Gov’t Defends Interest Rates

Government officials involved in microfinancing for the rural poor claimed Monday that interest rates for rural credit should not be considered too high, blaming additional operational costs for driving rates up.

Finance Minister Keat Chhon and other officials claimed in a press conference interest rates are affected by such factors as administrative fees and inflation at each stage of the microfinancing process.

The government, donors and rural credit operators concluded that it would need more capital funds to significantly reduce retail interest rates for the poor.

New interest rates for money lending to microfinance institutions will remain as high as 11 percent, only about 2 percent less than the current commercial loan rate, said Son Koun Thor, chairman of the Rural Development Bank, a public wholesale bank that lends money to microfinancing institutions, which then provide affordable loans to the poor.

This is because interest rates from the ADB to the RDB are already 6.5 percent and the RDB needs to add another 2 percent each for administrative expenses and other running costs.

“The RDB is more taking risks of running costs” to make rural credits more sustainable and accessible for the poor by reducing the interest rates, the chairman insisted.

Additionally, each microfinance institution needs to factor various operational costs, financial risks and business growth into interest rates. In the end, rural families often need to repay loans with 20 percent to 60 percent annual interest rates.

“It’s long way to go to develop sustainable microfinance sector,” Keat Chhon said.

The Asian Development Bank recently agreed to provide a $20 million loan to the Rural Devel­opment Bank through the government in order to promote microfinance loans to poor families. However, the additional capital funds will likely not reduce interest rates of loans to the poor. In March, Prime Minister Hun Sen had ordered interest rates on microfinance loans be lowered.

 

 

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