Brian Badzmierowski

Cambodia’s MFI sector appears ready to take the next step in digitalization by embracing emerging technology such as blockchain, artificial intelligence, and alternative data over the next two years, according to a recently released survey. 

This new tech could enable consumers to apply for loans and open bank accounts securely without leaving their homes. However, while the pandemic spurred many MFIs to start offering digital services like payments and transfers, this next natural step in the digital evolution is moving at a slower rate.

The Cambodia Microfinance Association (CMA) and Credit Bureau Cambodia (CBC) released their survey on the MFI industry Friday during the CMA’s 2021 annual conference, a daylong affair that brought together top financial executives to discuss Covid’s impact on the sector and peer into the future.

The survey queried about 30 percent of the country’s MFIs and showed that there was a willingness to jump into new tech, but a lack of technical skills and infrastructure is holding the industry back.

Only 15 percent of respondents said they use alternative data for loan assessments, with 85 percent of those not utilizing it saying they planned to in the next two years.

Alternative data refers to any data gleaned from non-traditional sources to gain a competitive edge in the market. Examples include app usage statistics, public sentiment gauged via social media, product reviews, and web traffic.

Similarly, less than 10 percent of respondents said they used advanced AI for credit scoring but 60 percent agreed that AI and blockchain technology was useful for microfinance.

Just over half (52 percent) of respondents reported that they use loan origination and collection software. Out of the 48 percent that did not, 88 percent plan to implement the software within the next one to two years.

Urgent areas needing digitalization for Cambodia’s MFI sector

Loan collection, loan recovery, and loan origination were reported as the most urgent areas needing digitalization in the survey.

Managing director of online payment gateway iPay 88 Cambodia Remi Pell said embracing the application program interface (API) economy is crucial to getting as many MFIs onboard the digitalization train as possible.

APIs allow different apps and software to talk to each other and enable the secure exchange of data that makes digital loan origination, data analytics, and services like digital identity verification possible.

“I think from the perspective of FinTech, CMA should embrace the API economy,” Bell said, before adding that the government has developed initiatives to push for an API economy.

Financial literacy, he added, could pose a problem, but credited the CMA and National Bank of Cambodia for implementing initiatives to help rectify this issue. 

“Everybody is talking about internet penetration being over 100 percent [in Cambodia]… That statistic already enables us to build off this momentum and move forward,” he said.

Other barriers, according to the survey, pointed to a lack of funding, IT infrastructure, and skill development.

Cambodia’s economy set for a rebound in 2022

In his presentation, Secretary General of the Cambodia Economic Association Leng Soklong highlighted several encouraging economic trends in 2021 that may point to a healthy economic recovery in 2022.

Foreign direct investment fell 166 percent in real estate in 2020 but increased by 72 percent during the first three quarters of 2021. 

Investment in energy has jumped a whopping 275 percent in 2021 while tourism continued its slide and fell by seven percent. Investment in manufacturing and the garment industry increased by 15 percent and 28 percent through September 2021, respectively.

Loans to the private sector increased across the board through September 2021 from 2020, as did personal loans and credit card loans.

Soklong said the government expects the economy to grow by 4.8 percent in 2022 but he said it could likely achieve ADB’s projection of a 5.5 percent increase in GDP.

He pointed towards an expansion of the non-bank financial sector, the new Investment Law, and the potential drop in electricity price as indicators that the economy will recover faster than expected.

Soklong said if reform policies are implemented faithfully, growth could reach seven percent in 2023 and climb higher in 2024.

Potential downsides that could stem growth are an increased cost of doing business due to higher minimum wages, an upgraded social security scheme, and low productivity, he said. Likewise, slow reforms and the continued threat of Covid-19 would also dampen the positive economic forecast.

Lending guidelines adopted to curb over-indebtedness

Sok Voeun, the vice chairman of the CMA Board of Directors, addressed concerns of over- indebtedness of borrowers in the MFI sector and outlined different guidelines the CMA has implemented over the years.

The latest guidelines provided by the joint ABC-CMA Financial Inclusion Committee in 2020 established rules for all institutions of each organization to follow, focusing on ensuring fair practices for loans under $20,000.

Voeun said the objectives of the guidelines are to promote responsible financial practices by providing standards for all financial institutions to follow.

He added that increased transparency for consumers was another priority, as was building trust between banks and consumers by adhering to fair and equal standards.

The financial sector codes of conduct are applicable to all financial institutions.

According to Vouen: “This self-regulated mechanism aims at promoting lending practices that protect the client through mitigating the risk of over-indebtedness by making sure that the borrowing capacity of clients is thoroughly assessed.”

Data provided by Soklong showed that personal lending in the MFI sector increased by three percent through September 2021 over 2020, while credit card loans increased by 28 percent over the same timeframe.

According to NBC data, non-performing loans (NPLs) owned by microfinance deposit-taking institutions (MDIs) and non-deposit-taking microfinance institutions (MFIs) more than doubled from 2019 to 2020. 

In 2019, NPLs represented .8 percent of the institutions’ portfolios while in 2020, NPLs accounted for 1.8 percent of the total loans. Household loans accounted for 31.2 percent of the total MFI and MDI loans in 2020.