Paper short abstract:

This paper provides an empirically grounded analysis of the Cambodian microfinance landscape during the COVID-19 crisis. It shows that the pandemic accelerated lending as a shock absorber for clients in the short term but at the cost of insecurity and rising levels of over-indebtedness.

Paper long abstract:

The reliance of the Cambodian economy on tourism, construction, and garment exports left it particularly exposed to the global economic shock triggered by the COVID-19 pandemic. This shock naturally flowed through the financial system. The microfinance sector was vulnerable due to market saturation and extremely high levels of household debt. This paper evaluates the impact of COVID-19 on the Cambodian microfinance sector. It triangulates this impact by utilizing three data sources: client interviews, financial industry data and loan officer surveys. The research finds that a large proportion of clients were negatively affected by the economic shock of COVID-19 due to decreased income. Financial service providers provided relief through loan restructuring, grace periods and interest rate cuts. Despite flexibility, clients were nonetheless forced to internally migrate, reduce consumption, sell assets and borrow additional funds from formal and informal sources. The profitability of financial service providers was marginally lower from 2020-2022 but the majority remained profitable. This enduring profitability is due to the continuing increase in loans outstanding, despite the economic shock, and relaxing of capital reserve requirements by the National Bank of Cambodia. Loan restructuring and continued provision of credit appears to have provided short-term respite to borrowers, at the cost of prolonging and deepening levels of over-indebtedness. The slow recovery of many sectors, such as tourism, suggests that such over-indebtedness is unlikely to abate. Sustained competition and the continued expansion of loans through digital channels, such as mobile money, is argued to exacerbate the risks of an eventual debt crisis.