The head of the National Bank, Asian Development Bank advisers and members of microfinancing institutions met Thursday to discuss a draft subdecree designed to create more transparency in the small-loans process.
Specifically, the draft subdecree requires microfinancers to provide clients with clear explanations of interest rates and the payment plan.
The subdecree also requires that interest charged on a loan “must be calculated taking into account the repayments of principal already made on that loan.”
Currently, interest rates presented by some microfinancing institutions do not accurately reflect the actual amount of interest the borrower will have to pay.
Certain types of loans, for example, carry with them a much higher actual annual interest rate than others, though both of them could seem to have the same nominal interest rate.
For example, if a farmer borrows 1 million riel for nine months at a 5 percent nominal interest rate and pays that interest each month calculated against the original principal, he will pay back a total of 1,449,999 riel. This is known as a flat rate loan and is commonly practiced by microfinancers in Cambodia’s provinces.
But if the farmer’s interest is calculated against the principal owed after each monthly payment, he will save 200,000 riel.
Jean Plamondon, an ADB adviser to the National Bank, said the flat rate is unfair to borrowers.
He said microfinancers are a “critical, key” part of the national financial system, with as many as 120 operating lenders.
Many of these agencies have an “excessive reliance” on outside money such as grants, which can make their operations unstable, said National Bank Director-General Tal Nay Im.
The subdecree is designed to prevent unfair lending practices of some institutions, such as the use of flat rates, Tal Nay Im said.
Some microfinancers, however, said elements of the subdecree were confusing to villagers and could create unnecessary difficulties for agencies.
Paul Luchtenburg, a representative from World Relief, an international organization that makes small loans, said he was “baffled” by some portions of the draft.
He said flat rates can be lowered so that the farmer pays back the same amount of money as he would with other repayment plans. And flat rates, Luchtenburg said, are easier for the agencies to handle and easier for villagers to understand.
The subdecree would be “a big burden for organizations,” he said, and make “a negative impact on the market.”
He suggested that the National Bank should set more realistic goals. “Keep it simple,” he said.
His concerns were echoed by other members present.
Plamondon said the subdecree is not designed to punish institutions that loan money with good will, but to create an enforcement mechanism for the National Bank. Some institutions make loans that actually charge as much as 300 percent interest on the amount borrowed, he said, but until the subdecree is approved, the National Bank has no means to stop them.
Meanwhile, other microcredit lenders are trying to keep their interest rates low while struggling with operating costs.
The Rural Development Bank, which makes loans to smaller institutions, is one such lender.
“We have lots of loan requests from farmers in the rural areas and are trying to work with farmers to reduce the interest rates,” said Son Koun Thor, president of the RDB.
In 1992, many financial institutions charged farmers about 10 percent to 15 percent interest per month for loans, which is an annual interest rate of approximately 120 percent to 180 percent, Son Koun Thor said.
That is sometimes higher than what the money lenders would charge. Now, the interest rate for people in the rural areas who receive loans from microfinancing institutions is between 2 percent and 5 percent per month, he said.
Annual interest rates, therefore, would be between 24 percent and 60 percent. This is still very high for many farmers.
“But the problem with loaning in rural areas is that there is such a high operating cost and the farmers borrow a very small amount—sometimes only $200,” Son Koun Thor said. “So if the loaner takes a trip out to the provinces to check on a $200 loan, the interest rate we charge them won’t even pay for petrol.”
(Additional reporting by David Kihara)