UNDERSTANDING MICROFINANCE DEBT: Impact on families supported by This Life Cambodia
Since the discovery of the first case of the coronavirus in Cambodia in March 2020, its impact has been steadily increasing. The level of infection has so far been low, but Cambodia is nonetheless suffering because the economic impact of COVID-19 has left a wake of destruction. Families already experiencing disadvantage have been placed at an even greater risk of poverty due to the devastation of three major sectors: tourism, construction, and the garment industry. The sustained lack of income is leading to an increased reliance on microfinance borrowing nationally (Cambodia Economic Update, May 2020).
When COVID-19 was announced as a pandemic, it became obvious that the families This Life supports would be impacted even if the virus itself did not gain a foothold in Cambodia. We conducted a survey in March to gather baseline data, and at this time we discovered that families were already concerned about servicing their existing loans. They identified repayments alongside other expenses such as food and housing as one of their main financial concerns. We are already addressing the very immediate support families require by providing emergency food packages. We began to look at the available data about microfinance debt in Cambodia, and we quickly realised that more information was needed to fully understand the nuances of the situation.
This Life works with the most marginalised families and we wanted to understand their relationship with borrowing, and in particular with microfinance institutions (MFIs) and informal lenders. This Life currently supports 420 families across six programs. As they are experiencing more and more difficulty in meeting everyday expenses, we felt it would be beneficial to gather data from these families in relation to debt. In the last week of May and the first week of June, we surveyed families that participate in one of This Life’s six programs and have a caseworker supporting them. To date, we have surveyed 396 of 420 families. Our initial question sought to discover how many of the families we support were carrying microfinance debt. In Cambodia, 25% of adults have a microfinance loan. In contrast, 75% of the families we interviewed had at least one microfinance loan, and many had multiple loans.
A staggering 53% of families with microfinance debt did not know the interest rate of their largest loan. In contrast to this, nearly all families with debt (92%) were able to tell us the amount of their monthly repayments. This shows that the families are focused on the dollar value of the repayments rather than the interest rate that determines them. Given that 54.2% of Cambodians over the age of 25 have no education or did not complete primary school (Cambodia Socio-Economic survey 2017), a lack of understanding of the way interest rates are applied to loans might be a contributing factor in this lack of awareness. It would be beneficial to provide education on the way interest is calculated so that families can make a more informed comparison of available finance options in future. This would also protect them from taking on a new loan with conditions that might set them up for failure down the track.
The average value of a microfinance loan in Cambodia is around $3,800. It’s concerning that 41% of This Life’s supported families with microfinance loans had borrowed relatively small amounts of up to $1,000. This points to a landscape where families are increasingly desperate, and are living with no financial safety net. Add to this the fact that the most common reason for borrowing was to buy food and pay bills, and the picture becomes even more bleak. The reliance on microfinance loans, little or no means of servicing the debt, and a lack of understanding of the loan structure places these families in a position where lenders might easily take advantage of them.
Cambodia’s national data shows most small loans are taken with MFIs. In contrast, the families supported by This Life are far more likely to have debt with informal sources such as private money lenders. This is concerning because private money lenders are not regulated or bound by the same standards as MFIs. Their interest rates may be much higher than MFIs and they may require borrowers to agree to unfair conditions. For example they may be required to provide collateral such as a land title (as they would with an MFI loan) for a loan that amounts to a tiny fraction of the land’s value. Because private lenders are not bound by processes and checks to make sure the borrowers can service the debt, families may be attracted to them as an option when they are not able to access MFI loans. Over-reliance on private lenders puts families in a position where they are more vulnerable to financial exploitation.
Microfinance loans in Cambodia tend to be of short duration, often only one or two years in total. It is very common for families to have loans from several sources, and this means they are constantly juggling overlapping dates, different conditions, and a range of repayment amounts. For this reason, maintaining an accurate understanding of their financial situation at a fixed point in time is difficult. The result is that families are less likely to be empowered to make informed financial decisions. Consolidation of several small loans into one larger loan with a lower interest rate and better terms might benefit families and assist them to consider the implications of new debt that they might acquire in future.
Following this survey, we are convinced that microfinance borrowing, both from institutions and informal sources, will increase future difficulties for the families we support. After initial exploration of the survey findings, we can see three potential ways to assist families: protect them from acquisition of new loans with unfair or unrealistic conditions; assist them to manage current debt; and empower them to make more informed choices in the future. This approach will rely heavily on education, and development of resources to support this is the first step we intend to take in addressing this issue.
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