Cambodian workers owe $10 billion in microfinance debt as COVID-19 wipes out incomes

Photo: LICADHO (Cambodian League for the Promotion and Defense of Human Rights)

As COVID-19 wrecks Cambodia’s economy, workers and families face added risks from record-high levels of microfinance debt. Without income, many will be unable to repay their microloans and may lose their land or be forced further into debt.


From health care systems to income and poverty, the COVID-19 crisis is highlighting deep inequalities across Southeast Asia. In Cambodia, the economic slowdown has derailed the garment industry, which employs over 800,000 workers in a country of 16 million. Due to declining demand, over half of the country’s garment factories will likely close by the end of April.

With many Cambodians out of work, COVID-19 is also throwing another problem into sharp relief: that of precariously high microfinance debt. Cambodia has the highest microloan debt per borrower in the world at around US$3,800, almost twice the country’s GDP per capita. Over 2.6 million Cambodians currently hold microfinance loans, collectively worth a total of over $10 billion, according to the Cambodia Microfinance Association. These numbers don’t include widespread informal lending.

As Cambodian workers are left out of jobs with minimal government assistance, this debt has become a major concern. Four out of five garment workers hold a microfinance loan. For many families, loan payments now represent a threat to their future, their savings and even their land. The impacts of overwhelming debt are also starkly gendered: women are traditionally in charge of household finances in Cambodia and around 75% of microfinance clients in the country are women.

VOA Cambodia spoke with one garment worker whose factory has suspended operations and is concerned about what the loss of income will mean for her children. “My children will stop studying if I don’t have money for them,” she said. “What I am concerned about the most is paying the debt, but I still hope that I can find a job and pay it off, bit by bit.”

The mother of four girls is working to pay back a $2,500 loan that she took on to pay for household expenses and a motorcycle for her husband to get around. The family still has 14 months of payments remaining. The minimum wage for garment factory workers in Cambodia is $180 per month.

Cambodia’s government struggles to offer COVID-19 relief with a limited budget

According to the World Bank, Cambodia may see its GDP growth drop by 5% in 2020. Unlike in other Southeast Asian countries like Thailand and Malaysia, the Cambodian government doesn’t have the money to attempt a bailout of the whole economy.

Prime Minister Hun Sen initially announced that factory workers will still receive 60% of their salaries, with employers paying 40% and the government covering 20%. But in early April, the government dropped the amount to only a third of workers’ salaries—around $70 a month for the next six months. Hun Sen said factories can’t afford to pay more than this.

One possible solution is to provide support for credit providers like microfinance institutions (MFIs) so that they can extend further loans to help borrowers weather the crisis. This would also insulate creditors against the impacts of borrowers being unable to pay back loans.

The government has launched a low-interest loan program for credit providers and is expecting a further $6 million in support for MFIs from a bond to support women’s livelihood projects, developed by Singaporean firm Impact Investment Exchange.

But this approach may only exacerbate the problem. Cambodia’s microfinance loans are already worth more than a third of the country’s GDP. It’s still unclear how deep the impacts of COVID-19 will be on the Cambodian economy and how long it may be until Cambodian borrowers have a steady income again.

Microfinance debt may leave workers landless

The Cambodian government, international donors and development organizations have pushed microfinance since the early 1990s. By the 2010s, it had become a nearly ubiquitous strategy to increase incomes across the country. The size of loans also increased, outpacing many borrowers’ ability to repay them.

The push has led to many Cambodians taking on a dangerous amount of debt. In 2017, a survey of more than 1,600 Cambodian microfinance clients showed that half of borrowers believed they had too much debt and nearly half were intentionally eating less to save money and pay back their loans.

Microfinance lenders in Cambodia often ask borrowers to use their land as collateral on loans and as a result, the land tenure of a large portion of the 2.6 million Cambodians who hold microfinance loans is at risk.

For many Cambodians, land is vital to their livelihoods and their identity in their community. As most people in rural areas raise animals or plant crops, land is a source of income and security, especially in times of crisis.

Source: Cambodian League for the Promotion of and Defense of Human Rights (LICADHO)

Lenders in Cambodia often target low-income farmers and coerce them into selling their land, according to an August 2019 report by civil society groups Sahmakum Teang Tnaut (STT) and the Cambodian League for the Promotion and Defense of Human Rights (LICADHO). The report documented the practices of Cambodia’s nine largest microloan providers, which together account for 90% of the sector, and showed lenders engaging in predatory practices and encouraging borrowers to take on increasing debt. In some cases, MFIs also require borrowers to put up all of their land as collateral, not just enough to underwrite the cost of the loan.

“Many people, maybe 90% here, are in debt,” one restaurant owner in Kampong Speu told the Nikkei Asian Review. “Some of them are able to sell their land and pay back their loan. [The lender] warned us they will just take the land for free if we do not sell it.”

“It is difficult to see how any investment in MFIs in Cambodia can have a positive social impact at this time,” said LICADHO director Naly Pilorge. According to LICADHO and STT, the solution is to ensure that Cambodian borrowers have access to sustainable and community-managed financing options.

As the Cambodian government’s response to COVID-19 becomes increasingly politicized, so does the problem of microfinance debt. Through a new “state of emergency” law, Hun Sen has further consolidated power, drawing intense criticism from human rights groups.

On April 19, Cambodian police arrested a former official of the banned Cambodia National Rescue Party (CNRP) for alleged “debt to a microfinance institution.” The arrest of Sok Chenda was the latest in an ongoing string of detentions targeting former CNRP officials, but his wife said he did have an outstanding debt, which police used as a pretext for his arrest.

The Hun Sen government’s handling of the COVID-19 crisis will play a large role in determining the course of the country’s politics. It’s not clear how much the government can do to provide relief for the country’s debt-burdened workers, but its response and the repercussions for borrowers will likely impact the future of microfinance in Cambodia and in the international development industry for years to come.

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