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Cambodia’s microfinance a growth engine, not a debt trap

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The recent controversial report entitled “Collateral Damage” published by LICADHO and Sahmakum Tean Tnaut has stirred public debate and created misunderstanding on the whole situation of the microfinance in Cambodia. Several international media outlets have used the report to name and shame Cambodia for its failure to manage this growing sector.

The fact that both these nongovernmental organisations rely on foreign funding is completely overlooked.

That the Cambodian microfinance industry was actually started by nongovernmental organisations to assist the needy and poor who at that time could not excess formal lenders was also completely ignored, deliberately and not out of ignorance.

Now that the industry has grown and the NGO’s which founded them have moved on to become banks, some of these self centered entities have now turned on the very people they wanted to assist in the guise of protecting the poor. This is a fallacy.

Their motives are questionable and the report is more of a means to an end, to continue receiving foreign funding and go on to paint the country in a negative manner, rather than highlighting the gains and positives.

The report itself acknowledges the limitation that it is not “statistically representative” given the sample is small and the field work was done within only three weeks. The lack of longitudinal, scientific research method makes the report seriously flawed. Therefore, the reporters and analysts should treat the report with caution and critical mind.

The questions with multiple choice answers provided is in essence a ‘suicide pact’ of sorts to elicit leading answers to probing questions as any answer chosen is a negative response which in turn ensured that the final report itself turned out to be negative.

This is a biased report, which aims to tarnish the image of the booming licensed micro lenders. It does not in any way reflect the industry as a whole and demonises the industry as well as vilify the genuine borrowers.

Reporters and analysts must try to understand the big picture of the impacts of microfinances on Cambodia’s economy and livelihood of the people rather than overgeneralise some extreme cases.

The 28 case studies presented in the report can be extreme cases or even outliers; hence they do not represent the realities. These unfortunate borrowers do not in any way or in any methodology and analysis, reflect the industry as a whole.

At the epicentre of the report is the fact that the issue at hand, is recognised by the concerned authorities. However the manner in which this essentially non consequential news has been sensationalised by the international media and blown out of proportion is beyond comprehension.

One wonders whether this report is a pre-emptive and premeditated strike against Cambodia’s financial sector in order to cripple micro lending and drive the needy genuine borrowers helpless and hopeless.

This report is a classic example of NGO’s having hidden agenda’s to tarnish the country as the only way these organisations can sustain themselves is to paint a bleak picture. This is the true nature of the beast – the NGO’s whose agenda is not one to assist the community but rather, to mislead the same community they pledge to assist and destroy them with a masterstroke of misinformation and deceit.

Unfortunately, as in any industry, there are unethical practices, an issue which regulators and the private sector are dealing with regularly with better oversight, self-regulation, and code of conduct.

Microfinance has been regarded as the vehicle to eradicate poverty especially in the post-conflict developing countries like Cambodia. A study by Daraka Chay, published in the Journal of Development in Practice in 2011, illustrated that microfinance enhance income generation and job opportunities among the poor in Cambodia, especially in empowering women.

Another study by Izah Mohd Tahir and Siti Nurzahira Tahrim published in the International Review of Business Research Papers in 2015 found that “the microfinance institutions in Cambodia have exhibited an overall efficiency of 92% during 2008-2011 suggesting an input waste of 8%”.

The World Bank’s report in 2019 found that, “growth in microcredit is having positive financial and welfare impacts for households in Cambodia”.

The report argues that, “the share of households who borrowed from formal sources of credit quadrupled during 2004-2016. This shift increased access to finance for segments of the population who previously relied on unregulated money lenders and provided households with longer loan durations and lower effective interest rates relative to informal lending”.

These three scientific researches help us understand the positive impacts of micro-financial institutions in Cambodia. Of course, we need to be aware of the risks arising from the nonperforming loans and household’s debt entrapment. Financial illiteracy makes the clients of the microfinance exposed to greater risks.

There are more than 70 microfinance institutions operating in Cambodia, as licensed by the National Bank of Cambodia (NBC). The numbers are growing. As such, regulating such booming financial industry is indeed a challenge for the Kingdom.

The vision of integrating microfinance into the regulated financial system arose out of a consultative process among the government, the NBC, and leading Microfinance Institutions (MFIs). However, as in all industries, self-regulation is still the most effective mechanism to curb excesses.

Among self-regulation the MFI sector has undertaken, through regulations enacted by the NBC are strict adherence to ethical competition practices, especially with regard to preventing over indebtedness by borrowers.

This includes policies of not issuing loans to any borrower who already has loans from two or more financial institutions reporting to Credit Bureau Cambodia (CBC and agreeing not to issue any additional loans to groups or individuals that already has loans with three or more financial institutions.

Microfinance stakeholders have made remarkable strides in advancing a commercial approach to expand pro-poor financial services in Cambodia.

The NBC has taken measures to improve the financial condition and access to credit, while trying to build a harmonious interest between the lending agencies and the clients.

Undoubtedly, microfinance has become an important tool for poverty alleviation in Cambodia. It is not by chance but from the support of all humanitarian agencies and the development partners. It is at a stage that MFI can have self-sustainability. Thus, MFI is running at market mechanism that is based on the demand and supply principle.

The Cambodia Microfinance Association (CMA), formed in 2002, has also played a critical role in capacity building, knowledge sharing, information sharing, professional networking, and overseeing conflict resolution between microfinance operators. The CMA has also contributed to consumer protection through the promotion of public awareness.

The CMA initiated Client Protection Principles (CPP) to help protect borrowers from over-indebtedness that arises from their inability to meet their financial obligations on time as agreed in a credit agreement.

The CPP helps microfinance institutions to practice good ethics and smart business. These principles are the best practices adopted from international networks and national MFIs to develop pro-client codes of conduct and practices as the CPP makes it clear that the financial products and services offered by MFIs are appropriate to client needs and do no harm.

Regulators and the industry acknowledge the cases of abuse and this is why financial literacy was launched at a national level in cooperation with the Ministry of Education and other self-regulated measures have been put in place by the industry themselves. For instance, the Memorandum of Understanding on Temporary Lending Guidelines was signed by the CMA members.

The aggressive financial literacy programme undertaken by financial institutions is a step in the right direction for the MFIs to educate the public at large on how a financial system works and provide a set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.

Once the clients are aware of the risks and opportunities of getting access to micro credit, the cases relating to non-performing loans and abuses will be reduced. Financial literary is the most effective way to protect the consumers.

Unfounded, misleading and flawed reports surely did not find its own way to international media without a well-funded, coordinated and well executed misinformation and slander campaign. However, this may be part of a wider campaign against Cambodia as a whole and not just the MFI.

The headlines of the various news agencies speak volumes of the chronic disease which plagues Cambodia – misinformation. The report titled “Collateral Damage,” is indeed a report to unleash an attack, the “collateral damage” of which, is actually an attack on a country and not just an industry.

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