Bangladesh may be the homeland of microcredit, but no country is keener on it than Cambodia. According to its central bank, there were some 160,000 branches of microfinance institutions around the country in 2016—one for almost every square kilometre of Cambodian territory. Almost 2.2m of Cambodia’s 10m-odd adults have a microcredit loan outstanding, according to the Cambodian Microfinance Association (CMA), an industry group. The average debt is $3,320—roughly twice the country’s annual gdp per person. Credit is growing by 40% a year.

The microfinance boom has brought many benefits. An obvious one is a decline in the use of loan sharks….But the industry’s breakneck growth may not be sustainable. Household debt has swollen as the size of loans has ballooned. According to the World Bank, the average loan grew “more than tenfold” over the past five years. …“[Cambodia] probably should have had a crisis by now,” admits Daniel Rozas, an adviser to the cma, “but somehow it hasn’t.”

That may be in part thanks to the efforts of the National Bank of Cambodia, the central bank, to tame the industry…Some regulations, however, may be exacerbating the industry’s excesses. The central bank’s introduction of an interest-rate cap of 18% a year in 2017 seems to have backfired. Because of the cap, the CMA says, microfinance institutions can turn a profit only by lending more than $2,000. The number of loans of $500 or less declined by 48% after the rule’s introduction, the World Bank estimates. Some fees rose, too.

The CMA says defaults are minimal, with only 1% of loans in serious arrears at the beginning of the year. But there are hints that borrowers are getting into difficulty. The typical loan uses land as collateral... Lenders seldom take borrowers to court to repossess land; it is not worth the time and expense for a loan of just a few thousand dollars. But many conscientious borrowers appear to sell their land voluntarily to pay up. Government surveys show that the proportion of people who are landless rose from 32% in 2009 to 51% in 2016. Among the many reasons given for selling land, one of the most common was to repay debts. Given that the government does little to monitor the conduct of lenders, and many land sales are informal, it is hard to tell how voluntary such transactions really are.

Excerpts from Service Economy: Development in Cambodia, Economist, Aug. 15, 2020