Hit by climate change, farmers in Cambodia are risking everything on microfinance loans

According to a report, tens of thousands of farming families are being pushed into debt traps as they attempt to adapt to a changing climate.

The study, conducted by researchers at a group of U.K. universities, looked at a range of case studies in Cambodia, where easy-access loans had caused an "overindebtedness emergency."

Microfinance institutions, which are generally small, locally run organizations with a variety of funding sources, emerged in the 1970s and grew rapidly in the early 2000s. They were promoted as a way to provide financial services, usually small working capital loans but also savings accounts and insurance, to the traditionally unbanked, such as women and people on very low incomes.

In Cambodia, around 61% of people live in rural areas, and more than 75% of rural households rely on agriculture, fisheries, and forest for their livelihoods, according to the development agency.

Many have seen these traditional livelihoods affected by a mix of climate change, over- development and illegal logging and fishing, with increasing droughts, wildfires and unpredictable rainfall patterns causing crop losses and damage to the environment of Cambodia.

The establishment of hundreds of MFI branches since the early 2010s, which can be seen advertising services along roadsides around the country of 17 million people, has often harmed rather than helped those affected.

Roughly half of the borrowers said feeding their family was their main motivation.

The loans are being taken up to service existing debt from a mix of formal and informal sources. Even though the loans are high-interest and have short repayment windows, farmers are still putting their assets up as security.

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 harmed rather than helped those affected, a report found.

Over the last five years, 167,000 Cambodians have sold their land to pay loans.

$4,213 per capita is more than double the gross domestic product per capita. More than 2 million people have taken out loans.

Ian Fry, United Nations special rapporteur on human rights within climate change, said that the debt burden created by the link between climate change and microfinance creates enormous challenges for many individuals and communities.

There are some oversights of the industry. The National Bank of Cambodia stopped issuing new licenses and told institutions to improve the quality of their services in December of 2021. The interest rates on microloans were capped in 2017.

According to the Cambodia Microfinance Association, MFI loans have an overall positive impact in increasing income and land ownership, as well as issuing lending guidelines to reduce the risk of excessive debt. In previous reports, it hit back at criticisms of the industry. Requests for comment were not responded to.

Over the last decade, the issues surrounding microfinancing institutions in Cambodia and around the world have been highlighted by NGOs and journalists.

There was an estimated gross loan portfolio of $124 billion for the year.

It has been shown to have positive effects. The World Bank published a book in 2016 that argued for the benefits of loans to the poor in Bangladesh.

Overindebtedness and the growing commercialization of the industry have been warned by the World Bank.

Farmer in rice field. Kep. Cambodia. (Photo by: Pascal Deloche/Godong/Universal Images Group via Getty Images)

Naly Pilorge, the director of Cambodian human rights organization Licadho, told CNBC that land- grabbing has been one of the most prolific problems it addresses on the ground.

When the Khmer Rouge ruled the country from 1975 to 1979 they banned private land ownership and left survivors without land deed.

Workers in rural communities lost their land because of another problem even after securing their land titles, according to Pilorge. Why can't a farmer farm with land?

In the Cambodian economy, where agriculture makes up a fifth of GDP, and the biggest employer is the garment factory sector, people were being forced to migrate and look for alternative work.

According to government figures, Cambodia's revenue from tourism plummeted from its all-time high of $4.9 billion in 2019.

One of the research projects done by Licadho was to highlight the risks of Microfinance.

Motorists ride past a Sonatra Microfinance Institution Plc branch in Phnom Penh, Cambodia, on Friday, July 31, 2018.

The numbers weren't right. The average loan went from $3,000 to $4,000 in a country that struggled with tourism due to Covid.

Some of the people being offered these amounts have never seen cash before, so when someone comes and offers it in exchange for their land it is tempting. The Cambodian riel and the US dollar are used in Cambodia.

A large portion of the loan forms are given to ethnic minorities who don't write or read. People are signing something with their hands.

She said she met people working seven days a week to pay off their loans in the capital of Cambodia.

Debt relief and interest suspension programs were supported by the report. Efforts should be made to cancel and restructure the national debt of countries in the developing world.

There needs to be more regulation of profits, dividends, and capital gains generated by the foreign owners of Cambodian Microfinance institutions.

Ian Fry, the U.N.'s representative to the UN, called on the international finance community to seriously rethink their approach to microfinance.

Pilorge took aim at international governments, financing institutions and investors who fail to prevent funds from being funneled towards predatory activities.

International investors still see MFIs as a positive thing because of the initial idea. Everybody thinks you are helping the poor. Red flags have been ignored for 15 years.

The investors are happy, they get the interest, the agents are paid a base salary and the people who suffer are the poor.