Because microfinance companies are scattered around the globe and borrowers are sometimes in remote villages, conducting due diligence is complex and expensive. Consumer protection laws in many of the more than 90 countries where microfinance is prevalent are patchy or nonexistent. For all its pledges to empower the vulnerable at the base of the economic pyramid, there are few clear standards regarding two important issues: What interest rates are predatory and what profit margins are exploitative?
Investors leave the bulk of the screening to investment firms like responsAbility. The CLO illustrates how in many cases those middlemen rely more on each other’s reputations than their own hands-on research. In this case, responsAbility relied mostly on the Smart Campaign to vet recipients. Although Smart’s website listed companies it no longer certified, it said some may have allowed their certification to lapse and didn’t specify why or when. One person with direct knowledge of the matter said they could remember only one firm in Southeast Asia being decertified for cause by Smart in its 11-year history, before it was disbanded in 2020: Cambodia’s Prasac Microfinance Institution Plc.
About $20 million raised through the CLO went to microlenders in Cambodia, including Prasac after it was decertified, more than any country except India, according to a prospectus for the offering. Cambodia is one of the most indebted places in the world. The average Prasac loan soared more than fivefold in the 10 years ending in 2018 to almost $5,000, three times the country’s average household income, industry data show. About one in five Cambodian adults now has a microfinance loan. For years academics and human rights groups have been warning about the crushing debt burden that has led to families to ration food, take their kids out of school so they can work and sell their land.
Prasac, one of Cambodia’s biggest and most profitable microfinance institutions, received $8.5 million, even though the Cambodian League for the Promotion and Defense of Human Rights, or Licadho, has documented scores of cases of borrowers, including Prasac customers, being coerced to sell land to repay their debts. Bloomberg News also interviewed several Prasac customers who described high-pressure tactics used by the firm’s loan officers.
Suy Sokna, a 32-year-old storekeeper in central Cambodia, is one of them. She says she borrowed $8,000 from Prasac to buy a motorbike and build a shop where she could sell groceries, vegetables and pork. That was about 10 years ago, she says, long before the CLO, and over the next decade she kept topping up the loan until, by 2020, it had ballooned to $27,000. Sokna, who can barely read or write, signed her contracts with a thumbprint.
For years she made the $600-$700 monthly payments, but she says she fell behind when her access to fresh pork dried up during the pandemic. Groups of loan officers on motorbikes began showing up, pressuring her to sell the land. She did last July, using the $30,000 to repay the loan and other debts. She says the property, a present from her parents on her wedding day in 2008, was worth $50,000, but she had to sell quickly as Prasac had threatened to take her to court. That meant closing the store and losing her home. She now lives with her husband and four children in a one-room house owned by her sister-in-law with no toilet or running water.
“They told me that they would get my land sold by themselves if I failed to pay,” says Sokna, as she fried bananas at a nearby wooden shack, wearing pink pants and a bright red fake Gucci shirt. “I am very frightened of facing court. I couldn’t sleep because of that.”
Prasac didn’t respond to emails and phone calls seeking comment.
Another microlender funded by the CLO, Edpyme Alternativa in Peru, charged annualized interest rates as high as 120% at the time, according to its website. One-third of its customers earn less than $5.50 a day. Alternativa 19 del Sur in Chiapas, Mexico, received $5 million, even though its website advertises annual interest rates of 98% for some small loans — about 30% higher than the average for microfinance lenders in Mexico.
Edpyme stopped charging interest rates of 120% in June 2021, and those small loans with daily payments accounted for less than 0.1% of its portfolio, General Manager Fernando Bautista wrote in a text message. The lender now charges an average interest rate of 45%, he added. Executives at Alternativa 19 del Sur didn’t respond to emails and phone messages.