PRISON OR PROSPERITY? Critics question whether micro-finance
operators really are helping the poor.
The practice of micro-financing was dragged into the spotlight after a recent
Senate hearing criticized micro-finance institutions (MFIs) for their high interest
rates. Senators said that loan rates of up to 60 percent a year cripple the poor,
line the pockets of MFIs and increase rural poverty.
Those rates come in a country that has enjoyed inflation rates in the low single
figures in recent years, a trend the Cambodian Development Resource Institute ascribes
to dollarization of the economy.
Senators also cited widespread lack of education, poor training of borrowers, and
the absence of micro-finance legislation as major factors forcing some rural borrowers
to sell land and possessions to repay loans.
Critics of micro-finance operators (MFOs) are not only found in the Senate. Director
of Oxfam's Womyn's Agenda for Change (WAC), Rosanna Barbero, says micro-finance has
been a failure in terms of its touted goal of alleviating poverty.
"It puts people in a cycle of poverty," she says. "It is a revenue
spinner, a tool of control. It is used by NGOs so they can mobilize the people when
they need to."
Yet credit schemes are run successfully in some developing nations. Predictably,
within Cambodia opinions differ on the best way forward, but proponents insist that
it reaches those who are too poor to borrow from commercial banks and helps tens
of thousands take control of their lives.
In Channy, director at Acleda Bank, the country's biggest MFO, takes that view.
"Micro-finance plays a big role in poverty alleviation in Cambodia," says
Channy. "It can help reduce transaction costs of customers. It helps people
generate income and provides job opportunities."
Critics respond that it can do those things, but question the way the various programs
Cambodia's banking system was completely destroyed during the Khmer Rouge period.
These days around 90 percent of the population has no access to formal credit.
So in the early 1990s NGOs started providing credit services for the rural poor as
part of their development programs. Acleda was established as an NGO in 1993 by the
International Labor Organization and the UN Development Programme. It registered
as a specialized bank in October 2000. Today it is the country's biggest MFO with
a loan portfolio of nearly $22 million.
There are between 50-70 registered and unregistered small lenders. Two are licensed
MFIs: EMT and Hattha Kaksekar. Around 25 more small loan operators are registered
with the NBC. At least as many operate without accreditation.
The top five players dominate the market: Acleda, EMT, Hattha Kaksekar, PRASAC and
Seilanithih account for 84 percent of all loans. International NGOs (INGOs) operate
credit programs and also fund local NGOs to start their own schemes.
A major bone of contention is that loans don't generally reach the very poorest.
Lenders want assurances that clients can repay loans, which rules out many of those
who are most in need.
Independent consultant Karen Rasmussen, who wrote her masters thesis on micro-credit
in Cambodia, says that in reality, "a great many of the micro-credit programs
in Cambodia are not lending to the very poor, sometimes not even to the middle poor".
That, says Margaret Robinson, author of several books on the subject, is common around
the world: sustainable micro-finance can only serve the "active poor".
She says the problems of the ultra poor have to be met by governments.
And that seems to be the approach MFOs are taking here. Rommel Caringal, program
manager at World Vision, says the NGO lends money to "the poorest of the entrepreneurial
Neither Acleda nor EMT targets the poorest of the poor. Instead they focus on those
with the skills and business ideas to generate income.
The aspect that causes most outrage is the amount the poor pay for access to cash.
In a country where commercial banks lend at 18 percent a year, many people are asking
why the poor are charged as much as 60 percent for small loans.
Critics are particularly irked that INGOs, who have a mandate to help alleviate poverty
and are given international funding to do so, charge almost as much as commercial
heavyweights like Acleda.
The most common reason cited is the high cost of providing credit services in rural
areas. Loan sizes are small, transaction costs are covered by the lender, transport
is expensive, as are staff located in remote areas. Acleda also blames the prevailing
"There is illegal tax collection that makes businesses fail and security is
a problem," says Acleda's In Channy. "If women travel alone to sell vegetables
they will get robbed, so they need two people and security, and transport costs increase."
Concern, an Irish charity, has been running micro-credit schemes here since 1999.
Last year its loan portfolio was $700,000 and its 16,000 clients were being charged
3 percent a month. Like most INGOs, its funding comes from donors who rely on the
likes of Concern to supply affordable credit to the poor.
Country director Theresa McDonnell admits the rates it charges would be regarded
as illegal in some countries. While most INGOs told the Post the reason they charge
such high rates is to cover the high costs of running their programs, Concern was
more forthright: its program costs are met by donors, and all the interest earned
goes to building up its loan portfolio for future years in the interests of sustainability.
McDonnell says that as far as she is aware, that is quite common among INGOs operating
WAC's Barbero feels that expecting people to pay even 40 percent a year is absurd.
"If international agencies give grants to NGOs to do poverty alleviation through
micro-finance, I don't agree with that because I don't see it as poverty alleviation,"
she says. "Rates of 40-60 percent are criminal. No one in the world would borrow
money at 60 percent because no business would give you enough return."
However World Vision says its experience shows that its annual rate of 48 percent
doesn't put access to credit out of the reach of the poor.
"Our 3,700 clients think these interest rates are achievable and that number
is growing every year," says World Vision's senior operations manager Andy Leigh.
Other operators disagree. Team leader at PADEK, Kep Kannaro, says charging more than
3 percent a month makes repayment by the rural poor extremely difficult.
"People don't have the skills to use the money for small business and can't
do calculations," he explains. "This is very serious. NGOs should take
into consideration how they operate because it damages people's lives."
Regional comparisons make interesting reading. AusAID says interest rates vary widely
between different countries: specialized micro-finance providers in Bangla-desh charge
20-30 percent a year, while rates of between 30-70 percent are the norm in the Philippines,
although subsidized government and donor projects often charge less.
Nepal's Nirdhan Utthan Bank charges 20 percent on group-based loans, but best of
the bunch is Vietnam, where the Vietnam Bank for the Poor is the only source of significant
domestic funding for MFIs. It caps the rate micro-credit lenders can on-loan its
funds at only 7 percent a year.
The National Bank of Cambodia (NBC) and the Rural Development Bank (RDB) told the
Senate forum that rates here are too high.
"The interest rate is very high," said Kim Vada, NBC's deputy director
of supervision. "The NBC has held seminars to try to explain to MFIs how to
bring down the interest rates, but interest rates cannot be defined [by the government]
because Cambodia is a free market economy."
The RDB explained that under the loan rules of the Asian Development Bank, interest
rates could not be fixed. However, ADB country director Urooj Malik, denies his bank
has any say over the rates.
"We want to see more efficiency by the RDB for who they lend to, but we don't
control the MFIs," says Malik. "We do not intervene in the market - it
is up to market efficiency and the viability of these operations."
WAC's Barbero says that micro-finance must be placed in the wider context of the
conditions the IMF and World Bank place on Cambodia including trade liberalization.
She said the privatization of natural resources, health care and education costs
have increased people's vulnerability so that illness or floods will tip them over
the edge into a cycle of poverty, debt and migration.
Another major criticism is that some defaulters are forced to sell their land or
other assets to repay. In 2000, Oxfam-GB studied 39 families in two districts. It
found that micro-credit loans were a crucial factor contributing to landlessness.
Almost half the respondents said that they would not have sold their land if they
had not received a loan.
Rasmussen believes some NGOs are loaning money to people who don't have the ability
"This forces people into debt and often they may lose land, a cow or a moto.
In the worst possible scenario the husband may have to go to Thailand to work and
they may have to sell their daughter to a brothel," she says.
WAC's Barbero concurs, saying that micro-finance can lead to poverty, migration,
bad health, and young women having to seek employment in brothels.
"This makes people very vulnerable; they have no education and have to sell
off land to pay back debts," she says.
Acleda was embarrassed last December when Prime Minister Hun Sen accused the bank
of jailing numerous debt defaulters. The bank response was that only one person went
to jail for non-payment, and claims that since 1993 only 61 clients have lost their
EMT says around ten of its 74,000 clients lose their land each year. Acleda suggests
the reasons for land loss are not down to the loans, but previous bad debts or family
MFOs say a key issue in providing their service is getting quick and sustainable
financial services to the poor.
"From a client perspective the rates aren't the issue. The focus is quick access
to money," says Paul Luchtenburg, regional technical advisor to World Relief.
The methodology behind providing fast access to capital is the balloon approach,
in which MFOs require monthly interest repayments, with the principal repaid at the
end of the loan cycle. The alternative is monthly repayments that combine interest
and capital, much like a mortgage on a house.
A staff member at AusAID, which gives money to several MFOs to loan, questions the
"The balloon approach is unique to Cambodia," she says, "and everyone
who comes here is alarmed. Surely there is more risk in leaving someone to pay back
capital at the end?"
Before MFOs arrived, the rural poor relied on local money lenders, who charged as
much as 240 percent a year. Many INGOs cite these rates to show how much better off
people are under their schemes.
"Money lenders charge 10-20 percent a month," says World Vision's Caringal.
"Now our clients can borrow at a much lower interest rate, and people are very
The idea that MFOs have forced down interest rates due to increased competition is
widespread. However some point out the philosophical difference between private business
people loaning cash, and NGOs which are not-for-profit, donor-funded organizations
with different ideals.
"The claim that these NGOs are better than money-lenders is ludicrous,"
says WAC's Barbero. "To say one form of extortion is less harmful than another
And there is no doubt that some people who fall into arrears are forced to borrow
money from the loan sharks to pay back their debt to the MFOs. Elizabeth Abrera,
credit program manager for Catholic Relief Services/TPC, admits that does happen,
but says it is impossible to follow up since her organization has 27,000 clients.
All the MFOs the Post spoke to emphasised the importance of running sustainable programs.
If they charged lower interest rates, their operations would fold, leaving the poor
with no access to credit.
What is more, they say donors require proof of program sustainability. For example,
AusAID has granted World Vision around $500,000 over three years for its program.
It says that although very few projects are in reality sustainable, funding proposals
must show moves towards sustainability. MFOs also say they cannot rely on outside
"Donor grants aren't always there when you want them," says CRS's Abrera.
"Many INGOs and local NGOs are dropping by the wayside because there aren't
enough donors to fund them."
Veena Krishnamurthy, of Australian Catholic Relief, which works with local partners
on self-help group programs, says a balance must be struck between financial sustainability
and reaching the poor.
"If you are helping the poor there must be some subsidies," she says. "In
Cambodia NGOs seem to be losing sight of this. There needs to be a recognition that
there's a certain segment of the population - the very poor - to whom NGOs need to
provide subsidized credit."
And there are alternative models. Both PADEK and Church World Service (CWS) operate
self-help groups rather than credit schemes. The key difference is that all interest
repayments go to the village committee rather than the NGO. CWS program officer Olivet
Visda says their donors still support them even though they are not making a profit.
"We strongly believe in the self-help concept and we are non-profit," she
says. "We don't charge interest because our objective is capacity building."
Calls for enforcement of legislation have grown louder in recent months, and not
just from politicians. Both Acleda and EMT want to see the industry more accountable,
and believe that regulating lenders will help.
That is on its way. By the end of this year all NGOs with an outstanding loan portfolio
of more than $25,000 must register with the NBC. Those outfits with more than $250,000
of outstanding loans or more than 1,000 borrowers must obtain a license and register
as an MFI. Six small loan operators, including Concern, World Relief, World Vision
and CRS are in the process of setting themselves up as MFIs.
Acleda's In Channy says it is about time the INGOs registered as MFIs. He says the
fact they are subsidized and don't pay taxes means some have operated unprofes-sionally,
creating bad practices that spoil micro-finance.
"We are there to balance social and commercial objectives," he says. "Private
shareholders want profit and we want to maintain the social balance by lending to
the lower segment of the market."
Some question how it is possible that an MFI, which operates as a business, can possibly
serve the poor and operate commercially. Consultant Karen Rasmussen says some INGOs
could end up marginalized by the requirement that they register as MFIs.
"International NGOs have a mandate to work with the very poor, so they will
be caught between the government and international headquarters," Rasmussen
explains. "I think some NGOs may shut down their credit programs rather than
not work with the rural poor. If this happens, people will lose access to credit
and return to moneylenders charging outrageous rates of interest."
However both World Vision and Catholic Relief Services believe that becoming formal
profit-making institutions will not stop them from working with the poorest.
"It is very clear we are not doing this for profit," says World Vision's
Caringal. "We will be looking for socially responsible shareholders."
CRS's Abrera agrees: "You can maintain your social vision even though you have
Other NGOs question whether the government realistically has the capacity to enforce
the new regulation. There are tens of thousands of micro-credit clients throughout
the country, as well as an unknown number of credit operators. Not least, enforcers
are based in Phnom Penh.
Probably the least controversial aspect of the micro-finance debate is that the rural
poor desperately need access to credit. It is on how best to provide these funds
that views differ. Most commentators agree that to be successful, credit schemes
must operate alongside other development programs. Rasmussen says that, "micro-credit
can be a powerful tool for development, but it must be viewed as only one part of
a whole approach to community-based rebuilding".
Most operators are careful to point out that micro-finance schemes are not the only
solution to poverty, and must be implemented alongside health and education development
"Micro-finance is an element, but you need many activities to help people,"
says EMT's general manager Chea Phalarin. "Health care and infrastructure are
MFOs say that while their programs do help alleviate poverty, their impact is modest.
Acleda's In Channy maintains that although micro-finance doesn't help all those who
take out loans, the lives of the majority are improved.
CRS's Abrera says comparisons are helpful in assessing the impact of her organization.
"If you compare women in 1995 when I started and now, they are not becoming
rich. [That] takes time - you see small changes," she says. "They
have better clothing, healthier children;the fronts of their houses are wood instead
World Vision has been running micro-credit operations in Cambodia since 1990. It
is registered as a small-loan operator. Two years ago it separated the management
and staffing of its micro-enterprise development (MED) unit from its development
program to increase its efficiency and sustainability.
It says that at the current rate of growth it will need to register as an MFI by
the end of the year. Total loan portfolio is $114,000. That covers 3,700 clients
in four provinces: Kandal, Takeo, Kampong Speu and Battambang.
Eighty three percent of borrowers are women, who loan an average $50 each at 4 percent
interest per month on a declining rate. World Vision's MED program manager Rommel
Caringal says its clients earn between $1-3 a day. They are classified as "vulnerable
in the community; big families with dilapidated houses who rarely own over two hectares
The NGO's credit agents have an average 285 clients each borrowing $50. At the moment
it is the middle of the loan cycle, with each agent lending $8,585 per month at 4
percent interest. That generates $343 interest a month.
Monthly running costs per credit agent are between $400-$420 including branch costs,
salaries, gasoline, administration, loan loss and motorbike depreciation. That does
not include head office staff and training. The NGO says that interest repayments
only cover 20 percent of its running costs with 80 percent covered by international
Where did it all start ?
The concept of micro-finance originated in Bangladesh in 1976 when Muhammad Yunas
set up the Grameen Bank to lend small amounts of money to poor rural women. Now more
than 30 million micro-loans are dispersed every year worldwide, and according to
the World Bank that is increasing at an annual rate of 30-40 percent.
The Asian Development Bank (ADB) defines micro-finance as the provision of a broad
range of financial services such as deposits, loans, payment services, money transfers
and insurance to the poor and lower income households and micro-enterprises.
Three sources provide micro-finance services in Cambodia: formal institutions, semi-formal
institutions such as NGOs, and informal sources such as moneylenders.
More than $30 million has been disbursed under credit schemes in Cambodia, allowing
20 percent of rural people access to funds. Between 75-100 percent of micro-credit
clients are women. Demand for credit far exceeds supply: it is estimated that 65
percent of demand is not being met.
The country's small lenders are a hodgepodge of 50-70 registered and unregistered
bodies. There are two licensed micro-finance institutions (MFIs), Ennatien Moulethan
Tchonnebat (EMT) and Hattha Kaksekar. Acleda is a specialized bank, 25 are registered
with the National Bank of Cambodia (NBC) as small loan operators, and at least 25
more operate without any accreditation.
The top five players dominate the market, accounting for 84 percent of all loans.
They are: Acleda, EMT, Hattha Kaksekar, PRASAC and Seilanithih. International NGOs
also operate credit programs and jointly fund local NGOs to implement schemes.
Most loans are for agricultural production or small business operations, and range
from $20 per person to $5,000 for individual business loans.
Average interest rates on loans range from 3-5 percent per month, or 36-60 percent
a year. Collateral such as property or livestock is not required for most group loans,
but is for larger individual and business loans.
Private money lenders by comparison charge between 10-30 percent a month, although
that has come down in some areas. Commercial banks, including Mekong Bank and Cambodia
Commercial Bank, charge 18 percent interest on loans a year, but collateral is required.
Some operators require monthly repayments of both principal and interest, similar
to a mortgage. However the balloon method is very common: interest repayments are
made monthly, with the entire principal paid at the end of the loan cycle. Average
loan cycles range from 4-12 months. Loan repayments for most operators are 95 percent
There are many methodologies of credit, the most common being solidarity groups.
This involves between five and 15 people jointly taking out a loan, with all members
responsible for repayment of the loan and interest. Individual business loans are
Some NGOs operate self-help groups in which village banking committees, which decide
on the loan and interest rate, are set up. Interest repayments go to the committee,
not the NGO.