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Micro finance linked to poverty

MICRO credit programs are failing the rural poor in Cambodia by contributing to landlessness

rather than mitigating the problem, a report by OXFAM UK has suggested.

The report, "Where has all the land gone?", is the result of a study into

the connection between ongoing developmental efforts by various micro credit agencies

and the growing problem of landlessness in the Kingdom.

According to the report, over the past decade landlessness has increased proportionately

to a simultaneous increase in public access to micro finance services.

"The mini case study [on credit and landlessness] identified 39 families in

two sample districts (Cheung Prey and Battambang) who have sold or pawned land and

used the proceeds to repay loans from the credit organizations. A large proportion

of the interviewees believe that the loan from the credit organizations had been

a crucial factor in the decision-making process leading them to sell or pawn their

land,'' the report said.

The Association of Cambodian Local Economic Development Agencies (ACLEDA) and Support

Programme for the Agricultural Sector in Cambodia (PRASAC), the Kingdom's two leading

micro finance institutions have dismissed the findings.

ACLEDA and PRASAC say the Oxfam UK study was flawed by a focus on a minuscule aspect

of overall micro credit programs that continue to benefit thousands of families.

"It's like saying the entrepreneurial spirit adds to poverty," retorted

PRASAC Co-Director Manfred Hans Staab. "To justify that statement one can always

find at last 20 per cent among those starting new businesses who fail and, thereby,

are actually rendered poorer.''

While the OXFAM report does in fact attribute factors other than micro credit to

Cambodia's worsening rural poverty, the report blames micro finance schemes for compelling

villagers to sell their land to repay micro credit loans.

Even more damaging to the credibility of the Kingdom's micro finance organizations

was the report's finding that poor villagers perceived private money lenders who

charged 30% annual interest on loans as "more flexible" than agencies like

ACLEDA with interest rates of only 4%.

The report documented numerous instances in which villagers were forced to utilize

agricultural or business loans on medical fees, forcing them to sell or pawn the

land that they'd used as loan collateral.

Chhoun Pouch, a 34-year-old woman in a family of seven is a typical example cited

in the report. Since losing her land after defaulting on her fourth ACLEDA loan,

Pouch has taken a fifth larger loan using her house as collateral. Thirty per cent

of her defaulted loan was directed to daily expenses, 60 per cent for medical fees

and the remainder for repaying old debts.

Much Thon, 45, has so far taken four PRASAC loans of US$50 each. A full 30 per cent

of the money from the latest loan was used to repay another debt from a private money

lender, an additional thirty percent for treatment of her sick child leaving only

40% of the loan for the agricultural development it was intended.

"[These] findings are important because they suggest that credit organizations

may have an opportunity, through changing their policies and practices, to reduce

the incidence of landlessness," the report states. "As a matter of policy,

formal lending institutions should work hand-in-hand with institutions and agencies

providing extension information and training and small business development advice...

lending funds without assuring that the borrower can gain the skills and expert advice

needed to use the funds profitably is shortsighted and is likely to exacerbate the

process of land sale to repay loans among a vulnerable sector of credit seekers."

A senior ACLEDA official admits there have been cases of villagers selling their

land to repay loans, but insists it has never been due to pressure from ACLEDA. The

agency, he says, had to take over the collateral (land) in only 0.01 per cent of

cases in seven years.

Ian Channy, who oversees ACLEDA's micro credit program, says the real and measurable

benefits of micro credit - improved living standard for rural villagers - far outweigh

its flaws.

"In a nationwide scheme, it is difficult to avoid some cases that are unable

to draw benefit from the scheme due to sickness in the family, business failure or

consumption," Channy said. "...the conclusions you draw depend on the aspect

you are looking at."

PRASAC co-director Staab is even more adamant about the benefit micro credit programs

have provided the rural poor of Cambodia.

"If not [for] micro credit agencies, what options do the villagers have, private

money lenders who are known to charge up to 200 per cent interest?'' he asked.

Staab further insisted that PRASAC had no policy which could compel the villagers

to sell their land to repay loans and, in fact, did not even deal with the individual

borrowers, "but we have to stress that every credit program needs a well defined

repayment system as it can not survive without repayments''.

According to Staab, PRASAC's NGO status made its loan repayment methods "extremely

soft" that had been instrumental in eliminating the private money lenders from

several regions.

Shaun Williams, Program Coordinator of OXFAM UK's Phnom Penh office maintains that

the OXFAM UK report on micro credit was not intended to undermine the efforts of

micro credit agencies but rather prompt a re-examination of their strengths and weaknesses.

"Micro credit and development programs [are] actually a very complex and under-researched

area that needs more targeted research," Williams said. "But since the

study's release I'm glad to say that considerable work has been down in improving

the approach [to micro credit]."

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