During the 1970s and 1980s, Cambodia was torn apart by the aftermaths of the civil war and was slowly rebuilt during the 1990s through foreign financial support. In particular, microfinance contributed significantly to the socio-economic reconstruction of the country.
Contrary to other countries where microfinance exclusively emerged in densely populated and urban areas, Cambodia’s microfinance sector was mainly focused on smallholder farmers in rural areas. This population had minimal access to credit from regulated banks due to the nature of their high risk profiles and as a result, were often targeted by unscrupulous loan sharks. The microfinance sector was critical to providing fair and safe financial opportunities to the local population.
As the microfinance sector developed in Cambodia, several initiatives have been undertaken to protect microfinance customers. For example, the central Bank of Cambodia played a key role in developing adapted regulations for financial institutions in the sector. Additionally, microfinance institutions have engaged in the product development of individual loans in addition to group loans, changing weekly repayments to monthly and establishing rural points of presence and local agents. Several institutions also voluntarily agreed to conduct independent third party audits through programs such as the ‘Client Protection Principles ‘ and the ‘SMART Campaign‘.
A recent World Bank report (2018) confirmed the benefits of the growing microfinance sector in Cambodia. The report demonstrates how microfinance has resulted in positive effects on financial inclusion and the well-being of families. Further, the overall poverty rates in Cambodia dropped from 47% in 2007 to 14% in 2014 of overall population, and the established microfinance sector has diminished informal loan shark activity from 32% in 2004 to 6% in 2016.
The August 2019 report ‘Collateral Damage‘, published by the Cambodian human rights organisation LICADHO and the poverty organisation Sahmakum Tean Tnaut (STT), recently caused an international debate on the validity of microfinance in Cambodia, as the increased lending activity could push people into over-indebtedness.
As a global impact investor, Incofin is active in supporting financial inclusion in Cambodia, focused on rural areas.
At Incofin, we are well aware of the risks of over-indebtedness. In 2012, Incofin coordinated and financed an initiative to map the problem of excessive debt in Cambodia. This project helped create a credit bureau, which all authorised microcredit providers in Cambodia have to consult before providing credit.
In 2016, Incofin pioneered the ‘ Responsible Lending Guidelines ‘ initiative, which encourages ‘responsible’ lending. Since then, these guidelines have been adopted by the financial sector. Incofin only invests in institutions that consistently apply these guidelines. As a result, Incofin Investment Management has reduced its investments in Cambodia from US$ 84 million in 2016 to US$ 44 million today (from 15% of all Incofin investments in 2016 to 5% today). As such, Incofin has challenged the general trend of rampant growth in the Cambodian microfinance sector. Today, Incofin observes that there are a number of organisations in Cambodia that responsibly provide credit sees that a healthy and fair sector growth is possible.
Incofin currently supports the third phase of the ‘Responsible Lending Guidelines’, which, among other metrics, assesses the over-indebtedness in an effort to further improve lending methodology. Incofin believes that this research can provide representative data to complement the data provided in the LICADHO and STT report. The research results are expected in November 2019. Incofin hopes to stimulate a sensible debate on microfinance in Cambodia and to resolve remaining issues in partnerships with other financial players, such as the central bank.
Building on its years of experience and presence in the field, Incofin concludes that a risk of over-indebtedness exists in Cambodia; however, the microfinance sector has significantly contributed to the socio-economic development of the country, particularly in rural areas where alternative solutions were fundamentally unavailable. Together with other organisations, Incofin encourages the continuation and growth of responsible lending. Incofin’s goals include protecting the end customers in Cambodia and to responsibly support entrepreneurship.