In the past few months, questions have been raised about the quality of microfinance debt collection practices in Cambodia. A damning recent report by LICADHO, a Cambodian human rights organization, concluded that MFIs in Cambodia have relied on “inadequate government regulation and the widespread complicity of local authorities” to unethically and illegally force indebted Cambodian borrowers to sell their land titles in order to secure repayment. Borrowers, unaware that land seizures are illegal, are intimidated into doing so. Interviewees in the report also indicated other lender abuses, including child labor, debt-driven migration and food insecurity – all because they couldn’t pay loans on time. The report, which the Center for Financial Inclusion recommends reading, raises serious concerns about human rights and consumer protection.
CFI has been an advocate of consumer protection in Cambodia for many years, working with a variety of stakeholders in the country, including donors, financial service providers, clients and the government. We believe that using threats as a means to extract repayment is unacceptable, and the allegations from LICADHO should be taken seriously and further investigated. Responsible practices should be reinforced by providers as needed.
We believe that using threats as a means to extract repayment is unacceptable.
However, as the report itself and the Cambodia Microfinance Association (CMA) point out, the results need contextualization. The sample size is very small – only 28 interviews were conducted in four provinces and Phnom Penh – and is not meant to be statistically representative of Cambodia or all MFI clients. All interviews were conducted in a very short timeframe: spring 2019. Are a small number of providers concerned, or is the report surfacing issues that indicate an existing (and possibly increasing) general crisis amongst MFI providers? While the issues raised in the report merit attention, even if they affect a proportionally small number of clients, it is important to understand the scope of the problem in order to determine how to adequately address it.
The Consumer Protection Principles contain strict guidelines that deter providers from violating borrowers’ human rights. Consumer Protection Principle 5, which concerns the fair and respectful treatment of clients, strictly prohibits Smart-certified financial service providers from using abusive language, using physical force, limiting physical freedom, shouting at the client, entering the client’s home uninvited, publicly humiliating the client, violating the client’s right to privacy, mistreating a client based on any protected groups, using intimidation or threats, sexual or moral harassment. Guideline 5.3.3 explicitly states that “the provider staff may not force clients to sell their own collateral to pay off their debt.”
But it’s not about just setting principles and hoping providers abide by them. The Smart Certification process requires financial service providers to demonstrate their adherence to the Client Protection Principles and corresponding standards. It represents a rigorous analysis of an institution’s policies, systems and practices, carried out by licensed third-party organizations. Recognizing that organizations, regulations and product offerings evolve, our 115 certified-organizations worldwide are required to be recertified every four years, with a two-year check-in, and a required recertification if the organization goes through material change. Certification is a measure of whether an institution has adequate systems in place to prevent client harm, ensuring that harm isn’t occurring, and mitigate it if it is. The Cambodian microfinance sector, with support from CMA, has worked hard over the years to improve practices in order to meet the rigorous bar set by Smart Certification. Eight Cambodian institutions are currently Smart-certified: LOLC, Acleda Bank Plc, AMK, Hattha Kaksekar Ltd., Amret Microfinance, Sathapana Bank, VisionFund Cambodia, and Thaneakea Phum.
Through the assessment and certification process, widespread client abuses come to light and the institution is given recommendations on how to address them. On the other hand, one-off poor and abusive decisions on the part of selected individuals may not surface. This is why complementary research of alleged abuse, and the presence of well-functioning recourse mechanisms for clients are critical.
CFI’s Role in Cambodian Consumer Protection
CFI started its engagement with the microfinance sector in Cambodia in 2012, a time when the Cambodian market, a victim of its own success, was growing at a pace seen by many as unsustainable: between 2004 and 2014 the growth in the average household loan size outpaced growth in average client income by a factor of four. CFI convened key funders of the main MFIs and encouraged them to embrace Smart certification as part of their screening and due diligence process to ensure that providers had adequate policies and practices in place to prevent over indebtedness and poor client treatment. In the years that followed, and with generous support from the Agence Francaise de Développement (AFD), CFI supported an ambitious consumer protection program aimed at developing the country’s credit bureau, strengthening the capacity of the Cambodia Microfinance Association (CMA) and improving practices of the main financial service providers (FSPs) to the poor in the country.
FSP practices drastically improved as part of this work. Collectively, the eight Smart Certified institutions in Cambodia serve 1.6 million clients. This is an incredible achievement for the sector, as these clients are served by institutions that have committed (and demonstrated) that they have put in place systems and processes to protect their rights and treatment. Preventing over indebtedness is complex, especially in the context of fast-growing markets and an environment where lenders are not always required to report to the credit bureau.
The eight Smart Certified institutions in Cambodia serve 1.6 million clients.
As concerns of over indebtedness have continued to rise over the years, concerned players decided to go a step further and understand better the underpinnings of growth in the Cambodian market, as well as ways to ensure a responsible growth. Since 2016, the CMA, Incofin, MIMOSA, the Credit Bureau of Cambodia, the Smart Campaign at CFI, and several other stakeholders have been developing and refining the CMA Lending Guidelines. The project was funded by Incofin, PROPARCO, BIO, FMO and ADA.
The Lending Guidelines, published in 2016 (overview here), were developed because the industry in 2015 was growing at an average of 25 percent per year, even as the number of loans remained unchanged at 2.3 million. This meant that the same clients were taking more debt when their loans were renewed, even though their economic activities did not justify it. The average loan size had almost doubled, growing from close to $1,700 to a little over $3,000 with loan maturity of four to five years (the GDP per capita in 2017 stood at around $1,400). The Lending Guidelines have identified excessive and reckless refinancing as a key concern area for the lending sector, and recommend maximum thresholds for refinancing, above which lenders are bound to more scrutiny. They include a mix of indicators highly correlated to over indebtedness, such as multiple borrowing, loan to income ratio, and refinancing rates.
The Lending Guidelines have identified excessive and reckless refinancing as a key concern area for the lending sector.
The FSPs that have endorsed the lending guidelines have adapted their credit their underwriting policies and enhancing their risk management practices. The National Bank of Cambodia (NBC) has been supportive of the Lending Guidelines and has made public statements on calling FSPs to adopt them. The Central Bank of Cambodia issues a monthly dashboard that shows the FSPs level of compliance with the Lending Guidelines. The Lending Guidelines have been fully integrated into the Smart Certification process and not abiding to the Lending Guidelines can be one of the causes for not having a Certification renewal. The Lending Guidelines are reviewed to ensure that they are meaningful in curbing the risk of over-indebtedness. The Lending Guidelines are an example of a market defining precise recommendations to address a specific issue occurring in a market (here, excessive refinancing). As other issues surface and are demonstrated (i.e., intimidation and illegal land seizure), additional monitoring and mitigation strategies can be put in place at the market level to address systemic issues and complement the individual work of responsible providers.
Next Steps: Improving Regulation and Learning From Clients
I recently traveled to Phnom Penh to attend a closed meeting of regulators, hosted by the NBC and supported by Asian Development Bank, to discuss how authorities can improve oversight. There were a few key takeaways from this. Even though the NBC is actively working on draft consumer protection regulation, current financial consumer protection regulations are weak. The National Bank of Cambodia is dependent on the CMA to mitigate the risks that are looming over the sector. There is, however, an initiative in an initial phase to create a registry of collaterals, assets, and fixed values. Overall, it’s encouraging to see that there’s consensus on the necessity for more sensitization of regulators on consumer protection, as the national financial inclusion strategy is more heavily focused on credit report sharing. The CFI is excited to work with the NBC, drawing from the Handbook on Consumer Protection for Financial Inclusion (recently updated to reflect the risks to consumers in a digital financial world) to improve the Cambodian regulatory framework.
It’s encouraging to see that there’s consensus on the necessity for more sensitization of regulators on consumer protection.
In addition to improving the regulatory framework, we must have better and more frequent ways to hear from clients directly.
With this in mind, we ask: is collateralized debt seizures a troubling and growing trend, or was the LICADHO study reflecting isolated incidences of mistreatment? We hope that a new study initiated by CFI will help shed light on the issue. The study, known as Client Voice, uses an interactive voice response (IVR) approach. Three Smart Certified FSPs – AMK, Maxima and HKL – will participate, and 500 to 1,000 clients from each institution will be surveyed. Institutions that are at the stage of transforming to digital product offerings – such as AMK – are looking to adopt new and better ways to gather ongoing feedback from clients to improve their product design and delivery and are keen to test the IVR system to that effect. The study will be completed by December 2019, and the results will be published by January 2020.