Cambodia’s rapidly growing microfinance sector is placing increasing emphasis on ensuring its members are lending sustainably as the sector recovers from the COVID-19 pandemic and the winding back of emergency measures implemented by the regulator.
According to the Cambodian Microfinance Associations’ (CMA), latest data loan portfolios grew to $9.135 billion (23.8% annual increase) with 2 million clients while deposit at the 5 MDI has grown to $4.686 billion (20.1% annual increase) with 2.66 million depositors.
Speaking to Cambodia Investment Review a spokesperson for CMA Tongngy Kaing explained that despite a hiccup in early 2022 from Covid-19, the microfinance sector remained healthy adding if no external challenges may arise, CMA is confident with the current economy, and we expect the sector to grow 20% in 2023.
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“With the exit of Covid-19 loan restructures and other relaxed policies to ensure the financial sector stability, the NPL in microfinance grew to 2%, compared to 3% for the whole banking and financial sector by late 2022. However, this expected 2% level was among the lowest in the world,” he said.
Increasing global interest rates
Increasing bond rates by the federal reserve are already causing the cost of Cambodian lenders to increase which will in turn result in higher interest rates to consumers and impact already thin margins under the current 18% per annum interest ceiling.
“While CMA members have increased interest rates for depositors, we have agreed in principle that we will not increase the interest rate for loans while trying to absorb the increasing cost by ourselves. We hope this will help our clients to grow faster after three years of the pandemic,” Tongngy said.
There is ongoing discussion around consolidation in a market that has 54 commercial banks and 79 Microfinance lenders according to the Founder and Managing Partner of Mekong Strategic Capital, Stephen Higgins the regulator should look to increase the minimum capital deposits set at $75 million for commercial banks and just $1.5 million for MFIs.
Read more: Stephen Higgins on Cambodia’s post-COVID financial sector outlook
“Consolidation in the sector is absolutely needed, but unfortunately the smaller players just don’t want to sell or merge, often for reasons like pride, or wanting the reputational benefit that goes with saying you own a bank,” Stephen Higgins said.
CMA implements strong self-regulation initiatives
As the sector is tipped to continue strong annual growth the lenders, regulators, and the association have understood ensuring sustainability is paramount to the finance sector as a whole, introducing a number of initiatives and self-regulations to ensure the sector’s sustainability such as:
- BFIs’ Codes of Conduct
- Lending Guidelines
- The responsible Lending Certification program
- Branch Manager Training
- A safe finance community project
- Many financial literacy campaigns
The study “Micro” Finance in Cambodia: Development, Challenges, and Recommendations was commissioned by the Federal Ministry for Economic Cooperation and Development (BMZ) after ongoing concerns by donors in the sector.
The study found the sector overall has a positive impact on borrowers while also raising concerns about over-indebtedness and land sales.
Read more: Associations respond to German-funded study on Cambodia’s microfinance industry
“Since 2019, microfinance in Cambodia has been under criticism after a decade of growth and admiration. The critics often link microfinance to over-indebtedness or even human rights abuse,” Tongngy said.
“CMA takes these allegations seriously and we have studied and analyzed these reports while we have also dispatched our team to verify the report in some cases. What CMA has found is often different from the allegations. We believed these may be caused by a lack of understanding of the microfinance sector,” he added.
Client protection at the front
The association has reiterated that preventing over-indebtedness has always been the priority of the sector in the last decade while trying to balance supporting our clients, especially SMEs, with access to finance to fuel their growth and increase jobs in the kingdom.
In 2022, the global not-for-profit financial inclusion organization Social Performance Task Force (SPTF) and Cambodia Microfinance Association (CMA) entered into a first-of-its-kind partnership to assist microfinance lenders to adhere to strict client protection standards.
The framework includes a financial sector code of conduct, client protection training certifications, external assessments/audits to check and demonstrate practices, a national responsible, inclusive finance label, consumer protection and financial literacy, and coordination on relevant policies/regulations.
Read more: Cambodia Microfinance Association and SPTF partner to increase client protection standards
The two organizations have agreed to focus on helping financial institutions in Cambodia learn about the SPTF’s Client Protection Pathway and the Universal Standards for Social & Environmental Performance Management.
“These have been proven in numerous reports on the impact of microfinance on economic growth and poverty alleviation. While critics often say self-regulation does not work citing the case of India and Bangladesh, Cambodia’s self-regulation is very efficient with support from the National Bank of Cambodia regulator,” Tongngy said.