MICROCAPITAL STORY: Economic Downturn Forces the Cambodian Microfinance Sector to Scale down Recruitment Plans

The rate of job creation and recruitment in the Cambodian microfinance sector is expected to drop sharply this year, according to microfinance industry experts in the region. A press release on the Cambodian based newspaper Phnom Penh Post states that the current global crisis has forced the fast-expanding microfinance institutions (MFIs) in the region to scale down their recruitment plans. The release quotes Mr. Bun Mony, Chairman of the Cambodian MFI Sathapana Limited and member of the Cambodian Microfinance Association (CMA), as saying that the sector-wide employment growth in the region is expected to be only around 5 to 10 percent this year. As per available estimates, this year’s growth forecast is far lower than the past few years which had registered growths of nearly 30 percent.

A sharp drop in lending in the region is cited as one of the reasons for the slowdown. In 2008, the Cambodian microfinance sector had lent USD 740 million to nearly 1 million borrowers, recording an increase of nearly 61 percent on the previous year’s loan portfolio. However, the growth trend is not expected to continue this year with current projections estimating only about 10 to 20 percent growth in the industry’s lending for 2009. The reason for this slowdown is attributed to the decrease in foreign investment which accounts for nearly 80 percent of Cambodia’s capital inflow. According to the press release, the global financial crisis has adversely affected several of Cambodia’s foreign investors, resulting in a decrease in investment from these investors. Consequently lending in the industry is expected to slow sharply this year, thus decreasing the need for Cambodian MFIs to hire more employees. According to the 2008 Microfinance Policy and Regulation survey published by the International Development Law Organization in association with Cambodia Ministry of Economics and Finance, the Cambodian microfinance sector needs about USD 20 million (p4) in investments per year.

In view of the global crisis and its impact on the lending capacity of Cambodian MFIs, the CMA announced late last year that it had lowered growth targets for the region’s microfinance sector by nearly 20 percent. According to experts from the Rural Development Bank of Cambodia and the Cambodia Institute for Development Study, these lending challenges are expected to create an additional strain to the Cambodian economy as consumers also struggle with rising inflation. Despite the slowdown in recruitment and growth projections for the region’s microfinance sector, a February 2009 news release on the Phnom Penh Post stated that Cambodia’s microfinance sector would weather the current economic crisis with considerable growth,. Also reported in this February 2009 MicroCapital story, the Cambodian microfinance industry was expected to grow at double-digit rates in 2009, although the growth would be at a slower pace than previous years. The reason for the sector’s stability was attributed to consumer savings and deposits which make up a sizable chunk of MFI assets. In this regard, the Chief Executive Officer of the Cambodian microfinance institution (MFI) AMK microfinance, Paul Luchtenburg, opined that although the decrease in financing and foreign capital made Cambodian MFIs more ‘conservative’ in their lending practices this year, the sector overall was still heading towards positive, albeit slightly slower growth. However, a more recent report on the Phonm Penh Post, also covered by MicroCapital, states that MFIs in Cambodia have ‘begun to feel the effects of the economic downturn’. For more on this new development, please lookup this March 2009 MicroCapital article.

Cambodia is one of the most rapidly developing microfinance sectors globally, according to a report by the International Finance Corporation (IFC), the private sector lending arm of the World Bank. So far, Cambodia has 17 licensed MFIs, each with an asset portfolio greater than Reil 100 million (approximately equivalent to USD 25 thousand), in addition to 25 registered NGOs providing microfinance services. An IFC study reveals that microfinance in Cambodia has been growing at the rate of about 20 percent since 2004. However, according to this MicroCapital story, it is estimated that only 45 to 55 percent of the total demand for credit in the Cambodian region is being provided by existing financial institutions. According to report by Banking With the Poor (a network of national policy institutions, commercial banks and NGOs), Cambodia has a weak rural finance network with a lack of rural development banks. With 85 percent of Cambodian population residing in rural area, the United Nations classifies ‘alleviating rural poverty and avoiding inequality’ as the greatest challenge for Cambodia. In terms of meeting the first of its Millennium Development Goals by 2015 (i.e. reduce, by half, the proportion of population living on less than one dollar a day), the United Nations states that Cambodia might be able to achieve provided ‘some changes are made’ to its approach.