Research commissioned by the Cambodia Microfinance Association (CMA) and carried out by the M-CRIL ratings agency signals a retreat from the claim that there is a verifiable connection between microfinance lending and poverty reduction.
The availability of microfinance loans, or microcredit, is “a necessary but not a sufficient condition” for reducing poverty, Sanjay Sinha, managing director of India-based M-CRIL, said at the presentation of findings in Phnom Penh on January 19. Cambodia’s rapid economic growth, he said, is the main reason why poverty has been reduced.
The CMA has clearly been working hard to control the content and presentation of the research. Sinha told me a year ago that he aimed to publish it around March 2023, the date at which the research was completed.
In any event, Sinha’s comments are the clearest retreat to date by the microfinance industry from claims that it directly contributes to poverty reduction. Bangladeshi microfinance pioneer Muhammad Yunus, awarded a Nobel Prize in 2006, was so confident in his innovation that he claimed that in future the only way to learn about poverty would be to visit a museum.
Such over-excited claims have long been undermined by critical analysis. Lesley Sherratt, a director of Temple Bar Investment Trust in the U.K. and a visiting lecturer at King’s College in London, wrote in her 2016 book that there is a small minority of microfinance winners of about 5 percent, while at least 10 percent of borrowers become worse off.
The book, “Can Microfinance Work? How to Improve Its Ethical Balance and Effectiveness,” finds that the percentage of losers is higher in markets where there is an oversupply of microcredit. “The average impact of zero for microcredit looks to be masking a positive impact for a very few least-poor clients and a negative impact for the poorest, presumably least able to bear it,” Sherratt wrote.
CMA chairman Sok Voeun hailed the M-CRIL findings as showing that microfinance makes a “significant contribution to economic growth and reducing poverty.” In fact, the results fit squarely within the consensus that microfinance has little overall impact.
The survey involved 3,262 households in 10 Cambodian provinces. Two-thirds of the sample reported improvement in their lives in the last five years, while 25 percent said their lives have deteriorated. Only about 18 percent of people attributed any kind of change directly to loans, the report says.
About 13 percent said that borrowing helped improve their lives, while 5 percent said that debt had made their lives worse. The length of time over which clients borrow “does not seem to affect their poverty status” with the proportion of poor households remaining at around 11-12 percent in older and newer groups of clients, M-CRIL found.
The research reflected the long-term shift by microfinance away from trying to address the very poor in favor of finding more profitable borrowers higher up the income chain. The proportion of households in the survey who were below Cambodia’s National Poverty Line was 11.6 percent, versus a national rate of 18.3 percent. So there were less extremely poor people in the sample than there are in Cambodia overall.
Even the weakened claim that microfinance is a necessary condition for reduced poverty has scant evidence in the research to support it. M-CRIL did not have a control group of poor people who did not borrow. This would have enabled the differences in outcomes to be measured.
An analogy helps to make the technical point clear. At the start of the COVID-19 pandemic, Madagascar’s President Andry Rajoelina touted a locally produced herbal drink as a cure. Most people who caught COVID-19 recovered, so the claim was hard to disprove, and some people who used the drink might well report that it had done them some good.
To establish that the drink had cured COVID-19 would be a different matter. Two groups of people with COVID-19 would need to be studied – one group of people which was given the drink, and one group which was not. If there was a clear difference in recovery rates, it would be fair to conclude that Rajoelina was onto something. As far as I know, no such study exists.
Just as many people recover from COVID-19, so many people will become less poor in times of rapid economic growth. Studies commissioned by the microfinance industry such as that produced by M-CRIL don’t have any control group of people who don’t borrow. Academic studies using control groups have for many years failed to detect any clear evidence of beneficial impact.
There’s nothing to suggest that Rajoelina’s herbal brew has any detrimental effects. The same can’t be said of microfinance. Microfinance-related suicides have been reported in Cambodia, continuing a pattern already witnessed in India and Sri Lanka. The International Finance Corporation’s Compliance Advisor Ombudsman (CAO) in August 2023 launched an investigation into a complaint filed by the Cambodian League for the Promotion and Defense of Human Rights (LICADHO) and Equitable Cambodia.
The investigation concerns investments by the World Bank’s International Finance Corporation in Cambodian microfinance operators Acleda, Amret, Hattha Bank, Prasac, LOLC and Sathapana. The CAO cited “preliminary indications of harm” caused by microfinance lending, “including loss of land, livelihood impacts, impacts on Indigenous Peoples, and threats and reprisals.”
Much of the public discussion at the M-CRIL presentation focused defensively on minimizing the perceived damage caused by microcredit. Sanjay Sinha said that borrowers with over $10,000 in assets are “able to survive” periods of repayment distress, saying, “It’s not a significant matter of concern.” M-CRIL found that repayment stress affected 24 percent of borrowers with a concentration among poorer households. This had results including borrowing from family and friends, with the research not considering the impact on those people of having to come up with the loans.
Further results included sales of land, motorbikes, and borrowing from moneylenders, whose activities Yunus proclaimed microfinance would end. Sanjay Sinha also said that some households reduced food consumption “for short periods” but no information was offered about if or when a normal poverty-level diet was resumed. The threshold for debt distress used by M-CRIL was 70 percent of income being used for repayment. Borrowers in Western developed countries will have a hard time getting a bank loan which requires them to spend more than a third of income on repayment – even if they have jobs with formal contracts, which most Cambodian borrowers don’t.
Overall, there is not the slightest reason to believe that poverty reduction can be achieved in any poor country which does not have rapid economic growth, nor any evidence that microfinance helps where that growth is present. According to M-CRIL, the total Cambodia microfinance portfolio of $9.4 billion at the end of 2022 was worth about 30 percent of GDP. M-CRIL argues that the growth of the microfinance sector contributed to GDP growth, but investment in any sector of the Cambodian economy on the scale seen in microfinance would have done the same.
The retreat on claims about poverty reduction is far from meaning that the industry has stopped seeking new markets for expansion. Tanmay Chetan, a board member of M-CRIL, was CEO of Cambodian microfinance lender Angkor Mikroheranhvatho Kampuchea (AMK) between 2003 and 2007. Chetan then founded Agora Microfinance, which purchased AMK in 2012.
Agora sold its controlling stake in AMK in 2018, and exited Cambodia in 2020. In Cambodia, Chetan has said, there is now a group of “more aggressive operators,” which results in some people “borrowing more than their circumstances allow.” Research from LICADHO published in August 2019, while Agora was still in Cambodia, found that AMK borrowers had sold off land to repay their loans, with some children dropping out of school and into child labor to help service debts. Agora recently secured a lending license in South Africa. Chetan has told The Africa Report that he has applied for a license in Botswana and plans to do likewise in Malawi.
A long-standing criticism of microfinance impact studies is that they don’t look beyond the immediate project environment. This applies also to the M-CRIL presentation, which doesn’t take any account of the institutional and regulatory framework in Cambodia. The clearest lesson from the Cambodian microfinance experience to date is that lending, in a weak institutional and regulatory environment, can rapidly increase to levels that cause repayment stress.
That lesson has possibly been understood by Agora and M-CRIL. But especially in small national markets, no single lender is able to control the extent to which competitors will adopt aggressive lending and recollection practices to seek to grab a slice of the limited pie. Regulators in small poor countries which are yet to experience large-sale microfinance operations, and greater caution by the Western development institutions which invest in microfinance, are the only realistic lines of defense.