How do microfinance institutions (MFIs) cope with a crisis? Cambodia has the most saturated microfinance sector in the world and was severely affected by the COVID-19 pandemic. This article draws on novel data collected from microfinance institutions, borrowers and loan officers to explore how the sector responded to that global health crisis. In doing so, it sheds light on two opposing narratives of the post-COVID period in Cambodia: one suggesting that the sector responded effectively through loan restructuring, leading to strong growth and performance, and another positing that borrowers experienced sustained difficulties and were affected by new cycles of indebtedness and unwanted survival strategies. Our data suggest that, while MFIs offered extensive loan rescheduling, they did so selectively and contributed little to reducing borrowers’ debt burdens, even as they increased the average loan amount for high-risk borrowers. We demonstrate how this strategy of over-indebtedness failed to stem the portfolio’s deterioration; although the sector has avoided disaster, it has done so by shifting risk onto borrowers themselves. These results highlight the limitations of defensive lending during systemic crises: emergency loan restructuring that fails to address underlying borrower solvency merely postpones portfolio problems rather than resolving them.
Crawford et al. (Tue,) studied this question.