Webinar on “Regulating Over-indebtedness: Local State Power in Cambodia’s Microfinance Market”

In this webinar, Dr Nathan Green shared on his paper on the over-indebtedness crisis suffered by Cambodian borrowers, Dr Green argues that local authorities performing key regulatory roles of the state are essential for the microfinance market to function.

Webinar Series 2020-2021: Financial Transformation, Credit Markets and Household Debt in Southeast Asia

Monday, 3 May 2021 – ISEAS – Yusof Ishak Institute hosted a webinar on “Regulating Over-indebtedness: Local State Power in Cambodia’s Microfinance Market”, delivered by Professor W. Nathan Green, Assistant Professor of Geography at the National University of Singapore. He was also joined by Dr Isabelle Guérin, Senior Research Fellow at the French Institute of Research for Sustainable Development (IRD), associate at the French Institute of Pondicherry.

Professor Nathan Green
Professor Green argued that local state authorities are both a constitutive and coercive power within Cambodia’s microfinance market. Dr Isabelle Guérin was Discussant. Dr Nicolas Lainez moderated the webinar. (Credit: ISEAS – Yusof Ishak Institute)

The webinar began with a brief insight into the development of Cambodia’s microfinance market back in 2019 by Professor Green when two human rights organisations accused the microfinance industry of causing a national crisis of over-indebtedness. In the past two decades, the government has argued the case for industry self-regulation as the best way of growing the microfinance sector. Consequently, state regulatory power has been limited to basic provincial requirements as well as protecting property rights and loan contract enforcement. Critics of self-regulation, however, tend to overemphasize the tendency of neo-liberal reforms. As such, few studies have probed at how regulation in the microfinance industry can be carried out by local institutions. Keeping in with this concern, Professor Green argues that local state authorities are both a constitutive and coercive power within Cambodia’s microfinance market.

Firstly, Professor Green delved into an overview of Cambodia’s microfinance industry. Since the 1990s Cambodia’s local economy has transformed from a planned to a market economy. As part of these transitions, the government has pursed decentralisation reforms by giving local authorities more power in rural development- by allowing them to issue and validate land titles as collateral for microfinance loans. Commune and village authorities became the primary agents that enforce property rights and retain significant discretionary power to mediate between citizens and market transformations. Hence, microfinance borrowers navigate debt burdens within power relations and localised dispute mechanisms. While this gave rise to the possibility of corrupt state officials, Professor Green also found that some officials felt obligated to sign off on titles even if it put the borrowers in economic trouble. Thus, multiple borrowing has been a pervasive problem for Cambodia’s microfinance industry despite efforts implemented to track borrowers’ credit history.  Moreover, the enforcement of microfinance contract is in contrast with the Cambodian civil code which stipulates contract violations are to be resolved in the local court system. However, since the court would require extensive unofficial fees and political patronage networks, credit officers turn to local authorities instead. This attests to how contract enforcement rarely follows the regulatory procedure outlined in the national law.  Ultimately, the Cambodian state still depends heavily on the regulatory processes carried out by local state authorities. The role of the Cambodian state within microfinance markets can be analysed as a space of regulatory power shaped by a mixture of international best practices, national-level political systems and locally specific networks of power.

Next, Professor Green proceeded to outline the regulation of neoliberal finance in Cambodia. Microfinance may be viewed as a type of “debtfare,” in which poverty is managed through financial institutions rather than state programs. Debtfare requires financial laws that grants and disciplines debtors into repayment whereas lenders are often self-regulated. While these measures have been lauded within the industry as an efficient and market-based method to expand formal financial services, critics suggest it may have exacerbated problems of over-indebtedness as compliance with the measures are entirely voluntary. However, processes of neoliberal reform have not simply rolled-back the state’s power to regulate microfinance markets, but rescaled state power to sub-national institutions, thereby creating complex social hierarchies and deepening inequitable market rules.

Lastly, Professor Green elaborated on the institutions created to regulate the microfinance industry. Faced with a widening wealth gap, the Cambodian government committed rural financial inclusion as part of its poverty alleviation strategy. Following global trends, the largest NGOs were structured into commercial financial institutions alongside a creation of a legal and institutional infrastructure required to mortgage property. The financial regulation that helped to commercialise Cambodia’s microfinance sector aimed to limit the state regulatory power to maintain market-based economic growth. The actual management of microfinance lending was up to the hands of Microfinance Institutions (MFIs) themselves. The seven largest MFIs later teamed together in 2004 to form the Cambodian Microfinance Association (CMA) to coordinate operational activities away from government oversight. Since then, Cambodia has seen the highest number and fastest growing rate of microfinance borrowers per capita in the world. Much of these expansions have been financed by MFIs’ international capital loans and the purchase of many MFIs by East Asian banks. Alongside this expansion, the CMA has continued to advocate for self-regulation. Case in point, the CMA launched a SMART Campaign certification program in 2013. Today, almost all of Cambodia’s MFIs are SMART-certified. However, MFIs regularly violate client protection principles due to an absence of state law. Instead of reviewing such practices, the CMA has allowed these regulations to remain financially viable. Similar issues may exist during the COVID-19 pandemic. However, Professor Green emphasised that local institutions are deeply involved in microfinance markets. Without such institutions, formal microfinance institutions would not be possible.

In conclusion, Professor Green concluded that Cambodia is in the midst of an over-indebtedness crisis which the COVID-19 pandemic has worsened. For critics of self-regulation, it is crucial to understand the state apparatus as multi-scalar institutions and spaces of power, underpinned by social norms and historical practices, to identify successful regulatory reforms.

Thereafter, Dr Guérin shared her views, wherein she echoed the need to understand regulation, political economies, and informal alliances to gain deeper insights into microfinance. She also probed deeper into the issue of the party that benefited from the loss of land, the extent of such a practice, the field of influence local authorities have and complicity in the microfinance market.

The webinar concluded with Professor Green and Dr Guérin answering the questions posed by the audience. The questions included the reasons behind the explosion of microfinance loans, details about the multi-scalar system in the microfinance market and the potential of the default of loan.

About 40 participants attended the webinar. (Credit: ISEAS – Yusof Ishak Institute)