Is This the Moment for Microfinance Reform in Southeast Asia?

Microfinance is one of those ideas that are too easy to fall to fall in love with. In theory, by giving the poor the access to credit they are normally denied, they can invest money productively and raise themselves out of poverty. Forget about welfare and redistribution – which governments in poorer countries can seldom afford and, even if motivated, can seldom manage competently – and instead think of creating a country of self-speculating entrepreneurs.

But like all simple (and somewhat utopian) ideas, success depends on two conditions: effective management and sticking to the original goals. All too easily, though, ideas like microfinance can be corrupted, with profit put above ideals; ever-higher numbers of borrowers are then considered a success, not a failure. Instead of social mobility, microfinance can actually lead to social paralysis. This, many argue, is what has happened in Southeast Asia; the industry has become a debt trap: legal loan-sharking.

Warnings about the dire state of Cambodia and Myanmar’s microfinance industry – and an “industry” is what it has become – have been on the rise since at least 2017. Naturally, Cambodia receives the most attention because it now has the world’s largest microloan debt per borrower, at around $3,804, or twice GDP per capita. Put differently, some 2.6 million microfinance borrowers in Cambodia owe a collective debt of $10 billion.

While none of this is new, the coronavirus pandemic has turned a looming problem into a crisis. Regional governments – which, for years, were told to keep their noses out of the microfinance sector – have waded in to try smoothing the edges. Myanmar’s microfinance regulator, the Financial Regulatory Department, suspended lending and loan collections by microfinance companies from April 5 until May 15. How much that regulation was followed is debatable, as Frontier Myanmar’s Hein Thar noted in an excellent article in May. In Cambodia, the central bank freed up restrictions on capital for microfinance institutions (MFIs), while the government appealed to them to go soft on lenders, though no formal instruction was drawn up. At the end of April, 135 NGOs in Cambodia argued for microfinance debt to “be suspended and land titles returned to property owners… with full rights.” The Cambodian Microfinance Association rejected this.

Temporary suspension of repayments makes some sense. But it is only delaying the problem, and could actually make matters worse down the line. Partly this is to do with how much the epidemic has decimated regional economies; even in best-case scenarios, growth rates this year will be the worst in decades. Some countries, including Cambodia, are likely to experience their first annual contraction in modern history. It also has to do with how this pandemic crisis has affected the entire economy. In normal periods of economic weakening, the informal sector picks up the slack of a faltering formal sector, as unemployed workers who used to receive a regular wage from a contracted position turn to day-work, return to their family’s farms, or look for jobs in neighboring counties. In Laos, where unemployment typically hangs around the 0.7 percent mark, recent estimates say it has climbed to 25 percent, the Vientiane Times reported recently.

A toxic combination of unprecedented high levels of unemployment, a weakening informal sector, and no clear idea when the global economy will return to normalcy – which may be months or years – has pushed the microfinance industry into crisis. It is the not knowing that matters most. A Cambodian small business owner, for instance, could think it sensible to take out a $1,000 microfinance loan today to tide over their company for a few months. But if the global economy doesn’t recover until next year, they would be saddled with a considerable debt and no chance of their business surviving.  

But can the microfinance sector in places like Cambodia, Myanmar, and Laos be reformed? Indeed, maybe such a crisis as we are now in could provide the bump needed to spur some long, hard thinking. The microfinance industry, first of all, needs to remember its original ideals. That means helping those who actually need loans, not just those who want credit. It means quality over quantity. This, however, requires MFIs to be close to the ground, to be aware of the realities faced by their clients.

Yet many of Southeast Asia’s largest MFIs have been bought out by foreign banks in recent years, which, critics say, means they have to put profit before ideals and, naturally, places executives even further from the reality of their borrowers. A major report last year from LIDADHO, a Cambodian NGO, argued that “MFIs have relied on inadequate government regulation and the widespread complicity of local authorities to facilitate and pressure coerced land sales.” It added: “What little government regulation has been passed and what little self-oversight MFIs employ have failed to adequately protect Cambodian borrowers or slow the sector’s growth.”

Yet, regulations in the region on microfinance lending are actually rather good, considering international organizations helped draw up the laws. Greater regulation would also narrow the market so that only the bigger banks can afford required legal costs, disadvantaging smaller, more careful lenders. But enforcement of existing rules is weak. Indeed, hardly any MFIs face punishments for offering multiple loans to those already in debt or for pressuring borrowers to sell their land to pay back loans. One, naturally, would like to see more fines being handed out by government regulators, and even cuffs slapped on wrists for the more extreme MFI offenders.

Controversially, too, borrowers themselves must also look at their own role in this problem. After the 2008 financial crisis that began with the subprime mortgages collapse in the United States, scant attention was paid to why so many people took on debt they knew they couldn’t afford. Equally, the same questions must also be asked of microfinance borrowers.

There is another issue, too. All too often, the microfinance problem isn’t presented as a political issue. That’s wrong. There’s a reason why so many poor Southeast Asians take out microfinance loans. Report after report shows that a significant number of Cambodian borrowers, for instance, don’t spend their microfinance loans on “productive” activities – namely, investing the money into business. One study last year found that almost a third of Cambodian borrowers take out loans to pay for healthcare. This has been known for years. An ADB report from back in 2006 found that 34.9 percent of Laotian borrowers in the poorest quartile take on debts for healthcare and medicines, compared to just 0.4 percent in the richest quartile.

For many people, debt is the choice between life and death. Last year, it was estimated that only 30 percent of Cambodians can participate in the National Social Security Fund, which includes health insurance, and the majority were formally employed. In communist Vietnam and Laos, health insurance is more accessible. But across mainland Southeast Asia public healthcare services are underfunded and underperforming. For rural folk the cost of even getting to a free clinic can be debilitating, and even when free, bribes are commonly expected. Anyone with money (or anyone who can get their hands on a loan) prefers to pay for private healthcare.

Some may argue that a time of unprecedented economic crisis isn’t ripe for a major push for welfare policies. History shows that not to be true. America’s welfare system developed in the 1930s, after the Great Depression. The massive welfare states of Europe were formed in the aftermath of World War II, a time of considerable economic deprivation. Maybe it’s optimistic to think that the coronavirus crisis could prompt major change in Southeast Asia. But, at least, an honest assessment of how the microfinance industry went so wrong would be a start.