Interview with Daniel ROZAS : Cambodia at the crossroads
In terms of microfinance, Cambodia is the exception. Why is that?
Cambodia is a particularly interesting case. During the first decade of this century, the country basically had no financial sector. The primary vehicle for developing local financing were microfinance institutions, rather than banks. All those MFIs were originally NGOs active in the countryside in a variety of development projects, including microlending. What distinguishes Cambodia is that its MFIs got started in rural areas, not in cities. The result of microfinance has been to connect the rural economy to the financial sector. A further point is that institutions from abroad, for example, foreign social investment funds and development institutions like Proparco, have played an essential role in the sector since the early 1990s. Virtually all of the Cambodian microfinance sector’s financial resources initially came from development assistance, and that was still true five or six years ago. Microfinance NGOs gradually developed into MFIs and in some cases banks funded by foreign organizations. That has happened nowhere else in the world.
You claim that the decree of 13 March 2017 has created a lot of uncertainty. Could you elaborate on that?
The decree shows confusion between interest rates charged by informal MFIs, which are considered usurious, and those charge by regulated MFIs. It could have a major impact on those institutions. If interest rates are kept at such a low level without any room for flexibility, a number of MFIs will find it hard to stay in business. They’ll be forced to lend money at rates that don’t even cover their operating costs. If you slash interest rates over night, MFIs will stop offering specific products. Rural borrowers are likely to be the first casualties, given that it costs more to provide service in remote areas.
You also take part in designing good practice guidelines together with the CMA. What needs does that project seek to meet? What are your goals?
The CMA was concerned to lay down guidelines for preventing overindebtedness and guaranteeing sustainable expansion of the market. So a number of development finance institutions, among them Proparco, were asked to help out. These restrictive, self-regulatory guidelines establish a framework for MFI activity that includes requirements on reporting to the Credit Bureau Cambodia (CBC). The CBC is responsible for producing a follow-up report that funding providers can access. A noteworthy feature is that the guidelines have been set exclusively by microfinance organizations themselves. The CMA hopes that the National Bank of Cambodia will incorporate the guidelines into a law that applies to all financial sector institutions. In practice, the guidelines will compel MFIs to collect more extensive customer information, provide the data to the CBC, limit the number of loans to any single borrower and more effectively protect customers.
Could you describe good practice in the sector?
MFIs in Cambodia are eager to cooperate with each other. For years now, they have strived to create a responsible microfinance sector governed by common principles. They routinely respond to requests from funding providers that they submit to social ratings, something you don’t see in other markets. This has given rise to a prescriptive framework covering both financial and social standards. In fact, a number of MFIs have distinguished themselves with socially responsible treatment of their customers. For example, they cooperate with the Social Performance Task Force (SPTF) and the Smart Campaign, a global effort to safeguard the well-being and overall financial situation of individuals and families involved in microfinance projects. Above all, they make sure they understand their customers and zero in on the needs that are specific to their situation. This creates a more ethical framework. In this respect, too, Cambodia is in the vanguard.