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Logo of Phnom Penh Post newspaper Phnom Penh Post - Rural credit schemes are booming, but controls needed

Rural credit schemes are booming, but controls needed

U SAID'S recent $800,000 injection into the growing portfolio of rural lending

has highlighted the Royal Government's desire for more control over such lending


Rural lending - from international organizations and NGOs to

poor rural families, the vast majority of which are headed by women - goes to

the heart of the government's aim of rural development.

The oldest scheme

started in 1988 but most have been operating less than two years. Business is


More than 28 agencies now lend money to the poor; interest rates

fluctuate widely from agency to agency; there are around 70,000 outstanding

loans totalling $2.2 million; and the client base is more than


However, the lenders are still unable to reach more than one in

every 100 needy people.

Although USAID has given its $800,000 to an

established NGO lender, there is concern that two other big funders - the Asian

Development Bank (ADB) and the European Union (EU) - are ignoring small but

experienced NGO lenders and setting up schemes which could be


"That could create more problems than help," said the

chief of one NGO lender. "They must consider the situation of the local


There are fears too that government factions - already gearing

up into campaign mode for the '98 elections - could control ADB and EU rural

development funding for their own politiking.

In February the government

established an independent body called the Credit Committee for Rural

Development (CCRD), chaired by Rural Development Minister Hong Sun Huot. CCRD's

other members represent the Ministries of Agriculture and Finance, the National

Bank, and three NGO lenders - Catholic Relief Services (CRS - the recepients of

the USAID's $800,000), ACLEDA and the French GRET.

In one of its first

moves, CCRD got all 28 NGO lenders together to provide information and comment

on their activities and to ensure there was no duplication. CCRD will eventually

set legal guidelines to rural lending, or "credit schemes".

CRS credit

program manager Elizabeth Abrera said CCRD were looking to set up a national

"credit fund", made up of all bilateral and unilateral funds, and to control how

best it should be shared.

Such controls are important. The present loans

will be dwarfed by the sums the EU and the ADB have to spend. The EU has $3

million earmarked for rural credit lending; the ADB intends getting into rural

lending with some of the $275 million it intends spending on Cambodia till the

end of 1997.

"They really need to touch base with us," said Abrera. "Some

of their recommendations really undermine the direction of others, and not only

in the area of credit."

Khmer NGO ACLEDA is the biggest NGO money lender

operating in nine provinces (with plans to open others in Siem Reap, Battambang,

Sisophon and Pursat, and eventually nationwide). ACLEDA has around $1.3 million

in receivables, the money it lends having come from the UNDP and the French

Development Bank. It has asked for another $1.5 million from the German

Development Bank KFW.

ACLEDA has $1.23 million outstanding in U.S. dollar

loans to small enterprises, in production, agricultural, service and trade

industries. It has another 558 million riels out in short-term "micro" loans.

"CCRD want to establish fixed interest rates [for lending], but the NGOs

want to retain flexible rates," said ACLEDA president In Channy.


NGOs have different objectives, they are subsidizing their lending to the poor,"

Channy said.

ACLEDA is conscious that even though it lends money to

Cambodia's poor, some sort of "profit" will eventually have to be made to offset

its own rising operational costs.

"Our lending fund is still there and

will always be there," Channy said. "However, at the moment we rely on our

donors to pay 100 percent of our operating costs. Most NGO lenders rely on

donors to pay all their costs.

"We want to assist the people in the

community, but on the other hand we want to survive... I think in the long run

we can't depend totally on the donors [to pay costs such as salaries, travel,

rent, inflation and cost of credit]".

ACLEDA aims to eventually

contribute at least $1 for every $5 it spends on operating costs. It has

therefore upped its lending interest rate to 18 percent, where before it used to

be around 10 percent.

Statistics show lending rates vary from under one

percent to 18 percent. "They are losing money," Channy said of NGOs subsidizing

their rates. CCRD wants to create discipline among lenders too, he said, so NGOs

cannot "just lend out and not care about the collection."


Abrera of CRS - which charges it loans out at five percent - said "really, it's

very hard to come up with a rule that allows only one certain rate to be

charged... it's not very realistic.

"Some NGOs go directly to the

borrowers and therefore incur more cost. The cost structures differ from each

NGO. And salary rates differ, for instance most NGOs pay their lending officers

$50 a month but ACLEDA pays $152 a month".

Traditional money-lenders are

the only alternative for the poor - and their true rates are 30 percent or more

each month.

Abrera sees a time, as the rural banking system develops,

when competition between lenders will creep in.

Loans are given only for

those who want to start small business enterprises. Lenders insist that

borrowers are "vetted" - visiting their houses and talking to village chiefs -

to ensure they are indeed "the very poor."

And yet, there have been no

reports of bad debts or legal action taken to recover arrears in any of the

70,000 outstanding loans. That alone should amaze first-world money lenders,

especially as those being lent money in the Cambodian countryside consist of

widows, women heads of households, IDPs, the handicapped, demoblized soldiers

and "the unskilled poor".

ACLEDA has a three percent rate of arrears -

that is three out of every one hundred borrowers are a month behind paying their


"People have to respect what they sign in their [loan]

agreement... we have to teach repayment discipline to [Cambodian] borrowers,"

Channy said. "We have to be fair that credit is not a hand-out."


said that the main security demanded by lenders was from guarantors - for

example relatives or parents with property - or alternatively the loans were

made to "savings groups" where each was responsible for the debts of


Abrera agrees with the idea of borrower responsibility: "If you

have a high default rate you might as well have just given the money


"Discipline and credit worthiness are among the most important

factors, especially dealing with the very poor. It's the only way a credit

program can be viable and sustainable.

"However, if we lend someone $50

and end up having to sell someone else's house to get it repaid, then that's not

the idea of helping anyone.

"Most credit schemes rely on group

accountablity... peer pressure really works," Abrera said.

CRS - like

ACLEDA - have never had a problem with even their most poorest of borrowers

repaying their loans. A whole community in Battambang pitched in with 500 riel

from each person to repay the 25,000 riel debt of a widow borrower who had


Other lenders talk about being secure that borrowers here do not

want to lose face in their community if they didn't keep up with their

repayments; and that Khmer women are a good risk because they were the

"accountants" of the family.

CRS plans to select three NGO lenders to

control the use of its USAID windfall, and want to establish 35 new village

banks in various provinces, taking their village bank "stable" to 78.



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