Cambodia's microcredit boom: a blessing but also a curse

Cambodia's microcredit boom: a blessing but also a curse

Takeo Province, Cambodia (dpa) – Kuong Chhuon's village is doing better than it was five years ago. Incomes have doubled due to the opening of nearby factories, but villagers also have something many rural people around the world lack: access to credit. 

The villagers borrow money to buy fertilizer, rebuild their homes and expand their businesses, said Kuong Chhuon, the village headman.

"If they have small businesses, they borrow around 1,000 to 2,000 dollars. But for those who have big businesses, they borrow up to 10,000 dollars," the 68-year-old said.

These microloans, known collectively as microcredit, are often issued to groups or to several members of the same family.

Around three-fifths of the 226 families in Prech village, in the country's south-west Takeo Province, have taken out microloans, Chhuon said.

He can name a half-dozen microcredit institutions active in the area, saying that they all come to see him and ask about potential customers.

The village, despite its humble surroundings of dirt roads and rice paddies, is in the middle of one of the most competitive microcredit districts in Cambodia, which itself is one of the largest markets for microloans in the world. 

Cambodia's microcredit market is second in size only to India's, according to Symbiotics, an international social investment firm. 

In fact, at 4.4 billion dollars, Cambodia's microloans market makes up 9.7 per cent of the global microcredit industry.

Today, nearly one in five adult Cambodians has such a loan, according to Microfinance Index of Market Outreach and Saturation (MIMOSA), an independent research group. 

Although it's a good way to get businesses started, industry insiders are starting to question whether Cambodians are taking on too much debt, a situation that has led to political and economic crises in other large microcredit markets, like India.

More than 80 people committed suicide in Andrah Pradesh in south-eastern India in 2010 allegedly related to stress over their microloan debt. The crisis led to a backlash against the industry, as people asked whether it was adhering to its original humanitarian principles. 

Founded in 1970s Bangladesh as a way to alleviate poverty, microcredit traditionally provides loans to the poor, or people who cannot borrow from a bank, in order to start a business or buy agricultural equipment.

In Cambodia, where the economy was obliterated by decades of war, microcredit lenders helped recreate the banking industry after Cambodia returned to democracy in 1993.

These days, the industry is booming, achieving 48-per-cent compound annual growth from 2006 to 2015, according to the Cambodia Microfinance Association (CMA).

With interest rates of 2 to 3.8 per cent per month, microcredit loans are attractive propositions for many families. The rates are generally lower than informal lenders or commercial banks.

But now the market has reached over-saturation, according to MIMOSA, meaning that everyone who needs a loan already has one. The size of the loans is also growing rapidly.

"If you look at [microcredit institutions] that serve the poorest Cambodians, their loan sizes are 70 per cent of median income," said MIMOSA's Daniel Rozas, who researches microcredit crises.

"You start wondering, 'Ok if I imagine the clients they are serving ... These are not wealthy clients, so how is it that they have loans that large?'"

This question, and others, will be raised at the CMA's annual general meeting on December 2, when 73 lender organizations will gather in Sihanoukville to discuss the challenges facing the industry. 

While there have not been any national studies on how the loans are being paid off, one answer may lie in how Cambodians borrow and how the country's industries are changing.  

Group loans are increasingly popular and single borrowers often receive help from their entire family. At Chhuon's village, the headman said earnings from a new factory have raised family incomes and also the ability to borrow.

Across the country, 700,000 Cambodians – mostly from rural areas – are employed in the garment sector, and their income has helped raise family incomes across the provinces. Remittances from Thailand, where 1 million Cambodians are employed, are also keeping villages afloat. 

But while families are willing to help each other, it is unclear how stable this source of income will be in the future, as a downturn in the garment sector, or other hazards like a drought or health emergency, could impact people's ability to repay loans.

"It is always difficult for families to pay [back loans]," Chhuon said. "Sometimes if they cannot pay, they sell their land or some part of their land. Only a few families have done that so far."

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