As Cambodia’s microfinance sector comes under pressure from post-pandemic strain, global fragmentation and a rising number of non-performing loans, transitioning microfinance institutions into banks is often seen as a way to improve resilience. But the strategy does not necessarily expand access to credit and may weaken microfinance’s inclusion mission. The challenge is to govern the shift so that stronger institutions do not crowd out microfinance or leave vulnerable borrowers behind.
By Dina Chhorn
Cambodia’s microfinance sector is entering a new phase. After three decades of rapid expansion, several leading microfinance institutions (MFIs) have become banks. Others appear headed in the same direction.
The shift has a clear policy appeal — in a more volatile world, larger and more tightly regulated institutions should be better able to withstand shocks. But the question is whether this development improves stability without weakening access for the rural and low-income borrowers whom microfinance was originally created to serve.
That question matters because Cambodia’s financial system combines rapid credit expansion with rising borrower stress and post-pandemic loan deterioration. As argued in the Cambodia Development Resource Institute (CDRI) report, Building Resilience in the Geoeconomic Fragmentation, geopolitical tensions, the pandemic shock and weaker global growth have all increased uncertainty around trade and finance. For a country heavily reliant on foreign capital and with limited domestic fundraising platforms, this creates structural vulnerability.
By 2013, MFIs held about 10 per cent of banking sector assets
Cambodia’s microfinance sector has been a major driver of financial access. By 2013, MFIs held about 10 per cent of banking sector assets and served around 2.4 million customers. By 2023, deposit accounts had reached 18.9 million and credit accounts 3.9 million. But rapid expansion also exposed serious weaknesses. These included rising non-performing loans (NPLs), borrower stress, over-indebtedness, non-productive borrowing and mission drift. Expansion alone does not guarantee inclusive and sustainable finance.
In 2023, NPL ratios reached 5.4 per cent in the banking sector and 6.7 per cent in microfinance. The ASEAN+3 Macroeconomic Research Office observed that by June 2025, NPLs had risen to around US$4.7 billion — equivalent to 8.1 per cent of total loans, the highest level in years. This deterioration reflects delayed recognition of distressed loans from the pandemic period, weaker credit growth and more cautious lending conditions. It also points to the need for loan restructuring and resolution arrangements for NPLs, faster establishment of deposit insurance and stronger domestic capital mobilisation.
Microfinance widened access to formal finance, supported rural households and helped reduce reliance on informal moneylenders. But some studies associated the sector with debt juggling, land-backed over-lending, labour migration pressures and the use of credit for consumption or emergencies rather than productive investment. The introduction of the 18 per cent interest rate cap in 2017 illustrated the difficulty of balancing consumer protection with continued access to small loans. While it reduced borrowing costs for some clients, it also restricted access to smaller loans and pushed some borrowers back towards informal moneylenders.
Transitioning to bank status can look like a corrective. Cambodia has already seen several prominent cases — ACLEDA in 2003, Sathapana in 2012, Ly Hour and Hattha in 2020, Prasac in 2023 and a planned acquisition of Amret by Bank SinoPac announced in 2024. Between 2013 and 2023, the CDRI report counts eight transition cases in total. Institutions that transitioned tended to have much higher foreign ownership than those that did not, underlining how closely this restructuring is tied to foreign capital and cross-border finance.
CDRI report’s main empirical finding is more nuanced
The CDRI report’s main empirical finding is more nuanced than either defenders or critics of transition may expect. Using panel data on 120 financial institutions from 2013 to 2023, it finds no strong evidence that MFIs transitioning to banks increases access to loans. Financial access appears to be driven mainly by persistence — institutions that already lend continue to lend. Upgrading regulatory status does not, by itself, guarantee broader outreach. That is an important result because it challenges the assumption that institutional scaling automatically deepens financial access.
But the CDRI report also finds that MFI-to-bank transition is associated with fewer NPLs, and that transitioned institutions were more resilient during the post-pandemic period. Transformed institutions expanded branch networks more aggressively, especially after the COVID-19 pandemic.
In other words, transition appears to improve institutional robustness and physical expansion, but not necessarily the accessibility of credit for lower-income borrowers. Stability gains at the institutional level do not automatically translate into inclusive finance at the systemic level.
That gap points to the main policy risk — mission drift. If acquisition and transition encourage institutions to move away from rural and low-income borrowers towards larger urban markets, Cambodia may end up with a stronger banking sector but a weaker microfinance function. Non-transitioned MFIs are already showing more volatile and much higher NPL ratios, suggesting the remaining part of the sector may become both riskier and more socially concentrated over time.
Stricter credit assessment to prioritise productive lending
The right conclusion is that the transition should be governed, not idealised. That means stronger regulatory oversight, including stress testing, onsite inspections and resolution mechanisms. It also means stricter credit assessment to prioritise productive lending, faster establishment of deposit insurance and greater domestic capital mobilisation to reduce dependence on volatile foreign flows. Mergers and acquisitions should be managed carefully to improve efficiency without forcing institutions to upgrade before they are ready. Commercial banks should not simply duplicate microcredit activities in ways that crowd out MFIs.
Cambodia needs a differentiated financial system in which banks provide resilience and scale, while MFIs retain a clear inclusion mission. Regulatory coordination and institutional arrangements can help preserve credit access for vulnerable borrowers as parts of the sector transition toward bank status. MFI-to-bank transition can support financial stability — but only if regulation ensures that stronger institutions do not leave poorer borrowers behind.
Dina Chhorn is Centre Director of Development Economics and Trade at the Cambodia Development Resource Institute. This article was first published in East Asia Forum.
