MICROCAPITAL STORY: Credit Crunch Hits Cambodian Microfinance Institutions

Nguon Sovan and George Mcleod, writers for Cambodian newspaper The Phnom Penh Post, reported in March 2009 that although the microfinance institutions (MFIs) have so far avoided the worst of the current economic recession, they are expecting slower growth rates and higher interest rates as the global credit crunch hits foreign lenders who have been a key source of funding in the past. This is a new perspective on the Cambodian microfinance market, as in February 2009, The Phnom Penh Post published a far more optimistic article stating that although the growth of the microfinance sector this year would be at a slower pace than previous years, the industry is still stable and expected to grow at double-digit rates. For more on The Phnom Penh Post’s February 2009 article, please read this MicroCapital article.

Sources in the Mr. Sovan and Mr. Mcleod’s more recent article stated that the main concern of MFIs is the decrease in available capital. With foreign investors cutting back their emerging market investments, already diminished funding available to MFIs will decrease further. Contrast this with comments provided by In Channy the president and CEO of ACLEDA Bank Plc., an MFI based in Cambodia, in the February 2009 article, “The crisis doesn’t affect our [segments]. Deposits are still growing. We don’t need foreign capital because our local deposit base is strong enough.” Founded in 1993, ACLEDA has a gross loan portfolio of USD 315.1 million, a debt equity ratio of 832.82%, and a return on assets of 3.11%.

Mr. Sovan and Mr. Mcleod reported that MFIs have now begun to feel the effects of the economic downturn. “A large number of microfinance institutions have been seriously affected by the global financial crisis because 80 percent of our capital is from abroad,” says Bun Mony, the general manager of the Sathapana Limited, a MFI established in 1995. As of December 2008, Sathapana Limited has a gross loan portfolio of USD 37.6 million and in 2007, the MFI reported a debt to equity ratio of 452.78% and a return on assets of 6.26%, as reported by MIX Market, the microfinance information clearinghouse. Mr Mony continues, stating that prior to the credit crunch, about 50 foreign banks were lined up to lend to local MFIs but since the onset of the crisis, that number has fallen to zero.

The decrease in available capital has resulted in higher costs of lending for MFIs. The higher costs of lending have made MFIs hesitant to borrow money to pursue previously set expansion goals. “If we [Cambodian MFIs] want to take out new loans, we have to pay one or two percent more per year, so we are hesitating to borrow,” says Mr. Mony. As the Cambodian Microfinance Association (CMA) predicted, lower foreign investments would result in a reduction in Cambodia’s anticipated fulfillment of customer credit needs.

In 2008, growth rates of Cambodian MFIs reached 61 percent. CMA Chairman Hout Leng Tong said the number of microfinance borrowers hit one million in 2008, up from 970,152 borrowers in 2007. In the fiscal year of 2008, loans totaled US$740 million from 18 microfinance institutions.

This year, Mr. Mony predicts “growth will slow to 10 to 20 percent.” Other MFIs, like Angkor Mikroheranhvatho Kampuchea, or AMK Microfinace, and ACLEDA Bank Plc., reported similar situations. They expect some growth in 2009, just far below original expectations. AMK Microfinance was established in 1999. It holds USD 23.2 million in its gross loan portfolio and has a debt equity ratio of 173.75% and a return on assets of 6.47%.

As a result of less available capital and higher costs of lending, MFIs may have to raise local interest rates to make up for the loss. “We may have to raise local rates more to make up for our higher costs,” says Mr. Mony. He warned that interest rates, which currently reside at two to three percent per month, are likely to rise in this economic climate.

Although portfolio risk continues to be very low, at an estimated 0.67 percent, Mr. Mony reports that there have been instances in less than one percent of loans where land and property have been seized to repay debts. Tal Nay Im, director general of the National Bank of Cambodia, says she is worried that farmers are at risk of losing their assets if they default. She states, “They risk being deprived of their houses, but it is their only choice if they want to borrow money.”

By: Andrea Chu

ADDITIONAL RESOURCES

The Phnom Penh Post, March 17, 2009: “Credit crunch hits Microfinance Institutions (MFIs)”

MicroCapital story, Feb. 18, 2009: “Customer Savings and Deposits Ensure Stability of Cambodia’s Microfinance Sector Despite the Economic Crisis; Country’s Microfinance Industry Expected to Grow at Double-digit Rates in 2009”

Symbiotics, February 6, 2009: “Can Microfinance Beat The Credit Crunch?”

Sathapana Limited: “home”

Cambodian Microfinance Association: “home”

AMK Microfinance: “home”

ACLEDA Bank Plc.: “home“