SOK VANNAK used to live in a small house with three children; they had many food

shortages. "But now," says Vannak, 43, a vegetable grower from Beng Tumpon

Dike, just outside Phnom Penh, "I can build a big house, feed 10 children, and

still have enough food."

Youk Houn molds her clay pigs . . . thanks to Acleda's loan she is able to

support her family

Over in Stung Meanchey, Van Sareth, 43, an incense-maker, recalls how she used to

struggle to make ends meet, borrowing money from loan sharks who would charge 20

percent interest a month. Now, she says, the low interest rate she pays her new creditors

means she can afford to keep all her children in school.

And in Thnot Chrum village, Meanchey district, Youk Him, 53, smiles as she skillfully

molds a clay pig money-pot, and explains how without help from Acleda, the microfinance

institution who lent her the money to start her business, she would have been unable

to support her family.

All these women are clients with NGOs who provide rural banking schemes, or microfinance.

Touted as one of the biggest success stories in the development sector, over the

past 10 years microfinance has become the backbone of many aid operations around

the world.

In Cambodia, microfinance services are providing around $20 million of credit, mainly

to the country's rural poor - allowing people who have never had the chance before

to manage and save their own money.

Although the methods used by different organizations vary, the basic concept is fairly

simple, as David Leege of CRS (Catholic Relief Services) explained.

"People who are involved in very-small-scale businesses do not present much

of an interest to commercial banks ... who tend to prefer clients who have collateral

in the event that a loan doesn't get repaid," he said. "So microfinance

is about providing sustainable financial services for people who do not have access

to capital."

Rural poor wishing to set up their own business used to have two choices - either

save for years to be able to take the first step, or borrow money from a shopkeeper,

relative or money lender - often at crippling rates of interest.

Although there were once provincial branches of the Central Bank of Cambodia, which

lent money to farmers, these were all closed down or sold off after 1989, resulting

in an enormous contraction in the amount of financial services reaching the rural

population.

The resulting gap was filled by NGOs. The first microfinance scheme was launched

by Unicef in the early 1990s, and followed by GRET, CRS, World Relief, Concern, Oxfam

Quebec, and the giant of them all, Acleda, which was the organization UNDP chose

to direct all of its credit funding to after 1995.

Perhaps the most interesting aspect of microfinance in terms of social impact is

the idea of village banking, where a group of people come together to form a "village

bank". When money is lent to individuals in the bank (by the NGO), a sub-group

is formed which guarantees repayment of the loan: if the original borrower cannot

pay back his or her money, the whole group will pay back the money.

"I think the real secret about village banking, and why it has achieved such

high repayment rates, is because of this solidarity and peer pressure - people's

reputation is at stake," said Leege.

According to microfinance experts, the process is self-selecting: people in the village

make their own decisions about who is a worthy credit risk. Although this seems to

open the way for possible marginaliz-ation (Leege said he had never heard of any

kind of political intimidation or complaints of bias from the villages) the results

seem to prove that the system really does work: CRS has a 98% repayment rate, World

Relief has a 99% repayment rate.

Savings also play a dominant role in many microfinance operations.

"We link credit to savings to build equity and accumulate reserves," said

Leege. "People aren't just looking for credit, they're also looking for a safe

place to put their money.

"People will start with a loan of say, 120,000 riel [$30]. If they pay that

back over six months and they save, they get a second loan for a larger amount ...

so over time, as their savings increase, the amount of the loan they can take out

also increases."

While the successes of the microfinance NGOs are manifold, they will soon have to

rethink their way of doing business in Cambodia, when new legislation, due before

the end of this year, will require larger NGOs to register as microfinance institutions

(MFIs).

This will be part of the new banking law currently being discussed at the National

Assembly and would ensure that the institutions are regulated far more thoroughly,

as well as enabling them to expand.

"We're at the point where it is necessary [for large microfinance NGOs] to register

as microfinance institutions, where you do have to respect various laws regarding

management and savings," said Leege. "Because if you're handling deposits,

you have to have systems and regulations and staff able to manage them in a way that

is secure."

Mark Capaldi, Country Director of Concern, agreed.

"The only way to be sustainable is to become a microfinance institution,"

he said, "because you have rules on governance, you have a legal framework to

adhere to."

Neal Youngquist, micro-finance advisor to World Vision, put the matter more bluntly.

"You need to be able to monitor, especially those people who are dealing with

savings, because you don't want rogue operators," he said.

There are certainly several major pros and cons for NGOs considering the change.

Losing NGO status will mean that they will have to pay corporate and commercial taxes,

and although coming under closer scrutiny may be a good thing, too much scrutiny

may generate unwieldy paperwork, and slow processes down.

But on the upside, transformed NGOs can get access to additional loan capital at

attractive rates from the Rural Development Bank, according to Youngquist.

"That's the carrot," he said, "But you have to register and transform

to get those rates. As an organization you have to decide whether you can effectively

use that extra capital."

He noted that there was a danger of over-expansion by new MFIs not used to dealing

with large sums of money.

"Money can be good and bad. You can have too much money, loan too fast; you

may not have the capacity to manage it all."

It is unclear whether it will eventually become mandatory for NGOs to make the transformation,

although at the moment, according to Son Koun Thor, Director General of the Rural

Development Bank and economic advisor to the Government, it is a matter of choice.

"However, you will need to have minimum capital of $65,000 to register as a

microfinance institution" he said.

He noted that Acleda, which earlier this month received $210,000 from the Japanese

government, would be likely to be registered as a "special bank", as opposed

to an MFI, owing to their vast reserves.

"They are dealing with millions of dollars," he said. "They need a

different operating procedure."

The new changes are certainly a positive sign in Cambodia's vastly unregulated banking

sector; as Son Koun Thor notes with a wry smile; as they stand at the moment the

microfinance NGOs are "neither illegal, nor legal, because no law exists for

them".

But one thing all are concerned for is that in the rush to transform, the initial

impetus for microfinance - to lend money to the poorest in the country - is not lost.

"We must maintain our mandate of targeting the poorest," said Capaldi.

He said Concern had developed policies to support this, including wealth ranking

in villages, follow up visits with rapid assessments, keeping loan amounts at a level

the poor can afford, and providing training to ensure the clients would have greater

success in their ventures.

Long term, the role of the smaller NGOs who operate microfinance systems, may become

defunct. With Acleda operating in a growing number of provinces as a special bank,

and with other NGOs transforming to MFIs, Capaldi admitted that maybe some organizations

had a short shelf life.

"For example, if Acleda were to access the rural poor in an affordable way,

the NGOs might become less useful [long term]" he said. "And perhaps in

the future the MFIs and banks who offer similar services would merge together."

But all this is a long way down the line. In 1998 the Asian Development Bank estimated

that the demand for rural credit in Cambodia was between $88 million and $100 million.

With MFIs and NGOs only providing $20 million, there is still a large gap to fill.

"MFIs play a critical role in the country right now," said Youngquist.

"And I would argue that a country cannot prosper unless it has a reliable institution

to save and lend money."

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