KEAN SVAY, KANDAL PROVINCE, Cambodia — Five years ago, Lun Sam Ath took out a $12,000 loan to build a new wooden house and repay a previous loan that she had used to buy a motorbike.
The 45-year-old mother of five owed $200 a month to Amret, one of the country’s largest microfinance institutions (MFI), which she figured she could repay with help from her older daughter’s earnings from a garment factory job. But then her husband contracted hepatitis, and treatment was costly.
After her husband died, Lun Sam Ath, who made about $180 a month in a garment factory, fell behind on payments. So, she decided to sell their house — along with a 10-by-20-meter plot of land. But with Cambodia experiencing a post-COVID real estate slump, it remains unsold.
The MFI credit officers seeking repayment started pressuring Lun Sam Ath.
“They would come to my home with several people, three to five motorbikes, and also bring the village chief with them,” she said during a recent interview with VOA Khmer.
She couldn’t handle the stress and shame. Last June she abandoned her home and rented a room for $40 a month, living with her three younger children, ages 9 to 14.
In February, she moved to the capital, Phnom Penh, where she sells face masks on the street. She screens phone calls “since I am afraid the bank agents will call me” she said. “They [the MFI] can take my land and sell it now to pay off the loan.”
Lun Sam Ath’s loan was one of nearly 2 million outstanding microfinance loans in Cambodia as of the end of 2023, according to the Cambodia Microfinance Association (CMA). Cambodia’s population is about 16.5 million, and researchers say the ratio of microfinance loans per person is the world’s highest.
The MFI sector was once hailed as a key tool for lifting Cambodians out of poverty by injecting capital into small businesses or farms unsuitable for traditional loans. Instead, thousands of Cambodians found themselves in a debt trap, taking out increasingly burdensome loans to pay back other loans, and taking increasingly extreme measures to escape the cycle of indebtedness. Substantial research conducted in Cambodia and in other developing nations found that while microloans helped many, especially women, the small loans have also made lives, like Lun Sam Ath’s, worse.
Advocates say the MFIs in Cambodia frequently fail to clearly explain the risks of these loans to borrowers, who are often financially illiterate and use their land as collateral.
Two local rights groups, Licadho and Equitable Cambodia, released a report, Debt Threats: A Quantitative Study of Microloan Borrowers in Cambodia, based on a survey of 717 households in Kampong Speu province, which is about 50 kilometers from Phnom Penh.
“Widespread over-indebtedness has led to significant numbers of serious human rights abuses,” the study said.
It found 6.1% of households had sold land to repay a debt, while about 3% of households had a child drop out of school specifically due to a loan, often to start working to help repayment.
The study, released in August, also found a spike in people increasing their borrowing to repay other loans. In 2012, 3.45% of loans went to repaying existing loans, which increased to 34.8% of loans in 2022.
Am Sam Ath, operations director at Licadho, called for urgent intervention from MFIs and the government to protect borrowers. But he said loan officers employed by MFIs were often perpetuating the problem.
Rather than approving loans for income-generating activities, these institutions were issuing loans for house repairs, medical expenses or repaying other loans.
And Cambodia is seeing increasing reports of credit officers resorting to intimidation or other unscrupulous tactics to compel borrowers to repay their debt, Am Sam Ath told VOA Khmer in January.
That month, the CMA released a study touting the “transformative impact” of microfinance loans.
Kaing Tongngy, a spokesperson for the association, said there were more than 2 million borrowers across the country, “so it is unavoidable that some clients were unable to pay.”
The CMA impact study, conducted by development research agency M-CRIL, found that 31% of the 3,200 microfinance borrowers surveyed experienced substantial economic benefit and life improvements, while 36% reported some improvement over the past five years.
And while nearly 6% of borrowers had reported selling some land over the past five years, 20% reported purchases of some land, according to the CMA report.
Licadho’s Am Sam Ath said the CMA study “focused mostly on positive work of MFIs, but little on negatives.” He and other like-minded advocates want to see “solutions and improvements in the sector.”
The growth of MFIs has been staggering. Starting with about 50,000 clients and a total loan portfolio of more than $3 million in 1995, the microfinance sector provided loans to 2.1 million households with a portfolio of $9.4 billion by the end of 2022, according to the CMA. That accounts for more than 30% of Cambodia’s estimated GDP of $29.96 billion.
MFIs often tout the relatively high repayment rates as proof of the industry’s health. The National Bank of Cambodia in 2022 reported a sectorwide non-performing loan rate of just 2.5%. But researchers from Cambodia and Singapore said an obsession with “portfolio quality” was masking the true cost to individual borrowers.
“These indicators hide how people are juggling debt from informal lenders to repay their loans. Consequently, claims about the social impact of microfinance are based on a flawed understanding of household borrowing practices,” said their report, released last year with a grant from the National University of Singapore.
“Lenders not only fail to measure the impact of their services, but they also have a conflict of interest in reporting on the abuses that their services have caused. So long as repayment rates are considered an indicator of success, then the risks associated with juggling debt are likely to increase,” it added.
According to a report by the National Bank of Cambodia, its officials have imposed fines or taken other administrative actions against MFIs that fail to follow existing regulations.
Cambodia’s microfinance industry is being investigated by the International Finance Corporation’s (IFC) watchdog’s Compliance Advisor Ombudsman (CAO), because of the reports of forced land sales and other human rights violations from advocacy organizations.
CAO is reviewing six of Cambodia’s top IFC-funded microfinance institutions including Amret, which issued Lun Sam Ath’s loan. It declined to comment on her case in an email to VOA on March 16.
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