The “microfinance” industry, long promoted as a way to help poor rural communities in developing countries, is pushing tens of thousands of farm families into a debt trap as they try to adapt to a changing climate. , according to a report.
The to studyconducted by researchers from a group of UK universities, looked at a range of case studies in Cambodia, where it found that easy-access loans had caused a “debt distress emergency” that was undermining borrowers’ long-term ability to cope with their new environment. .
Typically small, locally run organizations with a variety of funding sources, such as international investors, banks, and development agencies, modern microfinance institutions (MFIs) emerged in the 1970s and grew rapidly in the early 2000s. They were promoted as a way to provide financial services, typically small working capital loans, but also savings accounts and insurance, to the traditionally unbanked, such as women and people with very low incomes.
In Cambodia, about 61% of people live in rural areas, and 77% of rural households depend on agriculture, fishing, and forestry for their livelihood. according to the development agency USAID.
Many have seen how these traditional livelihoods are affected by a combination of climate change, overdevelopment and illegal logging and fishing, with increasing droughts, forest fires and unpredictable rainfall patterns that cause crop losses and damage to the ecosystem Cambodia’s vital Tonle Sap lake.
The establishment of hundreds of MFI branches since the early 2010s, which can be seen advertising services along highways across the country of 17 million people, has often hurt rather than helped those affected, according to the report published in September.
In their survey of about 1,800 borrowers, about half listed feeding their family as their main motivation.
But the authors say that loans are increasingly being taken to service existing debt from a mix of formal and informal sources, rather than for climate-smart investments. the loans are also seeing farmers put up assets, including their land, as collateral, even when the loans are high interest and have short repayment windows.
A Maxima Microfinance branch in Kandal province, Cambodia, in July 2018. The establishment of hundreds of local MFI branches since the early 2010s has often hurt rather than helped those affected, according to a report.
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NGOs estimate that around 167,000 Cambodians have sold their land to repay microfinance loans in the last five years.
The level of indebtedness for microfinance in Cambodia at the end of 2021 was $4,213 per capita, more than twice the gross domestic product per capita. About 2.6 million people have taken microcredits.
“The debt burden created by the climate change-microfinance nexus creates enormous challenges for many individuals and communities, causing physical and emotional stress,” said Ian Fry, United Nations special rapporteur on human rights in climate change, who also acknowledged that microfinance had been promoted. by the UN, the World Bank and other international agencies.
There is some industry oversight. MFIs must register with the National Bank of Cambodia, the country’s central bank, which in December 2021 stopped issuing new licenses and told institutions to improve the “quality, efficiency and affordability” of their services. In 2017, it capped interest rates on microloans at 18% per year.
The Cambodian Microfinance Association, a trade body, maintains that MFI lending has an overall positive impact on increasing income and land ownership, and has issued lending guidelines to “reduce the risk of excessive debt” for consumers. Also has hit back at criticism of the industry by NGOs and in previous reports. NBC and CMA did not respond to requests for comment.
Microfinance institutions globally had an estimated gross loan portfolio of $124 billion in 2019.
In some cases it has been found to have positive effects. A book from 2016 published by the World Bank argued that microfinance loans had reduced poverty and increased income in Bangladesh, and banking giant HSBC still promotes its financing of microfinance in the country.
But the World Bank, one of the earliest and longstanding advocates of microfinance, has also been warning for years of risks including over-indebtedness and the increasing commercialization of the industry.
Farmer in rice field. Kep. Cambodia. (Photo by: Pascal Deloche/Godong/Universal Images Group via Getty Images)
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In the 30 years of advocacy work carried out by the Cambodian human rights NGO Licadho, land grabbing it has been one of the most prolific issues he tackles on the ground, its director, Naly Pilorge, told CNBC by phone.
That’s partly a legacy of the murderous Khmer Rouge regime, which outlawed private ownership of land when it ruled the country from 1975 to 1979 and left survivors without title deeds in the tumultuous years that followed.
“We started noticing that in rural communities, workers were losing their land because of another problem, even when they had secured their land titles: they were losing it to MFIs,” Pilorge said. “How can a farmer farm without land?”
Licadho found that people were forced to migrate and find alternative work, which was difficult in the Cambodian economy, where agriculture represents about a fifth of GDPand the largest employer is the garment sector, which has been Hard hit by the Covid-19 pandemic Y EU sanctions.
Cambodia was severely affected by the pandemic, with Tourism revenues plummet from its all-time high of $4.9 billion in 2019 to just over $184 million in 2021, according to government figures.
Licadho has conducted four research projects on topics related to microfinance to highlight its risks, including one in 2021.
Motorists drive past a branch of Sonatra Microfinance Institution Plc in Phnom Penh, Cambodia, Friday, July 31, 2018.
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“The numbers didn’t make sense. In a country perceived as developing, which struggled with tourism due to Covid, the MFI sector was still growing at 30% each year, and the average loan went from around $3,000 to $4,000 Pilorge said. .
“Some of the people being offered these amounts have never seen $500 in cash, let alone $4,000, so when someone comes along and offers it in exchange for their land as collateral, it’s tempting.” Cambodia uses both the Cambodian riel and the American dollar.
The loan forms are complicated for the average person, he added, but “a significant portion is given to ethnic minorities who do not read or write Khmer. People sign with their thumbprints.”
In the capital, Phnom Penh, he added, he commonly finds people working seven days a week to pay off the growing loans from MFIs.
The 2022 report added its support to previous calls for the establishment of debt relief and interest suspension programs. That should be on par with efforts to cancel and restructure the national debt of developing countries, He said.
He also said that the international development community should redirect support from microfinance institutions towards more specific projects, arguing that there must be “stronger taxation and regulation of profits, dividends and capital gains generated by foreign owners.” of Cambodia’s Microfinance Institutions”. “
The UN’s Ian Fry called on the international financial community to “pay close attention to the recommendations in this report and seriously reconsider its approach to microfinance.”
Pilorge also took aim at international governments, financial institutions and investors who fail to prevent funds from being funneled into predatory activities.
“All these international investors, Asian, European, American, etc., still perceive MFIs as something positive because of the initial concept. It looks good, you get a high return, they all think they are helping the poor. But there have been red flags at all levels for 15 years and have been ignored,” he said.
“The investors are happy, they get the interest, the agents get a base salary and a commission, and the people who suffer are the poorest.”