Logo of Phnom Penh Post newspaper Phnom Penh Post - MFI loan interest capped

MFI loan interest capped

Minister of Defence Tea Banh speaks at a meeting of CPP commune council candidates in Siem Reap on Sunday. Facebook
Minister of Defence Tea Banh speaks at a meeting of CPP commune council candidates in Siem Reap on Sunday. Facebook

MFI loan interest capped

The National Bank of Cambodia (NBC) has capped interest on microfinance loans to a maximum of 18 percent per year, an unprecedented move that came on the direct orders of Prime Minister Hun Sen, Defence Minister Tea Banh said yesterday – a decision some experts suggested had political overtones and could have unintended negative consequences for the poor.

The step, which will nearly halve what some microfinance institutions (MFIs) currently charge, comes in the wake of a recent campaign by the government to publicly distance themselves from lenders by forcing nationwide overhauls of bank and MFI logos, and to declare it “illegal” for any party to promise to cancel MFI debts.

Reached yesterday after a speech delivered on Sunday to more than 800 ruling party commune candidates in Siem Reap, Banh said that while the issue fell outside his defence portfolio, he was speaking on behalf of the premier, who floated the populist rate cap in November.

“I just [repeated] the words of the premier, [who ordered] the bank to restrict the MFI to set the [maximum] interest rate at 18 percent. The bank will do it,” he said.

The NBC made good on Banh’s pledge just hours later, announcing yesterday afternoon that the new rate ceiling would be imposed on all MFIs from April 1, in what appears to be a direct contradiction to advice from one of the bank’s economic researchers, Leng Soklong, who only three months ago warned an interest rate cap was bad policy.

According to the 2016 annual report of the NBC, 1.9 million MFI clients took out a total of $3 billion in loans, making the average loan about $1,500.

AMK CEO Kea Borann said a loan of that size would attract an interest rate of 25 to 30 percent per year, depending on individual risk. The bank’s new directive will mean the maximum that MFIs can charge will be severely curtailed.

Banh stressed the move was “not connected” to the upcoming elections in June, but was instead about “relieving the burden” of those who borrow and struggle to pay back loans in the face of too-high interest rates.

“I think the people will be happy with us, because we really care about them,” he said.

Kaing Nengsong, CEO of small microfinance Apple Finance PLC, said that while he didn’t disagree with policy, it would be impossible to implement in such a short timeframe, suggesting the cap should gradually decrease to 18 percent over a number of years.

“This is surely going to affect my business ... It is very difficult for us to earn a profit as everything keeps increasing, like the staff’s salary, which increases year by year,” he said.

Stephen Higgins, managing partner of local investment firm Mekong Strategic Partners, said yesterday’s announcement was a “surprising move by the NBC”.

“Given the adverse impacts that this cap would have on the economy, and that it will ultimately hurt the poor in Cambodia who will lose access to finance, I assume that it is not being driven by the NBC, which has always been very sensible and pragmatic,” he said via email.

“Interest rate controls are demonstrably the wrong policy, they actually hurt the poor the most,” he said, adding the poor may be forced to turn to loan sharks “who charge exceptionally high rates”.

Miguel Chanco, lead ASEAN analyst for the Economist Intelligence Unit, said that if government influence was behind the move, “then it does not speak well about the independence of the NBC”.

“The government and the NBC can’t force MFIs to cut interest rates,” Chanco said via email. “First of all, given the high level of dollarisation in the economy, the NBC’s ability to manage overall money supply is limited. Secondly, as these institutions are privately run, it would send a worrying signal to the financial industry if the state compels MFIs to cut interest rates.

“The ceiling should provide some relief for many borrowers in the short term. However, I do not think it’s a sound economic decision overall as it sets an artificial cost of credit that is likely to dissuade many MFIs from extending the microloans many Cambodians still need.”

Given the nearly 2 million borrowers in the MFI sector, Chanco said the government appeared to be distancing itself from high interest rates and that the “political optics are certainly a consideration with key elections coming up”.

General Banh yesterday said he would order the arrest of any politicians that “whispered” they could “clear” MFI loans to gain popularity, echoing a threat that Hun Sen made last year.

Opposition deputy president Mu Sochua said the Cambodia National Rescue Party had never promised to wipe away debts, and while she said it was “positive” the government was “finally taking action, because the situation is very serious”, it was not the role of government to set a price ceiling.

She said a hypothetical CNRP government would order an independent review on the positive and negative impacts of microfinance loans and would strengthen regulations to make MFIs more transparent.

She added that the government should address the many factors that saw people trapped in debt cycles, and give financial subsidies in extreme circumstances such as drought or flood to indebted farmers to help them pay off their MFI loans.

MOST VIEWED

  • Ministry requests school opening

    The Ministry of Education, Youth and Sport on Thursday said it would request a decision from Prime Minister Hun Sen to allow a small number of schools to reopen next month. Ministry spokesman Ros Soveacha said if the request is granted, higher-standard schools will reopen

  • Kingdom eyes India FTA, China deal set for August

    Cambodia is studying the possibility of establishing a bilateral free trade agreement (FTA) with India to open a new market with the second-largest regional economy. This comes as an FTA with China is scheduled to be signed next month while similar negotiations with South Korea

  • Judge lands in court after crashing into alleged thief

    Sen Sok district police on Thursday sent a Koh Kong Provincial Court judge to the Phnom Penh Municipal Court on manslaughter charges after he crashed his car into a woman riding a motorbike on Wednesday, killing her. District police chief Hour Meng Vang told The

  • Preah Vihear court drops charges against villagers

    The Preah Vihear Provincial Court has dropped all charges against eight ethnic Kuoy villagers who were in a land dispute with the Hengfu Group Sugar Industry Co Ltd since 2014. Wednesday’s decision was made by the judge who tried the case on June 10. The eight

  • Gov’t to boost Siem Reap tourism

    The Ministry of Tourism released the results of an inter-ministerial committee meeting concerning Siem Reap province’s Tourism Development Master Plan for 2020-2035 on Wednesday, revealing the government’s plan to improve the overall tourist landscape there. The meeting was attended by Minister of Tourism

  • Residents ordered to remove structures on Phnom Penh’s canal

    Phnom Penh municipal governor Khuong Sreng has ordered authorities to act against the perpetrators who built houses along the Luo 5 canal in Meanchey district. The municipal administration plans to create a committee to solve the matter. The order was given on Wednesday while Sreng led

  • ‘On the offensive’: Cambodia to load up on loans to stimulate economy

    As the dust settles on the economy, Cambodia comes to grips with what needs to be done to turn the economy around, starting with a big shopping list for credit ‘We are going on the offensive,” Vongsey Vissoth, Ministry of Economy and Finance permanent secretary

  • Eighty replacement peacekeepers set for Mali mission despite Covid

    Eighty Cambodian blue helmet soldiers who completed the peacekeeping mission under the UN umbrella in Mali will return to Cambodia on Friday, said the Centre for Peacekeeping Forces spokeswoman Kosal Malida. “To protect their families and communities from the Covid-19 pandemic, the 80 are required to

  • Government set to make up for cancelled April holiday

    The government is set to make up for a five-day Khmer New Year holiday late this month or early next month. The holiday was earlier cancelled due to the onset of Covid-19. The announcement is expected on Friday as the government is studying a range

  • Families told to register for cash handouts

    The government has called on poor families to apply to commune authorities for evaluation to receive financial support during the Covid-19 crisis. A $300 million budget has been planned for implementation within a year. Ministry of Economy and Finance secretary of state Vongsey Visoth said this