Topic : Effect of Microfinance in Cambodia

Submitted by :
Year 2: Group B

Members :
1.​ Sorng Sonita (JD23-0575)
2.​ Chea YangKorng (JD23-0810)
3.​ Mam Daro (JD23-812)
4.​ Tith Malisa (JD23-628)
5.​ Lun Socheata(JD23-0992)

Submitted to :
Dr. Ky Sereyvath, PhD,
Micro, Macro, Research

CamEd Business School

2025
 Table of Contents

I. Executive summary
II. Background
III. Research Questions
IV. Research Goals & Objectives
V. Literature Review
VI. Study Methodology
VII. Findings/Results
IX. Discussion
X. Conclusion
XI. Reference List
XII. Appendic

Background :

As one of the most important development tools, particularly in the context of

post-conflict recovery and rural development, microfinance is highly valued in Cambodia. After
years of conflict, microfinance emerged in the 1990s as a way for capital services to help people
who were marginalized from the banking system (Liv, 2013). Originally started by NGOs, the
industry now comprises over 80 microfinance institutions (MFIs) licensed by the National Bank
of Cambodia, which exercises regulatory control over the sector (NBC, 2023). Microfinance is
acclaimed for, among others, poverty alleviation, income enhancement of a household, and
women’s empowerment, especially in rural areas (Armendáriz & Morduch, 2010; Ledgerwood,
1999). On the other hand, microfinance has also attracted some criticism due to the fast rate of
growth. Concerns of sustainability and borrower protection due to increasing unpaid household
debt, reckless lending, and losing homes because of loans are on the rise (Green, 2018; Bylander,
2020). Along with these hurdles, microfinance in general continues to be one of the critical
components in the financial system of Cambodia and understanding the implications, both good
and bad, is crucial for development policy planning.
Research Goal :

To analyze the impact of microfinance on Cambodia’s economic growth, poverty reduction, and
financial inclusion, while assessing both its benefits and potential risks.

Research Objectives :

-​ To evaluate the role of microfinance in improving the livelihoods of low-income

individuals and small businesses in Cambodia.
-​ To assess the impact of microfinance on financial inclusion, particularly in rural areas and
underserved communities.
-​ To identify the potential challenges and risks associated with microfinance, such as
over-indebtedness and high-interest rates.

Literature Review :

Microfinance has become an important element in international development because it’s

the provision of small-scale financial services such as loans, savings, and insurance to
low-income individuals and communities. Microfinance has risen significantly in Cambodia over
the last two decades, with the goal of reducing poverty, increasing financial inclusion, and
promoting rural development. However, current research paints a more nuanced picture, with
both positive results and serious worries about excessive debt and social implications. This
literature review seeks to assess and integrate existing research on the effects of microfinance in
Cambodia, highlighting its positive impact, negative effect and topics for additional
investigation.

Microfinance institutions (MFIs) emerged in the 1970s with the success of the Grameen
Bank in Bangladesh and have since expanded globally (Yunus, 1999). These institutions aim to
provide financial services to populations traditionally excluded from the formal banking sector.
Globally, microfinance is linked to increased income generation, women's empowerment, and
improved household welfare (Armendáriz & Morduch, 2010). Microfinance started in the early
1990s as Cambodia came out from a long period of conflict. Microcredit was first provided by
NGOs, to fill the gaps left by the banking sector. (Asia Resource Centre for Microfinance, 2005).
Over time, it has evolved into a sophisticated and competitive industry regulated by the National
Bank of Cambodia (NBC). According to the Cambodia Microfinance Association (CMA, 2022),
there are over 80 licensed MFIs serving millions of clients across the country. The sector is
widely praised for contributing to financial inclusion, especially in rural areas where traditional
banking services are scarce (Bylander 2015).

Several studies suggest that microfinance contributes to poverty alleviation by enabling

poor households to access capital for income-generating activities. Montgomery and Weiss
(2005) argue that microloans allow families to invest in small businesses, which can increase
household income and improve living standards. A 2017 study by the International Finance
Corporation (IFC, 2017) reported that Cambodian households participating in microfinance
programs experienced better food security and health outcomes compared to non-participants.
Microfinance is often seen as a tool for empowering women economically and socially. In
Cambodia, a significant majority of microfinance clients are women (ADB, 2015). By providing
access to credit, MFIs enable women to engage in business activities, gain financial
independence, and participate more actively in household decision-making. However, the depth
of empowerment varies based on social and cultural contexts (Malhotra, A., Schuler, S. R., &
Boender, C, 2002). Microfinance has also stimulated microenterprise development in Cambodia.
Many small-scale farmers and entrepreneurs use microloans to purchase equipment, livestock, or
raw materials (Ledgerwood, 2013). The increase in microbusinesses has contributed to local
economic growth and employment generation, particularly in rural areas (Chen & Reille, 2010).

Despite its benefits, the rapid expansion of microfinance in Cambodia has led to rising
concerns about over-indebtedness. Studies by Licciardi et al (2019)show that many borrowers
take loans from multiple MFIs, leading to excessive debt burdens. (Bylander & Oxford
Development Studies, 2017) also highlights the aggressive lending practices and pressure from
loan officers that contribute to borrowers’ vulnerability. Over-indebtedness has, in some cases,
resulted in land dispossession. Cambodian households often use land titles as collateral for loans.
When borrowers fail to repay, they risk losing their land, which can lead to homelessness and
migration (German & Stein, 2024). (European Union, 2021) reported that rural families lost their
land due to unpaid microfinance debts. Debt-related stress is another adverse outcome of
microfinance. Research by the Cambodia Institute for Cooperation and Peace (Cambodia
Institute for Cooperation and Peace, 2021) found that high levels of debt contributed to family
tensions, mental health problems, and, in extreme cases, suicide. These issues point to the need
for stronger consumer protection mechanisms. The Cambodian government and the NBC have
implemented various measures to regulate the microfinance sector. In 2017, the NBC introduced
an interest rate cap of 18% per annum to protect borrowers from predatory lending. However,
scholars such as Bateman (2024) argue that the cap may lead to unintended consequences, such
as reduced lending to high-risk clients. The government also encourages financial literacy
programs and debt resolution mechanisms, although the effectiveness of these initiatives is still
debated.

While there is a considerable corpus of research on Cambodia's microfinance sector,

several gaps exist. First of all, most research uses cross-sectional data, which makes it difficult to
determine long-term effects. Second, there is little study on the gender-specific implications of
microfinance. Third, the impact of digital financial services on Cambodian microfinance
practices has received little attention. Addressing these gaps is critical for creating more
successful and sustainable financial inclusion efforts.

The literature on microfinance in Cambodia is divided. On the one hand, microfinance

has unquestionably enhanced access to credit, aided small enterprises, and empowered women.
However, factors such as over-indebtedness, land loss, and mental stress should not be
disregarded. Policymakers, microfinance institutions, and development partners must collaborate
to increase enforcement, raise borrower education, and provide products that match the
requirements of vulnerable communities. More study is needed to analyze microfinance's
long-term impact and ensure it is used as a tool for inclusive and equitable development.

Research Methodology :

Our research mainly focuses on the Access to Financial Services, Poverty Reduction,
Women’s Empowerment, Business and Entrepreneurship Development, Over-indebtedness and
Financial risk in the microfinance section in Cambodia. To add, we looked more into variables
that have an influence on loan sizes, repayment rates, interest rates, borrower demographics, and
indicators of household welfare and financial inclusion. We took a quantitative approach, using
secondary data sources. Secondary data is organized to show the relationship between 2-4 types
of variables and their effects. Our sample included collected information from reports produced
between 2015 and 2023, with a focus on studying national trends and relationships between
variables across time that represent the reach and effect of microfinance institutions across the
country.

Our team decided on this approach in order to guarantee data accuracy and make use of
the substantial statistical resources that are accomplished by national institutions. Our data was
specifically obtained from official Cambodian ministries and organizations, including the
Ministry of Economy and Finance (MEF), the Cambodia Microfinance Association (CMA), the
National Bank of Cambodia (NBC), and foreign partners, like the World Bank and Asian
Development Bank (ADB). We ensured that the data we gathered was consistent and answered
all of the research objectives and questions. While this study only uses secondary data at
national-level, due to limitations of the data we are unable to compare differences between rural
and urban areas across Cambodia. Some variables, such as gender-specific income or
borrower-level business data, were also not promisingly available. Beside these limitations, our
analysis still keeps on providing meaningful national insights into the impact of microfinance in
Cambodia from 2015 to 2023. To ensure that we met our research objectives, we formatted the
data using Google Sheets. In addition, we moved on to the analysis part of the study paper.

We have divided our analysis into 5 parts to explore how microfinance has contributed to
access to financial services, poverty reduction, women’s empowerment, business and
entrepreneurship development, and the issue of over-indebtedness in Cambodia. The first part we
use trend graph to show growth in total MFI clients, % female clients, and average loan size
from 2015 to 2023 and correlation analysis to check if access (more clients, loan size) relates to
average household income in order to see if access to microfinance has improved over time and
who benefits the most.The second part is going to use correlation comparing average loan size or
% loans used for business and % below poverty line, regression testing by using % below
poverty line as the dependent variable, see how much it is influenced by microfinance variables
like average loan size, client numbers, or % business loans, plus the hypothesis testing by
comparing the average poverty rate from 2015–2018 vs. 2019–2023 to see if it dropped
significantly. In the third part, we will use correlation comparing between % of female clients
and average household income , regression testing is used where average income (if available) or
% loans for business as dependent variable and % female clients as independent variable, tread
analysis to show % female borrowers increasing over time. For the fourth part, we use
correlation for comparing loans used for business and avg business revenue, regression testing to
see if microfinance grows small businesses where business revenue as dependent variable, loan
size and % business loans as predictors.and ANOVA to compare business revenue across time
periods whether it is getting stronger or weaker. The last part, we use correlation for comparing
average loan size and loan default rate / % with multiple loans , regression testing for where loan
default rate as dependent variable and average loan size or % multiple loans as predictors and
trend graphs to show whether % of clients with multiple loans is rising or falling over time. To
further support our findings, we visualized the data using various charts, such as line graphs and
scatter plots, to clearly illustrate trends in client outreach, loan use, poverty rates, and borrower
risk level.

References

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Bylander, M. (2020). The role of debt in development. Insights from Cambodia. Development
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Green, D. (2018). Microcredit and land loss in Cambodia. A cautionary tale. Oxfam Blogs.
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Ledgerwood, J. (1999). Microfinance handbook : an institutional and financial perspective.
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