Cambodia’s micro-loans accused of ‘predatory’ lending

Phnom Penh, Cambodia – Two prominent civil society groups in Cambodia have released a report detailing predatory practices by local microfinance institutions (MFIs), including coerced land sales.

The joint report, released on Wednesday by human rights group, Licadho, and land rights group, Sahmakum Teang Tnaut (STT), spans 10 communities in four provinces and the capital, Phnom Penh. The report includes cases of abuse, which paint an unflattering image of MFIs.

While microfinance loans were meant to be a social enterprise to lift Cambodians out of poverty, the report argues that instead micro-loan entities are taking advantage of borrowers while making massive profits.

There are roughly two million Cambodians with microfinance loans.

Of the 28 families interviewed, 22 experienced “coerced” land sales, while 13 turned to child labour to pay off debts and 18 had at least one family member forced to migrate for work.

Two anonymous micro-loan executives quoted in the report admitted that it is common practice to “regularly pressure clients to sell land” and use local authorities to “increase that pressure when necessary”.

In one case study, a woman was forced to migrate to Thailand in order to find work to pay off her loan from Cambodian bank Acleda.

While away, she insists she continued to make regular payments, but returned home to find her house had been sold anyway. She now lives in a small shack with her five children, one of whom is sick, but she is too afraid to take out another loan to pay for treatment.

“The bank doesn’t care,” she is quoted. “They just want their money.”

Another man was repeatedly told by the micro-loan companies, LOLC and HKL, to take out more loans to pay off his original loans, creating a debt spiral. Eventually, 11 men from HKL visited him to demand that he sell his land.

“There are no benefits of MFIs,” he said.

One of the executives admitted: “Land prices are the single most important factor for the MFI market right now.”

Rampant malpractice

Despite this rampant malpractice, the report says MFIs still enjoy a favourable reputation internationally. In a meeting on Monday, MFI executives told journalists that the violations in the report are “isolated incidents”.

“MFIs have thousands of loan officers. We’re not 100 percent sure that all loan officers will behave,” said Kea Borann, the CEO of AMK micro-loan company.

But all of the industry insiders interviewed by Al Jazeera said these problems are widespread and common knowledge.

One former employee of LOLC said that the social mission always takes a back seat to profit-making.

“That’s why I quit, basically when I figured it out,” he said. “I was like I’m not helping anyone.”

“At LOLC there was a big culture of making money and showing off wealth. The CEO had a massive jewel ring,” he said. “If you got promoted you got a bigger ring.”

LOLC CEO Sok Voeun said the MFIs “can’t control” if borrowers turn to dangerous practices like child labour and migration to pay back loans.

But the former employee said LOLC was taking advantage of low financial literacy and recklessly pushing borrowers into desperate situations.

“Some guy driving around the village knocking on every farm and saying, ‘hey do you want money?’,” he told Al Jazeera. “I felt the people taking these loans didn’t understand what they were getting themselves into.”

‘Untouchable’

He said the institutional power of the MFIs and nonexistent government regulation also made them basically untouchable.

Dos Dinn, the CEO of Amret, said criticism of MFIs is “a bit unfair”.

“NGOs and the public and the government, they expect too much because we are working with the poor,” he told Al Jazeera.

But many of the local MFIs receive investments from European and international institutions specifically because of their mandate to help the poor.

Triodos, a Dutch bank that partners with Acleda, claims to put a high emphasis on social enterprise.

“Responsible practice is one of the most important aspects for us in the selection of our partners,” the bank said in a statement.

While the bank said the report doesn’t match their “image” of Acleda, they take the allegations “very seriously”.

“Pending the outcome of our own investigation regarding these allegations, we will liaise with Acleda Bank on how to move forward,” the statement reads.

An employee at a global impact investment firm said the issues reported by Licadho were already well known in the industry. He said the international institutions backing MFIs might make changes in the wake of this report because “they’re worried about their reputations”.

‘Oversaturation’

He said the biggest problem in Cambodia is “oversaturation”, as MFIs aggressively push too many loans on people who should not be taking them in the first place.

“We work in other countries that don’t have the same problems as Cambodia,” he said.

Maryann Bylander, a researcher on migration and debt, told Al Jazeera that despite the limited sample in the Licadho report, the findings “align really closely with the kinds of things I’ve seen”.

“People having to sell their land or being dispossessed is an extreme situation but it’s certainly not rare,” she said.

Bylander noted that since 2009, over-indebtedness is cited as the second most common reason for selling land in Cambodia, only after medical emergencies.

She agreed that the systematic problems with Cambodia’s MFI industry are an “open secret”, and she would be surprised if international investors were not already aware.

At the meeting with journalists, the MFI executives referenced an internal 2017 study on over-indebtedness – which was never publicised – claiming it shows over-indebtedness is not a major issue.

But the numbers in the report, obtained by Al Jazeera, do not match this.

A total of 28 percent of respondents were objectively insolvent, while 50 percent reported over-indebtedness to some degree. Around a third of respondents reduced food quantity and quality due to debts and one-fifth reported migrating for work to pay off debts.

The report also states that land titles are the most common type of collateral, admitting this poses a “severe threat to low-income households”, but claims land repossession seldom happens.

Bylander says this is because most borrowers are pressured into selling their land and using that money to pay back the loan, effectively avoiding repossession but still driving the rural poor into landlessness.

The 2017 report includes no information on whether respondents sold land to pay back loans.

“They don’t want to know the answer to that question or don’t want it documented,” Bylander said.