Companies such as 60 Decibels, which provide marketing services to microfinance institutions (MFIs) in the form of research, are in a tricky position as they seek to defend loans made with the aim of poverty reduction in developing countries.
On the one hand, the “research,” which consists of short telephone surveys carried out with customers selected by the MFIs themselves, has to serve the interests of the microfinance industry which pays for it. At the same time, the output also has to retain some kind of credibility. The balancing act involves a strategic retreat from positions that are judged too difficult to defend.
60 Decibels, which describes itself as a “social impact measurement company,” has decided that the explosion of lending in Cambodia’s microfinance industry falls into the indefensible category. This is clear in the company’s Microfinance Index 2024, published in November.
Overall, the index follows the usual upbeat narrative, peppered with positive personal snippets from handpicked developing country borrowers. The tone shifts when it comes to Cambodia. The oversaturation of the market is clear and outcomes are worse than in other markets, the marketing communication says. Only 6 percent of Cambodian clients said their quality of life had “very much improved” due to microfinance, compared with 26 percent in other Asian countries. Almost a third of Cambodian borrowers, 32 percent, said they found their loan repayments burdensome, versus 20 percent in the rest of Asia. Increased financial worry after taking a loan was much more widespread in Cambodia than the Asian average, at 39 percent versus 16 percent.
These outcomes, 60 Decibels says, may reflect the fact that Cambodia is poorer than other countries in Southeast Asia. So far, so good – but the industry justifies itself by saying that microfinance loans help to reduce poverty. 60 Decibels adds that there are signs of progress in Cambodia, with fewer clients now reporting reducing food consumption to make repayments. It’s not exactly heady and idealistic stuff.
Cambodia’s microloan portfolio in 2023 stood at over $16 billion, an absurd level for a country of 16 million people. The average size of a microloan in Cambodia is over $4,000, among the highest in the world and far larger than microfinance pioneers intended.
The microfinance market in Cambodia “has grown aggressively and, it appears, may be over-saturated,” said Pranav Sridhar, head of sales for Europe and Asia at 60 Decibels. There have been efforts by regulators and local industry bodies to provide oversight and training to Cambodian microfinance institutions to “minimize harm,” he said. The government’s response has concentrated on providing training for MFIs, and promoting a voluntary MFI code of conduct and financial literacy for borrowers.
For 60 Decibels, the crisis in Cambodia simply creates new opportunities. Negative microfinance outcomes have occurred because there is a lack of gathering and sharing of standardized customer-level data for the industry, Sridhar said. That, of course, is a gap, which 60 Decibels wants to be able to fill.
A more far-reaching response to the crisis was presented by Cambodian human rights organizations LICADHO, Equitable Cambodia, and Sahmakum Teang Tnaut to the U.N. Human Rights Council during Cambodia’s Universal Periodic Review in April and May. LICADHO says that the Cambodian government has threatened and intimidated borrowers and local NGOs that report on adverse microfinance impacts, ensuring that credit officers continue to act with impunity.
An essential reform, LICADHO says, would be to protect whistleblowers exposing human rights abuses arising from predatory lending. There needs to be an independent body to receive borrower complaints and determine enforceable remedies. Indigenous peoples in Cambodia are particularly vulnerable, with some microlenders using as collateral improper individual land titles that overlap with protected indigenous communal land, LICADHO says. Many indigenous people are not fluent in Khmer, so don’t understand the demands credit officers make of them.
MFIs in Cambodia must end the practice of forcing land sales outside of the judicial system, and end the use of fees, which means real interest rates often exceed the legal maximum of 18 percent. They must adopt rules to prohibit requiring land titles as collateral for all new loans. The government, LICADHO says, should begin developing alternate sources of capital, such as community-run banks, savings groups, and cooperatives that do not require land titles as collateral. In wider policy terms, it argues, the government’s failure to ensure universal access to free healthcare and education forces Cambodians to turn to microloans to cover essential costs.
Developing countries have much to learn from the Cambodian experience. 60 Decibels is certain that growth in the global industry can continue. It says that there are now more than 7,000 microfinance institutions worldwide, yet 56 percent of clients report that their current provider was the first to offer the loan services they are now using.
The debacle in Cambodia shows that the industry cannot be relied upon to lend at a reasonable quantum in a small market, where the need to achieve scale gives an incentive for predatory lending. There’s no point simply hoping that MFIs will regulate themselves. Effective oversight at the national level needs to be established before, not after, a major build-up in lending.