Micro-lending institutions have been forced to cut their rates to attract customers amid tight competition across the sector
Microfinance lenders have cut interest rates by between 0.2 and 0.5 percent in a bid to attract customers amid an intensely competitive market, the chairman of the Cambodian Microfinance Association (CMA) said Friday.
The cut follows heavy criticism of the Microfinance Institutions (MFIs) in recent months over high rates, which sector representatives claimed were necessary to cover costs.
But Hout Ieng Thong said the rate cut would neither threaten profitability nor expose the sector to bankruptcies, as lenders had streamlined operations in recent months.
"Earlier this year we felt that we could not reduce rates because we had some difficulties in terms of operational costs, but we have improved our operations," he said. "We have also taken some measures to improve risk management."
Hout Ieng Thong said Hattha Kaksekar Limited, of which he is chief executive officer, has reduced rates from around 3 percent per month to 2.5 percent. The lender had disbursed $28 million to 44,000 customers, he said.
Prasac Microfinance Institution reduced rates from 3 percent to 2.7 percent per month, while rates on smaller loans were dropped from 2.2 percent to 1.6 percent, after borrower numbers dropped from 100,000 customer last year to 80,000 as of August, General Manager Sim Senacheert said.
"The effect of the economic downturn on people's incomes and tough competition among MFIs are the main factors for the reduction in interest rates," he said.
"We know it will affect our income, but we are willing to take the risk because we have reduced operating costs from 23 percent in 2003 to just 8 percent this year."
CHC Limited General Manager King Kap Kalyan said the rate cut exposed lenders to financial risks.
"MFIs really should not reduce interest rates at this time because our foreign lenders have increased their rates and non-perfoming loans have increased, but we don't have a choice because of market competition," he said.
CHC reduced its average rates last month from 3 percent to 2.6 percent, he said.
Cambodian Economic Association President Chan Sophal applauded the move, saying Cambodian MFIs already charged too much interest compared with lenders in other countries.
"We know that the interest rates charged by MFIs are too high, and they take a lot of profit as a result, so this initiative will give some of those profits back to customers," he said.