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Cambodia’s Micro-credit Trap

Written by Simon Marks
India isn’t the only country with problems
Roaming the streets as a
motorcycle taxi driver in Dangkao district on the edge of Phnom Penh, Ek
Sovannara is lucky to earn US$2.50 a day. But his aspirations once
stretched much further.
In 2005 he was
presented with an opportunity to borrow US$500 from Credit Microfinance
Institution, a firm established by the Christian charity World Relief US
in 1993, to set up a small food stall in Trapaing Krasaing commune
where crowds of garment workers pass on their way to work. His decision
that day to take the money would stay with him for years.
then, borrowing more and more from private lenders to pay back
microlenders, he has fallen into a complicated web of debt now so severe
that he is considering selling his house and about 50 square meters of
land, together worth around US$6,000.  Though he has managed to pay back
some of what he borrowed, his business ceased turning a profit two
months ago. After successive borrowing to repay other loans, Sovannara
still owes US$1,520 to Credit Microfinance Institution and a further
US$400 to seven private moneylenders.
39, is far from alone in his battle with debt. From its nascent days in
the mid-1990s, Cambodia now has more than a million families with a
microcredit loan in a population of 14 million people. That number is
growing fast. Total outstanding loans as of the end of the first quarter
amounted to US$711.8 million, an almost 10 percent increase over the
previous quarter.
Like many others in his
village, he has been approached by both private moneylenders and
licensed microfinance institutions that hand out small loans with few
strings attached, offering anywhere between US$50 and US$2,000.
lenders often allow borrowers to pay back the formal lenders, who in
return agree to provide their clients with more credit. A lack of
available credit history has also produced cases where clients have
taken loans from more than one microfinance institution at the same
It is hard to know if this scenario is
representative of the broader microcredit sector. Only licensed
microfinance institutions are obliged to report on loan defaults, while
smaller, registered institutions do not.  According to figures from the
Cambodia Microfinance Association, non-performing loans among licensed
institutions were calculated to be just 0.99 percent in the first three
months of the year.
Defaults on loans appear
to be even lower. At Chamroeun Microfinance, defaults on loans amounted
to just 0.01 percent in 2010 while at Hatta Kaksekar Ltd, which started
offering micro-loans as an NGO in 1994 and became a licensed MFI in
2004, defaults on loans was just 0.2 percent in 2010.
institutions “have invested in improving systems and there are higher
levels of control than before,” said John Brinsden, vice president of
Acleda Bank, the country’s largest microcredit lender. He added that
commercial banks in Cambodia were beginning to look at many licensed
institutions as “serious peers” in the financial services industry.
microfinance institutions admit that loan officers need more training
to assess borrowers’ creditworthiness and analysts say high levels of
debt are a growing problem.
As Cambodia’s microfinance sector
has established itself, particularly over the last five years, a
plethora of institutions have flooded into the market. Meanwhile dozens
of non-governmental organizations and private moneylenders have also
sought a piece of the action.
“In difficult
times I took money from private moneylenders to pay back the loans I
borrowed from the microfinance institutions,” said Sovannara, who now
relies on his wife’s job in a nearby garment factory as well as his
meager income from the motorcycle taxi service. “I feel scared I will
lose my home as so many people in my village lost their house to debt
The scenario being played out in
Sovannara’s village in Trapaing Krasaing commune — a tight-knit
community where strife in the quest to earn a living is shared — is at
times dismal.  Both poverty and crippling debt levels loom over the
heads of many here. By day, credit officers from some of Cambodia’s 27
licensed microfinance institutions travel round on motorbikes looking
for new clients and collecting outstanding debts.
acknowledging instances of high debt levels, those in the industry say
that most microfinance institutions are largely healthy and have
stringent policies on only handing out loans to those with viable
incomes.  Still, Chan Mach, general manager of Credit Microfinance
Institution, which has a loan portfolio of US$35 million in micro-loans,
making it the country’s fifth largest microcredit institution, said he
was aware of the problems facing the microfinance sector.
main concern in the microfinance sector in Cambodia is over
indebtedness,” he said, acknowledging that he had identified cases where
loans his institution had made were being repaid by overlapping loans
from other institutions or private lenders. “We need to commit ourselves
to revise the policy, to guide our staff about the loan assessment.”
said Credit Microfinance Institution plans to conduct research with its
clients to find out exactly how many of them have overlapping loans. To
combat the problem, he said his institution is also giving training to
its clients in family budgeting, saving techniques and debt management.
Ieng Tong, general manager at Hatta Kaksekar Ltd, said that some
microfinance institutions had problems with their credit officers’ level
of training and doubted the purpose of handing out loans of as little
as US$100.
“To do some business here you must
have some capital…otherwise you cannot do the business,” he added. “I
think the microfinance that lend with small amount, maybe it doesn’t
help the client. What can you do to a business with US$50 or US$100?”
said that 10 percent, or US$1.5 million of total revenues at HKL, is
spent on training staff every year to ensure that all employees are
capable of carrying out robust loan assessments.
while less than 1 percent of microloans are considered non-performing,
analysts say that number would be much higher if private lenders did not
prevent borrowers from defaulting with microfinance institutions.
National Bank of Cambodia says it is aware of the risks facing the
microfinance sector and will include an entire chapter on how to ensure
the industry’s strength in its financial sector development strategy for
2011 to 2020, to be completed shortly.
will try to find a solution and a road map in order to strengthen the
microfinance institutions,” said Ngoun Sokha, director general of the
National Bank of Cambodia. She said that part of the strategy would be
to encourage MFIs to inform borrowers of the benefits of taking money
from formal lenders–lower interest rates and more flexibility–rather
than those which operate outside central bank regulation.
A credit bureau, which is due to be launched by the end of the year, will also help MFIs to better target suitable borrowers.
circumstances there have drawn critics to accuse microfinance
institutions of handing out loans with little regard for the ability of
borrowers to make repayments.  Analysts say that as the microfinance
sector has grown its policy has come to be guided by a desire for
profits rather than for reducing poverty.
a borrower has defaulted, the collateral land most often end up with
the private lender, who has paid off the MFI,” said Jan Ovesen, a
professor of cultural anthropology at Uppsala University in Sweden, who
has completed extensive research on microcredit lending in Cambodia. “We
also have examples of private lenders taking MFI loans.”
said that research in Cambodia had shown that borrowers would take a
private loan for a couple of days in order to pay the microcredit loan,
because when the loan is paid according to schedule, the borrower is
eligible for a new one. This scenario has brought about what she
described as “predatory lending” among both microfinance institutions
and private lenders in Cambodia. 
Asia Sentinel
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