Microfinance was meant to help the world’s poor, but in Cambodia, it’s plunging people deeper into debt

Microfinance was hailed as a way to change the lives of hundreds of millions of people without access to credit. It worked so well that Grameen Bank founder Muhammad Yunus was awarded a Nobel Prize. But then, banks jumped in to get in on the profits. To manage high debt levels, Cambodians are migrating for work, eating less and even pulling their children out of school.

The World

October 6, 2023

By Hanna Hett

Kum Sreymom, a Cambodian rice farmer, talks shop with other farmers. They’re sitting in the shade of a farm shed on the vast flood plains of Tonle Sap, Cambodia’s great lake.

It’s mid-December 2022, and the waters have recently receded. Surrounding them is an expanse of newly planted rice fields.

Sreymom’s had a challenging few months. Both droughts and floods damaged her rice crops. Russia’s invasion of Ukraine caused fertilizer and fuel costs to skyrocket. Rice prices went down.

Woman looking out from behind metal interior — Kum Sreymom looks out onto the rice fields planted on the Tonle Sap, Cambodia’s great lake, flood plain. She’s had a challenging year rice farming—with droughts, floods and the high cost of farming inputs forcing her to take out multiple loans. Hanna Hett/The World

“The difficulties are quite many. But as a rice farmer, I have to keep going,” she said.

Sreymom had to take out loans from multiple lenders, including microfinance institutions, or MFIs, to make ends meet.

By the end of last year, she owed more than $12,000 — over six times Cambodia’s GDP per capita of $2,000.

Two women standing next to each other — Kum Sreymom had to take out over $12,000 USD of loans to keep farming last year. The rising cost of farming inputs, like fertilizer and fuel, alongside low rice prices and climate change have driven her deep into debt. Hanna Hett/The World

That’s when a bank worker showed up at her door.

“We were late to pay them for 10 days. They said if we do not have money for them today, they will put a sign up to sell our land.”

She and her family live in a house owned by her mother and used the land title as collateral for one of the loans, a common practice in the country.

Most indebted country in the world

Cambodia is the most indebted country in the world by volume of microfinance debt. At the end of 2021, microfinance loans averaged over $4,000 per capita.

Academics and local nongovernmental organizations have raised concerns about the practices of MFIs. Not only do lenders threaten to sell borrowers land if they can’t pay up, but research shows that to pay off debts, Cambodians have taken on additional loans, eaten less, migrated for work and even pulled their children out of school.

“These MFIs, the process and the way that they’re conducting their business is predatory. It’s a business. It’s not for the good. It’s not pulling people out of poverty. It’s doing the opposite,” said Naly Pilorge, the outreach director of the Cambodian League for the Promotion and Defense of Human Rights (LICADHO). She has focused on the country’s growing debt crisis for years.

Where did microfinance come from?

Microfinance promised to help lift millions of people from poverty in the Global South. It’s a way for low-income individuals to access credit — something they couldn’t receive from traditional financial institutions, like banks.

It came to Cambodia in the 1990s as a poverty-alleviation strategy after decades of civil war. At first, microfinance was run by nongovernmental organizations with a number of checks and balances on the size of loans, the number of loans given and interest rates, according to Nithya Natarajan, a lecturer at King’s College London.

But in the early and mid-2000s, commercial banks took over microfinance and wanted to make more profit.

“Those checks and balances were largely eroded because the commercial push meant that the emphasis was more on expanding the market, trying to reach new consumers all the time. So, it went to more poor and more precarious households,” she said.

Green field landscape and a tree in the forefront — Rice fields stretch as far as the eyes can see in Battambang Province in Cambodia. Battambang is recognized as the rice bowl of Cambodia. Hanna Hett/The World

But Kaing Tongngy, the head of the communications department at the Cambodian Microfinance Association, a group that represents the industry, said that the industry has adequate regulations.

“In Cambodia, when you provide a loan to a client, you are legally required to check their credit history, and you have to strictly analyze their cash flow or repayment capacity,” he said.

International investment

Many international lenders profit from microfinance. In the Global North, it’s often thought of as part of an environmental and social goods portfolio, Natajaran said.

Last year, local nonprofits LICADHO and Equitable Cambodia filed a complaint to the International Finance Corporation (IFC), a sister branch of the World Bank, for funding six microfinance institutions that have allegedly harmed lenders.

After several delays, the watchdog arm of the IFC recently said it will investigate. Vuthy Eang, the executive director of Equitable Cambodia, said that the IFC has breached its own environmental and social policies.

“We want to make sure [that] not just the IFC, but also the borrowers follow the policy and provide remedies to the affected people,” he said.

The investigation will take up to 18 months, Eang said.

In a statement to The World, an IFC spokesperson said, “There are legitimate concerns about indebtedness in the microfinance sector.”