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Micro-finance balance sheet

Dear Editor,

Like all human activities that have languished in the

shadows for too long, micro-finance can only benefit from the present - if

somewhat critical - spotlight currently being focused upon it.

Firstly,

it will force all practitioners in the field to ask themselves the questions

'what are we doing and why?' and 'how are we doing it and is it the best way?'

Secondly, by bringing the subject into the open it may goad a notoriously

reticent community to justify itself and try to dispel some of the confusion and

ignorance revealed by certain interviewees in your article 'Microfinance: who's

helping whom?' in the May 24 - June 6 edition of the Phnom Penh Post.

Some of the allegations are clearly ludicrous. (I note that in addition

to the previous list of complaints micro-finance now apparently leads to

prostitution, bad health, and migration. Flooding, drought, and other natural

events do not seem to play any part - unless, of course, micro-finance is held

to blame for them as well)

However, before engaging in a melee of

charges and counter-charges it might be useful to point out just how widely

diverse the microfinance field has become - so much so that the term

'micro-finance' is now a generalisation too imprecise for any objective

analysis: about as useful, in fact, as trying to discuss the behaviour of an

elephant when all we know is that it has four legs!

Whilst all MFIs

march under the banner of 'poverty alleviation' it is quite clear that it

implies different things to different people and the first divide in the road

comes when a program has to decide whether it is to be 'self sustaining' or

'dependent'. This is important because, make no mistake, what we really mean is

'generating sufficient income (and preserving our assets) to ensure that the

program can continue on its own' or 'continuing to rely on external subsidies' -

in other words 'profit making' or 'charity'.

Both have a vital role to

play and, as microfinance has failed in the past to attract any significant

private sector investment (I wonder why if we are indeed making the extravagant

profits ascribed to us?), every MFI of which I am aware, including ACLEDA, has

depended on the generosity of donors to start up in business. The decision on

whether and when to seek 'self sustainability' usually comes only after a few

years experience in the field. Nevertheless, the point is that it requires a

change in the culture and a disciplined approach to business that some at the

charity end of the spectrum seem to find distasteful.

Further

complications in classifying MFIs arise over the particular purpose of a

program. There are those for whom providing credit is the main activity per se

(i.e. acting as a bank) and those for whom the supply of credit is subsidiary to

a larger agenda such as promotion of clean water, education or even membership

of some particular social or religious group.

There are also significant

differences across the spectrum between those like ACLEDA who are 'home grown' -

founded by Cambodians usually with external support but essentially independent

of any one dominant partner - and those promoted by and under the effective

management of a single, usually foreign, backer.

After five years as an

NGO ACLEDA, in conjunction with its sponsors and donors, came to an important

conclusion. This was that in the long run an effective micro-finance program

needs to be sustainable if it is to guarantee access to funds as and when

required and if it is to make a significant and lasting impact on poverty. This

means essentially that borrowers should 1) pay a realistic rate of interest for

the use of the money borrowed and, 2) they should repay their loans when due.

The failure to do either would very quickly lead to a drying up of funds

available to support ongoing lending activity.

Whilst charity has its

place, as far as ACLEDA is concerned lending at artificial or subsidised rates

only prevents the determination of 'fair price' which in turn leads to unreal

expectations, discourages further investment, distorts performance measurement

and undermines those it is intended to help by creating ongoing donor

dependency.

This of course begs the question as to just what is a

'realistic' rate of interest. '60%' seems to be the number that is most

frequently quoted to illustrate the supposedly usurious practices of

microfinance lenders. In fact, while it is true that some types of loans -

essentially very small, short term unsecured loans - are priced this high they

represent only a very small part of the total portfolio and the average rate is

less than half that. The interest rates we charge on loans are linked to our

'cost of funds' which you will appreciate are somewhat higher in Cambodia than

in other financial centres where lower country risk premiums apply and there is

a healthy interbank market. But they must also take into account processing

costs, statutory reserve requirements, the expense of maintaining the branch

network and - the most significant cost factor in micro-finance - the expense of

administering such a large and geographically distributed loan portfolio with

much smaller individual loan amounts compared to those of other commercial

banks.

Your correspondent, Allen Myers (Jun 7 - 20) raises the age old

issue of how financial institutions quote (and apply) their interest rates. The

regulatory authorities in many other countries now require that banks should

publish the 'real annual rate' of their loan products taking into account such

things as the frequency and timing of repayment installments, interest charges,

etc. Clearly a balloon loan in which interest and principal are repaid at the

end of the loan term (these are known as 'bullet repayments') is more

advantageous than one where interest is to be paid monthly but to suggest that

the 'real annual interest rate' needs to regard the interest payments as

principal repayments is stretching it somewhat! After paying his rent every

month for a year does he seriously believe that he has a claim to half the

apartment?

Loans in which there is an element of principal repayment

alongside the interest payments - generally the most transparent and, from the

lenders' point of view, the least risky - are fast becoming the norm amongst

many MFIs.

The National Bank imposes clear rules on all financial

institutions which ensure that the borrower pays interest on the outstanding

balance only ('Declining Balance') and not on the original principal ('Flat

Rate'). The Flat Rate system is now illegal in Cambodia - at least for

registered MFIs, and none - least of all the borrowers - will mourn its demise.

- In Channy, General Manager, ACLEDA BANK LIMITED

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