The subject of this digest* has been bubbling for a while. I was first made aware of the topic of microfinance in relation to land loss nearly two years ago through a student presentation at Chiang Mai University, Thailand.
Since that time, several articles have been published focused on this country, and our feature report carries vital case analyses of communities affected by debt. My first thought was to compare the situation in Cambodia to other countries in mainland southeast Asia. However, there is a dearth of new quality research to flag up, and there was not the time to source and set up interviews with regional practitioners in microfinance. (As an aside, a subsequent piece of research will be to explore why there is so little regional reporting, and whether Cambodia is really an exceptional case.)
As a result, I cast my net wider and have found fascinating comparable studies from Timor-Leste and Guatemala. All three countries are post-conflict states, where peace was followed by significant injections of capital from International Financial Institutions (IFIs) towards economic reform. In this context, IFIs see that microfinance not only creates jobs and reduces poverty but can help break a cycle of violence. However, it will be clear from all three articles that microfinance may not be the panacea to help the poor rise out of situations of precarity. Indeed, it may result in increased burdens of debt, social and gender inequality. All three countries allow for land to be used as collateral in loans, leading to the risk of distress sales or dispossession should the loanee struggle with repayments.
To set the scene, one of our authors, Dr Melissa Frances Johnston, quotes Lamia Karim who defines microfinance as ‘financial services using small amounts of money, targeted at the poor, to allow investment in existing or new productive activities to generate income, employ family members and smooth economic shocks’.
There have been forms of credit fitting this description for centuries. However, the modern iteration has its roots in the 1970s through the Grameen Bank in Bangladesh, set up by the pioneer Muhammad Yunus. Inspired by early successes, microfinance has been promoted as a means to alleviate poverty, particularly in its ability to reach impoverished women. Yet there remains a tension as to whether microfinance should conform to the wider world of financing, driven by the neoliberal maxim for profit generation, or that it is a form of welfare to improve the standing of the poorest.
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*Update note: the Country Insights digest was re-branded in April 2022 to "What to Read digest" to better reflect its content
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Right to Relief: Indebted Land Communities Speak Out
By the Cambodian League for the Promotion and Defense of Human Rights (LICADHO) and Equitable Cambodia, June 2021
This new report features the stories and voices of 14 Cambodian communities that have suffered debt at the hands of microfinance loans. It is based on research led by the Cambodian League for the Promotion and Defense of Human Rights (LICADHO) and Equitable Cambodia, two key NGOs that advocate for human rights in Cambodia, and whose work frequently links to land conflicts in the country. The report is also presented as a website, where the viewer can navigate around the different community stories via a map.
The report states that Cambodians have received $US11.8 million in microloans, both from microfinance institutions (MFIs) and banks. A land title is commonly used as collateral for a loan. As of the end of 2020, the average loan was $4,280, an amount that exceeds the annual income of 95% of Cambodians.
Yet despite representing the largest microfinance industry in the world, there is very little client protection in Cambodia, and the report calls for radical reform to the sector. The plight of indebted loanees contrasts to record profits for banks and MFIs during the COVID pandemic.
The 14 communities highlighted in this report are located in eight provinces around the country issue. They have already been involved in a variety of land disputes over several years (the reason that they are known to LICADHO and Equitable Cambodia), so it is disconcerting to see how the microfinance system is proving a new threat to their hard-earned land titles and general livelihoods. Focus group discussions were held in each community, followed by individual interviews with 1-4 members. Perspectives were gathered under topics including:
- Reasons for borrowing
- Unethical behaviour of credit officers
- Negative consequences of microloan debt
- Emotional effects
- Effects of COVID-19
Responses for each topic were categorised in terms of being widespread (mentioned by 10-14 communities), common (5-9 communities), and uncommon (2-4 communities). For example, in the topic ‘reasons for borrowing’, repay other debt was mentioned by 13 communities, an important fact appreciating how microloans mix with other forms of lending. Meanwhile, 13 communities mentioned land sales as a ‘negative consequence of microloan debt’, and credit officers have pressured land sales in 9 communities.
The report also acknowledges the role of local authorities (frequently village and commune chiefs) who are signatories to loan deals with land as collateral. Rather than support their community, there are many instances of these authorities participating in the pressurisation of borrowers to repay debts, a service for which they are paid by credit officers. In some cases, the officials are actively involved in promoting loans, or offer their own informal loans to pay off debt.
It is well worth following the story of each community. However, for the sake of brevity in this digest, I would like to reflect on two examples:
Pailin Land Community, Pailin province
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Quotes from Pailin Land Community
“They came with two to three staff and threatened me that ‘Aunt! If you can’t earn money to repay, I will call you to meet with the village and commune chief.’”
“If we didn’t sell our house to repay them, they would have come every day. We would’ve been so embarrassed.”
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Traditionally a farming community, many members have migrated to work in Thailand or in garment factories within Cambodia. A claim to their land was first made by a government official, before actual loss occurred through claims by a provincial governor and his wife. Following protests and petitions, some households received titled land in compensation. Now 97% of families in the community have microfinance debt, and 60% have sold land to fund repayments. Even when a debt was paid, credit officers might hold onto a land title up to two months before it was returned. Many community members migrated to work, including children, while one member entered sex work to pay off bills.
Talao and Inn, Ratanakiri province
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Quotes from Talao and Inn
“Sometimes, when the repayment due date approaches, we borrow money from a private lender to repay the MFI, and then borrow from the MFI to repay private lender.”
“If people have cows and water buffalo to sell, they can keep their land. If they don’t, their land is already gone.”
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These two indigenous agricultural communities earlier lost land to a rubber concession run by the Vietnamese group Hoang Anh Gia Lai (HAGL). Some families eventually received land as compensation, though many still lack formal titles. Around 90% of families borrow from MFIs, using (where possible) land as collateral. While many families have managed to repay loans on time, 9 families have sold land and coercion to do so continues from credit officers. For example, they have threatened to put up ‘for sale’ signs in front of homes of borrowers who are late with payments. Inflicting shame is highly significant, and some villagers have been forced to flee from the shame of selling land, or due to pressure from credit officers.
Photo credit: Jan Chipchase, World Bank, CC BY-SA 3.0 license
Frontier finance: the role of microfinance in debt and violence in post-conflict Timor-Leste
By Dr Melissa Frances Johnston, April 2020
Based on 11 months of ethnographic fieldwork, primarily from 2015, the study focuses on the relation of microfinance to brideprice and debt, where it reinforces class and gender-based hierarchies rather than providing an escape from poverty. Admittedly, land is given less attention in the analysis. However, it is worth working through the article in its own terms, the case being highly instructive in the potential for microfinance to contribute to debt rather than improve livelihoods of poor women. For those looking for greater historical details on Timor-Leste, and an extensive analysis of the land system, I recommend consulting the excellent recent profile written by my colleague Anne Hennings (who indeed also authored a profile for Cambodia).
There is evidence of microcredit-type loans to cooperatives in both colonial and post-independence Indonesia and East Timor. Once Timor-Leste gained recognition as a sovereign state in 2002, following over 30 years of conflict between separatist groups and the Indonesian military, microfinancing was promoted by International Financial Institutions (IFIs) such as the World Bank and Asian Development Bank as a key pillar of economic reform. An initial World Bank scheme was deemed a failure with targeted war widows defaulting on their loans under the burden of a fragile post-conflict economy. Microfinance schemes were then put under the control of the state, with financing and regulatory support from IFIs. The sector was further consolidated through the promotion of local self-help groups, who would manage financial inputs, interest rates, and returns, independent of formal institutions.
Johnston contrasts the visible hand of IFIs against the predominantly invisible role of households and kinship groups as economic subjects and agents. Microfinance slots into existing class relations with on the one hand aristocratic elites acting as lenders and on the other working-class farmers descended from slaves as borrowers. The rise of debt through microfinancing contributes to an elite hold on land and labour. There is a particular focus here on gender relations and how microfinance is used to re-service brideprice debt, exacerbating an already exploitative system. Although microfinance organisations claim that loans can only be used for entrepreneurial activities by women, the author claims that village elites from higher lineages are running money-lending businesses funded in part by state-based microfinance through local self-help groups. For example, evidence is presented of a self-group where the female treasurer and president were hoarding profits, unbeknown to other members. Microfinance loans were borrowed and then loaned out to others at higher interest rates, including to those outside the group, a practise commonly found in Timor-Leste.
There is a clear overlap between microfinance and other forms of moneylending, placing lower lineage loanees in a cycle of debt. Distress sales of land, housing, and other possession are also noted as consequences. Even though the focus on land is minimal here, and would warrant closer examination, the study does confirm how land becomes caught up in overindebtedness.
Photo credit: Timor-Leste women, by Josh Estey / CARE, CC BY 2.0 licence
“Why would anyone leave?”: Development, overindebtedness, and migration in Guatemala
By Lauren Heidbrink, Giovanni Batz, and Celeste Sánchez, November 2021
For the final article in this digest, we travel around the world to Almonga, a town in southern Guatemala. The town is predominantly made up of people from the indigenous Maya-K’iche’ group. It is promoted as a site of internal migration, where agricultural production is geared towards a national export strategy. However, there remains significant outmigration to the USA. The article, as with the other studies in this digest, questions the notion of microfinance supporting the rural poor, ethnic minorities, and women, instead claiming that it reinforces existing inequalities, further conflicting with local understandings of development.
Following the end of 36 years of conflict in 1996, USAID and the World Bank injected tens of millions of dollars of funding into Guatemala. A microcredit industry emerged at this point. This sector saw significant growth after the economic downturn in 2008, expanding its portfolio to providing small-business loans, mortgage credits, and insurance. Almonga itself has over 12 registered MFIs.
The data for this study was collected through a survey conducted with 148 households in 2016. There were further semi-structured interviews with key community stakeholders. The focus is indigenous Guatemalans, who make up 60% of the national population but also 80% of the country’s poor. Such groups carry an alternative concept of development to the neoliberal insistence on growth without limits. In Almonga the K’iche’ concept of utz k'aslemal perceives a balance of human and non-human entities on an earth of finite resources. Quality of life is measured through quality of co-existent relationships. This contrasts to state development models which over several generations have supported the capitalisation of land for commercial agricultural exports, frequently leading to dispossession for indigenous groups. The concern of the authors is that microfinance will take what land is left from poor people, driven to debt-induced migration. Indeed, Guatemalans comprises the largest nation migrating to and being deported from the USA.
As with the other cases in this digest, microcredit is promoted as being available for small business enterprises and yet they are frequently used to meet everyday needs and support moments of crises, such as in health problems within the family or loss of employment. In another similarity, there are a mix of sources for loans both formal (banks, MFIs) and informal (moneylenders, family), with many families juggle multiple forms of debt. Over 77% of respondents used their land and homes as collateral to loans. 53.1% had paid their debts, 40.6% were still in the process, and 6.3% had defaulted, many losing their land as a result. Although there is a long-standing tradition of permanent and seasonal outmigration for Guatemalans, recently the decision to migrate is being driven by issues of debt and land loss. Employment migration also takes place to prioritise debt repayment over other household needs. In this way, deportation from the USA carries a risk of default on loans. Seen next to their own terms of development, migration is not seen to contribute anything beneficial to Almonga life, instead representing a necessary activity despite causing inflated land prices through remittances and breaking up household and community cohesion.
Photo credit: Almolonga valley in the high mountains of Quetzaltenango, by Febel3345, CC0 1.0 Universal license
Some concluding thoughts...
The cases provided in the three articles contrast sharply with the world of microfinance held up as an antidote to global poverty and structural inequality. Could it merely be that the negative outcomes on display here represent a faulty application of regulation? This would be a convenient way to defend the role of microfinance in poverty alleviation. Certainly, there is much evidence here of under-regulation where microcredit is being used to fund activities quite separate from the small businesses promoted by IFIs for post-conflict economies.
However, I think this misses a point that microfinance fails and is perhaps unable to remain objective of local socio-economic conditions where it is implemented. Indeed, the cases here show how it is not only assimilating into structural forms of inequality, but can end up exacerbating them. This is seen in Timor-Leste (class and gender-based violence) and Guatemala (poverty for indigenous groups). Further, microfinance is merging into a package of credit sources, both informal and informal, which are collectively creating overindebtedness and land dispossession. Microcredits may be taken out to cover other debts or vice versa. In this sense, it should not be help solely accountable but part of an economic landscape resulting in debt.
The question must also be asked as to whether this is even microfinance anymore. The amounts being loaned in Cambodia are so high as to surpass annual household incomes, used for activities with little potential to reduce poverty. So has microfinance, under a highly commercialised guise, merely warped into other forms of rural credit, where the profit margin trumps all other aims?
Since the global financial crisis in 2008, banking institutions from north America, East Asia and Europe have actively sought out new markets for financial investment. There is a worrying corruption of the concept of microfinance from pro-poor strategy to driver of debt in the quest for profit. Yet there is a gap in the analysis here.
We could benefit from more data as to whether the lenders are actually making a profit. What is true is that land loss is becoming an ugly consequence of this commercialised form of microfinance. Economists such as Hernan de Soto have made a point of emphasising how land remains a key asset for the rural poor, and a potential source of capital growth towards livelihood betterment. It would be a disaster if microfinancing becomes a means to strip the poor of this asset, leaving them worse off.
It took some searching to find these three articles. Cambodia may represent an exceptional case, in the extreme growth of a commercial microfinance sector since the mid-2000s. However, it is not unique, judging by the cases from Timor-Leste and Guatemala. The question is whether other countries are witnessing negative invisible consequences from micro-lending.
The issue warrants wider geographical scrutiny. Land distress sales over debt are complex in their lack of visibility, submerged within a package of local economic issues. They may not appear as dramatic as large-scale land grabs for resource extraction and infrastructure development projects. This does not mean they are any less harmful to victims of debt.
