The Underside of Microfinance: Performance Indicators and Informal Debt in Cambodia

Abstract

Microfinance is a dominant strategy used to promote rural development around the world. Rather than directly track its impact on borrowers, however, microfinance institutions rely on indicators of financial performance adopted from commercial banking as proxies for positive social impact. Yet, as critical research has shown, the industry depends on coercive peer pressure, social shaming and various forms of gendered exploitation to achieve its high rates of loan repayment. This article maintains that there is a need to investigate how the microfinance industry's own indicators of impact contribute to the ways microfinance can harm borrowers. Based on qualitative research in Cambodia during 2021 and 2022, the article demonstrates how financial performance indicators, most notably portfolio quality, both hide and exacerbate the ways that borrowers juggle debt between formal and informal lenders. In making this argument, the article advances critical scholarship on microfinance by showing how microfinance repayment structures debt‐juggling practices in ways that put borrowers at greater risk of over‐indebtedness. As a result, the microfinance industry is able to claim that it successfully helps to alleviate poverty, even as it accumulates profits by appropriating wealth from poor and low‐income households across the global South.

Land Titling and Microcredit in Cambodia: Examining the Reality of Hernando de Soto’s ‘Three Steps to Heaven’

“…Instead, as the take-up of microcredit continued to increase, yet income-earning opportunities for microenterprises were becoming even scarcer than ever, a growing number of clients predictably found themselves unable to repay their microloans. Fearing being pressured to sell family land in order to do so (see Section 7), many MCI clients were driven to approach the local moneylender (once more) in order to obtain an informal microloan that would temporarily cover the installments due on their formal microloan [49] (p. 12) [103,104].…”

Agrarian financial ecologies: Centring land and labour in geographies of debt

“…As such, stiff market competition has reduced the quality of assessments of borrowers' repayment capacity, with aggressive loan sales to people who may not be able to repay their debts. Moreover, the microfinance industry has extremely strict repayment policies, which are shaped by demands for a steady rate of return from shareholders and investors (Green et al, 2023). As such, banks and MFIs commonly use coercive practices, such as public shaming and threats of land seizure, to collect loan repayments (Green, 2020).…”

“…First, by mapping out the diverse intermediaries within financial ecologies, this approach seeks to explain how these institutional actors shape the geographies of debt and why certain financial relations and processes are more or less durable (Lai, 2016, p. 30). In rural areas, despite state and private efforts to provision formal credit to farm households, financial markets continue to be comprised of a variety of actors, such as private moneylenders, rural supply merchants, state credit cooperatives, rotating savings and credit groups, and international banks, among others (Green, 2022c;Green et al, 2023;Guérin et al, 2014;Taylor, 2011). In other words, informal lenders continue to persist even alongside formal markets.…”

“…Households may engage in complex borrowing practices to meet the strict time discipline of debt repayment imposed by such accumulation imperatives. They may seek to cross-borrow or loan-swap from informal lenders in order to repay their formal loans (Green et al, 2023;Guérin et al, 2014;Taylor, 2011). This is because, unlike banks, whose businesses must respond to the demands of shareholder and investor returns, local creditors sometimes provide more flexibility of repayment (Leyshon et al, 2004).…”

Identifying Credit Accessibility Mechanisms for Conservation Agriculture Farmers in Cambodia

“…In Malaysia, the Public Islamic Bank of Malaysia offered a higher interest rate to customers, reaching 10.6% in 2020 [23,24], and Indonesia's lending rates reduced from 10.4% to 8.5% in the same period. MFIs charged a higher interest rate, at around 1% per year on average, than banks for providing credit [25][26][27]. However, the interest rates offered in these countries are still lower than those in Cambodia.…”