Dear Milford,
As someone active in the Cambodian microfinance sector, I have been shocked by your assertions that 45 percent of Cambodian households are spending up to 45 percent of their income on microdebt servicing and that more than ever the principal reason for taking out a new microloan is to repay existing microloans. These very serious assertions have prompted me to go through the two sources you have cited. I can find similar assertions in the Phnom Penh Post article, but, puzzlingly, not in the underlying Ministry Report. Can you please clarify how you have come about your findings?
As a matter of fact, the impression I get from reading the government report is by far not as bleak as you say:
- The proportion of Cambodian households having a debt amounted to 31.6% of total households in 2014. The proportion has decreased from 34.2% in 2013 (p.96, table 7 in the government report).
- The main purposes of borrowing are household consumption needs (29.1% of total borrowing) and agriculture (27.1%). Servicing of existing debts accounts for 2.7% only (p.100, table 10, idem).
- Average monthly interest rate on household debt has fallen from 2.9% in 2009 to 2.6% in 2014 (p.101, table 11, idem).
- The main items in household consumption are food and beverages (44% of total expenditure) followed by housing, water and electricity (19%). Servicing of existing debt is not explicitly mentioned, so I presume that it is under "miscellaneous goods", which account for 11% of expenditure (p.107, table 2, idem).
I look forward to hearing from you. Kind regards,
Mingyee
Sent: Monday, November 02, 2015 12:22 PM
Subject: [MFP] Re: Microcredit-driven financial inclusion in Cambodia is destroying the lives of the poor
In this week of FI2020, it is appropriate to step back a little from the egregious PR and have a look at the growing number of country examples where the financial inclusion movement has indeed achieved its goal, and everyone is able to access as much microcredit (and other financial services) as they want, and disaster has ensued. Cambodia would appear to be one such country.
It has long been known that the huge and growing level of microcredit-driven over-indebtedness among Cambodia's poor has inflicted serious damage on their lives and future prospects. Very few micro-businesses have succeeded in the artificially-created hyper-competitive local markets, and the very many micro-business failures have all too often plunged their hapless owners into even deeper poverty. One of the worst aspects of all has been that failed micro-business owners often have to forfeit long-held family land to repay their unrepayable microdebt, especially around the capital city of Phnom Penh. Indeed, some of the main MFIs are now the owners of significant property assets as a result of defaulted clients simply handing over their land as full and final repayment of their microdebt, which they then bundle up into a larger bloc and sell on to property developers at a very high price. There is much talk on Cambodian websites and in local newspapers that this phenomenon is a deliberate accumulation strategy being adopted by some of the major MFIs in Cambodia, and elsewhere in the region (such as in Myanmar) – it is known as 'debt farming' – which would be pretty scary if true. I have only come across partial evidence for this phenomenon, but maybe someone else has strong evidence of this taking place?
Of course, this encroaching disaster is water off a duck's back for the senior managers and equity shareholders in the main microcredit institutions in Cambodia, notably ACLEDA and AMK, who have long been doing very well in recent years thanks to high salaries and bonuses for managers, and generous dividends and share capital appreciation for equity holders. However, according to the latest survey by the Ministry of Planning's National Institute of Statistics conducted in collaboration with the Swedish International Development Cooperation Agency, the extent of the damage inflicted by microcredit sector on Cambodia's poor would now appear to be reaching a crescendo. This survey revealed, first of all, that a whopping 45 per cent of Cambodian households are spending up to 45 per cent of their income on microdebt servicing. This is hardly a scenario associated with poverty reduction and sustainable progress for Cambodia's poor. Second, and even worse, more than ever the principal reason for taking out a NEW microloan is simply to repay a bundle of EXISTING microloans. This would appear to suggest that the microcredit sector in Cambodia has now reached the final stage of the boom-to-bust financial cycle under capitalism described by the great US financial economist, Hyman Minsky – the famous 'Ponzi stage', where new debt is largely taken on simply to cover the installments due on existing debt. One might therefore speculate that the end for Cambodia's microcredit sector cannot be too far off. So before they push other developing countries down the same damaging 'universal financial inclusion' trajectory as in Cambodia, the FI2020 folks might first provide an explanation for why things are going so seriously off the rails there and what might be done about it?
A good local article on the issue is this one:
The original NIS report produced by the Ministry of Statistics can be found here:
If anyone has any further insights into the deteriorating situation in Cambodia, please get in touch (I'm preparing a report for one of the international development agencies on microcredit-driven over-indebtedness and Cambodia is one of the countries I was asked to look at)
Milford
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Posted by: Hsu Ming-Yee <mingyee0706@yahoo.fr>
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