On the road with one of hundreds of credit officers navigating an industry growing at a rapid pace
A typical day for Nhiep Samay, an officer with Cambodia’s largest microfinance institution, involves background checks on prospective clients: What do the neighbours think? Can the village chief vouch for their ability to pay back a loan? Have their business activities been successful in the past?
And for those people his organisation, Prasac Microfinance, is already lending to, Samay becomes a business adviser of sorts - giving guidance on anything from rice cultivation techniques to duck rearing.
“To be a successful credit officer [CO] one needs to understand their institution’s policies, have knowledge of the finance and loan assessment process, but also have a strong social sense to be able to do a good job in assessing clients,” said the 10-year-veteran at Prasac’s Ang Snoul district branch in Kampong Speu, as he surveyed a client’s duck pond.
By most business standards, Cambodia’s microfinance industry is booming. MFI clients have grown from 351,100 in 2005 to over 1.5 million at the end of 2013. Total loans have increased from $50 million to more than $1.3 billion over the same period. The average return on equity for MFIs across the industry in 2013 was 22 per cent – market leader Prasac was almost twice that figure.
Samay is among hundreds of credit officers who are navigating a complex mix of cultural and commercial factors on the frontlines of an industry growing at a rapid pace.
In the absence of hard data, a credit check means gathering anecdotal evidence from the fellow villagers on the credibility of the loan applicant. A credit officer asks the village chief whether a person has multiple loans with other institutions or from a fellow villager or commune patron. The village chief will also confirm that a person’s home and land title – used for collateral – is their own.
“I can confirm their character, their background and history, and if they are a long-time resident here or have just lived here temporarily,” said Khan Kheung, village chief of Prey Tapok in Por Senchey district – a village where Prasac has several clients.
According to Stephen Higgins, a managing partner at Cambodia-based Mekong Strategic Partners, Cambodia’s top eight performing MFIs have an average healthy return of 26 per cent on shareholder investment. Good management of costs at MFIs play a part, Higgins said, but low credit losses at about 1.6 per cent below the global average are also driving strong performance.
“These low credit losses come down to good credit policies and processes, and culturally, there is a very strong willingness to repay,” Higgins said.
“This willingness to repay is particularly powerful in the rural areas, which are more conservative and people generally have much more insight into the affairs of their neighbours.”
Of the 2,611 accounts opened since 2004 at Prasac’s Ang Snoul district branch, there are just 17 accounts with late payments and there have been no defaults on loans.
There are two reasons for low losses according to Laing Khan, manager of the Credit Product Development Unit at Ang Snoul. One is the company’s strong – and deeply enshrined – company controls, and the other
is the honesty of their clients.
“Cambodian people believe in sin and karma. They believe that if they don’t return their debt, bad karma will be with them in the next life,” he said.
The social structure of traditional village life plays a role also, whereby villagers shy away from the embarrassment in their community of being unable to pay back their loans, Khan said. “They care about their reputation.
Cambodians are people who are very honest and are willing to return debts.”
Despite the a steady rise in account holders, a 2014 report by Jan Ovesen and Ing-Britt Trankell from Uppsala University in Sweden argue that microfinance has not led to poverty alleviation in Cambodia.
Since 2004, when microfinance started taking off, poverty has decreased on average by 0.6 per cent per year, compared to a rate of 1.2 per cent for the decade prior, the article notes.
The rapid commercialisation of microfinance means that the industry is driven by increased profits, rather than reducing poverty, according to Ovesen and Trankell. This has seen microfinance drift away from the country’s poorest – namely farmers who make up 70 per cent of the population – towards smaller non-farming businesses and salaried employees.
The steady rise of lending at high annual interest rates of close to 30 per cent has led to cases of over-indebtedness, where villagers take out multiple loans from both MFIs and informal money lenders, according to Oversen and Trankell.
And microfinance’s rise clashing with “widespread” traditional forms of lending, rooted in traditional village life and driven by the social pecking order of village patrons, is a cause of social tension in communities, Oversen and Trankell argue.
But MFIs like Prasac point to their strong credit procedures to help manage the problem: they check with villagers as to whether clients have other debts and finally cross-check with the Credit Bureau of Cambodia – a record of people with loans from formal financial institutions across the country.
A decade-long expansion, from 56 branches in 2005 to more than 175 branches, has aided Prasac’s goal of providing access to finance for the poor and reducing poverty levels in the country – something industry representatives would say could not be achieved without increasing revenues.
And as the market grows, Cambodia’s small rural businesses are taking advantage.
From inside the chicken shelter that a $10,000 micro-finance loan helped to build, farmer Thul Buntha, hunched over as he threw feed to 5,000 squawking chicks, talked business expansion with the credit officer. “The chicken poop is very good fertiliser and is in high demand,” he said.
Eyeing a second $10,000 loan, to fund another chicken shelter, Buntha is also aware there is a growing demand among lenders for his business and he will be looking for a good interest rate with favourable payback conditions.
Within ear shot of his credit officer, Butha smiled slyly and said: “There are a lot of microfinance companies coming to the village now.”