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Small loans transform attitudes to debt

Microfinance extends reach to almost 800,000

The microfinance sector has enjoyed impressive growth in the past five years, with today’s total amount of outstanding loans ten times what it was in 2003 and rurally focused microfinance institutions (MFIs) planning to expand their services.

According to Bun Mony, the former chairman of the Cambodian Microfinance Institution, an umbrella association for the small-scale lenders, in 2003, six MFIs extended $59 million in loans to some 351,000 borrowers.

By March 2008, 788,017 small- and medium-sized enterprises and individuals had borrowed $598.7 million from the 18 MFIs recognized by the National Bank of Cambodia.

“This is a big change for the past five years,” Mony said.

He also noted the MFIs’ unanimous welcome of the National Bank’s new policy, put forth in December, allowing the lenders to offer other basic banking services. If an MFI can meet an investment capital requirement of $2.5 million – a long stride from the $65,000 needed to establish a lending-only institution – it can begin accepting customers’ deposits for savings and checking accounts.

The capital requirement is intended to guard against fly-by-night malfeasance and to protect the institutions’ creditors – which, in the case of Cambodia, usually began as non-governmental organizations – and depositors.

Mony said that the National Bank will require microfinance institutions to provide a deposit of eight percent of their total holdings in order for them to accept deposits.

“If you receive $1 million in savings capital, you must deposit $80,000 [at the National Bank] as a reserve deposit. In case you go bankrupt, [the National Bank] will use the reserve deposit to pay back the creditors,” Mony said.

The Cambodian Microfinance Institution’s newly appointed chairman, Hout Ieng Tong, said he sees no serious obstacles to the sector’s continued growth and expansion of services, as long as the country’s power structure and overall economy remain healthy.

In fact, he said, the MFIs’ evolution is assured by the fact that so many customers now require larger loans and other services in order to grow their businesses.

“As an MFI, you can’t provide many financial services to the poor,” Ieng Tong said. “In some developing countries, poor people already are using ATM machines and Visa [credit] cards.”

Ieng Tong said many of Cambodia’s 18 MFIs are looking to meet the National Bank’s $2.5 million requirement and improve their information technology systems, in order to collect capital from small- and medium-scale depositors and accrue the $13 million that the National Bank requires for an MFI to become a commercial bank.

With the rate of return on micro-lending having improved from 90 percent in 2003 to 99 percent in 2008, Ieng Tong said, this goal is achievable.

Several MFI operators echoed that optimism.

Chea Phalarin, general manager for Amret, said his MFI will put up the $2.5 million soon and prepare to switch to a commercial bank.

“Our institution is getting ready for the National Bank to license us to offer savings accounts,” he said. “We want to be able to offer savings account services and other services once we become a full commercial bank.”

Phalarin said the sharp growth of MFIs, with their outstanding loans increasing by 50 percent to 80 percent annually, has been coupled with an increased understanding of the banking system and its benefits. This has consequently destigmatized indebtedness in a society that has long frowned on owing others.

Increased lending has meant lower interest rates for borrowers. Phalarin said Amret has dropped its rates from 3.5 percent in 2003 to nearly two percent in 2008. Kuch Setha, general manager of Seilanithih, said his MFI has dropped its rates from 5 percent in 2003 to 2.5 percent today.

In fact, rates cannot go much lower, Phalarin said, as the MFIs borrow from their creditors at a rate of one percent.

The Cambodian economy is enjoying another boon as well, according to Setha. The rising price of rice in domestic and foreign markets has encouraged farmers to expand their operations, requiring to them to take out more loans.

“They need money to buy fertilizer, buy equipment or make repairs,” he explained.    

  

“Ten years ago, people were shy to borrow money, they felt ashamed to borrow money from someone, but now they need it more.”

According to Touch Vanneath, marketing officer of Prasac Microfinance Institution, financial organizations geared towards the needs of rural people have a bright future ahead of them.

“I see the number of borrowers increasing because of the demands of their living standards,” he said, adding that since 1995 more than 83,000 farmers have borrowed from Prasac, investing in capital worth more than $30 million.

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