With tears streaming down her face, 36-year-old El Sarifat describes how she is “terrified” of losing the modest wooden two-tier home she shares with 13 relatives. She returned to the house that perches on stilts over the Sangkae River, Battambong province last Friday after it was completely submerged by this year’s month-long flooding, which to date has left 134 confirmed dead.
But having weathered the impact of natural forces, Sarifat is now cowering under the threat of having to sell up the family home she’s lived in since 1979 to break free of an already suffocating debt cycle fuelled by multiple loans from micro‐banks and private moneylenders that this latest disaster has rendered unbearable.
Having spent the capital of an initial $500 loan from a microfinance institution (MFI) to set up her own fishing business, a fragile and sporadic revenue stream necessitated a further two loans to pay off the first.
Even before the floods hit, paying off interest and capital absorbed half the household’s income, leaving a paltry $60 a month to feed her large family. Severe conditions have cut off Sarifat and her family’s means of generating revenue for the past three weeks. The sizeable monthly interest rate of 3 percent (typically MFI loans are between 2.5 and 3.5 percent) is crushing her family.
“Our only hope was to delay payment until we could start fishing again. We went to one of the [MFIs] to ask to postpone the repayment schedule but the case was referred to the police. I was summoned to the station where I had to just take the officers’ abusive language and I had to promise to find other ways to pay. But there’s nothing we can do,” Sarifat explains via a translator.
As is now part of an established global trend, it’s the world’s poorest that are hit disproportionately hard by the effects of climate change and Cambodia is ranked in the top ten most vulnerable nations. Floods are part and parcel of the seasonal cycle here but Cambodia is increasingly susceptible to unseasonably heavy monsoons and an unfortunate combination of factors has made this year’s floods particularly devastating, affecting 1.7 million people and displacing nearly 120,000 so far.
In addition to the misery of loss of livestock, and destruction of crops and property, the monetary woes wrought by an acute vulnerability to financial shocks can leave lasting damage long after water levels have receded for Cambodia’s agrarian poor, often propelling households irretrievably into debt where short-term relief is sought through more borrowing at high rates.
There is a precedent for how this complex culture of money, which flows through an intricate debt network incorporating MFIs and private moneylenders, can be compounded by natural disaster. In the wake of the 2011 floods, the most severe in a decade during which 254 people were killed, a CARE report found that for half of all households surveyed further loans were a necessary financial lifeline. But plunging households deeper into risk of insolvency is commonly the first step towards an inescapable debt spiral according to Jan Ovesen, a leading Cambodian microcredit expert at Uppsala University, Sweden. “Once you’ve entered the vicious cycle of taking out a private loan to pay the MFI, and then take out a new MFI loan to pay back the private lender, it may be very hard to get back on your feet economically.”
Loans from private moneylenders come with much higher interest rates – as high as 65 percent – and are a common go-to for those facing insolvency at an MFI. They also fall beyond the remit of Credit Bureau Cambodia (CBC), the institution set up in 2012 to introduce tougher regulation to prevent over‐indebtedness and access to multiple loans through a credit-check system.
Once a borrower has fallen into the quagmire of multiple loans, or if profit isn’t being turned on economic activity, the likelihood of becoming over‐indebted or at risk of insolvency increases dramatically. This is a particular concern at a time of a force majeure, when additional loans are more likely to be devoted to tide over a family’s basic consumption needs than re-investment in entrepreneurial activities.
Nov Ny and Chum Chanty in Ohtaki province, Battambong, used to have a husband and wife firewood collecting business, until deforestation made it unviable. Chanty now works in a sausage-making plant, and Ny seeks wage labor on a day-to-day basis, but the floods have left them stranded. Using Ny’s mother’s land as collateral they spent their first MFI loan on a trailer that was subsequently paid off by a private lender. The creditor is now threatening a lawsuit after Ny has been in arrears for the last two months on interest payments. Ny could face prison.
The highly lucrative microfinance industry is big and it’s booming. Steve Vaile, a consultant at CBC, says the market is “too young” to put an accurate valuation on it because it’s “too high growth, it’s such an emerging market and it’s incredibly fluid.”
According to the Cambodia Microfinance Association (CMA), the volume of MFI loans reached $1.08 billion in the first half of 2013, up from $808 million at the end of 2012. Figures from Microfinance.org suggest the sector grew by a third in 2012 and Mix Market, the specialized microfinance ratings agency, puts the current number of micro-borrowers at 1.7 million. That’s half of all households in Cambodia.
Sabina Lawreniuk, a Cambodian rural development expert at King’s College London, says that MFIs are “swamping the provinces. They make it very easy and very attractive. Dapper representatives in super smart white pressed shirts from local branches cruise round on snazzy motorbikes, visiting villages and pushing products."
The industry regularly touts MFIs as a poverty alleviation mechanism. However, what began in the mid 1990s as a donor-funded NGO initiative has ballooned into a commercialized for‐profit microcredit behemoth with 39 licensed MFIs now operating in Cambodia. Investments in agriculture represent roughly a third of the industry, according to Sun Mony, director of the CMA.
In a forthcoming publication, Ovesen and Ing-Britt Trankell argue that the “poorest of the poor,” the purported priority of international development agencies, have been written off as a lost cause, whereby “their inability to engage in entrepreneurial activities confines them to oblivion”; despite the number of microcredit loans tripling between 2004 and 2012, poverty decreased at an annual rate of just 0.6 percent, half the rate of reduction for the nine years up to 2004.
Although it is now law in Cambodia that every MFI must run a credit report on a loan applicant, risk and risk management as well as the loan approval process is still down to the individual vendor. Mounh Sarath, legal activist and former chairman of Cambodia Vision in Development, argues that too often, with collateral in hand the more unscrupulous MFIs give inadequate consideration to the ability of borrowers to generate enough profit to service the loan and stay afloat.
A propensity to slash household living standards to maintain repayments is indicative of the value rural communities place on access to credit from MFIs. Although direct repossession is rare and the rate of default is often pointed to as a benchmark of success in the MFI industry (less than 1 percent in 2012), this belies a trend of borrowers selling up and shipping out to avoid defaulting in the short term. Exact figures are notoriously difficult to obtain but Sarath estimates that loans from MFIs leading indirectly to loss of land pre‐flood is in the region of 10-15 percent in rural areas.
With a dire lack of social safety nets in a country that has otherwise enjoyed trend‐defying growth, borrowers are left to the whims of individual vendors as to how arrears are recouped. With the World Bank putting emphasis on the major role of adverse shocks on livelihoods and the importance of adequate risk management, perhaps it’s high time MFIs shouldered some of the responsibility when the destitute are left languishing.
George Steptoe is a freelance reporter based in Phnom Penh.