The Capitalist Trap: A Microfinance Case Study in Cambodia

Microfinance Institutions (MFIs) have been considered a ‘miracle drug’ for developing countries around the world, especially with Muhammad Yunus having won a Nobel Peace Prize for its inception. Small loans are made accessible to the poorest of the poor, who would otherwise be unable to get any financial support. As a form of neoliberal development policy, MFIs promote sustainable economic development and reliance on free-market capitalism, i.e. minimal government intervention and market-based solutions, by providing low-income groups access to credit. Looking at Cambodia, however, MFIs paint a starkly different picture. With the highest rate of microfinance debt in the world, this supposed miracle drug is more akin to poison, slowly destroying the lives of more than 2 million Cambodians. One might dismiss this as a poor execution of a traditionally reliable economic model, but I argue that Cambodia’s MFIs are actually working exactly as designed. Beneath the noble veneer of financial inclusion and empowerment, MFIs in Cambodia were always intended to be a wealth extraction mechanism. 

Microfinance in Cambodia originally emerged in the agricultural industry, with the aim of uplifting farmers in rural areas by presenting a ‘safer’ and ‘more sustainable’ alternative to loansharks. With microloans, poor farmers are able to invest in physical capital and purchase fertilisers or equipment to support their irrigation systems or crops. Theoretically, the increased productivity of their land should then increase crop yields, boosting their income growth and allowing them the disposable income to redirect savings back into physical capital, potentially enabling them to break out of the poverty cycle. Alternatively, these loans can be channelled into paying off household bills like electricity and water, freeing up disposable income. On paper, MFIs seem promising: they can uplift the poverty-stricken and encourage financial independence, all while mostly relying on profit incentives. However, microloans are nonetheless often tagged with high interest rates relative to that of traditional banks. It is, therefore, not uncommon for small loans to snowball into an extensive financial loss if not paid in due course. Expecting farmers to experience an immediate increase in productivity and income after taking on microloans, when the very nature of their work is highly volatile due to supply shocks, is unrealistic. In this sense, the inherent premise of the microfinance system has been flawed since its inception. One drought is all it takes to decimate a farmer’s harvest and set them months behind on their progress of repayment. Thus, they are left at the mercy of profit-maximising lenders, who are anything but merciful. 

Cambodians who have low financial literacy due to their low income status are less able to rationalise notoriously predatory MFI lending practices, and they typically rely on MFIs the most. A survey conducted by JICA showed Cambodian respondents’ financial literacy scored an average of 4.13 out of 7,8indicating a relatively low baseline of understanding. Furthermore, rural Cambodian respondents in particular perceive MFI’s generally high interest rates as “reasonable” and worth the risk, whereas Cambodians with higher financial literacy scores perceive it conversely. Due to this information asymmetry, Cambodian borrowers are put in a vulnerable position each time they seek out a microloan. MFI credit officers deliberately capitalise on this vulnerability by “offering loans to clients who clearly could not afford them”. Sreymom, a humble rice farmer, at one point owed more than USD$12,000 in microloans, significantly higher than Cambodia’s own GDP per capita of $2,000. Many people like Sreymom are similarly forced into a debt trap, where they take on more loans to repay old ones, just to make ends meet. In fact, almost one-fifth of Cambodian borrowers have forgone meals to repay microloans, jarring evidence that these microloans have proven too difficult to repay.

The desperation to repay microloans is heightened by the fact that MFIs commonly consider land as collateral, forcing borrowers to sell their land if they cannot repay their debt. A report by ACLEDA Bank, which provides microfinance services, states 96.42% of loans are land collateralised, putting most borrowers in an extremely vulnerable position. The asset stripping is exacerbated by the fact that MFIs are emboldened by local authorities, like village chiefs or police officers, who further assist in intimidating borrowers. This stems from the Cambodian government giving local authorities the responsibility to issue land collateralisation for microfinance loans. So, power-hungry officials are similarly empowered to serve MFIs rather than locals. Borrowers who find themselves unable to pay back their loans can stand to lose their homes, and often sell their land anyway in order to pay for these loans. Out of 48 households who sold their land in Cambodia’s Kampong Speu province to repay debts, 44 of them did so in order to repay MFI and bank debt.

LICADHO do not read their own microloan contracts themselves due to poor literacy and complex jargon. Credit officers do provide summaries at times, though it is unclear whether crucial information is omitted or miscommunicated. It’s no wonder many borrowers lack fundamental comprehension regarding the process of land collateralisation and seizures. Farmers stand to lose their entire livelihoods and communities, and often resort to suicide to escape these debts, creating immense social consequences for their loved ones. There are instances of borrowers relying on their children for child labour to repay debts, where data suggests microloans almost double the rate of school dropouts of children as young as 10 years old among households with formal microloans. These children end up pursuing dangerous work that threatens their health and physical development.20 These are only some of the harms that extend far beyond financial debt borne by borrowers.