Tag Archives: predatory capitalism

New Loan Sharks? Microfinance

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

Onerous Debt and its Consequences

A Beijing-funded wharf in Vanuatu  is big enough to allow powerful warships to dock alongside it, heightening fears the port could be converted into a Chinese naval installation.  Fairfax Media inspected the $114 million Luganville wharf and was told US coastguard officials and Marines recently visited the sprawling facility and took a keen interest in its specifications.  The Chinese and Vanuatu governments have strenuously denied they have discussed a military base…

The Vanuatu government has taken on significant debt to China, though it appears to have stopped taking large loans since getting a stern warning from the International Monetary Fund in 2016.  The wharf expected to be used to accept container and cruise ships was constructed by the Shanghai Construction Company and opened with fanfare in the middle of 2017.   It is unclear whether the wharf loan contract with the Vanuatu government includes a so-called debt-equity swap clause, which would mean China could take over the facility if Vanuatu defaults on its payments. It has recently taken over the major port of Hambantota from Sri Lanka in these circumstances.

Malcolm Davis, a defence expert at the Australian Strategic Policy Institute, said it was “not by accident” that wharf had been built for large vessels.
“My guess is there’s a Trojan horse operation here that eventually will set up a large facility that is very modern and very well-equipped. They’ve done this before in other parts of the world. “Their hope is that the debt of the Vanuatu government will be so onerous that they can’t pay it back. The Chinese will say, ‘the facility is ours for 99 years’ and the next thing you’ve got a PLA Navy Luang III class [destroyer] docking there.

Excerpts from China and the Pacific: The Great Wharf, Economist, Apr. 21, 2018, at 33.

The Scramble for Maldives: US/India v. China

The Maldives archipelago, popular among luxury honeymooners, has become a playing field for geostrategic rivalry as China expands its influence in the Indian Ocean and the U.S. and India push back.

Maldives President Abdulla Yameen Abdul Gayoom, who has steadily swung his country toward Beijing and away from traditional partner New Delhi, has imposed a state of emergency, jailed opponents and clamped down on protests to weaken his opposition, which is led by pro-India ex-President Mohamed Nasheed.

India and the U.S. don’t want Beijing, already dominant in the South China Sea, to entrench itself in these waters. The island nation sits astride shipping lanes that connect China to the oil-supplying countries of the Middle East, via the Strait of Malacca. The location also makes the Maldives vital to Beijing’s Belt and Road plan to develop land and sea trading routes linking China to Europe.

Chinese President Xi Jinping won Mr. Gayoom’s support for the project’s maritime corridor on a visit to the Maldives in 2014, and China began investing in island infrastructure. A Chinese bridge now under construction will connect the capital city, Malé, to a nearby island where its airport is located. A Chinese company is expanding the airport; another has leased an island close by for development. Chinese contractors are building roads and housing units for locals.

Many in the Maldives opposition have raised concerns that Chinese infrastructure loans will turn into “debt traps,” particularly after a major Chinese-financed port in neighboring Sri Lanka passed into Chinese control last year when Colombo couldn’t repay.

U.S. Secretary of State Rex Tillerson…called China’s infrastructure-financing deals an example of “predatory economics” that saddle developing countries with unsustainable debt and could undercut their sovereignty.  Mr. Gayoom steered a constitutional amendment through parliament in 2015 allowing foreigners to own land, a change the government said was meant to attract investment and critics in the country said could help Beijing establish a military foothold.

In recent years, China has built a naval base in Djibouti in East Africa; in addition to the port in Sri Lanka, it operates one in Pakistan. A senior Indian navy officer said Chinese submarines and research vessels are visiting the Indian Ocean more frequently.

The Indian military deploys aircraft specialized in anti-submarine warfare to patrol the ocean, and its government is negotiating the purchase of U.S. drones with advanced surveillance features. India also plans to build new attack submarines, and a military upgrade is afoot in its Andaman and Nicobar Islands, whose capital is around 1,200 nautical miles from Malé.

Excerpts from China-India Rivarly Plays out in Maldives, Wall Street Journal, Mar. 6, 2019