Hang Khun, a noodle vendor in the Tonle Bassac area of Phnom Penh, once saw microfinance programs as a tool to improve his family’s living conditions.
The former border camp refugee twice borrowed about $50 each from an NGO in 1998 to launch a business selling water. But he said he ultimately turned to private money lenders because of what he characterized as restrictive requirements such as a 10 percent deposit, weekly payments and membership in a “solidarity” group that puts pressure on others to repay their loans.
“The NGO is supposed to help the poor, but their money collectors pushed us hard to repay the money,” Hang Khun recently said at his makeshift house. “I’d rather borrow money from a private lender even though its interest rates are much higher.”
Such negative sentiments are often heard from microcredit borrowers these days. Despite rapid growth, the 10-year-old industry in Cambodia is facing a daunting challenge—how to prove its worth and help the poorest.
“We, micro-finance operators/ NGOs, have social missions to reach out to the poor,” said David Leege, country representative of the Catholic Refugee Services, which has run a rural credit program called “village banking” since 1994. “We have to reduce cost, improve human resources and supply more affordable loans to the poor…. It is a critical turning point for micro-finance services.”
High interest rates, limited financial resources of credit operators, and inadequate laws and regulations are some of the biggest impediments to achieving those goals, experts say.
Microcredit services emerged in Cambodia in 1989 on a small scale with support from international donors. Many NGOs launched credit programs as part of their community development activities in the early 1990s.
In 1995, the government started promoting microfinance by forming the Credit Committee for Rural Development. That led to the creation in 1998 of the Rural Development Bank, which was established as a wholesaler to support NGO services.
But currently the rates to use the Rural Development Bank as the middleman are high, about 12 to 15 percent a year. To avoid the high cost of money, many NGOs instead rely on their own donors.
According to the National Bank of Cambodia, currently about 72 operators, mostly NGOs, officially provide loans to the poor in 18 provinces. More than 334,000 families nationwide received rural credit loans totaling $23 million last year, or an average of $68 per loan. The figures have markedly increased from 1995 when 44,000 households borrowed a total of $2 million ($45 per loan), according to the bank.
The loans are used to support a number of entrepreneurs, ranging from Cambodia’s ubiquitous drink stores and live-stock trade to motorcycle repair shops.
The amount loaned hasn’t caught up yet with the demand, government officials maintain. Prime Minister Hun Sen said in a recent speech that Cambodia needs to provide $75 million to $125 million in loans per year to meet the needs of the rural poor.
Informal loans by relatives, friends and private moneylenders fill the gap. The government estimates $10 million are provided by those means.
Experts suspect formal and informal loans, particularly ones by moneylenders at exorbitant interest rates of 10 to 30 percent a month, might be causing debt-ridden villagers to lose their properties. The Australian-funded Oxfam’s Land Study Project is studying the correlation between landlessness and rural credit.
Hun Sen sees high interest rates as the largest obstacle to successful microcredit programs and recently urged operators and the Rural Development Bank to reduce their interest rates.
Hun Sen maintained that neighboring countries provide loans at annual interest rates of 11 to 20 percent, and said high interest rates—ranging from 20 to 60 percent—hinder government efforts to alleviate poverty.
However, rural credit operators say there are reasons for higher interest rates in Cambodia.
In Channy, general manager of the Association of Cambodian Local Economic Development Agencies, the country’s largest microfinance operator, said interest rates are determined by cost of funds and operation, inflation and bad debts. Cost of operation is high because of poor infrastructure in rural areas, he said.
But the biggest single factor is the cost of funds. Acleda receives money from the Rural Development Bank at a 12-15 percent annual interest. By the time it factors in other costs, loans to individual entrepreneurs tend to have annual interest rates of between 24 and 60 percent a year, he said.
New banking regulations adopted recently could help. They would require microfinance operators to be licensed and have a certain level of capital.
The licensing is tied to a possible $18 million loan package to the Rural Development Bank from the Asian Development Bank. If that loan package comes through, licensed microfinance institutions are expected to be able to borrow funds for as low as 7 percent annually.
“Lowering interest rates and adding funds at our bank would make it easier for the poor to access microfinance loans,” said Vong Sandap, deputy director general for the Rural Development Bank.
It also would encourage more competition among microfinance institutions, which will ultimately bring interest rates down, and improve microfinance services, he predicted. At the same time, he said the new regulations would prompt more professional services.
Still, experts are likely to remain split on whether microloans are a good development tool.
Leege, who believes they are, said a Catholic Relief Services evaluation of its village banking program in 1998 found that 75 percent of borrowers had made improvements to their houses as a result of additional income generated from the loans. Other living conditions also improved, he said, including nutrition.
Christophe Le Picard, technical adviser to the French-funded operator GRET/EMT, agreed. “Microfinance offers lots of opportunities for people,” he said.
Others aren’t so sure.
Chhith Sam Ath, development project coordinator for the NGO Forum, an umbrella group of NGOs, conducted a survey of 60 villagers in Prey Veng province last year.
He found that some villagers borrowed money for food or medicine, rather than their business, and that others used loans to pay off other debts. He also said inflexible repayment policies forced some to borrow money at exorbitant rates from private moneylenders in order to pay off their first loan. “It’s very hard to see benefits from rural credit services,” he concluded.
(Additional reporting by Kay Kimsong)