FLASH INFO

Investigation of IFC Investments in MFIs to Move Forward

Published on 2 August 2023
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A microfinance loan payment schedule.

The Compliance Advisor Ombudsman (CAO) of the International Finance Corporation (IFC) will carry out a compliance investigation of six microfinance lenders in Cambodia and four intermediaries over harms caused by over-indebtedness and predatory lending.

The CAO’s investigation was initially announced on 13 June 2023, but was delayed after IFC management requested the IFC Board to review the CAO’s decision. This was the first ever request of its kind, made using a 2021 amendment to the CAO policy that allows for such reviews under narrow, technical grounds only. The IFC later withdrew its request on the last day of the review period without explanation. The CAO noted a policy requiring “any request” to be published, but also said a decision on whether to publish this withdrawn request is “pending.”

The CAO’s Compliance Appraisal Report determined that an investigation was warranted. In this report, the CAO stated it had found preliminary indications of harm and that the IFC may not have complied with its own policies. The report noted that those harms are plausibly linked to IFC’s potential non-compliance.

The report also found “indications that IFC is not actively and systematically carrying out its obligations regarding project [Environmental and Social] due diligence and supervision.” It also noted there is a “wide range of available literature documenting the extent and severity of social impacts associated with microfinance lending in Cambodia” and pointed out that such concerns were identified by the IFC itself as early as 2015.

The Compliance Appraisal Report also included IFC Management’s assertion that the impact on borrowers due to their loans should fall outside of the IFC’s policies. This would have meant that the issue would be ineligible for review by the CAO. However, the CAO instead found that the “text of the Sustainability Framework does not support IFC Management’s argument.”

The complaint to the CAO was filed by LICADHO and Equitable Cambodia (EC) in February 2022 on behalf of Cambodian microloan borrowers who suffered harms as a result of predatory microfinance loans. Their loans were provided by six institutions in which IFC had invested either directly, or through an intermediary fund. The CAO undertook a 15-month process to evaluate and assess the relevance of the complaint, and in June 2023 decided that an investigation was merited.

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