Unsustainable growth and lack of effective client protection in Cambodia’s microfinance sector have increased borrowers’ debts and led to the confiscation of their land when they can’t repay loans, according to a report by two Cambodian human rights NGOs.

Much of the growth has led to widespread over-indebtedness with borrowers’ land titles serving as collateral, said “Right to Relief: Indebted Land Communities Speak Out,” a 22-page report that examines the effects of microfinance lending in 14 communities in eight provinces across Cambodia, all of which are struggling with overwhelming levels of microloan debt.

Microfinance institutions (MFIs) in Cambodia charge high interest rates, require land titles as collateral, and target poor clients who are vulnerable to land loss, the report says.

“Many Cambodians are drowning in microloan debt, which is leading to drastic and serious human rights violations across the country, and many people are suffering in silence,” said the two NGOs responsible for the report — Equitable Cambodia (EC) and the Cambodian League for the Promotion and Defense of Human Rights (Licadho) — on the report’s website www.mficombodia.com.

As of December 2020, the country had 2.8 million loans totaling U.S. $11.8 billion dollars, as tracked by the Cambodian Microfinance Association, including loans from registered MFIs as well as small portfolios of several Cambodian banks. The average size of the microloans was $4,280, an amount that is higher than 95 percent of Cambodians’ annual income, the report said.

If borrowers have difficulty repaying microloans, they often are subjected to unethical behavior by credit officers, including the use of aggressive collection practices, threats, pressured land sales, the keeping of their land titles after repayment and, at worst, fraud, the report says.

It also notes that most MFIs frequently work with local authorities, including village and commune chiefs, to both offer loans and ensure repayments.

“These predatory practices have led to immense profits for MFIs and their foreign lending partners and have negatively impacted the land tenure security of Cambodians, especially vulnerable communities,” they said.

The report also indicates that bank and MFI options for restructuring or delaying microloan repayments during the COVID-19 pandemic have been insufficient and have failed to stop coerced land sales or other abuses from occurring during the health crisis, when many Cambodians’ lost jobs and income and couldn’t repay their loans.

In the community of Krang Tbaeng in Kampong Speu province, where all families are estimates to have MFI loans, with an average loan amount of U.S. $4,000, reported that the only thing that creditors ask about before issuing loans is whether the borrower has a land title. About one-third of families said they had sold land to repay their microfinance debts, and some borrowers have also made their under-aged children to work to earn money to repay debts.

“Now I have only 3,000 riel (U.S. $0.75) to buy fish twice a day. Before having debt, we could eat well,” one resident is quoted in the report as saying.

In the community of Chi Khor Kraom in Koh Kong province, an estimated 80 percent of families have average loan sizes of U.S. $5,000 from MNIs and from private informal lenders. But because of the lack of options to help repay what they owed, the borrowers were forced to sell their land to repay the debt, leading to reduced food consumption for their families and the inability to pay off older debt.

Villagers said that the “fear” created by credit officers in the community meant that they had to pull their children as young as 12 years old out of school and to do work so their parents could repay the MFI debts.

The report also noted that in one case, an MFF returned a borrower’s land title more than one full month after the person had repaid the loan and encouraged him to take out another loan.

‘Not just about credit’

Reports commissioned by international development agencies have routinely raised concerns about over-indebtedness and market saturation, resulting in what many borrowers report as the seizure of collateral — most often land — by microfinance institutions (MFIs) and banks, the report says. But when decisions about new investments are made, the institutions often disregard these reports.

“These actions are a direct result of the sector’s rapid growth, which has been fueled by investments from private and public actors, including the World Bank’s International Finance Corporation (IFC) and many state development agencies in Europe and the U.S.,” the report says.

In Channy, president of the Banking Association of Cambodia and president and group managing director of ACLEDA Bank, told RFA that he had not yet seen the report but had no obligation to respond to Equitable Cambodia or Licadho because they are not shareholders or debtors.

He pointed out that MFIs and banks already have their own policies to support their customers, however.

ACLEDA Bank is named in the report as one of several MFIs that has issued loans to residents of 12 of the 14 communities named in the report.

Providing microloans to the MFI and bank customers is a way of respecting human rights, In Channy said.

“We are actively implementing policies to help and support our clients as our institution grows in Cambodia,” he said. “We grow with our customers from the beginning. Banks are not just about credit, they have a wide range of services, including people’s savings, so when a bank accepts a deposit, the bank is also the debtor of the depositors.”

RFA could not reach government spokeswoman Phay Siphan or National Bank of Cambodia spokeswoman Chea Serey for comment.

Ministry of Economy and Finance spokesman Meas Sok Sen San declined to comment on the findings of the report, saying he was busy with a meeting.

Need for ‘urgent debt relief’

Rights groups have criticized Cambodian MFIs and banks as profiting from hundreds of thousands of borrowers who have lost their jobs and income during the COVID-19 pandemic as they struggle to survive.

Equitable Cambodia or Licadho, which help highlight human rights abuses perpetrated by private and public actors in Cambodia in local communities, gathered information from focus-group discussions with community members and interviews with individuals to look at the consequences of over-indebtedness among Cambodian microloan borrowers. The information then was verified with community representatives.

In all, 124 community members participated in the focus-group discussions, about two-thirds of whom were women. Researchers also interviewed nearly 47 individuals, about 80 percent of whom were women, the report said.

All the communities have dealt with land conflicts in the past, when companies or powerful individuals forced them off their land after the government granted the businesses economic land concessions. After years of fighting for land rights, the communities’ land tenure security is now being threatened again by the over-indebtedness crisis in the microloan sector, the report says.

The most common reasons people borrow money are to repay other debt, to cover health care costs, to build a house, or to pay for agriculture-related expenses, the report says. Other reasons include to pay for a child’s education or business expenses, to clear land, or to cover migration costs.

Options provided by banks and MFIs for restructuring or delaying microloan repayments during COVID-19 have been insufficient and have failed to stop coerced land sales or other abuses from occurring during the global pandemic, the report says

“Without the right to relief, borrowers will continue to face debt-driven hunger, child labor, migration, coerced land sales, and many other human rights abuses,” the NGOs say.

Among the reform measures the report recommends are the returning of land titles to borrowers and the need for systematic and widely implemented restructuring options rather than the haphazard ones currently in place. The report also calls for an investigation of human rights abuses perpetuated by some creditors.

“People who cannot repay their loans need urgent debt relief,” the report says.

“Investigations into human rights abuses must be conducted, independently of the MFIs themselves. These investigations must carry enforceable accountability mechanisms, both in terms of compensating borrowers who have been wronged and holding perpetrators accountable for abuses.”

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