The sleeve of Srey Pheak's pink-striped T-shirt hangs loose from where her right arm used to be.

Key points: A new report alleges microfinance institutions have led to serious human rights abuses

A new report alleges microfinance institutions have led to serious human rights abuses The Collateral Damage report links Australian aid to Cambodia's microfinance sector

The Collateral Damage report links Australian aid to Cambodia's microfinance sector Microfinance proponents maintain that when "done well" the sector reduces poverty

"It still hurts when the weather is cool," she said. "It's just too hard to play."

The 10-year-old was working in a Cambodian brick factory in March this year when her hand slipped into a clay-slicing machine, severing it.

"I felt nothing when I had the accident. I didn't feel any pain … I asked my mum if my hand would grow back," she said.

Pheak was working at one of Cambodia's dangerous brick factories after her family sank into debt after struggling to repay several microloans — small loans accessible to those shut out of corporate finance in the developing world.

Her mother, Khim Channa, told the ABC that she took out as many as four loans in recent years — one, of roughly $1,500, was taken from a microfinance institution called Thaneaka Phum Cambodia (TPC) using a land title as collateral.

Srey Pheak lost her arm while working in a brick factory. ( Supplied )

After being unable to make the repayments, Ms Khim said loan officers came to the house to say that they would sell the land and their home.

"I was very stressed and worried that they would do it," she told the ABC.

"That's why I decided to approach the brick factory owner and borrow money from them."

'Collateral damage' report links microloans to child labour

Over the last decade, Cambodia's microfinance institutions (MFIs) have been booming — proponents say that it helps alleviate poverty by giving the rural poor a leg up instead of a hand out.

But a new report by human and land rights groups titled Collateral Damage suggests that MFIs — some with ties to Australian aid — are complicit in the country's cycles of debt and land loss.

The microfinance sector has grown significantly in recent years. ( ABC News: Graphic by Jarrod Fankhauser )

The report alleges the profit-driven MFI sector has fuelled unethical lending practices, "coerced" land sales, debt-driven migration, debt bondage and child labour.

It also says that MFIs have extracted "hundreds of millions of dollars in profit from Cambodia's poorest families".

Meanwhile, almost 2.4 million Cambodians have at least $11.8 billion in microloan debt — around a third of the country's GDP.

"MFIs, as they currently operate, pose a direct threat to the land tenure security of millions of people in Cambodia," according to the report.

"Rural Cambodians often rely on their land and cannot continue to earn income without it.

"Loss of land is therefore more than just a transfer of real estate: it jeopardises a family's livelihood, career and identity."

The research examines 28 cases where human rights abuses had stemmed from MFIs — however its authors say that it's not intended to be statistically representative of all microfinance in Cambodia.

The Cambodian Microfinance Association (CMA) has criticised the report for "painting a distorted picture and ignoring significant contributions to poverty alleviation and financial inclusion by MFIs".

"Microfinance has been an integral part of Cambodia's economic growth and has contributed to a [significant] reduction in poverty levels," it said.

Report says MFIs have extracted hundreds of millions of dollars from Cambodia's poorest families. ( ABC News )

Australian aid linked to Cambodia's microfinance sector

The Collateral Damage report also raises questions about international banks and development agencies' — including Australia's — role in funding the sector.

For example, Australian non-profit Good Return has partnered with five Cambodian MFIs and the CMA to provide training in responsible lending practices — four of which are certified for consumer protection — and currently facilitates loans to one MFI called Chamroeun Microfinance.

Good Return, which is fully accredited by the Australian Council for International Development (ACFID), received $1.73 million of Australian aid funding through DFAT in 2018–19 for microfinance and other finance projects in Cambodia, Nepal, Indonesia and the Pacific.

Good Return provides microloans through Chamroeun Microfinance and provides training on responsible lending and financial literacy. ( Supplied: Good Return )

Good Return has in the past facilitated microloans through TPC — one of the MFIs Ms Khim borrowed from in 2012. TPC was purchased in 2014 and renamed LOLC.

Good Return's 2018 annual report lists LOLC as a partner, but when contacted by the ABC, Good Return distanced itself from LOLC.

"The last loan was repaid in June 2018. LOLC [was taking on an] increasingly commercial focus and we decided to look for a partner with a stronger focus on assisting those living in poverty, consistent with our mission," Good Return CEO Shane Nichols told the ABC.

A map shows the density of microfinance loans from LOLC in Cambodia. ( Supplied: Licadho )

DFAT also told the ABC that "Australia's aid program supports increased access to financial services to help reduce poverty, improve wellbeing and promote economic growth by empowering people to manage their finances and avoid risks".

"Effectively administered microfinance programs with appropriate safeguards have an important role to play in achieving this goal," they said, adding the department "prioritises children's safety, and the prevention of sexual exploitation, abuse and harassment of any kind".

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Good Return added that DFAT has not funded any microfinance loans, instead, its funding is used to provide financial education training to 1.5 million Cambodians and improve responsible lending among MFIs.

However, the Collateral Damage report maintains that LOLC loan officers encouraged Cambodians to take multiple loans including through private lenders and had threatened to take Pheak's family land. LOLC did not respond to repeated requests for comment by deadline.

In an email sent to the ABC after publication, LOLC chairman Brindley De Zylva said "we do not understand the logic of the report saying that the microfinance sector has fuelled coerced land sales, migration, debt bondage and child labour" as it was not a statistical study.

He said Pheak's mother had settled the loan and that two repayments were late.

"We had no further dealings with this client and find it very difficult to understand how a delayed payment of approximately $US110 in 2015 could push the customer to debt bondage at a factory," he said.

He added LOLC does not permit their officers to encourage borrowers to take out additional loans and said "we do not take any collateral" for the smallest of its microloans, but did not comment directly on whether LOLC officers had threatened to take Pheak's family's land.

"We have adequate safeguards in place to detect and correct aggressive and abusive treatment of clients by our staff," he said.

Good Return's Mr Nichols told the ABC that "the claims presented are deeply concerning".

"This type of behaviour is not in accordance with responsible lending standards and we believe would not be compliant with LOLC's own policies."

Mr Nichols said while Good Return does provide interest-free loans, the lion's share of their "important and life-changing work" is delivering programs to protect vulnerable people from abuses like those outlined in the report.

Children with indebted parents often move to live on brick kilns. ( Supplied: Thomas Cristofoletti )

"The situation would be worse if we were not involved — tackling these sorts of entrenched problems is the nature of international development work, and it takes time and persistent effort," he said.

"We aim to be part of the solution, addressing the types of problems that have been highlighted in the report and improving practices in a sector that provides fundamental services to people in need.

"Done well, microfinance is empowering. You are treating people as a customer, not an aid recipient."

Good Return collected data for an October 2017 report which found that half of MFI borrowers reported being over-indebted, and that around half reduced the amount of food they ate to cope with their debts.

Collateral Damage said that report — seen by the ABC — was never publicly released "despite worrying findings", but Good Return said it was presented at a workshop and "used to motivate changes to the way MFIs operate" in order to reduce spirals of debt.

Those findings led to Good Return shifting its focus to financial education, Mr Nichols said, adding they had seen a 54 per cent reduction in multiple borrowing after training for 9,000 Cambodians.

Good Return's corporate sponsors Accenture, Clayton Utz, Origin and Deloitte were all approached for comment.

In a statement Origin Foundation said it gave more than $1,050,000 in philanthropic grants between 2011 and 2014, that Good Return was accredited with DFAT and ACFID, and that it had a child protection policy that was externally reviewed.

"We take seriously such allegations and will be seeking clarification," it added.

Accenture said it provided "skilling and developing digital technology platforms" for Good Return, but did not comment on the report. Westpac and Macquarie, also listed as sponsors, said the relationship was limited to matching donations from their employers.

Calls for Australian agencies to reassess microloan support

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Cambodian human rights NGO Licadho who co-authored the report said the findings should serve as a "wake-up call".

"All development agencies, Australia's included, should reassess their support of the microfinance industry in Cambodia," deputy director Naly Pilorge said.

"They should prioritise helping overindebted Cambodians who are at risk of losing their land and suffering other abuses due to unsustainable levels of debt."

Milford Bateman, an economics professor at Juraj Dobrila University at Pula in Croatia, told the ABC the MFI sector in Cambodia was not the "silver bullet" the aid community once hoped it would be, and that it underlined a sad irony.

Machines like this present a serious danger of limb loss in brick factories. ( Supplied: Thomas Cristofoletti )

"With most communities in Cambodia crammed full of micro enterprises each desperately trying (but largely failing) to sell simple items to their equally poor neighbours, the whole thing has backfired spectacularly," he said.

"The fact it is now creating more landless poor is a stunning but entirely predictable reversal."

He said NGOs and development agencies can put a "superficial ethical crust" around MFIs while "aiding and abetting a disaster".

Mother Khim Channa with her daughter Srey Pheak. ( Supplied )

The International Finance Corporation, a sister organisation to the World Bank, said it would review the report's findings.

For now, Srey Pheak's mother says she has no more debts to repay — Pheak is attending a local village school, and she'll begin classes at a state school in a few months' time. But Ms Khim has seen a change in her child.

"Before the accident she was an obedient daughter — she listened to us when we explained things to her," she said.

"But now she is very quick to anger … she gets very mad and starts crying a lot."

Additional reporting by Kong Meta