Cambodia’s huge microfinance sector is wobbling in the face of the pandemic, and the collateral damage that its 2m borrowers face could be catastrophic. The sector, which has enjoyed historic support of international financing institutions, could face a painful collapse.
Cambodia, despite having a population of only 16m, has the tenth largest microfinance sector in the world — around $10bn of loans, more than a third of the country’s GDP.
The development of the sector was hailed as a success story by international financing institutions (IFIs) who fostered its development as a means of increasing availability of credit, particularly in rural areas.
Acleda, one of the only large microfinance institutions (MFI) to be majority Cambodian-owned cites various IFIs in its “roll of honour”, deeming them “organisations whose support was indispensable to establishing the foundation on which Acleda Bank stands today”. These include the Agence Francaise de Développement, KfW, International Finance Corporation (IFC), the UN Development Programme and USAID.
But the sector has expanded out of control, according to Philip Mader, research fellow at the Institute of Development Studies. “There is simply no sensible explanation for two million Cambodians borrowing $10bn. The debt growth is spiralling out of control as people borrow on top of original loans.
“The IFIs encouraged a massive inflow of commercial capital and it has created a completely unsustainable debt bubble.”
With a pandemic crushing productivity around the world, Mader believes it is “difficult to see a private credit sector massively overleveraged to the poorest sector of society making it through a pandemic.”
Rescue package
Microfinance accounts for around a quarter of the country’s financial sector, meaning that its collapse would pose severe risks to financial stability.
Making matters worse, many of the loans are secured against land titles, meaning defaulting borrowers would lose their land. In June, Cambodia’s prime minister Hun Sen encouraged lenders to confiscate the property of borrowers who are delinquent on their loans.
Mader would like to see the IFI community put forward some kind of rescue package, perhaps purchasing the loans, then writing them down to sustainable levels and detaching repayment from land ownership.
A spokesperson for the IFC told GlobalMarkets that in the wake of Covid-19, as of June 2020, IFC’s financial sector clients in Cambodia had restructured more than 66,500 loans with a value of over $1bn.
“We have worked with the National Bank of Cambodia to set up a credit bureau to help strengthen Cambodia’s financial consumer protection framework, covering the regulated financial institutions, including microfinance institutions,” the spokesperson added. IFC owns 19.99% of Amret Microfinance Institution.