The authors of this report argue that microfinance loans in Cambodia are leading to over-indebtedness amongst farmers, inhibiting their ability to adapt to climate change. The aggregate gross loan portfolio of microfinance institutions worldwide grew from USD 5.5 billion in 2003 to USD 124 billion in 2019. Using Cambodia as an example, the authors posit that this increase in growth has not led to enhanced capability to adapt to climate shocks. This argument is premised on two conclusions: (1) microfinance borrowing has become a near requirement to farm in Cambodia due to climate change; and (2) once microfinance debt is taken on, it becomes virtually impossible to repay, leading to indebtedness over time.
In response to unpredictable weather patterns, higher temperatures and pest infestations related to climate change, farmers are making larger investments in machinery, chemical inputs and irrigation – largely funded by microloans. Sixty-four percent of participants in the study reported an increase in chemical and fertilizer use compared to 10 years ago. Meanwhile, 61 percent reported an increase credit use.
These loans have led to negative outcomes such as: (1) difficulty repaying loans due to low yields, resulting in farmers taking out new loans to repay existing ones; (2) household members taking on multiple jobs, sometimes against medical advice; (3) sacrificing necessities, such as food, to repay loans; and (4) selling assets to repay microfinance loans – 5.2 percent of indebted households have sold agricultural land for this purpose.
In conclusion, the authors outline four recommendations: (1) debt relief programmes, with an emphasis on greatly increasing financial flows from the Global North to the Global South; (2) reallocation of financial support from foreign investor-owned microfinance organizations to community-based institutions; (3) taxation of capital outflows generated by foreign-owned microfinance institutions, with the proceeds to be allocated to local climate emergency funds; and (4) the introduction of community-owned fintechs (financial technology firms) designed to facilitate affordable responses to climate change within the agricultural sector.
This is a summary of a paper by Vincent Guermond, Laurie Parsons, Long Ly Vouch, Katherine Brickell, Sébastien Michiels, Gráinne Fay, Milford Bateman, Giacomo Zanello, Nithya Natarajan, Dalia Iskander and Fiorella Picchioni; published by Royal Holloway, University of London; September 2022; 78 pages; available at https://static1.squarespace.com/static/62f2cf0e5c1d785dc4090f66/t/6327baac4be25f1d0d3ec013/1663548086338/Microfinance-over-indebtedness-and-climate-adaptation_English.pdf.
By Vaughn Rajah, Research Associate
Additional Resources
Royal Holloway, University of London homepage
https://www.royalholloway.ac.uk
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