The watchdog of the International Finance Corporation (IFC), the World Bank’s private lending arm, will review a complaint alleging it has caused “grave harm” by funding microfinance lenders in Cambodia.
The complaint was made by the local advocacy groups LICADHO and Equitable Cambodia (EC), who announced in a joint statement on Tuesday that the IFC’s Compliance Advisor Ombudsman had agreed to look into their claims that IFC loans and investments in the country’s ballooning microcredit sector have led to widespread human rights abuses.
The complaint, which the two groups made on behalf of hundreds of thousands of debt-burdened Cambodians, alleges that the IFC has “failed in its obligation to conduct due diligence and supervise projects to ensure compliance with performance standards.”
According to the complaint, the IFC has over the past five years channeled more than $400 million to six lenders in Cambodia – ACLEDA, Hattha Bank, Sathapana, Amret, LOLC and Prasac – that included “direct loans, syndicated loans, equity investments, and loans from IFC-backed funds.” Together, these six institutions hold about 75 percent of Cambodia’s microloans.
Cambodian households now hold nearly 3 million microloans totaling more than $14 billion, according to the statement, which called for “a sector-wide audit of the country’s microloan sector is urgently needed to identify the scope and severity of harms associated with these loans across the country.”
“The IFC’s reckless investments and lack of due diligence regarding its microfinance projects have destroyed lives and wrecked communities across Cambodia, and they must take steps to offer real relief to these borrowers,” Naly Pilorge, LICADHO’s outreach director said in the joint statement.
For two decades, microfinance has been pushed by foreign donors as a panacea to Cambodia’s rural development challenges. Technocrats and officials in far-off capitals have conjured visions of rural poverty melting away as financially empowered villagers use microcredit loans to invest in local businesses and haul themselves – and the country as a whole – up the ladder to “middle-income” status.
The reality in Cambodia has been very different. As microcredit sector has expanded, debt levels have risen rapidly, burdening hundreds of thousands of mostly rural families with crushing and sometimes insurmountable debt burdens. In a report published in March 2020, the Microfinance Index of Market Outreach and Saturation (MIMOSA) found that Cambodia’s rate of credit saturation was the highest among the 11 countries it studied. More than that, it found that loan sizes in Cambodia had grown rapidly over the years, burdening many borrowers with more debt than they could repay.
By this point, Cambodian NGOs had already been sounding the alarm about microfinance for some time. In an August 2019 report titled “Collateral Damage,” LICADHO and the urban rights NGO Sahmakum Teang Tnaut documented how skyrocketing debt levels had generated a range of human rights abuses, “including coerced land sales, child labor, debt-driven migration, and bonded labor.”
All of the 28 microfinance borrowers interviewed in the report described how their situation worsened after taking a loan from a microfinance institution (MFI). The report found that some Cambodian households had taken out at least on additional loan, either from an informal village moneylender, to repay an existing microfinance loan. It concluded that “MFI loans and informal private loans are used in tandem, forming a cycle that drives clients further into debt.” As Human Rights Watch noted in late 2020, donors including the IFC and the U.S. government’s International Development Finance Corporation made significant investments in Cambodian microlenders after these concerns had been widely aired in the media.
As with the subprime mortgage crisis in the United States, Cambodia’s microfinance disaster has been enabled by the aggressive marketing of loans to people who can’t afford them. The LICADHO report described the “reckless lending of many MFI credit officers,” who were found were “offering loans to clients who clearly could not afford to repay them and in pressuring clients to repay loans through coercive land sales or other unethical measures.” The MIMOSA report noted that client protection is “uneven,” and there are “no clear [government policies] regarding aggressive sales and debt collection practices.”
The situation in Cambodia reflects a broader crisis that has unfolded across swathes of the Global South over the past decade-and-a-half. In 2011, I reported on the dark flipside to the sunny MFI narrative, following reports that people in Bangladesh were selling their kidneys to cover repayments to microfinance institutions. “While the majority of microcredit institutions are doubtless well-intentioned,” I wrote then, “in many places an unregulated and overzealous lending market has led to rashes of personal indebtedness and desperation that are a far cry from the development outcomes originally envisioned by experts and donors.”
At its root, the problem reflects the limitations of a particular neoliberal worldview: That technocratic means can be used to solve problems that are rooted in questions of power and political economy. In the case of Cambodia, the persistence of rural poverty reflects much more than a lack of access to traditional forms of finance.
Since the 1990s, land conflicts and the related stagnation of the rural economy have driven tens of thousands to leave their land and enter the urban workforce or pursue sometimes perilous work abroad. All of these are side effects of an extractive political economy in which the nation’s resources – including land, the asset most precious to rural Cambodians – function as a currency of political loyalty. The country not only lacks the regulatory legal frameworks that could hold bad lenders in check; its elites lack any real incentive to introduce any systems that could operate independently of the play of obligation and loyalty.
This “technocratic fallacy” is an error that foreign governments and international financial institutions have particularly often in Cambodia since the 1990s, in part because of their own preferences and in part because Prime Minister Hun Sen’s government has taken steps to ensure that donor projects and reforms do not impinge upon the interests of powerful economic actors. The result has been a seamless symbiosis and unspoken bargain between neoliberal technocracy on the one hand, and the self-serving interests of a powerful ruling elite on the other.
The IFC watchdog’s willingness to take the complaint submitted by the two Cambodian NGOs is a positive development, and has implications for how the IFC chooses to support microfinance lenders in other parts of the world. Whether it makes much difference to those affected in Cambodia, however, is less clear.
If the complaint to the IFC ombudsman is upheld, it could result in some form of debt relief for those most affected. For those indebted microfinance clients who have already been forced to sell their most precious asset – their land – there may be no way back.