The apex body for the nation’s microfinance industry announced yesterday that the central bank had tentatively agreed to a number of measures it had requested to ease the burden on microfinance lenders following last week’s unilateral decision to cap annual interest rates at 18 percent as of April 1.
Hout Ieng Tong, chairman of the Cambodia Microfinance Association (CMA), told reporters that senior officials at the National Bank of Cambodia (NBC) had “agreed in principle” to reduce the annual licence fee of microfinance lenders affected by the new interest rate ceiling and provide loans in Khmer riel directly to microfinance institutions (MFIs) while acting as a guarantor.
He said the NBC would consider postponing a 12.5 percent reserve requirement on borrowing that was supposed to apply to microfinance deposit-taking institutions (MDIs) this year, as well as the deadline for microlenders to reach their revised minimum capital requirements.
MFIs are currently required to raise their paid-up capital to at least $1.5 million by March 2018, while MDIs must reach $30 million.
Ieng Tong said if the central bank were to follow through on these measures he was optimistic that the microfinance sector could weather the sudden imposition of an 18-percent cap on interest – a drastic cut from the prevailing 20 to 30 percent rates offered on loans under $1,000. Analysts have warned the new interest rate ceiling could bankrupt dozens of MFIs while drying up credit channels to the poor.
“At first, when the interest rate cap was announced, we were very worried . . . and we still hope that there will be not any institutions that go bankrupt because of this new policy,” said Ieng Tong. “But if the central bank helps us to cut the costs of our operations, it will allow us to operate sustainably.”
“Even if the financial institutions face lower profit margins, the cap can work and it could end up benefitting clients,” he said, adding that individual firms would still have to streamline internal operational costs to ensure that they continue to grow and meet credit demands.
But just to be sure, the CMA has also sought the approval of the Ministry of Economy and Finance (MEF) to exempt MFIs from tax on profit, he announced.
CMA board member Bun Mony, chairman of Vithey Microfinance Plc, said the central bank’s willingness to consider the CMA’s requests may have hinged on back-channel negotiations.
“We met with General Hun Manet last week and tried to inform him about the difficulties of this policy to the sector,” he said, adding that Manet the eldest son of Prime Minister Hun Sen – had said the government was keen to find solutions that would allow microlenders to continue supporting rural areas.
“The problem is that some of his colleagues in the government think that all MFIs are hugely profitable and can handle this 18 percent cap, which some can, but they don’t fully understand the market and that the smaller players giving small loans are barely profitable,” Mony added.
Sok Voeun, chief executive of LOLC (Cambodia) Plc, said the rate cap would slice deep into the MFI’s profits, but was unlikely to sink it.
“Our return on equity will decrease significantly this year and next year,” he said. “In the past, we use to get a return on equity of about 20 to 25 percent, but this year we might receive maybe 5 to 10 percent.”
He said the 18 percent interest rate cap would make small loans unprofitable, but the losses could be offset by profit on loans of $3,000 or more, which account for about half of LOLC’s portfolio.
“Though we will face losses, we cannot ignore customers who ask for small loans,” he said. “We will still provide small loans and hope profits from larger loans will offset our losses.”
Voeun said there was no sign that foreign backers would stop providing capital to Cambodian microlenders, as some analysts feared. However, they were pushing MFIs to trim high operational costs and stop hiring new staff until the situation improves.
“We will cut costs and strengthen our staff productivity,” he said. “For example, a credit officer who handles a loan portfolio of $200,000 will now be tasked with handling portfolios of $300,000 to $400,000.”
Stephen Higgins, managing partner of local investment firm Mekong Strategic Partners, said that internal MFI cost cutting was a given.“MFIs will accelerate cost-reduction strategies, which might include shrinking branch networks, reducing staff numbers, and redesigning products,” he said.
Higgins said there were various things that the NBC could do help the sector, but a cut in profit taxes should not be on the table as financial institutions should pay their fair share.
“Reducing branch licence fees would be a sensible move to help MFIs justify retaining branches in marginal areas,” he said. “And eliminating withholding tax on offshore borrowings would help to substantially reduce funding costs.”
Additionally, if the NBC did put a hold on implementing the 12.5 percent reserve requirements on wholesale borrowing for MDIs - a measure widely seen as a negative for the sector - it would be helpful, he added.