Although Cambodia is ahead of both Vietnam and Laos in microfinancing projects for rural development, high interest rates imposed by the government and the Asian Development Bank are still hindering rural credit loans and growth, an official from the Rural Development Bank said.
Son Koun Thor, Chairman and Chief Financial Officer at the Rural Development Bank, said officials from Vietnam and Laos praised Cambodia during a recent conference in Vientiane for the microfinancing programs that give small loans to farmers. The annual meeting was held to discuss ways regional countries could improve rural development and alleviate poverty.
The main reason Cambodia’s microfinancing projects have been so successful is due to the 72 NGOs participating in rural credit programs and the large loans from institutions like the ADB, Son Koun Thor said. By comparison, Vietnam has about 14 NGOs working with rural credit programs, while Laos has fewer than Vietnam. Both countries receive around $4 million to $5 million per year for their microfinancing projects from a variety of sources.
In 1999 alone, 334,000 families received $23 million in microcredit loans, according to the National Bank of Cambodia.
Despite the reported success of Cambodia’s microfinancing institutions, however, Son Koun Thor said that high interest rates demanded by larger financing institutions make it difficult for rural farmers to repay their loans.
“Every day [the RDB] tries to reduce the interest rates for farmers. But it is still too much because our creditors have too high an interest rate,” he said, referring to the ADB and the government. The loans which farmers receive essentially go through four financial or banking institutions before they arrive in the hands of the farmers.
For example, in March the ADB finalized a $20 million loan for microfinancing programs. The ADB loans the $20 million to the Ministry of Finance at a 1 percent interest rate per year, with an eight-year grace period. After the grace period, the interest rate will increase to 1.5 percent.
From there, the Ministry of Finance lends the money to the Rural Development Bank at an approximately 7 percent interest rate. The RDB is then responsible for distributing the loans to microfinancing institutions.
The RDB will distribute the money at an 11 percent interest rate per year.
In the final stage, microfinancing institutions such as Acleda will disburse money to farmers at interest rates between 24 percent and 60 percent per year, Son Koun Thor said.
“Cambodia is ahead of [Vietnam and Laos] because our market and political system is more free,” he said. “But the interest rates are still too high.”
“The government charges us 7 percent interest for the ADB loan even though they have previously charged only 3 percent for other microfinancing loans from the International Fund for Agriculture Development [IFAD]. Why must they charge us 7 percent?” Son Koun Thor asked.
Finance Minister Keat Chhon was not available for comment.
He has previously said that the interest rates should not be considered too high.
While administrative fees and inflation affect the interest rates, the operating costs for creditor institutions is the primary reason rates are high, he has said.
Anthony Jude, Portfolio Management Specialist and Deputy Head at the ADB, also said that the 7 percent interest rate for the $20 million ADB loan should not be considered too high.
“The loans are at the standard rate,” Jude said. “There should be an added effort of competition among the NGOs to bring the interest rates down.”
One possible reason the Ministry of Finance charges only 3 percent for the IFAD loans but 7 percent for the ADB loan is because IFAD is only loaning $9.2 million while the ADB is loaning $20 million, he said.
Jude also expressed doubt that borrowers would see any benefit if the government lowered its rate.
“Even if the government reduces their interest rates from 7 percent, that will not get lower rates to the end users—the farmers,” he said.
In Channy, director of Acleda—the largest micro-financing bank in Cambodia with more than 68,000 borrowers—blamed the RDB for charging too high interest rates.
“To Acleda, we think in terms of market rate. The government and the ADB is charging the market rate, but the RDB loans to microfinancing institutions is too high,” he said.
But Son Koun Thor said the 11 percent to 12 percent interest rates the RDB charges is necessary.
“The reason [the RDB] rates are high is because there are such high operating costs and farmers borrow a very small amount—sometimes only $200,” Son Kourn Thor said. “So if we takes a trip to the provinces to check on a $200, the interest rates we charge won’t even pay for petrol.”
The government has been making progress in reigning in the previously unregulated micro-financing sector, observers and officials say.
In November 1999, it passed its new banking law, which required NGOs acting as lenders to be licensed—and thereby regulated—by the National Bank.
On July 12, the Ennatien Moulethan Tchonnebat lending agency became the first such lender to be licensed as a “micro-financing institution” under the new law.
At the agency’s inauguration, National Bank Governor Chea Chanto praised EMT as a lender “that charges fair interest rates from the rural poor.”
(Additional reporting by Brian Calvert)