Dear Editor,
Like all human activities that have languished in the
shadows for too long, micro-finance can only benefit from the present - if
somewhat critical - spotlight currently being focused upon it.
Firstly,
it will force all practitioners in the field to ask themselves the questions
'what are we doing and why?' and 'how are we doing it and is it the best way?'
Secondly, by bringing the subject into the open it may goad a notoriously
reticent community to justify itself and try to dispel some of the confusion and
ignorance revealed by certain interviewees in your article 'Microfinance: who's
helping whom?' in the May 24 - June 6 edition of the Phnom Penh Post.
Some of the allegations are clearly ludicrous. (I note that in addition
to the previous list of complaints micro-finance now apparently leads to
prostitution, bad health, and migration. Flooding, drought, and other natural
events do not seem to play any part - unless, of course, micro-finance is held
to blame for them as well)
However, before engaging in a melee of
charges and counter-charges it might be useful to point out just how widely
diverse the microfinance field has become - so much so that the term
'micro-finance' is now a generalisation too imprecise for any objective
analysis: about as useful, in fact, as trying to discuss the behaviour of an
elephant when all we know is that it has four legs!
Whilst all MFIs
march under the banner of 'poverty alleviation' it is quite clear that it
implies different things to different people and the first divide in the road
comes when a program has to decide whether it is to be 'self sustaining' or
'dependent'. This is important because, make no mistake, what we really mean is
'generating sufficient income (and preserving our assets) to ensure that the
program can continue on its own' or 'continuing to rely on external subsidies' -
in other words 'profit making' or 'charity'.
Both have a vital role to
play and, as microfinance has failed in the past to attract any significant
private sector investment (I wonder why if we are indeed making the extravagant
profits ascribed to us?), every MFI of which I am aware, including ACLEDA, has
depended on the generosity of donors to start up in business. The decision on
whether and when to seek 'self sustainability' usually comes only after a few
years experience in the field. Nevertheless, the point is that it requires a
change in the culture and a disciplined approach to business that some at the
charity end of the spectrum seem to find distasteful.
Further
complications in classifying MFIs arise over the particular purpose of a
program. There are those for whom providing credit is the main activity per se
(i.e. acting as a bank) and those for whom the supply of credit is subsidiary to
a larger agenda such as promotion of clean water, education or even membership
of some particular social or religious group.
There are also significant
differences across the spectrum between those like ACLEDA who are 'home grown' -
founded by Cambodians usually with external support but essentially independent
of any one dominant partner - and those promoted by and under the effective
management of a single, usually foreign, backer.
After five years as an
NGO ACLEDA, in conjunction with its sponsors and donors, came to an important
conclusion. This was that in the long run an effective micro-finance program
needs to be sustainable if it is to guarantee access to funds as and when
required and if it is to make a significant and lasting impact on poverty. This
means essentially that borrowers should 1) pay a realistic rate of interest for
the use of the money borrowed and, 2) they should repay their loans when due.
The failure to do either would very quickly lead to a drying up of funds
available to support ongoing lending activity.
Whilst charity has its
place, as far as ACLEDA is concerned lending at artificial or subsidised rates
only prevents the determination of 'fair price' which in turn leads to unreal
expectations, discourages further investment, distorts performance measurement
and undermines those it is intended to help by creating ongoing donor
dependency.
This of course begs the question as to just what is a
'realistic' rate of interest. '60%' seems to be the number that is most
frequently quoted to illustrate the supposedly usurious practices of
microfinance lenders. In fact, while it is true that some types of loans -
essentially very small, short term unsecured loans - are priced this high they
represent only a very small part of the total portfolio and the average rate is
less than half that. The interest rates we charge on loans are linked to our
'cost of funds' which you will appreciate are somewhat higher in Cambodia than
in other financial centres where lower country risk premiums apply and there is
a healthy interbank market. But they must also take into account processing
costs, statutory reserve requirements, the expense of maintaining the branch
network and - the most significant cost factor in micro-finance - the expense of
administering such a large and geographically distributed loan portfolio with
much smaller individual loan amounts compared to those of other commercial
banks.
Your correspondent, Allen Myers (Jun 7 - 20) raises the age old
issue of how financial institutions quote (and apply) their interest rates. The
regulatory authorities in many other countries now require that banks should
publish the 'real annual rate' of their loan products taking into account such
things as the frequency and timing of repayment installments, interest charges,
etc. Clearly a balloon loan in which interest and principal are repaid at the
end of the loan term (these are known as 'bullet repayments') is more
advantageous than one where interest is to be paid monthly but to suggest that
the 'real annual interest rate' needs to regard the interest payments as
principal repayments is stretching it somewhat! After paying his rent every
month for a year does he seriously believe that he has a claim to half the
apartment?
Loans in which there is an element of principal repayment
alongside the interest payments - generally the most transparent and, from the
lenders' point of view, the least risky - are fast becoming the norm amongst
many MFIs.
The National Bank imposes clear rules on all financial
institutions which ensure that the borrower pays interest on the outstanding
balance only ('Declining Balance') and not on the original principal ('Flat
Rate'). The Flat Rate system is now illegal in Cambodia - at least for
registered MFIs, and none - least of all the borrowers - will mourn its demise.
- In Channy, General Manager, ACLEDA BANK LIMITED
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