Financial institutions, like banks, are vital for the creation, collection and management of a country’s currency. In Cambodia, the microfinance industry acts as a banking system for many people, with around 160,000 branches across Cambodia in 2016. Of the 10 million people in Cambodia, a little more than one in five people have taken out some sort of microloan. Average loans are more than twice as much as the country’s average yearly GDP per person. Microfinance in Cambodia has the potential to help people trying to survive the COVID-19 pandemic and avoid poverty, but it does not come without consequences.
The Microfinance Boom
In Cambodia, predatory loan sharks with exorbitant rates were the norm until microfinancing came into prominence. Microfinancing offered lower interest rates and shifted residents toward more formal money lending institutions. Microfinance institutions have allowed people to rise out of poverty because people are able to start businesses, fund their education and pay for emergency healthcare. The Cambodian Microfinance Association (CMA) sees a clear link between access to credit and reduced levels of poverty. The benefits of microfinance help Cambodia to develop and expand economically. For instance, for farmers who would typically be unable to access improved agricultural equipment, microfinance in Cambodia means sustaining a livelihood.
The Impact of COVID-19
The credit boom in Cambodia did not come without consequences. Firstly, the size of household debt exploded. The average microloan borrower in Cambodia has $3,800 worth of debt, the highest in the world. The IMF and the World Bank have warned that an improperly regulated microfinance industry can push Cambodians further into debt and further into poverty. In 2017, when the Cambodian government responded with policies to cap the interest rates, microfinance institutions, in turn, garnered more money through increased loan fees. Due to the poverty brought on by COVID-19, the debt crisis in Cambodia ballooned. The CMA reports that in March 2020, in response to the impacts of the pandemic, repayments were paused for about 25,000 people and roughly 25,000 loans were restructured to ease financial pressures.
The Outlook of Human Rights Watch
In spite of some debt relief procedures during COVID-19, many Cambodian families are still pushed to the brink of selling their homes and land in order to pay back debts. The Cambodian government received criticism for not doing enough to help indebted Cambodians. Human Rights Watch (HRW) recommended that Cambodia “urgently suspend debt collection and interest accruals for micro-loan borrowers who are no longer able to meet their debt payments due to the COVID-19 pandemic.”
According to Phil Robertson, deputy director of HRW’s Asia Division, “Many Cambodians fear losing their land more than catching the novel coronavirus because they can’t pay back their loans and the government has done little to help them.” When land collateral strips Cambodians of their homes, their ability to remain out of poverty is severely threatened. The poorly regulated microfinance industry in Cambodia risks becoming a catastrophe because of the lasting effects of the pandemic and little government action.
The Way Forward
Hun Sen, the prime minister of Cambodia, remains optimistic about the future of microfinancing in the country. In June 2020, Sen committed to dedicating about $25 million per month to help roughly 600,000 indebted and impoverished families in Cambodia. The National Bank of Cambodia has called upon lending institutions to restructure or defer loan repayments for those in economic struggles. The HRW feels more needs to be done and has provided guidelines in this regard combined with close monitoring of the situation.
– Alex Pinamang