OFFICIALS say microfinance institutions will help spur consumer confidence over the next five years in Cambodia's banking sector, which currently serves less than 30 percent of the Kingdom's estimated 14 million residents.

Chea Chanto, governor of the National Bank of Cambodia, said MFI transactions constitute the majority of business in the banking sector and that increased support will lead to the purchase of additional products.

"In four or five years' time, Cambodian people will have a greater understanding of the banking sector, and the country will develop more rapidly as people stop worrying about losing the money they store at home to robbers or to the elements," he said during the grand opening of the new Sathapana Ltd head office in Phnom Penh earlier this week.

He said the microfinance group Sathapana reflects not only an improved banking environment, but also an important opportunity to further advance development of the Kingdom's financial sector.

"More people are now able to get MFI loans to develop their business and earn additional income," Chea Chanto said. "MFIs are considered a key element in reducing poverty in rural areas and will put the country on the right path."

MFI loans have increased by 73 percent in the first half of 2008, compared with last year, he said, with loans being granted to 979,000 people. Sathapana had provided 142 billion riels (US$35.5 million) in loans to 32,350 clients, Chea Chanto said.

"We will continue to ensure fair competition in order to reach a reasonable interest rate level agreeable to borrowers and lenders alike," he said.

"The government is currently drafting a new financial contract to advance the development of small and medium-sized business enterprises by providing long-term loans," he said.

But with no current figures available, experts are divided on how the global financial crisis will impact local lenders.

"We are not worried about the global financial crisis.... But the NBC will continue to enforce good governance through internal audits to protect financial institutions and their customers," he said.

Chea Peng Chheang, secretary of state at the Ministry of Economy and Finance, said MFIs have made substantial contributions to the financial sector by attracting both local and international investors.

"MFIs are enabling the development of credit services and savings for rural people, and it is the most important force in encouraging the development of the national economy," he said.

Interest rates on MFI loans have fallen in the last few years, Chea Peng Chheang said, but they continue to fluctuate between two and four percent per month.

"The government is developing infrastructure in rural areas, including national roads, trails and bridges in an effort to reduce operational expenses and, eventually, to keep interest rates down," he said.

Michael Moormann, vice chairman of the board of directors at Sathapana, said continued growth of the MFI sector will require more effort from staff and sound management by the board, as MFIs will face challenges in the future.

"The increasing sophistication of products and services will require substantial investment in information technology," Moormann said.