I was pleasantly surprised to read in your paper a discussion about community financing
("Nobel prize puts spotlight on microfinance," PPPost, Oct 20, 2006).
While it is important to acknowledge the success of microfinance institutions (MFIs),
it is also important to realize that this success has made policy-makers complacent
of the need for affordable credit for the very poor, who are not always served well
Although it is fair that MFIs need to make profits to appease the interest of their
shareholders, the government must at the same time look at ways to support poor communities
to establish financial institutions where profits stay with the poor and their communities.
In the 2005 publication Self-Help Group Model: More than just economic development
... by Padek (the Partnership for Development in Kampuchea), three policy recommendations
(1) The government needs to design flexible financial services;
(2) The Rural Development Bank (RDB) and national financial institutions should provide
some form of subsidized credit for the very poor; and,
(3) The government should provide institutional support and a legal framework for
community finance groups.
The current practice where the RDB operates as a wholesaler, lending money to MFIs,
which offer loans to the public without considering their needs or social well-being,
is not creative enough.
It is important for policymakers to understand that both the rich and the poor need
access to credit. They also need to understand that the pattern of behavior of the
rich and the poor, vis-a-vis saving, borrowing and investment, differ. Padek's study
found that the poor demand credit that is flexible in both loan use and repayment
terms, and can also accommodate emergency situations (illness, food deficit, etc)
that they often face.
It is not enough to be happy with the fact that Acleda has a non-performing loan
portfolio of less than 2 percent. It is more important to learn how the poor pay
back those loans, which have an interest of between 2 and 5 percent per month, and
where local authorities are, in many cases, tasked with collecting the loans.
Performance indicators of any development intervention should reflect its impact
on social and institutional development over a period of time. At the current interest
rate, as Adam Sack said, "microfinance is not a panacea to reduce poverty."
Padek recommends that the RDB and other national financial institutions urgently
need to provide some form of subsidized credit (lower interest rates, flexible repayment
terms, etc) for the poor if they are serious about reducing poverty and meeting the
MDGs. The current "one-size-fits-all" practice is not helping the poor
adequately, and in many cases has landed them in a vicious cycle of indebtedness.
For over a decade, Padek and other members of the Cambodian Community Finance Network
(CCFN) have been facilitating communities to work together to address their credit
needs, in the form of self-help groups, rice banks and village banks, all around
the country. These community finance groups, consisting of poor people, represent
their attempt to alleviate poverty as a community, by addressing their financial
needs. What we have learnt from these groups is that poor people's need for savings
that are safe and secure is just as great as their need for credit.
By way of example, in 1999, 16 poor women of Leang Dai commune, Siem Reap province,
came together to start a saving and credit group or self-help group (SHG) called
Rasmey Chamroeun (Ray of Progress). Before joining the SHG, these women rarely took
out credit. Without assets to use as collateral, they were considered, by MFIs and
other money lenders, too poor and too ignorant to be able to use credit profitably.
For them, credit meant small loans from relatives for emergency needs, health care
or food. When this was not possible, they sold assets, land or animals, placing them
further into a precarious social situation.
In the five years since the formation of the Rasmey Chamroeun SHG, the members have
taken out 184 loans, an average of 12 loans each. Given the poor healthcare services
in rural Cambodia, it is not surprising that a quarter of the loans were used for
healthcare. At the same time, however, many of them courageously ventured into new
spheres of income-generating activities, and kept their families afloat.
Twelve members have been able to reduce the number of months they are short of food
each year, while eight members declared that they no longer experienced food shortage,
compared with only one before they joined the SHG.
Many of them have accumulated more wealth, with five of them climbing up the wealth-ranking
As with all Cambodian women, it was the ability to build a secure shelter that provided
the most satisfaction to the members' lives. Twelve of them have been able to improve
the quality of their housing: nine built new houses while three renovated their existing
Other important changes also took place, such as a decrease in domestic violence,
improvement in their confidence and family relationships and an increased ability
to send all their school-aged children to school.
For more discussion on these issues see two Padek reports: Rasmey Chamroeun Self-Help
Group, A Case Study, and Self-Help Group Model: More than just economic development.
Although it is uplifting to witness the changes experienced by these women, it is
important to ensure that mechanisms be established so that groups like these can
continue to operate successfully. This SHG, together with other community finance
groups, needs government assistance and investment to build the capacity to become
a viable financial institution.
Every village has the capacity to build its own financial institution. To date, the
government has not invested in, or has not been instrumental in, savings mobilization.
The government can help community finance groups by building their capacity to save
and borrow safely. These groups also need institutional support systems and a legal
framework to help them in their quest for secure savings and affordable credit.
Done properly, this process will become a tool where the people and the government
become more engaged in active dialogue. This would stimulate demand-driven financial
sector reform from the grassroots level, further strengthening the very much needed
trust between the people and the government, as well as between the people and the
It is important that the poor have their own financial institution. MFIs stay in
villages when there is a profit to be made, but in times of economic difficulties,
they will have no incentive to hang around the poor, unlike community finance institutions,
which will stay as they are owned by grassroots members.
Boua Chanthou - Director, Padek