Setting clear goals and business plans ‘a must’ to avoid debt trap

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Kreung Tola took out a loan from a microfinance institution (MFI) to open his mart in Mondulkiri province. SUPPLIED

Kreung Tola, a prominent coordinator for the Indigenous People Network in Mondulkiri province, is currently living and doing business in Lam Me village of Pech Chreada district’s Bousra commune.

Tola – like many other people today – is in debt. He initially took out a loan of just $1,000 from a micro-finance institution (MFI), but over time the total he’s borrowed has ballooned to $50,000, which he’s used to expand his business and farm.

The outspoken indigenous rights activist, now 37, is new to the world of loans but, in a recent interview with The Post, he estimated that 90-95 per cent of people living in his village have applied for loans from banks or MFIs to support their plantations or to build houses.

“Before banks or MFIs approve the loan, they will ask about your employment history, responsibilities and salary,” he said.

Tola said he first took out $1,000 from the MFI, which he did not name, in 2014 and has now extended his loans to $50,000 – $30,000 from the micro-lender and another $20,000 in interest-free loan from a relative. Today, his interest rate on the MFI loans is at 0.96 per cent.

“I borrowed money from the MFI to run a mini-mart. Presently, my mini-mart is operating but it doesn’t make much. However, I am still able to repay the bank loan,” he said.

Tola said some people in his area applied for bank or MFI loans to raise livestock, with most taking out $10,000 or less. In a month, they typically repay it somewhere in the range of $200 to $300.

“If we wait around hoping to have enough money to run a business, when will that happen?” he asked rhetorically. “So we have to take out loans, because if we don’t borrow we have nothing to do.”

“As a citizen, if someone is asking for a loan the first thing they need to do is consider its purpose. What will they do with the money? Secondly, they need to think about the market and which businesses will be profitable. If you don’t have a clear goal then you don’t need to borrow money. But if you have a plan for managing the market then it’s alright to get a bank loan,” he said.

Sok Phearum, a resident of Pech Chreada district, said her family first applied for an ACLEDA Bank loan in 2010 and then took out more from PRASAC Microfinance Institution, Sathapana Bank and Hattha Bank.

“In 2010, I borrowed $1,500 and in 2021 I borrowed $30,000 to start a business selling steel, electrical equipment and some construction materials,” she said.

She noted that later on, ACLEDA, PRASAC and Sathapana did not allow her to apply for any additional loans as they had strict lending requirements of a specific job or occupation to get the approval.

But Hattha gave her a loan against a title deed to her property in Sen Monorom town.

“Hattha Bank gave me a loan on the condition that I actually use it for doing business as stated in the request. Within three months after I got the loan, if I wasn’t doing business as I had described to them they will withdraw the loan,” she said.

She said the $30,000 loan she applied for from the bank in 2021 had an interest rate of around one per cent and a loan period of six years, which required monthly payments of more than $600 per month.

Those loans were used to build a house at a cost of more than $8,000 and the rest was used to buy inventory to sell.

Phearum said she was currently facing difficulties repaying the bank because there were not many customers.

“Now I think I’m going to have a hard time because my sales are not the same as before. The money I’m earning is different from what I expected,” she said.

Choek SokKhim, a coordinator for rights group ADHOC in Mondulkiri, observed that almost everyone in the eastern province has received loans from banks and MFIs.

He said that past information from provinces such as neighbouring Ratanakkiri indicated that banks and MFIs were lending people money too freely, with some borrowers eventually running off without repaying the loans.

However, he said he has not seen any widespread forfeiture of property in Mondulkiri province either.

“Most borrowers misuse the money. If they really borrow it to do business then they may have money to repay the loans. Right now if people give enough reasons for their difficulty in repayment of their loans, they won’t have much problem,” he said.

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Cover illustration of the Right to Relief: Indebted Land Communities Speak Out report. MFICAMBODIA

Heang Makara, a customer service agent at Sathapana Bank in Mondulkiri, said he was the officer preparing documents on behalf of those who want to apply for a loan to submit them to the bank’s lending committee for approval.

“During the preparation of documents, we set the conditions and requirements of the bank, especially related to the borrower’s business plan. As long as their business meets all the bank’s conditions, we submit their application for a loan. Ordinary people, if they have land – but no business – cannot apply for a loan,” he said.

According to Makara, people borrowing from Sathapana in his area of Mondulkiri have never had a problem with late payments or running away from their obligations to the bank.

In neighbouring Ratanakkiri province, Kress village chief Sor Nork – who is also in charge of the community land of the village in O’Chum district’s Poy commune – said that by 2022, there were a total of 101 households in this village with bank debts. Among them, 57 households had received loans from banks and MFIs, including cases of people applying for a group loan – normally with higher interest rates – for a total of roughly $200,000.

He said the families who applied for these loans found it difficult to repay as most of them took the loans to farm, noting that in 2021-2022, the harvest was not favourable, leading to heavy losses.

“When it became difficult to repay the debts, we submitted a letter requesting that all banks and MFIs, relevant ministries and [Minister of Interior] Sar Kheng intervene because the bank’s staff forced people to find the money to repay the banks,” he said.

He said the borrowers in the village who requested the intervention were asking for a reduction in interest rates, no increase in the principal for late payments and a moratorium on payments for now as well.

Thuk Nhang, president of the Indigenous Agricultural Development Organisation in Ratanakkiri, said most people, especially members of the indigenous community in the province, took loans from banks and MFIs for their plantations, but in 2021-2022 people’s crops were not very productive, so it was difficult to repay them.

“Regarding repayment, they are having a hard time because the problem is with the Covid-19 situation and also related to climate change, so the people’s farming is not profitable and they cannot repay on time. Some people have also decided to sell their land to repay the loans,” he said.

Yun Laurent, secretary-general of the NGO Cambodia Indigenous People Alliance, said there was a high risk of indigenous people’ access to loans using their property as collateral. The problem had made people hesitant or changed their position on choosing private or collective land ownership. It also led to divisions in indigenous communities.

“If they borrow in order to farm, it’s okay. But some took loans to buy other things and it is a risk for them,” he said.

He observed that the shortcomings in providing loans to indigenous peoples are related to the implementation of laws and regulations and existing regulations on allowing indigenous peoples to apply for loans.

“It means that in terms of banking or microfinance, they are comfortable at the grassroots level, without having to refer to any documents to get it right or ask before giving a loan what community they are applying for. Sometimes it’s not from not asking, but it could be from the knowledge of the creditors,” he said.

On May 3 this year, rights group LICADHO reported that the Compliance Advisor Ombudsman (CAO) – an independent complaints and accountability mechanism of the World Bank’s International Finance Corporation (IFC) – has accepted and will move ahead with its review of a complaint alleging human rights violations and violations of IFC performance standards committed by six banks and MFIs that offer microloans in Cambodia.

The complaint was filed on behalf of affected borrowers by LICADHO and Equitable Cambodia.

“These complainants are taking a risk by sharing their experiences in order to expose the harms and abuses perpetrated by MFIs and banks in Cambodia,” said Pilorge Naly, outreach director of LICADHO.

“The IFC’s reckless investments and lack of due diligence regarding its microfinance projects have destroyed lives and wrecked communities across Cambodia, and they must take steps to offer real relief to these borrowers,” she said.

The statement said this was the result of the severe damage caused mainly by the six MFIs and banks – ACLEDA Bank, Hattha Bank, Sathapana Bank, Amret Microfinance Institution, LOLC and PRASAC Microfinance Institution – which together account for about 75 per cent of all microloans in Cambodia.

The six institutions have received more than $400 million over the last five years, including direct loans, combination loans, credit loans and investments from funds supported by the IFC.

The Association of Banks in Cambodia (ABC) and the Cambodia Microfinance Association (CMA) on May 10 reported that they were aware of the recent statement by two rights groups that filed a complaint with the CAO.

The industry response said these banks and MFIs have been exerting themselves to serve and help the people and it would be regretful that those endeavours to promote financial inclusion, poverty alleviation and economic growth would somehow be diminished or undermined, they said in a joint statement.

During the Covid-19 pandemic, banks and MFIs have helped relieve borrowers’ burdens by providing loan restructurings to 627,524 accounts with a total portfolio amounting to $7.38 billion as of March 2022.

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Two Bunong traditional houses in the Bu Lu village of Bu Sra commune. WORLD MONUMENTS FUND

NBC director-general Chea Serey said in an event in April that there had been many complaints about the difficulty with accessing credit in the past, but some borrowers did not seem to pay attention to the concerns raised by lenders and regulators.

She said the Credit Bureau Cambodia (CBC), a regulatory body established in 2012, records the history of all loan repayments and makes the borrower’s credit visible to all banks and MFIs.

“We will know exactly who is a good borrower and who is a bad one. So if you want to continue borrowing and borrowing at a good interest rate, then you need to show proof of repayment and try to do it on time.

“If you have a hard time, then be sure to talk to the bank or MFIs, talk to them about how you can restructure your loan, rather than doing nothing and getting bad credit reports from those who report to the CBC to share among financial institutions,” she said.

ACLEDA senior executive vice-president Ma Amara noted that the pandemic had impacted almost all sectors of business severely, especially tourism.

“Agriculture got the least impact and the people in Mondulkiri and Ratanakkiri are the least affected. Therefore, there is less problem with repayments,” she said.

She also noted that financial literacy has improved in Cambodia through a number of changes, such as Cambodians daring to speak openly about borrowing, which some treated it as shameful previously. There had also been a change in borrower’s attitudes towards savings, wanting a loan size and repayment.

“In the past, some borrowers just wanted to get the cash they wanted, regardless of the repayment, but now they need to figure out how much they can repay,” she added.

Ky Sereyvath, an economics researcher at the Royal Academy of Cambodia (RAC), said he had read LICADHO’s report, but felt that it gave an incomplete view of the situation and that it had neglected the important contributions of the financial sector in the past.

“LICADHO’s study is not comprehensive, because if we talk about microfinance, it has helped a lot in the economic sector, especially those who lack capital and there are only a small per cent of unpaid debts on loans,” he said.

He claimed that lending to indigenous peoples was at risk due to the misuse of the loans by borrowers themselves. Some, he said, are engaged in agriculture but then they purchased tractors used to transport timber for logging businesses, which are illegal and lead to trouble repaying.

“Lending to indigenous peoples in mountainous areas is risky because most of the loans are for walk- behind tractors, so the risk is higher for borrowers to do business,” he said. “Those who default on loans are lying to credit agents, using misdirected loans.”