A meeting between the German Embassy in Cambodia and stakeholders in the microfinance sector has outlined proposals including improving communication with clients, compliance set-ups and grievance redress mechanisms.

They also aim to push for the engagement and dialogues between civil society organisations and relevant stakeholders, improve complaint mechanisms, establish an independent monitoring mechanism and regulatory frameworks and applications.

These outcomes were part of the discussion between 24 participants from banking and financial institutions, the National Bank of Cambodia, Credit Bureau of Cambodia (CBC), UN offices and non-governmental organisations and the embassy in early May.

According to Jost Kadel, the embassy’s deputy head of mission, the objective of the meeting surrounded the recommendations made by University of Duisburg-Essen’s Institute for Development and Peace’s (INEF) study on Microfinance in Cambodia.

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Speaking to Kiripost via email, he said this was the first meeting of its kind, bringing together stakeholders from various sides, including the civil society, who shared their different perspectives on microfinance.

A Twitter post by the embassy on May 16 revealed that the meeting had set the ground for a “fruitful dialogue” on microfinance in the Kingdom.

“We think that this meeting created a good momentum to embark on a multi-stakeholder dialogue in order to work together to find solutions to tackle what has been identified as challenges in the microfinance sector to promote economic and social development in Cambodia,” Kadel said.

Key observations

The study, commissioned by Germany's Federal Ministry of Economic Cooperation and Development last September, highlighted four issues.

Among them, it found that the microfinance market is “largely saturated” due to the high number of financial service providers (FSPs).

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This is aside from a few regional exceptions and one sectoral exception – smaller agricultural loans for pre-financing cultivation for agriculture.

The study said,

“Without persuading clients to take out new, larger loans or poaching borrowers from other MFIs, it is difficult to significantly expand business in the microcredit sector (even with a definition that still calls volumes between $2,500 and over $4,000 ‘micro’).”

Because of the oversupply of FSPs, the possibility of being able to secure loans with land titles tempts individual MFIs or banks to lend irresponsibly, it observed.

“This happens even in cases where merely examining the cash flow in the context of the loan application assessment would show that repayment from the income secured alone would hardly be possible.

“In other words, over-indebtedness, with the consequences listed, is foreseeable here,” the study noted.

Finance Sector Rejects Study Claiming MFIs Cause Over-indebtedness

While debt predominantly serves investment purposes and the majority achieves its purpose, a considerable part of the loans finances (longer-term) uncovered living costs. It said this should not be the case with responsible financing and inevitably leads to over-indebtedness.

The study observed that in an “unacceptable” number of cases, debtors have had to sell land to be able to repay their debts according to the contract to avoid being categorised as defaulting payers and thereby being excluded from further borrowing. “Or they have to sell other goods or are forced to take other measures such as reducing the quality of their food or, in very rare cases, child labour or forced labour migration,” it said.

The suggestions

A key recommendation made by the study is the floor to be set for real estate collateral on loans reviewed by the CBC at an amount that could range from $2,000 to $3,000, depending on the loan's purpose.

“In any case, this limit should apply to land titles as collateral, below which loans would not be allowed to be secured by land titles,” it said.

It also called for an immediate measure where credit assessments by MFIs and banks on the issue of whether loans can be secured with land titles be completely separated from microfinance funds supported by German development corporations.

“If cash flow calculations show that it is highly unlikely that a loan can be serviced, for example, there is a risk of over-indebtedness, the possibility of securing it through land titles must not lead to the awarding of a loan.

“This principle should be explicitly included in future contracts between investors and FSPs, even if they are only topping up existing credit lines,” it said.

In addition, the study urged that door-to-door canvassing by representatives of MFIs and banks, which is “very aggressive”, be stopped quickly.

What’s new

Meanwhile, the German Embassy’s Kadel said the microfinance sector has promoted the economic and social development in Cambodia but there are some issues related to the sector, which were raised in the study.

“For example, consumer protection and loan repayment issues, as in the lack of responsible banking practice of some actors, leading to challenges in the sector, including over-indebtedness. There is a need for certain reforms to take place.”

Kadel said the meeting served to also check on the status of implementation of the recommendations, as well as highlight necessities and challenges with regards to its implementation.

To date, the stakeholders have actively contributed to enhancing the sector, including establishing various coordination mechanisms among MFIs, associations and regulatory authorities. The FSPs and consumers have also carried out capacity building programmes.

Additionally, some MFIs have compromised their loan criteria, where loan amounts of less than $3,000 do not require land titles as collaterals, he said, noting that some of the issues and suggestions in the study have been addressed in the implementation plans.

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