Misuse of MFI loans leaves locals in debt

Misuse of MFI loans leaves locals in debt

Mismatches between microfinance institutions’ (MFIs), business returns and debtors’ repayment capacities often occur due to the difference between the debtors’ actual practices and the plans outlined in their loan application forms.

The mismatches have become a burden for a large number of people, particularly those dependent on agriculture who are now pressed with flailing prices in the market.

In Srei Preah Commune, Oudong district, Kampong Speu, middle-aged parents of five children live in insolvency. Requesting anonymity, the couple told Post Supplement that they had become bankrupt after taking out a $1,000 loan from a MFI to start pig-farming and to pay for their first daughter’s wedding.

“We had some leftover from the loan. After renovating the house and buying pigs, the remaining money we spent on our son’s wedding,” said the wife, adding that their fiscal problems started after the death of their main pig. The family could only pay the loan interest with income from the husband’s construction job and their daughter’s garment factory job in Phnom Penh.

“Almost 90 percent of our fellow villagers took credit from MFIs, putting down that they planned to use it for business in the application form,” she added. “Some did well, while many spent it on buying things such as motorbikes for their children or paying medical bills.”

Meas Thida, owner of a poultry farm in Beung Village in Ang Snoul district, Kandal province, said many people in her village have taken up poultry and pig-farming with the capital they borrow from MFIs, which they traditionally refer to as ‘Angkar’.

“Most of my villagers know that MFIs are part of the private sector, but we have called them Angkar since a very long time ago,” Thida said.

“In general, when people take out a business loan, they are supposed to use the money on creating or expanding a business. But if they spend it on a vehicles, houses, or medical bills, they will be in debt.

“Even my family sometimes struggles to pay the instalment at the end of the month.”

Thida was unaware of the 18 percent interest ceiling that was imposed on loans offered by MFIs, set by the National Bank of Cambodia last week. However, she claimed that the MFI she took out a loan from requires her to pay a 1.3 percent interest rate per month – equivalent to about 15.6 percent a year – and the figure is likely to go down if her business continues profiting.

“If the banks or microfinance institutions decreased their interest to 1 or 0.8 percent, like what I have heard, I believe it will provide the farmers and business persons with more capital opportunity to expand their farms or businesses since they could get acquire lower interest loans.”

Speaking under the condition of anonymity, a 60-year-old village chief said that about 90 percent of households in his village owe money to financial institutions.

“Some borrow money from small financial institutions just to pay back the old loan from the big ones, and such practice causes them to lose their houses or lands,” he explained.

“Some minor microfinance institutions set the interest up to 10 percent a month, which I find too high. I want the government to shut down those small institutions, allowing only the major ones to operate; otherwise, more and more people will be victimised.”

Hun Son, chief of Samraong Loeu commune, welcomed the interest rate ceiling, saying an interest rate cap of one percent a month would make the lives of those in debt easier, as well as assisting the many number of farmers who are in need of more capital to expand operations.

“I hope many farms will be enlarged further in terms of size as interest rates go down,” he said.

“Reducing the loan interest rate means benefits for all.”

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