The country’s first microfinance institution (MFI) professing to follow Islamic law may begin offering services in Cambodia by the end of the year, officials said on Monday, using fees in place of interest rates and new terms of collateral.
Othsman Hassan, a prominent Muslim leader and secretary of state at the Labor Ministry, said two Malaysian lenders—Amanah Ikhtiar Malaysia (AIM) and the Malaysian Islamic Economic Development Foundation (Yapeim)—were planning to open in Cambodia, with the former targeting the end of this year and the latter aiming for next year.
As Islamic microfinance institutions, AIM and Yapeim say their services comply with Shariah, or Islamic law, which bars lenders from charging interest and, more generally, from exploiting borrowers.
Instead of charging the government’s maximum interest rate of 18 percent a year, Islamic MFIs charge “fees” to a Muslim population eager for Shariah-compliant banking services, according to Mr. Hassan.
“For Islamic finance, they could charge a rate between 1 and 1.3 percent a month, which is considered a fee,” he said at an Islamic microfinance workshop in Phnom Penh yesterday organized by the World Islamic Economic Forum.
Stephen Higgins, managing partner of Mekong Strategic Partners, said the terms described by Mr. Hassan sounded much like traditional loans, and bore a resemblance to Islamic MFIs in other countries.
“If you are charging a monthly fee that is a percentage rate, it is still effectively interest, even if you call it a fee,” he wrote in an email yesterday.
Representatives of the two MFIs could not be reached yesterday for comment.
A 2007 paper by two Malaysian academics from the Universiti Sains Islam Malaysia described AIM as the largest MFI in that country. Clients were organized into five-person groups who guarantee each other’s loans, which were offered without collateral or interest “except a small service charge.” Individuals repaid the loans weekly, according to the paper, in addition to paying a 10 percent service charge for the latter half of payments and a 5 percent contribution into a “group fund” presumably used in the case of defaults.
Sman Saros, a 48-year-old Muslim drink vendor, said that many of her Muslim neighbors in Phnom Penh used their houses as collateral, and many might be willing to use community members as guarantors instead.
“But I don’t dare to do it,” she said yesterday. “Because I might not trust them to be able to return the loan.”
Yapeim made headlines in April after Malaysian authorities arrested its former deputy president for allegedly embezzling more than $50,000, according to the Malaysian newspaper The Star. Critics of Islamic finance contend that some lenders offer similar services to predatory lenders under the guise of Shariah compliance.
“Due to its emphasis on the forms of financial transactions rather than their substance, Islamic financial practices may violate the spirit of Islamic Law,” Mahmoud El-Gamal, an economics professor at Rice University in Texas and a leading critic of Islamic finance, wrote in a 2009 paper.
But those at the workshop cheered the entrance of the Islamic MFIs, saying they offered a better option for local Muslims stuck between violating their religion or turning away traditional MFIs.
“When we talk about microfinance and financial inclusion it has to first serve its purpose of helping the poor and the underserved…of Cambodia,” said Wan Mohd Zahid Mohd Noordin, chairman of the WIEF Education Trust. “This is an opportunity for Islamic microfinance to close the gaps and promote better financial inclusion.”
Islamic finance is serving more than 38 million customers globally, according to Mr. Mohd Noordin, and is even attracting interest from Western banks like Citigroup and HSBC.
In Cambodia, Cham Muslims are thought to number in the hundreds of thousands and make up a significant minority group in the country as well as a large potential market.
Vann Math, president of the Cambodia Islamic Association, said that his group had consulted with many institutions interested in setting up an Islamic MFI in the country.
“If there is one established it will be good news to the Muslim community in Cambodia,” he said. “Currently, people have no choice but still to take loans from the [traditional] MFIs and banks, even though it is against Islamic law.”
(Additional reporting by Anandha Loustau and Ben Paviour)