World Bank: Investigating Cambodia’s Micro-Loans


(Bangkok) – The World Bank Group should investigate allegations of forced land sales and other rights violations related to predatory lending and over-indebtedness in the microcredit sector, Human Rights Watch said today. These long-standing problems worsened during the economic crisis resulting from the Covid-19 pandemic.

An external report released in March 2020, the Microfinance Index of Market Outreach and Saturation (MIMOSA), based on data provided by the World Bank Group’s International Finance Corporation (IFC), revealed serious problems in the microcredit industry. in Cambodia. Civil society groups and investor-commissioned reports have corroborated these findings, which underscore the need for action to protect microcredit borrowers in the country.

“International donors to Cambodia’s microcredit sector should not fuel a system that abuses the rights of struggling heavily indebted borrowers during a public health and economic crisis,” said Phil Robertson, deputy director for Asia at Human Rights Watch. “The International Finance Corporation and other microfinance donors should conduct human rights-guided field surveys before investing further in the sector.

The MIMOSA dashboard, which measures market penetration for microcredit borrowers, found that Cambodia’s credit saturation rate was the highest among the 11 countries surveyed. The size of loans in Cambodia has continued to grow rapidly over the years, leading to insurmountable debt distress among borrowers. The MIMOSA report noted that client protection is “uneven” and that there is “ [government policies] regarding aggressive sales and debt collection practices.

He came to the “disturbing finding” that foreclosures of collateral, which are mostly land in Cambodia, are an integral part of collection practices. He also concluded that “the regulation of customer protection needs to be considerably strengthened” and noted that “self-regulation [of Cambodia’s micro-loan sector] Is insufficient. “

Human Rights Watch in July highlighted concerns expressed by Cambodian nongovernmental groups about rights violations in micro-loans. Among the most pressing concerns are forced land sales – when loan officers pressure borrowers to sell land to pay off their debts. The Covid-19 pandemic has exacerbated the current microcredit debt crisis, causing severe damage to the country’s most important economic sectors and the loss of hundreds of thousands of temporary and permanent jobs.

The government and micro-loan providers have failed to adequately address this crisis, instead offering insufficient loan “restructuring” solutions to financially distressed borrowers – frequently increasing their overall debt burden with significant interest charged on loan repayment extensions. The rights of borrowers to an adequate standard of living, including access to adequate housing, are also not respected.

The loan restructuring program should suspend accrued interest, in addition to suspending debt repayments, Human Rights Watch said. The IFC should work with the Cambodian government to establish a debt restructuring program that does not increase the debt burden or force delinquent borrowers to sell land to repay their debt, with the aim of ‘prevent forced land sales.

Despite serious concerns raised in the MIMOSA report, the IFC in June invested an additional US $ 50 million in two major microcredit providers in Cambodia, Amret Plc. (Amret) and Hattha Kaksekar Limited (HKL), to “continue to lend to small productive enterprises” and “to support Amret and HKL working capital loan programs to Cambodian micro, small and medium enterprises […]. The US government’s International Development Finance Corporation announced an additional $ 50 million loan to HKL in October.

Human Rights Watch wrote two letters to IFC regarding the forced land sales and the over-indebtedness problem of Cambodian borrowers, exacerbated by Covid-19, and recommended that the findings of the MIMOSA report be reflected in its future decisions to investment.

In its response of August 28, the IFC acknowledged that “there are legitimate concerns about indebtedness” and “over-indebtedness” in the microcredit sector in Cambodia. In a November 5 follow-up letter, IFC said it had worked with the Cambodian Microfinance Association (CMA) to issue guidelines to CMA members that would prevent any borrower from having more than three microfinance loans. active. However, a 2016 MIMOSA report found that borrowing from several microcredit providers – called “cross-borrowing” – was not widespread in Cambodia.

A bigger problem is the rapid growth in loan sizes. Between 2004 and 2014, the amount of loans increased four times more than the annual income of borrowers. Local civil society groups have also reported that borrowers generally evade restrictions on the number of loans they have by soliciting additional loans from informal lenders to repay micro-loan providers.

The IFC’s response also referred to the Financial Consumer Protection Unit of the National Bank of Cambodia, which has set up a hotline for borrowers. But civil society reports have revealed that a large portion of the country’s largely rural population is unaware of or unwilling to trust the complaint mechanisms run by the national government or the microcredit providers themselves.

The IFC said its investments in the sector were “aimed at easing the burden of paying their [clients’] borrowers, who have experienced production and trade disruptions and declining incomes due to the pandemic “, and sought to facilitate entrepreneurial activities, commercialize agriculture and improve” the overall standard of living of people “. However, civil society research shows that most micro-loans are not used to generate business income, but are instead used for food, health care and school fees to ensure “healthy living and living.” worthy ”. A recent survey showed that the most common reason for borrowing during Covid-19 was to pay off other debts.

The IFC said it performs due diligence, through assessments, and monitors how lending practices and borrower protection measures are implemented. However, the IFC did not specify how it dealt with a client’s non-compliance. Many of IFC’s clients have come under scrutiny in various civil society and media reports that point to predatory practices towards financially troubled borrowers.

In its responses to Human Rights Watch, IFC did not provide concrete steps to translate the findings of the MIMOSA report into IFC’s investment decisions in Cambodia. Rather, the IFC simply stated that the report “will inform follow-up consultations during the year on other mitigation issues related to high-risk revolving loans.”

“If IFC is serious about protecting Cambodian microcredit borrowers, then it is crucial that it sets clear criteria for their clients based on human rights standards and establishes independent accountability mechanisms to monitor compliance,” he said. said Robertson.

Human Rights Watch has repeatedly urged the IFC to act in accordance with the United Nations Guiding Principles on Business and Human Rights. IFC and its clients have a responsibility to respect human rights and to prevent and minimize rights violations. This should include strong systems of transparency, accountability and redress for any harm the projects may cause. IFC’s sustainability frameworks, based on the United Nations Guiding Principles, define IFC’s commitments and client requirements, assessing social risks and the impacts of its investments.

“The World Bank is not a newcomer to Cambodia’s poor record on land grabs and rights violations, so it should act immediately on these concerns about forced land sales,” said Robertson. “IFC and international donors to Cambodia’s microcredit sector should urgently investigate alleged rights violations, make their findings public and call on the Cambodian government to address these issues before many more lose their land and Their houses.

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