CONFIRMATION that Cambodia’s largest micro-lending organisation Prasac will start to accept deposits represents the latest sign the Kingdom’s microfinance sector is booming.
But MFIs need to be weary of straying too far from their original mandate – notably, to financially assist the country’s rural poor.
Cambodia’s MFI sector has become one of the most buoyant in the region, as shown by the decision of major microfinance investor BlueOrchard Finance to set up its first Asia office in Phnom Penh last month. However, in many ways, Cambodia’s MFI market appears to be losing sight of the model in its purest form, as represented by Bangladesh’s Grameen Bank.
Using a model that turns traditional finance on its head, the Grameen mantra dictates that borrowers club together so that localised peer pressure is the driving force behind timely repayment. The success of this approach is unquestionable – Grameen records non-performing loan rates rarely achieved among conventional lenders.
“There is no legal instrument between the lender and the borrower in the Grameen methodology,” according to the organisation.
Its group lending structure is the key. However, in Cambodia microlenders have increasingly, and openly, moved away from Grameen-style lending towards a traditional retail banking model.
In what it may well see as an inevitable step for growth, Prasac has stated its intention to become a commercial bank in five years. This is perhaps unsurprising following the success of ACLEDA Bank – given its expansion into Laos and the lender’s rising attraction following investments by Jardines Matheson and Leopard Capital. ACLEDA was once a humble MFI before the market expanded to 22 licensed institutions, five of which now accept deposits.
As noted by BlueOrchard’s Cambodia Director Julie Cheng: “The market has become very competitive in the past couple years, with very fast growth by a number of MFIs.”
But most of these rewards are not being passed on to Cambodia’s poorest. Although micro-loan interest rates did come down slightly last year, deposit-taking MFIs have yet to show significant benefits being passed down to borrowers.
To help reduce the cost of borrowing, Cambodia needs to establish a fully functioning credit agency. Furthermore, deposit-taking MFIs need to move towards savings rates that do not rank among the highest in the world, in some cases more than 10 percent – as when savings rates are more sensible, microlenders lower lending rates.
Perhaps most importantly, the sector needs to safeguard a focus on the methodology. By maintaining non-collateralised lending, Cambodia can ensure that MFI money reaches the most vulnerable populations.
The result is not only one of ethical advantage. Borrowers that suffer only humiliation from peers for loan default have little to lose financially and therefore everything to gain by borrowing and repaying on time. That can reap huge economic benefits on a countrywide scale.