MFI loans do little to help poor, study finds

A woman signs a receipt for a loan at a branch of a microfinance institution in Phnom Penh. Hong Menea

MFI loans do little to help poor, study finds

Mon, 13 June 2016 ppp

Igor Kossov

A study by Cambodian researchers has found microfinance institution (MFI) loans do little to lift the incomes of poor Cambodian families.

The study, released last month by the international research consortium Partnership for Economic Policy, surveyed families in 11 villages and found little difference between the incomes of people who had taken out MFI loans and those who had not.

“On off-farm self-employment income, there is no borrowing effect for poor households, specifically those at 50th or below quintile of the self-employment income distribution,” the study found. “This partially indicates challenges in nudging poor families to start non-farm activities with the small loans.”

The study suggests that households with pre-existing business activities tended to save and borrow more to expand, whereas households without other business activities were more likely to increase consumption.

Heng Samorn, secretary-general of the Independent Democracy of Informal Economic Association, said yesterday that poor people did not benefit from MFI loans because it was hard for them to access loans with favourable terms without land certificates as collateral. “The interest [rates] are very high,” he said.

Sathapana Bank chief executive Bun Mony said yesterday that smaller loans without collateral were available but had a 2.5 per cent interest rate, twice the 1.2 per cent interest rate for larger, collateralised loans.

However, he insisted that MFI terms for even the poorest Cambodians are still favourable and getting progressively cheaper. He added that MFIs provide a way for borrowers to get out of poverty, although not everyone will use their loans effectively.