An Uproar - Cambodia caps microfinance interest rates

The National Bank of Cambodia (NBC) announced on Monday that it would cap annual interest rates on all new or restructured loans from Micro Finance Institutions (“MFIs”) at 18 percent.

The move was immediately accused of being a populist political move. Defence Minister Tea Banh had said on Monday that the move came from the direct orders of Prime Minister Hun Sen who had previously floated the idea of a cap in November last year. The Central Bank made good on the Defence Minister announcement hours later, coming out with a directive that the new cap would apply from April 1 this year. Paradoxically the Central Bank had earlier warned of the negative consequences of a rate cap months earlier.

Besides commercial banks and specialized banks, Cambodia has 73 microfinance institutions and 170 rural credit operators, according to the NBC. Microfinance institutions and credit operators had lent a total of US$3.5 billion to more than 2 million customers by 2016.

High interest rates, averaging 25% to 30%, benign accounting and provisioning standards and low compliance costs as compared to other jurisdictions makes MFIs the envy of many in the finance sector. The MFI sector had been one of the few growth areas in Cambodia in recent years reporting stunning growth rates year on year.

Not surprisingly the sector is up in arms over the rate cap. High operating costs of between 14% to 16% and finance costs of up to 9% (as per Khmer Times report of March 16) could mean the demise of several MFIs, naysayers say. There were even reports that the Association of MFIs intends to appeal to the Central Bank to lend to them. After all in most jurisdictions the Central Bank is the lender of last resort.

Don’t hold your breath.

Some MFIs will be affected and exit the industry. Some will adapt, reducing costs, coming out with new products. A new growth area could be instalment sales where financiers tie up with retailers offering instalment sales such as hire purchase for consumer items such as motorcycles, computers, hand phones or white goods (TVs, fridges, ovens etc.). In many cases the effective interest rate of these instalment sales is high. A case in point is Malaysia where there is a similar cap of 18% for money lenders. Instalment sales of consumer items have seen high growth rates in recent years.

However there will be some who need outright cash for various expenses such as farmers who need to buy seeds or fertilizers or students who need loans to pay their tuition fees etc. It is this group of borrowers who will be badly affected when MFIs pull back. Perhaps the Association could appeal to the Central Bank for exemptions for agricultural and student loans.

But there will be some who fall through the cracks. The very basic premise of MFIs then needs to be re-examined, ironically micro finance started as a social, not for profit initiative. In that case an 18 % cap should not matter.

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