Microloans Work for Some, Leave Many in Debt

SVAY CHRUM commune, Kandal province – Nearly everyone living in Pann Sopheatra’s village, just across the Mekong River from Phnom Penh, has either taken out a microfinance loan or knows someone who has.

Out of the 700 families who call Svay Chrum village in Khsach Kandal district home, only a few haven’t borrowed from one of dozens of microfinance institutions (MFIs) that lend about $1 billion a year to those who would struggle to borrow from commercial banks.

Only when they received the money, however, did many of Ms. Sopheatra’s neighbors realize how high the price would be.

After accruing too much debt, some of her neighbors have had to sell their land and homes and relocate to more rural areas, Ms. Sopheatra, 35, said, sitting inside her tailor shop where she and her sister make and mend colorful dresses for weddings and other occasions.

Others have fled the province, or the country altogether, to avoid the lending institutions that they can’t afford to pay back, she added.

“Since they established the banks and microfinance, people get more poor,” Ms. Sopheatra said. “The people who are taking the loans never think about their ability to pay them back.”

About a year and a half ago, Ms. Sopheatra and half a dozen others took a four-year, $15,000 loan from Prasac, one of the nation’s largest microfinance institutions. She borrowed the largest chunk of the group loan—$5,000—of which she pays back about $200 a month at a monthly interest rate of 1.4 percent.

She used the money to build a larger brick-and-mortar store, allowing her to expand her business. Ms. Sopheatra, who has been in business for five years and earns about $1,000 in profit each month, is comfortably able to afford the monthly repayments.

For those like the 35-year-old, who use microfinance loans as they were originally intended—to empower small business owners to grow their enterprises and generate more income—access to credit can be a game-changer.

But on the other side of the coin, those who rely on loans for purchases of non-productive goods, like motorbikes, for everyday household consumption, or for seeds and fertilizer in the hope that the harvest will provide a return, it’s a very different story. These are the loans with the highest interest rates, up to 30 percent in some cases, justified by the cost of setting up operations in rural areas or the staff required to oversee lots of small loans rather than fewer large ones.

By the time the National Bank of Cambodia (NBC) announced it would establish an annual interest rate ceiling of 18 percent last Monday, effective next month, farmer Moeun Sophea, 48, had already soured on the industry.

“I don’t want to use microfinance any more because I always worry thinking about it and cannot sleep when I owe money,” Ms. Sophea said last week.

Ms. Sophea borrowed $8,000 about nine months ago from Acleda Bank, a commercial operation with a microlending division, at a monthly interest rate of 1.5 percent to be paid back over three years. The loan was meant to grow her income from lettuce and rice crops, but a second successive year of drought ruined her harvest, and what seemed like a reasonable financial plan.

“I’m worried that I will have no money to pay back” the loan, said the mother of five, who also lives in Svay Chrum village, adding that she had been able to pay back previous microfinance loans that she invested in her crops.

Her only option is to go even further into debt.

“If I cannot earn any money to pay back Acleda, I will borrow from someone else,” perhaps a relative, she said.

Capping the annual interest rate at a maximum of 18 percent may sound like good news for borrowers like Ms. Sophea, and that seems to be how the government wants its policy to be received.

However, experts have predicted that MFIs will likely respond by witholding smaller loans, forcing low-income borrowers into the arms of unregulated loan sharks, who charge much higher rates and can be unscrupulous in their efforts to see their money returned.

Those likely to suffer the most are people who borrow money to spend on daily food purchases, medical expenses or to service existing debts, said Seng Kimty, a Cambodia-based economic development specialist.

Mr. Kimty recently published a paper that found that households taking up microfinance loans usually “become worse-off in terms of household welfare, because the borrowing reduces household expenditure per capita.”

“The high interest rates and non-productive use of microcredit are more likely to plunge borrowers into a vicious cycle of high-interest indebtedness, in particular when the earnings are too low to cover the credit costs,” he said in an email last week.

The MFI sector has expanded rapidly in recent years, with the number of registered microfinance institutions in the country growing from 67 to 167 from 2012 to 2015, according to a National Bank report. In five years, the number of households receiving credit from MFIs and NGOs nearly doubled, from about 1.1 million in 2011 to about 2.1 million as of November, according to National Bank data.

Chou Ngeth, senior consultant at Phnom Penh-based Emerging Markets Consulting, said there was a strong correlation between levels of financial literacy among borrowers, the number of loans taken out by each borrower, and the chances of defaulting, citing a report from his firm released in September.

“This means the little financial literacy they have, the more loans they tend to take. The more loans they take, the more chance to get default,” he said in an email.

The rate of default for microfinance borrowers in the nation—0.77 percent in 2015, according to the NBC—is “very low,” said Hiroshi Suzuki, chief economist of the Business Research Institute for Cambodia, in an email.

Suspiciously so, according to some. Apart from borrowers taking out one loan to pay back another, there is also an incentive for MFIs to keep the rate low, by restructuring or reclassifying bad debt to keep their loan portfolio looking healthy.

No one denies, however, that some people are struggling to pay off their debts, and the results can be crushing.

Am Ley Eam, 53, a farmer and sugarcane juice vendor, lives next door to Ms. Sopheatra’s dress shop. She has previously taken out loans to build a house for her daughter and son-in-law and to develop a fish farm, which failed when all the fish died.

“I took a loan from a small MFI to repay the big one. And another small loan to repay the first small loan,” she said. “I took $3,000. Then, it became $8,000.”

“In the end, I sold some land.”

Ms. Ley Eam, who grows rice, lotus and sugarcane, said she currently owes Amret, another prominent MFI, about $3,000.

“Now, my business is not running well. I’m two or three days late on my payments. The economy is also going down. It is hard to find money,” she said. “I have money troubles.”

She has resorted to borrowing money from a neighbor, who charged her $20 interest on a $100 loan. Asked why she would risk taking out another loan, her answer was blunt: “Because I have no money.”

Representatives from Prasac and Amret did not reply to multiple requests for comment last week. Mr. Kimty, the economic researcher, said the shift away from loans that generate income for borrowers was to blame for the present situation.

“The MFI markets are sustained if they work not only for the lenders, but also the borrowers,” he said. “The success of borrowers are the MFIs’ success. This is the original promise of MFIs.”

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