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The National Bank of Cambodia in Phnom Penh, Cambodia, January 2011.  © 2011 Brent Lewin/Bloomberg via Getty Images

(Bangkok) – Debt relief measures by micro-loan providers in Cambodia are failing to alleviate the serious financial burdens on indebted families affected by the Covid-19 pandemic, Human Rights Watch said today. Indebted families risk having to sell land and housing they depend on to survive.

The Cambodian government and the National Bank of Cambodia should urgently suspend debt collection and interest accruals for micro-loan borrowers who are no longer able to meet their debt payments due to the Covid-19 pandemic. The government’s response has been insufficient to protect borrowers and violates their rights to an adequate standard of living, notably access to adequate housing. The micro-loan providers are likewise failing in their human rights responsibilities to borrowers.

“Many Cambodians fear losing their land more than catching the coronavirus because they can’t pay back their loans and the government has done little to help them,” said Phil Robertson, deputy Asia director. “The Cambodian government should immediately order a freeze on debt collection and interest accruals of those harmed by the pandemic, and hold financial institutions that fail to comply accountable.”

Cambodians hold the world’s highest average amount of microfinance institution loans, totaling US$3,804 per capita. While the National Bank of Cambodia is the licensing and regulating authority of micro-loan providers, it has never issued strong consumer protection regulations to protect borrowers from unethical lending practices.

In May 2020, Human Rights Watch sent letters to Cambodia’s top nine micro-loan providers and two financial institution associations seeking responses about debt relief during the Covid-19 pandemic. Human Rights Watch also spoke to borrowers, civil society groups, and reviewed publicly available information.

Communities reiterate their calls for adequate housing rights and an end to land conflicts on World Habitat Day in Phnom Penh, Cambodia, October 5, 2015. © 2015 LICADHO 

On June 24, Prime Minister Hun Sen said that Cambodia’s micro-loan providers should “confiscate properties of those [borrowers] who follow the opposition’s appeal not to pay back the loans.” Hun Sen was referring to a statement by the exiled opposition leader Sam Rainsy that borrowers unable to repay their debts should not have to sell their land or homes. Cambodia was already in the midst of a crackdown on members of the dissolved Cambodian National Rescue Party (CNRP). On June 1, Hun Sen had threatened CNRP activists with arrest, saying “If you act, I will arrest.” He alleged that the CNRP was using the pandemic to “cause chaos.”

Cambodia’s financial institutions recognized early on that the Covid-19 pandemic would create problems for many borrowers. On March 27, the National Bank of Cambodia (NBC) issued a “Circular on Loan Restructuring during the Impact of the Covid-19 Epidemic” containing non-binding recommendations to all financial institutions that they should “mitigate the burden of borrowers who are facing difficulty making [loan] repayments due to a drop in their main income.” The bank encouraged financial institutions to “pay attention to clients who are facing actual impact,” particularly workers in the garment sector.

But the circular does not provide interpretative guidance and leaves it to financial institutions to determine which borrowers should be deemed to be “facing financial difficulties.” The result is financial institutions have arbitrary and unfettered discretionary authority to grant or deny debt relief.

On April 27, 135 communities, unions, and local civil society groups appealed to the government for an urgent response to the debt crisis exacerbated by Covid-19, rejecting case-by-case debt relief measures upon borrowers’ requests, and calling instead for a debt collection moratorium.

On April 28, another 141 Cambodian communities echoed that call. Representatives of the groups attempted to hand a petition to the office of the Council of Ministers, which refused to accept it. Without any basis, the authorities detained nine community representatives that day and interrogated them for more than seven hours in Phnom Penh. The authorities asked questions about which organizations were behind the formulation of the petition and demanded proof that the representatives had debts with micro-loan providers. Before releasing the representatives, the authorities compelled them to sign a pledge promising not to advocate on behalf of their communities.

“The authorities’ harassment of peaceful protesters simply trying to hand over a petition shows that the government is unwilling to even consider the demands of those trying to prevent homelessness during a pandemic,” Robertson said.

The problem of indebtedness in Cambodia is longstanding and has been acknowledged by the government itself. In its Financial Stability Review of 2018, the National Bank of Cambodia stated that “An accumulation of individual debts going forward warrants closer monitoring […and] a continued increase in overall credit to individuals calls for ongoing monitoring to avoid excessive buildup of individual debt, which could potentially have destabilizing effects on the economy.”

The World Bank’s Microfinance and Household Welfare report of January 2019 also found that in Cambodia “Over the past five years, the average loan size increased more than ten-fold, as did the share of loans for consumption needs and the portfolio-at-risk. These trends are due to a combination of the low penetration of financial instruments, deteriorating lending practices, and low financial literacy.”

On January 3, the United Nations independent expert on the effects of foreign debt presented his report on private debt and human rights at the UN Human Rights Council, and stated that “There have been many cases of over lending and over borrowing that led to microfinance crises in countries such as … Cambodia.”

Recent research by Cambodian nongovernmental groups show that low-wage workers primarily take out micro-loans to purchase or build houses; pay off other unpaid debt; and buy assets, such as a motorbike or land. It was less common to use loans for business, health, and agricultural purposes. An earlier report illustrated that micro-loans mostly paid for borrowers’ vital needs, such as food, medicine, medical bills, or school costs to provide for people’s “healthy and dignified life.”

The Cambodian government has an obligation under the International Covenant on Economic, Social and Cultural Rights (ICESCR) to protect everyone’s right to an adequate standard of living, including the rights to adequate food and housing. During times of severe economic and financial crisis, the government needs to adopt special protections for those in vulnerable situations and ensure that relief measures reach those at greatest risk.

A Human Rights Watch Q&A document on economic and social assistance during the Covid-19 pandemic stresses the importance of government safeguards of the right to an adequate standard of living. Governments should ensure that people do not lose access to adequate housing and should put in place legislative, policy, and administrative measures to prevent and address homelessness.

Such measures can include direct financial assistance for, or deferral of, mortgage payments and suspension of debt collection. Suspension or grace periods should include reasonable measures to ensure that people can pay accumulated outstanding balances. Governments should also consider economic support for those who face losing essential services because they have lost their jobs, face pay cuts, and are struggling to pay mortgages and other loans.

“Without a moratorium on debt collection, indebted Cambodians will have little choice but to take on more debt from micro-loan providers,” Robertson said. “The government should immediately end coercive practices that result in people losing land and housing, and effectively regulate microfinance lending to ensure financial institutions act to benefit their clients rather than plunge them further into debt.”

Research on Debt Relief Responses by Micro-Loan Providers

In mid-May, Human Rights Watch wrote to the following nine micro-loan providers: PRASAC, LOLC, Hattha Kaksekar Limited (HKL), KREDIT, Sathapana Bank, ACLEDA, Amret, WB Finance, and Angkor Mikroheranhvatho Kampuchea (AMK), as well as the two financial associations, the Cambodian Microfinance Association (CMA) and the Association of Banks in Cambodia (ABC). Human Rights Watch received responses only from CMA, Amret, and LOLC, and had a follow-up phone call with Amret. Amret marked as confidential their written reply to Human Rights Watch. Information from Amret below came from a phone call between Human Rights Watch and representatives of Amret.

Debt Relief Granted to Borrowers Low Compared to Covid-19’s Economic Impact

Human Rights Watch researched the implementation and enforcement of the recommendations from the National Bank of Cambodia (NBC) to all financial institutions in Cambodia in mid-March. The NBC Circular called on micro-loan providers to offer debt relief measures to borrowers who had been financially affected by the Covid-19 crisis. Only a few micro-loan providers endorsed the circular publicly or published information on debt relief measures they adopted. The research shows that the number of borrowers who benefitted from debt relief measures is comparatively low in relation to figures on job loss or suspensions of employment that resulted from the pandemic.

On April 28, Amret announced that it was offering 120,000 group loan borrowers a repayment “grace period,” allowing for restructuring of unsettled debt payments, and with interest accruals for months of non-payment to be deferred like the principal loan repayment. LOLC wrote to Human Rights Watch that as of May 28, 20 percent of its total 300,000 borrowers had availed themselves of loan restructuring measures. CMA wrote that as of May 22, a total of 152,808 borrowers had received some form of loan restructuring.

These numbers are worryingly low in light of the estimated numbers of workers who, as a result of Covid-19, had lost their jobs due to a continually rising number of layoffs or suspensions. These job losses include more than 150,000 garment, footwear, and travel goods factory workers, more than 90,000 migrant workers who returned from Thailand without work, more than 17,000 tourism-sector workers, and an unknown but significant number of informal-sector entertainment workers.

Human Rights Watch is concerned that financial institutions have arbitrary and unfettered discretionary authority to determine the eligibility of borrowers for debt relief, leaving many borrowers negatively affected by the pandemic without debt relief.

Increased Debt Without Suspension of Interest Rate Accruals

Human Rights Watch is concerned that many micro-loan providers’ debt relief measures do not suspend the accrued loan interest, but merely delay it. As LOLC’s and Amret’s responses illustrate, micro-loan providers’ loan restructuring in response to Covid-19 only extends borrowers’ debt repayment plans and waives penalties for late loan payments. This means that even borrowers who have received restructuring may end up with larger debts after the pandemic ends, further exacerbating an existing indebtedness crisis.

The World Bank’s Microfinance and Household Welfare report from 2019 found that “interest rates in microfinance remain high due to operational inefficiencies” of micro-loan providers.

Previous to the National Bank of Cambodia’s decision in 2017, setting a cap on interest rates for credit at an annual 18 percent, micro-loan providers had charged up to 50 percent annual interest. A civil society report in 2019 illustrated that the NBC’s cap had proven “ineffective at providing relief for consumers” when micro-loan providers required “up-front fees from customers structured as percentages of the loans, ensuring that effective interest rates remain higher than the cap.”

Determining Debt Relief Eligibility

The Cambodian Microfinance Association and the Association of Banks in Cambodia have failed to provide clear instructions to their members, allowing for ad hoc and flawed implementation of debt relief measures. CMA said in an interview that members had their “own procedures […and] that the industry cannot use a single solution for every client.” This approach disregards the responsibility to protect everyone’s human rights regardless of individual company policies, Human Rights Watch said.

Human Rights Watch sought to learn from Cambodia’s top micro-loan providers about their eligibility and determination criteria for identifying borrowers who should benefit from debt relief. While the NBC identified borrowers in priority industries – workers in the garment, tourism, construction, and transport sector who are “facing actual impact” from the pandemic – all borrowers nevertheless need to ask their micro-loan providers for debt relief.

The NBC Circular does not provide interpretative guidance and leaves it to financial institutions to determine which borrowers should be deemed as “facing financial difficulties.” Amret representatives said that the company identifies borrowers affected by Covid-19 via individual monthly check-in processes with all its borrowers, allowing officials to assess their needs for debt relief. Other micro-loan providers either did not respond or did not elaborate on their eligibility criteria.

Leab Theary, a garment worker who lost her job in April, told Voice of America that she had applied for a loan deferral from KREDIT and was denied. She had only received her seniority pay from the factory, amounting to US$1,500, and had been unable to find new work. KREDIT told her that since it is a private institution, the government does not have a right to interfere. Theary reported she must use the money she has left to pay off her loan, leaving little money to feed her family or, in the case of an emergency, obtain medical care.

The World Health Organization (WHO) found that many Cambodians pay for health care themselves, noting “The predominance of out-of-pocket health expenditure remains a major barrier to accessing health care, especially for the poor and vulnerable, and puts people at risk of impoverishment.”

Coercion and Intimidation to Sell Land and Assets

Amret representatives said that Amret has never forced clients to sell land and that it could only seize land collateral through a court order, which had not happened since 2018. Amret’s representatives said it was the client’s choice to sell their collateral for whatever reasons, including to pay off their debt. In correspondence with Human Rights Watch, LOLC wrote that it was not seizing collateralized property of borrowers who are unable to pay off their debt or who have defaulted on payment.

The purported voluntary nature of sales of land and other assets used as loan collateral is a grave concern, particularly given reports of pressure or coercion leading to land sales outside of the legal system. Civil society groups reported that micro-loan providers engaged in widespread intimidation and threats against borrowers, demanding they pay off their loans. This pressure resulted in coerced land sales or compelled borrowers to take out additional loans to repay debt. While the extent of coerced land sales during Covid-19 cannot be fully determined, Human Rights Watch has received reports of such incidents.

On June 30, the Center for Alliance of Labor and Human Rights (CENTRAL), the Cambodian League for the Promotion and Defense of Human Rights (LICADHO), and the Cambodian Alliance of Trade Unions (CATU) released a joint report based on surveys with 162 garment workers directly affected by the Covid-19 crisis. The groups found that many workers have already sold or were planning to sell land to repay a micro-loan debt.

For example, a garment worker in Phnom Penh whose factory suspended her employment because of the Covid-19 crisis, said that she could no longer afford to pay off her debt to WB Finance. WB Finance insisted she repay the debt and a company official allegedly intimidated her and suggested that if she did not have money then “go sell your land.” Since her land title was the collateral for her WB Finance micro-loan, she feared non-payment could mean losing her land and house, so she felt pressured to sell her rice paddy field to settle her debt. WB Finance did not respond to the Human Rights Watch’s request for comments on its debt relief measures.

Taking Out Multiple Micro-Loans to Pay Off Debt

Pressure on overly indebted borrowers has resulted in many taking out multiple loans to pay off their rising debt. Another worker in the civil society study took out loans with two micro-loan providers collateralized with a land title and a motorcycle, on top of several other loans from private lenders and money borrowed from relatives. Reports have repeatedly highlighted micro-loan providers’ pressure on borrowers to pay off their debt, in fear of losing their collateralized land and assets, causes many borrowers to take out larger or multiple micro-loans from different providers, including private lenders, pushing borrowers further into a spiral of insurmountable debt.

Involvement of Local Officials

Human Rights Watch received reports of micro-loan providers threatening debtors, saying they would involve local authorities such as commune and police chiefs to pressure borrowers to repay their loans. The Cambodian government, and in particular the National Bank of Cambodia, should fully investigate these reports and take action into any alleged misconduct by officials supporting efforts by micro-loan providers to pressure borrowers to repay loans.

Haphazard Enforcement of Disciplinary Processes, Access to Complaints Mechanisms

Amret said that it has an internal client complaint process to address intimidation and borrowers’ complaints. The company records clients’ complaints and uses an internal control framework, and an internal disciplinary policy, to investigate cases it receives. Amret said that serious wrongdoing may ultimately lead to the firing of officials involved. Human Rights Watch did not receive information from any other microfinance institutions about internal disciplinary or complaints systems.

Human Rights Watch remains concerned about whether other micro-loan providers have internal control and disciplinary processes to prevent and respond to intimidation of borrowers or whether such cases are reported.

The National Bank of Cambodia should strengthen and expand its existing grievance mechanism to allow more borrowers – most of whom are unaware of and are uninformed about complaints procedures – to access it. The system should also be used to provide oversight and accountability for wrongful behavior by micro-loan providers.

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