors are often forced to reduce the quality of their food and in very rare cases turn to “child labor or forced labor migration” to make repayments.
A 2021 Center for Khmer Studies report conducted by the social anthropologist Res Phasy and funded by the Australian government noted that “reduction of household food consumption” was a primary strategy by which debt-distressed families repaid their loans. Migration and withdrawing kids from school were listed as common “last resort” strategies. In 2020 Nithya Natarajan, Katherine Brickell, and Laurie Parsons called microfinance a “key driver” of modern slavery in Cambodia’s brick kilns, a particularly dangerous, exploitive industry where child labor remains rampant. When all this research is added up, it is clear that any regulatory improvements made by the government, the microfinance industry, or development banks have fallen far short of the mark.
And yet in a sense the industry is working exactly as it’s been set up to. Even as the size of loans has grown, Cambodian borrowers are still managing to repay them. This benefits bank customers: a new ABA accountholder, for instance, can get a fixed deposit rate as high as 9 percent per year. And the money keeps moving up the chain. The six biggest MFIs hold some 75 percent of the country’s microfinance loans. Five out of six of those MFIs are majority owned by Thai, Japanese, Luxembourg, Sri Lankan, and South Korean banks.
“The profitability of microfinance in Cambodia” is clear, said Maryann Bylander, a sociologist at Lewis and Clark College who has spent years studying the country’s microfinance industry. In spite of the high rates of overindebtedness among the poorest, there hasn’t been any sort of larger economic collapse along the lines of the subprime mortgage crisis in the US. The reason for that, Bylander suggested, is that “Cambodians are bearing the cost of very personal crises.”
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The crucial component in Cambodia’s microfinance industry—the reason the sector has yet to crash—is land. Due to the rapid growth of both the population and the economy, land prices in Cambodia have skyrocketed over the past three decades. Many countries have barred land titles from being held as collateral for loans, but Cambodia has not.
Facing heavy debt burdens and lacking the steady cash to repay, Cambodian borrowers are increasingly selling at least part of their land to service their loans.
MFI representatives insist that their credit officers determine the size of loans by looking at cash flow rather than collateral, and both Voeun, of LOLC, and Tongngy, of CMA, stressed to us that MFIs follow that regulation. But the fact that a fisher or a garment worker making just a few hundred dollars a month can still receive a microloan worth several thousand dollars is evidence that cash flow can hardly be the key determinant in loan size. Meanwhile, the global standards set by the Social Performance Task Force, an industry social impact nonprofit, suggest that a borrower may spend up to 70 percent of their disposable income on debt.
Facing heavy debt burdens and lacking the steady cash to repay, Cambodian borrowers are increasingly selling at least part of their land to service their loans. The Bliss report found that 13 percent of borrowers surveyed had sold land to meet their obligations. According to LICADHO, that figure works out to about one land sale every sixteen minutes.
Sometimes borrowers arrange land sales proactively, but more often they’re responding to mounting pressure from loan officers and even local authorities. Rather than allow borrowers to default, which would increase their chances of losing their own jobs, credit officers push them to sell land—sometimes even going so far as to direct them to a particular buyer. Chan, the loan officer, said he had at least five clients who sold land during the pandemic after falling behind on repayments. “If they want to sell a little something to pass this challenge for once, then it’s up to them,” he said. Despite the experiences shared by borrowers and researchers, he insisted that there is no coercion in this process. “We don’t confiscate, we don’t force or pressure too much. We don’t connect them to other private lenders. It depends on them. We don’t ask how they get the money to repay.”
Across the lake from Kampong Khleang in Kampong Chhnang province’s Boribor district, thirty-nine-year-old fisherman Lonh Saly has been struggling with debt for his entire adult life. In the late 1990s his family managed to save enough money to buy a small plot of land a few miles inland from the Tonle Sap. “Usually, the river people do not have land like our family,” he said. “It’s just an exceptional case. Our parents happened to have some savings.”
Several years ago, Saly and his wife, Chhorn Sreyluch, borrowed money to pay for fishing equipment, home repair, and other basic life costs. After two decades of holding on to the eight-hundred-square-meter plot, in 2021 the couple sold three-quarters of the family land for around $10,000 dollars to repay their loans in full. Saly had hoped to build a home of his own, but now the couple lives with his mother on the small remaining plot.
The fresh slate was short-lived. Last year, using the two hundred square meters of remaining land as collateral, the couple took out a $10,000 loan to start a water bottling business. They hoped it could help offset the income they have lost since the start of the pandemic, when Sreyluch left her job at a Phnom Penh garment factory. But business has been slow, and Saly is constantly pestered by loan officers about missed payments. “If I could use all my twenty-four hours per day and didn’t have to sleep, I would use them all just to work,” he said in a November interview. “I know that if one day I am sick, I believe that I won’t be able afford treatment because our family doesn’t have any savings…and it will be devastating.”
The fallout from microfinance debt, as Bylander and other researchers have recorded, is not just financial but social. Loans are often cosigned by parents, children, siblings, or even neighbors acting as guarantors—giving loan officers another route for harassment. Saly and Sreyluch’s bank required a married guarantor, and they chose Saly’s sister. “When we are just a few days late,” Sreyluch said, loan officers call her sister-in-law repeatedly and place “heavy pressure” on her. “And then she calls me. She gets frightened every time she receives the call from the bank. She’s afraid that we don’t have money to repay and that she’s responsible to pay them for us.”
That dynamic has strained the relationship. Sreyluch dreads her sister-in-law’s calls and has grown resentful at the added stress. “Her husband is a teacher, and they have a regular and secured salary, so they can pay on time,” she said. “Our business is irregular and we are very insecure.” Yet even amid the mounting debt and harassment, Sreyluch’s greatest fear is that her failure to repay will see her marked by her bank as a “spoiled client.” Should that happen, she says, “I may not be able to borrow again.”
This article has been updated to take into account more recent guidance from the Social Performance Task Force.
✺ Published in “Issue 5: Debt” of The Dial
