MICROCAPITAL STORY: Cambodian Microfinance Institutions’ Non-Performing Loans Rise Again

Huot Ieng Thong, President of the Cambodian Microfinance Association, has announced that non-performing loans (NPLs) at Cambodian microfinance institutions (MFIs) rose again to 2.5 percent from around 1 percent in the first four months of the year. This compares to less than 1 percent for the same period last year. MicroCapital recently reported on the rise of Cambodian NPLs above 1 percent and the generally high level of disclosure by Cambodian MFIs. To read the story click here.

Mr. Thong said that since the financial crisis, MFIs have charged farmers interest rates of 2 to 3 percent per month, an increase since the liquidity crisis hit global markets. According to the article in the Phnom Penh Post, international lenders have charged Cambodian MFIs 10.5 to 12 percent interest per year since the global credit crisis hit, versus 8 to 9 percent the year before.

The Economist Intelligence Unit (EIU) increased the credit risk rating on Cambodia to 68 from 69 (out of 100) in January of this year and last month raised this rating again to 70 out of 100 (the higher the rating the higher the risk). For more information on the EIU’s credit rating methodology, click here. This higher risk rating is blamed by the Cambodian Microfinance Association for the higher interest rates charged to MFIs and to MFI clients, and in turn for the higher NPL rates.

Kuch Setha, general manager of Seilanithih, an MFI that offers loans mainly to farmers on the Thai border, stated “our country is considered high risk, so that is why they [international lenders] charge rates that are that bit higher.” Mr. Setha said that borrowers are probably earning half the profits they did in previous years and so are paying later. MFIs understand this and so are reluctant to over-lend to borrowers that might be unable to make repayments. The ensuing pro-cyclical credit crunch is a common situation encountered in times of financial crisis in less-developed emerging markets.

Unlike in developed financial markets such as the US or Europe where interest rates are lowered by their governments during economic slowdowns in order to encourage growth, in undeveloped, heavily indebted markets where much of the supply of credit comes from international sources, governments and local borrowers find themselves facing higher rates during economic crises as foreign lenders increase rates to compensate for the added risk of default. The higher lending rates can then aggravate the economic slowdown further, leading to even higher rates, and thus a downward spiral, and self-fulfilling prophecy.

There is little a borrower can do in this situation unless they can fund themselves through deposits and eventually become independent of international lending. In some cases governments have attempted to cap and restrict MFI lending rates, although in the end this action usually discourages competition, growth and development. Cambodian politicians have already called for lower interest rates in the belief that lower rates will mitigate higher NPLs. According to the article, Tep Kunnal, governor of Malai district in Battambang province, called on lenders to reduce interest rates by 2 percent or else farmers would be unable to make repayments.

Notable players in microfinance, such as Muhammad Yunus, have pointed out the dangers of foreign borrowing and recommended that in order to avoid this trap MFIs should take deposits to fund themselves. As reported in a recent MicroCapital story, Yunus stated at the Sa-Dahn Microfinance Conference, “Financial crisis makes it more clear dependence on foreign money is not a great idea at all. It gets you exposed to other things, so my recommendation is to rely on the local money, unless we can solve the money problem, micro credit will not go anywhere. In order to solve the money problem, the best solution is to create yourself into a bank, taking deposits and lending money.” According to a Country Level Effectiveness and Accountability Review (CLEAR) gap analysis, the development of savings services in Cambodia has lagged behind credit services, with the combined deposits of MFIs and registered NGOs representing less than 5 percent of their total lending portfolio as of June 2004. CLEAR reports are published by the Consultative Group to Assist the Poor (CGAP), a division of the World Bank.

By Laura Anderson, Research Associate

Additional Resources:

The Phnom Penh Post: Microfinance NPL rate rises again as lenders suffer high-risk status

Seilanithih: Home

Economic Intelligence Unit: Home, About the Country Risk Model

MicroCapital Story: Muhammad Yunus Warns of the Dangers of Foreign Currency at Sa-Dahn Microfinance Conference

Consultative Group to Assist the Poor: Country Level Effectiveness and Accountability Review: Cambodia