Cambodia’s Microfinance Sector Heads in New Direction

While shopping for a brand new television, 27-year-old Loek Bunhai recently bought a Sony flat-screen at the Sunsimexco retail outlet on Phnom Penh’s Monivong Boulevard for $345.

But with a monthly salary of $300 from his job as a microfinance loan officer in Phnom Penh, Mr. Bunhai was unable able to pay for the television outright. So he took out a loan from Japan’s Aeon Microfinance, which opened an office inside the store last year.

“Right now we can buy items like televisions and other objects and just need to pay the money back every month,” Mr. Bunhai said. “This system allows us to buy things that we really want.”

While Cambodia’s microcredit industry took off in the early 1990s and saw social-minded organizations start providing small loans to poor communities looking to start up a business, microfinance institutions (MFI) here are beginning to change direction.

Like in Thailand and Vietnam, Cambodia’s microfinance industry has begun looking toward clients like Mr. Bunhai, who earn more than the minimum wage, but whose spending power is not enough to afford expensive household items like television and refrigerators.

Aeon’s entry into the market is the first MFI among 28 registered institutions to move away from traditional forms of microfinance and target clients for retail purchases. Aeon’s business model is also part of a wider push by the National Bank of Cambodia (NBC) to diversify the MFI sector beyond handing out tiny loans to small businesses.

“We have to diversify MFIs for MFIs to provide another service,” said Nguon Sokha, director general of the NBC, adding that the central bank would start drafting new regulations on MFIs with the World Bank this month.

“According to our blueprint, we will look into opportunities for MFIs to offer more variety of services. At the moment, we don’t have a clear definition of MFI activities,” she added.

Although policymakers believe that diversifying the MFI sector will bring greater stability, economists say that young industries like that one in Cambodia must be careful that its regulatory framework is stringent enough to prevent borrowers defaulting on loans.

The non-performing loan rate here is officially less than one percent according to the Cambodia Microfinance Association. But poor communities often complain of mounting debt levels due to their engagement with loan sharks and their ability to take out multiple loans from more than one MFI.

“In some cases, commercialization has led to mission drift and abusive practices, and precisely because of that, more effective and appropriate regulation of commercial [microfinance] is needed,” said Maren Duvendack, a research fellow at the Overseas Development Institute, who has written a thesis at East Anglia University in England on the impact of MFIs in developing countries. “Microfinance does not and cannot operate in a vacuum. An appropriate regulatory, macro-and micro-economic framework supporting pro-poor growth is crucial.”

Daisuke Maeda, managing director of Aeon Microfinance, said that borrowers must have a minimum monthly income of more than $200 to qualify for a loan. However, Aeon does not require collateral from their borrowers, Mr. Maeda said.

“We believe that Cambodians have a right to receive more benefit and service from the financial institutions. NBC regulations are ready enough to allow it,” he said.

Despite the risks surrounding the microfinance sector – in India the sector collapsed in 2010 as borrowers stopped making repayments – some say diversifying into retail loans is an intelligent move.

“This will help both MFIs and their customers grow together. They need the enabling regulatory environment or conducive regulation so that they can introduce new MFI financial products and services,” said In Channy, CEO of Acleda Bank, the country’s largest micro-lender.

Mr. Channy added that new companies like Aeon should also make sure that they do proper background checks on its clients by asking their employees about their financial history.

Aeon’s business is still in its infancy, but its plans for Cambodia stretch much further. In January, a subsidiary of the microfinance firm, Aeon Mall, acquired 6.7 hectares of prime real estate in central Phnom Penh to buil a giant commercial center.

According to Mr. Maeda, Aeon’s microfinance arm will also be based inside its mall. “We would like to provide various financial services for customers who come to shop in Aeon Mall,” he said.

In Cambodia, Aeon has already formed partnerships with Sunsimexco Co and K4 Group, two large electronic retailers. The company also has operations in seven other Asian countries including Thailand where it has been doing business for 20 years. Cambodia is the second country, after China, in which Aeon is licensed as an MFI, rather than a retail bank or financial services firm.

In Phnom Penh, Aeon has one major branch along Monivong Boulevard along with five sub-branches in retail outlets across the city. So far, Aeon has about 700 borrowers, according to Mr. Maeda.

Mr. Bunhai, the microfinance loan officer, has a yearly income of $3,600, which is well above the country’s per capita income of $900. And so far, he has been on time with all his repayments for his flat-screen television.

Still, there are “pros and cons” to the presence of firms such as Aeon entering the market, said Sun Mony, the director of the industry working group Cambodian Microfinance Association and CEO of the Sathapana Ltd, a local MFI.

“It’s good that Cambodia is adopting the free market,” he said. But “it’s bad if MFIs don’t really apply professional MFI practices.”

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