Microfinance Environment

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Microfinance Environment

There are 42 CMA members including 37 licensed microfinance institutions (MFIs) and 5 NGOs (Rural Credit
Operators) that function in Cambodia with a gross loan outstanding portfolio of around 1,978 million USD and a
borrower base of 1,901,153 accounts, predominately located in Phnom Penh and large provincial towns.

The development of regular commercial lending activities has been stifled by the high costs of operations, the
inability to verify and enforce property rights, and the low levels of economic activity. As a result, the vast majority
of the rural population has had limited access to formal forms of financial services. Despite these obstacles, CMA
and its members are working diligently to advance the course of the microfinance sector.

History of Microfinance in Cambodia

Before 1990: Limited Financial Services

Prior to 1990, only banks provided financial services but predominately in the city and typically to Cambodians living
around the city. The majority of Cambodian people, who lived in rural and remote areas, could not access formal,
sustainable and timely financial services. During that time, moneylenders provided informal financial services in
rural and remote areas with high interest rates ranging from 10% to 20% per month.

1990-1995: The First Microcredit Seeds are Planted

Microfinance in Cambodia emerged from nonprofit microcredit projects initiated by international donors, NGOs, and
institutions in the early 1990s to fill the institutional void left by the virtually nonexistent banking sector. Without
a working banking system, organizations such as GRET (1991), World Relief (1992), ACLEDA and CRS (1993)
initially ran microcredit projects by physically handling cash transfers. After the international recognition of the
new Cambodian government in 1993, aid started to pour into the country, particularly into community rehabilitation
projects. Despite the long strides attained, microfinance initiatives only reached isolated pockets of the population,
with approximately 44,000 recipients in 1994.

1995-2000: Government Supported Institutionalization

In1995, the Royal Government of Cambodia established the Credit Committee for Rural Development (CCRD) with
funding support from UNDP and AFD to formulate a strategy for rural credit development, strengthen management
and manage funding. In 1997, the NBC set up the Supervision Office of Decentralized Banking System Bureau
which was then separated in 2000 into 2 branches: the Specialized Bank & MFIs Supervision Office, to oversee the
coordination, supervision and regulation of the sector, and the Project to Support Microfinance Sector, to ensure
capacity building within the sector.

By 1998, the new industry served 214,000 individuals. Reaching a significant size also translated into increased
risks for clients and microfinance promoters, thereby building pressure on microfinance stakeholders to formulate a
regulatory framework. In 1999, recognizing the MFIs’ wider breadth of the rural population, the Royal Government of Cambodia adopted a two-tier system under the Law on Banking and Financial Institutions for supervising microfinance.

2000-2005: Commercialization Drives the Sector Up a Notch

A Prakas, or government decree, on microfinance regulation was enacted and implemented by the NBC in 2000. In October 2000 the industry leader, ACLEDA, transformed from an NGO into a specialized microfinance bank with the support of its founding donors and new institutional investors. This move set a precedent for other successful microcredit NGOs to transform into commercial MFIs.

However, the procurement of loans from local commercial banks have generally been limited, the Royal Government of Cambodia’s support of a free-market economy and a more stable political environment attracted an astounding number of foreign private investors who financed approximately 80% of MFIs’ loan portfolios since 2000. Increasing competition has permitted MFIs to consequently decrease their average annual interest rates charged to clients from 42% in 2003 to 32% in 2004. The establishment of CMA by 7 MFIs in 2004 encouraged the microfinance sector to foster internal collaboration, including information sharing and provision of training programs. Serving as a communication channel for MFI members, CMA operates as a sub-division of the Association of Banks in Cambodia (ABC) in accordance with the legal framework and is entitled to negotiate directly with the NBC on relevant microfinance matters.

2005-Present: An Integral Economic Player

Since 2005, the microfinance field has undergone significant changes. In 2006 the NBC, with technical assistance from the ADB, established a Credit Information System (CIS) designed to collect and share negative credit information from commercial banks. However, the scope of information available to MFIs has been very limited, thereby decreasing the incentive to use it. Between 2006 and 2012, microfinance activities fostered a healthy environment, with the number of borrowers consecutively growing 28%, 35%, 36%, 6%, 14% ,16% and 14% during each respective year,(see Figures 1.1 and 1.2).

Figure 1.1: Value of Loan Outstanding in Million USD for 14 MFIs in 2005 and 37 MFIs and 5 NGOs in 2013.

Figure 1.2: Growth in Number of Clients for 14 MFIs in 2005 and 37 MFIs and 5 NGOs in 2013.

This growth was, however, stymied by the global financial crisis between 2008 and 2009, which had adverse impacts on Cambodia’s national economy across all sectors without sparing its microfinance sector. This is reflected by the rising portfolios at risk (PAR) ratio. The Prakas on Licensing Microfinance Deposit Taking Institutions was issued in December 2007 by the NBC, which authorizes eligible MFIs to receive deposits from the general public. This has provided MFIs with cheaper sources of funds, mainly in the local currency, and comes at a critical time when foreign investment has contracted significantly due to the global economic slowdown.

Microfinance Activities

Currently there are many MFIs in Cambodia providing financial and non-financial products and services to satisfy clients’ needs.

The financial products and services which MFIs in Cambodia usually offer to their clients are as follows:

• micro-loans (group lending and individual lending)
• micro-saving (voluntary Saving and fixed term deposits)
• money transfer (local money transfer service, remittance and mobile banking)
• micro-insurance (guarantees the loan where clients die or are accidentally injured, so that their relatives or group guarantor are not responsible to pay the loan).

Non-financial products and services which MFIs usually offer to their clients are as follows:

• Client education and reinforcement
• Client awards
• Scholarships for clients’ children
• Links to development programs

Group Loans vs Individual Loans

The difference between group loans and individual loans is as follows:

• Group loan: Credit officer must analyst clients’ cash flow and ability to pay and survey clients’ history from their neighbor, local authority and also other microfinance operators. Moreover, all clients must have group guarantee and signature from local authority on the lending contract.
• Individual Loan: Credit Officer must analyst clients’ cash flow and ability to pay and survey clients’ history from their neighbor, local authority and also other microfinance operators. Moreover, all clients must have one guarantor (can be their relative or neighbor, but have the same ability to clients), collateral and signature from local authority on the lending contract.

The Impact of Cambodian Microfinance

Microfinance has been expanding to poor people in more remote areas and specifically women. Approximately 80% of MFI clients live in rural areas and 81% of clients are women with the repayment rate from clients almost up to 98% before the financial crisis in 2008. MFIs in Cambodia have been shown to empower women as the head of the family who often have good cash management skills.

Research has estimated that the provision of financial services has impacted 3,878,618 Cambodian people (average of 4.7 people per household). The same research has suggested that this is due to Cambodian poor now having access to credit loans to start new businesses and expand existing ones. Areas of investment have included businesses sectors such as agriculture, small and medium retailers, handicrafts, services, construction, transportation among others. This seems to support the theory of economic development that argues that people can be moved out of poverty through empowerment as business owners. This has led microfinance to be described as "the key to breaking the poverty cycle".

Issues with Cambodian Microfinance

• Multiple Loans: The preval‎ence of multiple lending, whereby an individual has taken out loans from more than one MFI, has reached a desperate point. Some situations involve clients taking out as many as 4 to 5 loans which they are unable or unwilling to repay. These cases leave the respective loan‐providing MFIs to resort to suboptimal measures, including writing off the outstanding loan as nonperforming or restructuring the loan. The root causes of this mounting problem include:

  o Lack of thorough preliminary credit assessment of prospective clients
  o Weak credit‐reporting system
  o Issuance of multiple land titles by local authorities

• Mission Drift: Currently, much ambiguity exists concerning the actual socioeconomic impact Cambodian MFIs have on their clients due to the high costs of conducting impact assessments.
• Lack of Product Diversification: Credit is the primary financial product offered by MFIs and is offered mainly to small businesses and individuals, with decreasing group lending options. Given this saturated credit culture, the current number of savings accounts is relatively low as illustrated by the number of active savers. Today, only 4 MFIs have been granted a deposit‐collecting license due to legal and budgetary setbacks. Moreover, current credit options are not tailored to the majority of clients’ needs and financial preferences.

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