Responsible Finance Forum

Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in Cambodia

Dannet Liv
01 March 2013
Source:  Cambodia Institute of Development

Microfinance has grown rapidly over the last decade, directly reaching millions of poor people worldwide, providing credit and other forms of financial services. If used judiciously, it can serve as an effective instrument in promoting financial inclusion. It is mainly for this reason that BlueOrchard Finance, Incofin and Oikocredit have been investing significant amounts of capital and other resources in MFIs around the world.

The microfinance sector in Cambodia has grown rapidly over the last ten years. It has successfully professionalized as one of the leading microfinance sectors in the Southeast Asian region. There are claims, however, that the sector might be nearing saturation. Concerns have been raised that the possibility of over-indebtedness among borrowers could undermine the social mission and the sustained healthy development of the sector.

In some countries where microfinance services have rapidly expanded, the problem has shifted from the poor having too little access to finance, to having too much access, with the option of even borrowing from several MFIs. Aggressive growth of microfinance, even if driven by the desire to reach out to those with limited access to capital, could have a negative impact when borrowers take too much debt.

Over-indebtedness has become among the most serious risks of microfinance today and impacts all stakeholders. Most importantly, borrowers who are unable to repay their loans risk losing their assets, even their livelihoods, potentially worsening their living conditions. Where client protection and safety nets are weak, microfinance borrowers are often left with no financial or social support once they become over-indebted. The potential economic, psychological and sociological consequences are far reaching. Significant loan defaults can also gravely affect the portfolio quality of MFIs, putting institutional stability and sustainability at serious risk as has been seen in various countries around the world. This in turn can hurt returns for investors in the sector, tarnish the overall image of the industry, and potentially jeopardize the excellent work that so many are doing to build a healthy and sustainable inclusive financial system.

While over-indebtedness is a pressing and urgent challenge for the microfinance sector, the truth is that we know little about it and no industry level publication on multiple borrowing and OID in Cambodia exists. This is the reason that we embarked on this study, the aim of which is to contribute to a better understanding of the drivers of over-indebtedness among borrowers in selected saturated areas in Cambodia. As such, the study is limited to selected areas in the country. It will not be able to answer all our questions but we feel that it offers important insights from the borrowers and the factors that drove them to over-indebtedness. These should serve as key elements of our understanding of over-indebtedness.

Oikocredit, Incofin and BlueOrchard Finance strive to finance MFIs that hold to their mission of providing access to finance for those excluded from the formal financial system. We are cognizant that the challenge for Cambodian MFIs has shifted from financial sustainability to responsibility in ethical lending. Anchored by our commitment to the fair treatment and protection of microfinance clients, we invest in MFIs that offer services to disadvantaged people in a responsible, transparent and sustainable manner. As social investors, we want to ensure that as the microfinance sector grows, so does steadfast adherence to strict standards in responsible lending. We hope that this study will provide valuable inputs to improve collective efforts among stakeholders of the microfinance sector to prevent over-indebtedness and to ensure further protection of borrowers in Cambodia. We also hope that this study and its methodological framework could be used in other countries in order to better understand the drivers of multiple borrowing and over-indebtedness more broadly, to prevent their development and ensure the preservation of a sound and responsible microfinance industry.