Much ink has been spilled identifying the many problems with the sector, but much less so about possible ways forward.
Stripped of the realities of human selfishness and incompetence, microfinance seems a perfect model. Include the poor in the financial sector, give them small loans to invest in their business or purchase property, and they’ll slowly raise themselves out of poverty, becoming asset-owning, self-reliant citizens. There is no shortage of research and articles showing just how badly this has gone in Cambodia. The latest addition, by a researcher at the National University of Singapore, was published in June. Read David Whitehouse’s write-up of that in The Diplomat.
One might argue that it’s no different from other utopian theories that run aground because of human nature. Or, again like all utopianists, the microfinance theory is sound but it has only ever been imperfectly implemented. That, or you can also look at Cambodia’s history and see how the French colonists and the Sihanouk regime (1953-1970) attempted to create “agrarian capitalism” by developing a cash system in the countryside and modernizing land ownership, yet instead created mass indebtedness. A recent book on Cambodian famines, by James A. Tyner, noted that “Sihanouk’s limited efforts to address land reform often led smallholders to contract unpayable debts and to suffer subsequent landlessness,” which rose from 16 percent in 1962 to 20 percent eight years later. Plus ça change.
So we’ve been informed about the impact of microfinance in Cambodia (and your columnist had spilled much ink in the debate, including here in The Diplomat). Rarely is it asked: what’s the solution? Are there alternatives? Is it now too late to do anything bold enough to fix the problems? Does the sector just need some tweaking, some reforms that are actually enforced by a sharp-toothed regulator, as well as some debt forgiveness from the lenders and a national debate about the merits of microfinance longer-term? Or does it need to be stripped away, a revolutionary change to a different sort of lending?
Back in 2020, I gave a seven-point list of reforms that could still be useful, not least the formal separation of credit for “economically productive activity,” such as loans to open or expand a business, and credit for “urgent expenses,” such as unexpected medical bills. (One chief problem is loans taken out for short-term “unproductive” uses carry higher interest rates than they should, leading to spiraling indebtedness to repay the original debt.) I’d also still recommend the creation of a “Microfinance Borrowers Association of Cambodia,” a body to represent the interests of borrowers, and of an independent “Microfinance Council” with seats given to government officials, MFI executives, borrower organizations, and civil society groups. The intention of the government might have been to undermine trade unions, but the formation of a National Council on Minimum Wage, a tripartite body of labor unions, employer’s associations and the government which meets annually to debate minimum wage increases, has been useful.
Most important, though, there needs to be a genuine national debate, stripped of the dogfight politics. And this debate needs to be about whether the microfinance sector needs some minor adjustments: some reforms, some changes to how microfinance institutions judge the effectiveness of a loan and a regulator with real teeth. Or, instead, is the way microfinance works in Cambodia a spent force, needing to be ended and replaced by something entirely different? On the surface, and unless all Cambodians are happy to accept a considerable short-term cost, there appears no way of ending microfinance altogether. (“There were 3.06 million active microloans in Cambodia in 2022, in a country with only 3.6 million households,” Whitehouse informed us.) That points to the need for incremental reforms.
But who will take the lead? Does it need intervention from this government? Its past intervention didn’t go well with the lenders. If it’s to be the state, it isn’t abundantly clear who should take the lead. Would it be the finance ministry, the agriculture ministry, or the National Bank of Cambodia? For competency, I’d choose the father-daughter partnership of Chea Chanto and Chea Serey at the central bank, but it more closely represents lenders, not borrowers.
In an ideal world, the government would convene a far-reaching working group that includes relevant ministry officials, representatives of the microfinance institutions, scholars and delegates – a genuinely national body, such as the one I suggested in 2020. It needs some foreign oversight, such as from the United Nations Development Programme. Think of it as something like peace and reconciliation. And the microfinance lenders will have to reconcile their own mistakes; their own greed and malpractice; their own lobbying to avoid a tougher regulator. All this presupposes that the national mood must change, that there needs to be a genuine desire by all sides to sit down and flesh out a plan of action, before even getting to the stage where actual reforms or policies are decided upon.
The ruling Cambodian People’s Party, which is guaranteed a complete victory at the general election on July 23, last week announced its six-point campaign pledges. Almost all the points promised more welfare for ordinary people. As far as I’m aware, microfinance reform wasn’t mentioned. But it’s the root cause of much of the debt and impoverishment the ruling party says it will solve during its next mandate. Something bolder is needed.
The article has been originally published by The Diplomat.