Impending COVID-19 health measures and high levels of micro debt pose a serious concern for the approximately 2.4 million Cambodians with a combined outstanding debt of $8 billion, according to a World Bank report released this week.
The report, titled East Asia and Pacific: Countries Must Act Now to Mitigate Economic Shock of COVID-19, warned that Cambodia needs to ease credit and provide help to indebted households in the hope for borrowers and lenders to survive the upcoming economic shock from COVID-19 restrictions.
Khmer Times spoke to a local tuktuk driver yesterday and was told, “I borrowed almost $3,000 from a microfinance lender at the capped repayment amount [18 percent interest per annum] to purchase my vehicle. However, because of the mass closures and tourist exodus from Phnom Penh due to COVID-19, I have been unable to find customers to make money, while still being stuck with my monthly repayments.”
In response, the executive director of the Cambodia Microfinance Association (CMA), Phal Vandy said that COVID-19 is a global issue and will inevitably affect both lenders and borrowers worldwide, so Cambodia will not be immune. However, he said the CMA believe the situation is controllable.
“Currently our sector remains in control with applications and deposits continuing as usual, although we have started to observe some withdrawal amounts from small-scale deposit-taking customers. We are not currently facing a shortage of liquidity reserves,” Phal said.
“In regards to borrowers struggling to pay back any of our microfinance institution’s members, we have told our members to follow the policy set by the National Cambodia Bank in dealing with the situation. This includes exercising flexibility with any issues about loan repayments for customers genuinely affected by the COVID-19 pandemic,” he added.
The Central Bank has outlined guidelines for all CMA-membered microfinance institutions to follow if clients are struggling with paying back their loans. This includes lenders first determining when financial difficulty arose and the circumstances borrowers are in. After assessing these factors, lenders can grant grace periods and loan restructures to those borrowers who will be able to resume repayments in the near future.
Microfinance institutions came under fire last year when a controversial report entitled “Collateral Damage”, published by human rights group LICADHO and NGO Sahmakum Teang Tnaut claimed that Cambodia had the world’s highest average per capita microfinance institution debt of about $3,370. It highlighted that very high interest rates and the use of land titles as collateral, combined with pressure to repay loans have led to a “predatory form of lending” by microfinance institutions.
It also criticised microfinance institutions as they currently operate because they pose a direct threat to the land tenure security of millions of people in Cambodia and when land is seized, it is often income-generating. Loss of land, therefore, affects the entire family livelihood and identity.
However, in response, the report was deemed “highly biased” and not “statistically representative,” by various MFIs and government organisations. They pointed to the small sample size and inadequate fieldwork, coupled with a lack of scientific research methods as causing major flaws in the findings. Multiple choice questions were also skewed to elicit negative responses so that the overall report would be negative, was another criticism by the report’s detractors.