Drown in Debt Executive Summary

Executive Summary The 2011 floods affected 18 of Cambodia’s 24 provinces, caused many human deaths, killed livestock and damaged houses, infrastructure and thousands of hectares of rice fields. Following the flood event, a number of flood assessments indicated that household debt was an emerging and significant problem for many poor communities. This research study was designed to examine the impact of the floods on individual household financial circumstances, including debt.

A total 390 households were surveyed in three provinces – Prey Veng, Kandal and Kampong Thom. Results from the study haven’t necessarily revealed anything new, but the analysis does reveal the depth and breadth of household debt in rural Cambodia.

Understanding how to deal with the problem of household debt is an important consideration in both immediate flood relief efforts, and in restoring livelihoods in the flood affected areas.

The survey collected information on the extent of poverty. Whilst an unexpectedly high 97% of households owned the dwelling they lived in, annual net incomes (after farming/business costs) are low. Seventy one per cent of surveyed households reported an annual income below US$900, which translates to around US$0.44 per person per day. Over half (56%) of all households estimate their annual income at US$500 or less – or less than US$0.24 per person per day.

“Seventy one per cent of surveyed households live on or below the poverty line” Agricultural production is the main source of income in 80% of cases, followed by wage labour. Sale of livestock was the next most significant source of income. This underlines the fragility of household incomes during a flood crisis in which crops are damaged or destroyed, and livestock is lost. The 2011 Cambodian flood event has reduced incomes by an average of 60% for 84% of the surveyed households.

Prior to the 2011 flood, 63% of households reported an existing outstanding debt.

Translated nationally, this means around 7 million Cambodians, or half the population, are likely to live in households with some form of debt. Whilst the majority had only one loan outstanding, 11% of the households had two or more loans. Loans from Microfinance Institutions (MFIs) are the principal source of this finance.

“MFIs contribute to 44% of overall indebtedness (of 1st loan borrowers)” Purchase of agricultural inputs was the principal response on the reasons for taking out the 1st, 2nd and 3rd pre-flood loans. This means that return on investment from agriculture needs to be high enough to repay the loans and provide income for household necessities.

Use of loan funds for health, education and food for consumption was reported by 22% of households. As expenditure without associated returns, this is a significant risk factor for low-income households. Some 29% of 3rd loan borrowers used funds to pay back a previous loan. Borrowing to cover loan repayments will almost certainly place those households in a debt cycle from which it will be difficult to escape.

“At the 3rd loan level there is the emergence of ‘revolving’ or cyclical debt” Interest rates on all loans are high, ranging on average from 4.2% to 5.4% per month – or an annual interest rate of up to 65%. MFI interest rates are on average lower – from 2.5% to 2.8% per month – however this still represents an annual interest rate of over 34%.

Given the heavy dependence on loan funds for agriculture, the rate of return on agricultural investment is a critical to avoiding the debt trap.

The 2011 flood has had an impact on households’ ability to repay loans; 60% of households reported they would have some level of difficulty repaying their 1st loan, with 9% seeing no hope for repaying; this increases to 14% of households who stated they will likely default on the 2nd loan and up to 70% likely default for 3rdloans.

Nearly half (48%) of the households interviewed have taken out new loans as a direct result of the 2011 floods. MFIs were the predominant source of funds, accounting for 36% of all new loans. Private moneylenders accounted for 26% of 1st post-flood loans and 38% of 2nd post-flood loans.

“Nearly half of all households had to take out a loan as a direct result of the floods” The principal use of post-flood new loans was once again agricultural inputs. Food for consumption accounted for over 20% of 1st post-flood loans. An increasing number of borrowers, however, used the 2nd post-flood loan to pay back other loans – in other words, more cyclical debt.

In cases of households with one pre-flood loan, nearly one third (32%) had taken out one post-flood loan and a further 3% took out a 2nd post-flood loan. Thirty one per cent (31%) of those with two pre-flood loans had also taken out one post-flood loan. In 18% of cases, there were three pre-flood loans and one post-flood loan.

The 2011 flood had a marked affect on expected shortage periods of staple rice for consumption. Households expecting shortages of 4-8 months increased from 13% preflood to 31% post-flood.

“Multiple loans - pre and post flood – are an emerging concern” In summary, large numbers of rural communities are currently relying on borrowing money to support farming and basic necessities. Furthermore, a growing number of rural poor in Cambodia are at risk of getting into a cycle of debt. Disasters such as floods place them at even higher risk.

Four international NGOs - CARE, Oxfam, Pact and CRS - believe that access to finance through savings initiatives can increase household resilience during times of natural disaster. This Access to Finance consortium believes the way forward is to start the task now of supporting as many communities as possible to establish their own ‘social safety net’ through community savings groups.