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Microlenders weather the storm

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Some of the world’s biggest banks are threatened by the credit meltdown, but Asian Development Bank Country Director Arjun Goswami says Cambodian microlenders are solid

Photo by: TRACEY SHELTON

Arjun Goswami, the country director for the Asian Development Bank in Cambodia at a conference in Phnom Penh.

Are Cambodia's microfinance institutions as exposed to the credit crisis as foreign banks?

Less so, but there will be issues of liquidity and growth constraint for them as well. It's hard to tell exactly what the full impact will be on them, because it's not a monolithic market.

There is a formal microfinance market and there is an informal microfinance market, which is much smaller, that consists of NGOs and others. The formal MFI market is better capitalised and more robust.... Cambodian MFIs aren't directly exposed to subprime mortgages. However, there is an indirect effect of lower growth on the real economy, including MFIs serving microbusinesses in that real economy. Lower growth in tourism, garments and construction, will feed into the economy as a whole. I also expect the fall in real estate prices will have some impact.

How are Cambodia's MFIs looking right now?

At the higher end of the MFI market - there are about 17 registered MFIs - the market is being supervised. The central bank has supervision responsibility over them, which is a good thing.

That will allow appropriate prudence to be exercised. The demand for MFI services will rise because of the impact of the slowdown on the poor - there will be a greater demand for their services and the poor will have to borrow more. The rural poor population may need to borrow for their very immediate necessities.

How solid are Cambodian MFIs compared to those of other countries?

The MFI industry is still quite young in Cambodia. So relative to countries where MFI industries have been around for much longer, they have started from a lower base and have built up. It has been quite a successful story of the growth of the formal financial sector that registered MFIs belong to, and it's a good thing that those registered MFIs are there to provide these services. What's needed is to expand that formal financial market and the credit net further.  Further credit outreach by Cambodian MFIs to the poor is especially urgent.

But with the economy in decline are Cambodians really in any position to be borrowing?

It's a question of their need as borrowers. We have done survey work as have others, including a very good [Cambodia Development Resource Institute] survey that shows that there is a deeper amount of borrowing in areas where the food price crisis hit hard - so that's why I told you that demand for MFI services is going to rise.

 

The demand for MFI

services will rise because of the impact of the slowdown on the poor.

Is more borrowing a good thing - does it indicate people expanding their businesses, or does it show they are desperate for funds?
I think people are in a difficult position. At the lowest end of society, they are in deep need. So I think more borrowing reflects that, but it can help them through this period, provided they don't end up in the hands of money lenders, who may charge upwards of 10 percent per month.

   
Cambodia does not have a national credit bureau and financial disclosure is limited. Is there enough information available to assess the strength of the MFI sector?
We can always use more information, but there are the beginnings of a credit information system, and that's providing the beginnings of a national system.
The business registration system will help reduce transaction costs, and the fact that MFIs are under the supervision of the national bank helps because it puts them under a regulatory framework.

 
The National Bank of Cambodia has been tightening its credit and bank lending requirements while banks in the rest of the world seem to be losing them. Do you think Cambodia is taking the right approach?
Cambodia had been faced with significant inflation in 2008, which is gradually coming down. Under those conditions, tighter monetary policy was needed. [Cambodia] will have to carefully consider its options in 2009 whilst tracking inflation data.

 
How would you rate the government's response to the crisis?

The government has responded appropriately and taken some good steps on the domestic side of the economy. I think that they realise they need to diversify the economy to boost growth.

Even before the crisis, they understood this. One can debate the rate of growth in 2009, but the point is that there will be less growth. What they identified in 2007 has played out....

 
Why have the government's growth forecasts been consistently more optimistic than those of the ADB and other multilateral organisations?
Multilateral organisations by their very nature make conservative assumptions. If [the country] exceeds our growth estimates, then that's good - we stand by our projections, but these are just projections.

The government can't argue that growth is not declining and the focus should be on that, rather than whether it's 4.9 percent or more. We have to keep an eye on the prize, which is diversification to generate more robust and sustainable growth and social safety to mitigate the impact on poverty of lower growth.

 
Cambodia's trading partners are in recession and the main source of investment, Korea, is in even deeper trouble. It seems Cambodia is being squeezed from both sides, and yet the ADB and the government project growth for 2009. Where is that growth going to come from?
Through linking up with regional trade. There are some fairly major markets nearby, and Cambodia is in a dynamic part of Asia. If Cambodia can find its way into the regional value chain and take proper advantage of regional cross-border trade, it will mitigate the impact of the problems in the US and elsewhere.

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