Tonle Sap Lowland Stabilisation Project PPTA: Study of Micro-Credit Systems

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2 Tonle Sap Lowland Stabilisation Project PPTA: Study of Micro-Credit Systems Table of Contents Summary 1 INTRODUCTION Background of Micro Credit in Cambodia Summary of the Banking System in Cambodia Summary of MFI and Credit Providers in Cambodia Funding of Microcredit in Cambodia Cambodia Credit Information System MFI Rating Reports 7 2 CREDIT SERVICES IN TSLSP AREA Credit Providers in Tonle Sap Area Demand for Rural Credit in Tonle Sap Area Credit Systems in Use Constraints to Rural Credit 23 3 CONCLUSIONS & RECOMMENDATIONS Conclusions Recommendations 28 List of Tables Table 1: Summary of Microfinance Operators as at 30 June Table 2. Summary of Micro-Finance Rating and Risk Assessment Reports for Cambodian MFIs 9 Table 3. Summary of credit providers in Tonle Sap Lake area 11 Table 4. Summary of loans and deposits in the Tonle Sap Lake area 12 Table 5. Use of MFI loan funds 13 Table of Figures Figure 1: Structure of the Banking System in Cambodia 4 List of Annexes Annex 1 Annex 2 Annex 3. MFI Providers in Cambodia List of NGOs in Cambodia References i

3 List of Abbreviations ABC Association of Banks in Cambodia ADB Asian Development Bank CA Credit Agent/Officer CBO Community Based Organisation CCSF Cambodian Community Savings Federation CIS credit information system CMA Cambodia Microfinance Association CRS Catholic Relief Services GRET Group for Research and Exchange of Technology HH Household HRLS Household Resources and Livelihoods Survey IFAD International Fund for Agricultural Development ILO International Labour Organisation MEF Ministry of Economics and Finance MFI Microfinance Institution MOU Memorandum of Understanding MOWRAM Ministry of Water Resources and Meteorology MPDF Mekong Project Development Facility MRD Ministry of Rural Development MSME Micro, Small and Medium Enterprises NBC National Bank of Cambodia NGO Non-Governmental Organization PFD Partner For Development PRA Participatory Rural Appraisal RDB Rural Development Bank RGC Royal Government of Cambodia RRA Rapid Rural Appraisal SCA Savings and Credit Association SME Small and Medium Enterprises S&L Savings and Loans TSBR Tonle Sap Biosphere Reserve TSBRS Tonle Sap Biosphere Reserve Secretariat TSEMP Tonle Sap Environmental Management Project TSLSP Tonle Sap Lowland Stabilization Project TSSL Tonle Sap Sustainable Livelihoods UNDP United Nations Development Programe UNICEF United Nations Children s Fund VDC Village Development Committee WSUG Water Supply User Group WACOF Weighted average cost of capital ii

4 SUMMARY Cambodia is well served with micro-finance institutions, many of which evolved from international NGOs active in the 1990s when there was a concentrated development effort under the UN Accord following decades of conflict. Currently support to the MFI sector is provided through the one commercial bank ACLEDA and 16 registered MFIs, with many other registered NGOs and informal credit providers. ACLEDA is the largest microfinance provider, followed by AMRET and PRASAC. As of June 2006 the total amount of loans provided by the MFIs was KR753,458 million ($188 million) to over 520,000 borrowers. In the six provinces surrounding Tonle Sap Lake the amount of loans was KR260,072 million ($65 million) to 151,600 clients. About 70% of the volume of loans are provided by ACLEDA bank, the biggest provider in the country. MFIs concentrate on the more accessible urban areas and much of the rural sector is poorly served by formal credit providers. Most loans are provided for nonagricultural purposes for the trading and services sectors. Repayment rates are very high, commonly as much as 99%, but the level of savings in Cambodia is still low which constrains the MFIs to having to access foreign capital, which limits their expansion. As of June 2006 the it was reported that the MFIs had KR373,000 million ($93 million) on deposit from 220,000 depositors. Interest rates on loans are typically around 3-4% per month (36-48% per annum) while the cost of capital is around 6-8% resulting in a spread or margin around 25%. This spread is necessary to maintain the financial viability of the MFIs but there has been a general reduction in interest rates brought about by competition between MFIs and better efficiency. Never the less effective interest rates are still relatively high. Various models are used for providing credit which can be divided into group credit schemes requiring no collateral where members of the groups guarantee repayment and loans to individual borrowers, requiring some form of collateral. Group loans are typically around KR300,000 ($75) with interest rates of around 3% per month with a loan period of around six months on average. Individual loans are usually for larger amounts, have a lower interest rate and are for a longer repayment period. Other credit models that have been applied including village banking and group savings and loans schemes and rice, cow, pig and buffalo banks involving repayment in kind. Many of these models were introduced by NGOs to give impetus to rural development efforts in the initial stages of the redevelopment of the rural sector and to assist the poor and impoverished with varying degrees of success. Most have issues of sustainability once the concentrated assistance and support has ended and the applicability of the in-kind models has been largely superseded by cash-based systems. The main constraints to rural credit include: 1. A lack of clear land title that prevents potential borrowers from using their land as collateral for a loan 2. A lack of bankable business opportunities particularly for crop production with attendant risk of floods and drought which is iii

5 constrained by the relatively high interest rates that apply. 3. A lack of business skills and acumen to support borrowers to manage business ventures successfully. The majority of new small businesses that are established fail after a few years. Short intensive training courses of a few days duration on business and credit aspects that are often provided as part of the credit package, although providing a useful crash course introduction to the subject, are not very effective in introducing and sustaining new attitudes and knowledge. 4. Restricted access to formal credit because of lack of MFIs services in the more remote and inaccessible areas, especially for the poor low income households. Because of the emphasis on financial sustainability and credit performance, it is not viable for MFIs to service marginal areas/clients. As a result MFIs tend to only serve clients that have more assets and less risk of default. 5. Informal sources of credit from money lenders, merchants, relatives and neighbours are still very important and because of their flexibility, lower transaction costs and are likely to continue to play an important role in the community despite the high interest rates and exploitative reputation. 6. ACLEDA and most licensed MFIs have access to the ADB and IFAD wholesale funds channelled through the RDB, which provides wholesale credits to microfinance providers. In addition the leading microfinance providers have access to international funds are supported by International NGOs. Although the ACLEDA and the larger MFIs are not limited by access to capital, for many MFIs expansion of their outreach growth is said to be constrained by the lack of funds available to them. Recommendations A summary of the recommendations follows: 1. There are enough MFIs operating in the Tonle Sap area and it is not necessary to setup a new MFI organisation to provide micro-credit and financial services to the project area. 2. Microfinance services are best provided through the mainstream banking system and dedicated MFIs which have the staff, experience and systems in place, rather than through supporting a new organisation such as a NGO-based MFI to provide specialist credit services, or NGO based providers.. 3. The TSLSP should establish linkages with MFIs operated in the project area, particularly those that maintain a focus on group S&L schemes and in helping the poor. 4. Extra assistance is necessary to subsidise the cost of providing credit in marginal areas through for a limited period until sufficient volume of business has developed to support the overhead costs of providing credit. This initial support is best provided by assisting group S&L schemes in which the savings element is encouraged. iv

6 5. Support for new small businesses requires longer term engagement at the community level on an ongoing basis to change attitudes and instil knowledge about savings and credit and business development, especially when delivered through a group adult learning process. The use of the mentoring approach using model farmers and key community members can also be effective, particularly when included in a package of community-based learning activities. 6. Support for the rural credit sector should be approached from four aspects. a. Support to MFIs to allow them to provide a wider range of services in the remoter, more inaccessible areas where it is not viable for them to provided services. b. Support to MFIs to allow them to provide sustainable credit services in the project s target areas by providing technical training to MFI management teams and CAs on credit management best practice covering subjects such as loan methodologies, cash flow analysis, operational risk management, delinquency management, financial analysis and fundamentals of accounting, business planning and credit risk management. c. Support to MFIs by setting up and/or strengthening management, accounting, financial management, MIS and internal control and internal audit systems d. Providing support to communities to make better use of credit services and assistance with establishing and maintaining small business and livelihood development through specialised training, formation of support groups for credit services and ongoing low level training to increase awareness and knowledge about credit and business. This aspect should be integrated into other rural development and livelihood activities being undertaken by the project, such as farmer field schools and agricultural extension services that may be included as an activity under TSLSP. 7. Support to MFIs for innovative means to reduce their overheads and operating costs and improve efficiency through the use of new technology such as mobile satellite based banking services, Smart cards, mobile phone SMS, etc. on a pilot basis of limited duration to test the effectiveness of new technology and innovations. 8. The potential of developing linkages with between the formal sector and the informal credit providers (money lenders) should be investigated, with the objective to extend their coverage and reduce transactions costs. 9. TSLSP should support MFIs and other credit providers to strengthen and the broaden mobilisation of savings and promote mechanisms to encourage people to deposit their funds with the MFIs. 10. Cooperate with provincial education departments to encourage school attendance, develop the savings habit and help children to v

7 grow up with the knowledge and skills to make manage businesses and farming ventures using modern technology to achieve high productivity and avoid damaging the environment. 11. Improve the roads and other infrastructure, to generally improve the opportunities for business development by providing quicker and easier access to information, raw materials, human resources, markets, income generating opportunities and credit services. 12. Where access to funds is a constraint the TSLSP should facilitate access to credit funds for MFIs through the Rural Development Bank (RDB), or another suitable conduit. 13. Develop appropriate credit modals for communities (such as the Cham) where the current high interest model is not acceptable for religious and cultural reasons preventing the uptake of credit as a factor in community development and increased livelihoods. vi

8 1 INTRODUCTION 1.1 Background of Micro Credit in Cambodia Microfinance in Cambodia began from NGO roots in the early 1990s as the country emerged from decades of conflict and the destruction of the financial and banking sector when the Khmer Rouge abolished money. At first international NGO organisations such as Group for Research and Exchange of Technology (GRET) 1991, Catholic Relief Services (CRS) (1993), and World Vision (1992), in conjunction with donors including the United Nations Children s Fund (UNICEF), the International Labour Organisation (ILO), United Nations Development Programme (UNDP), United States Agency for International Development (USAID) and others provided microcredit as part of integrated development programmes to kick-start economic development in the absence of credit services from the formal banking sector. With the increase in development aid after 1993 following the recognition of the new Cambodian government, the number of microfinance providers and the level of service grew quickly, until by June 30, 2006 they were serving 520,365 households (2,601,825 people, at 5 people per household on average) 1. The Government of Cambodia, aware of the growth in micro-credit services and recognising that the industry needed a regulatory framework, established a supportive regulatory framework for microfinance through introducing a new law: Banking and Financial Institutions of Microfinance in Cambodia is regulated by the National Bank of Cambodia (NBC). In 2000 NBC introduced a Prakas or government decree regulations for a two-tier system for supervising micro-finance through a system to licence larger microfinance providers and deposit-taking financial institutions, and to register the smaller microfinance providers. 2 The conditions that apply are: MFIs must be licensed if they: have loans of 1 billion or more Riel have 1000 borrowers or more have 100 million Riel or more of savings have 1000 depositors or more 1 Cambodia Microfinance Association, 30 June 2006, 2 According to the legal framework in Cambodia there are three categories of banking institutions in Cambodia: commercial banks, specialised banks and microfinance institutions (MFIs). Microfinance is defined as the delivery of financial services such as loans and deposits, to the poor and low-income households, and to micro-enterprises. All microfinance operators, whether licensed or registered, are excluded from a range of financial sector activities including leasing, derivatives, gold and commodities dealing, the provision of cheque facilities and swap or forward dealing in foreign currencies. Registered and licensed operators must report to the National Bank of Cambodia (NBC) and in addition licensed MFIs established as limited liability companies must pay taxes. 1

9 MFIs must register with the NBC if they: have loans of greater than 100 million Riel have savings mobilization of 1 million Riel or more have 100 or more depositors Adherence to the Prakas also allows MFIs to benefit from certain services such as access to credit lines and refinancing opportunities. This improved access to funding was designed to enable MFIs to diversify their products, expand their geographic spread, and increase their number of clients. In order to control high interest rates charged by MFIs, NBC provides a set of guidelines on the methodology for MFIs to use when calculating interest rates. However these guidelines are non-binding and as a result MFIs are free to set interest rates according to the market. As a result relatively high interest rates have prevailed in Cambodia. ACLEDA was the first NGO specialising in microfinance and maintains its position as the leading bank serving the rural sector. It was registered in 1992, became a specialised microfinance bank in 2000, and a full commercial bank in The microfinance sector in Cambodia has matured to where there are now a diversity of financial institutions including commercial banks, microfinance institutions and credit unions providing their services and there has been a steady growth of outreach and diversity of services, fostered by competition amongst the providers. However, according to a recent assessment by the Rural Development Bank (RDB) despite the expansion of services there is around US$120 million of unmet demand in rural credit supply and many areas and sectors are still poorly supplied. 1.2 Summary of the Banking System in Cambodia Figure 1 provides a summary of the banking system in Cambodia as it is currently structured. Overall control is exercised by NBC in its function as the Central Bank. In addition to its head quarters in Phnom Penh, NBC has 21 provincial branches. Currently (June 2006) the sector is served by 15 commercial banks, of which 3 are foreign branch banks and 12 locally incorporated banks, including ACLEDA Bank - which was one of the original groundbreaking NGO microfinanciers. Two overseas banks have representative offices in Cambodia. There are five specialised banks including the RDB and four privately owned institutions. Licensed micro finance institutions total 16. In addition the sector is supported by 23 registered NGOs, around 60 unregistered ones including several incipient mutual and savings associations. The registered NGOs vary in terms of outreach, capacity, and sustainability and only those that are regarded as having the necessary attributes can develop to become licensed MFIs. In addition there are 2,158 registered exchange bureaus in Phnom Penh and the provinces. A complete list of the financial institutions operating in Cambodia in included in Annex 1. A list 2

10 of the 23 registered NGOs currently involved with savings and credit in some way in Cambodia is included in Annex 2. Support to the sector Support to the MFI sector is provided through the Cambodian Microfinance Association (CMA), which was created by a group of six MFIs in April Currently in November of the 16 registered MFIs in Cambodia are members. CMA was setup as a useful platform to represent the microfinance industry, to share information, to organise training (such as MIS training in 2004), to publish benchmarking reports and to lobby government about necessary changes to regulations and required support. It could also be used as a vehicle for sharing information on clients, to make a collective investment in MIS development, as a resource centre, or share other industry-specific costs. However, CMA is not recognised by the regulator, NCC, as it only acknowledges the Association of Banks in Cambodia (ABC) in this role, and would like to see CMA as a subsidiary of ABC. However, ABC serves commercial banks and has higher membership fees and so is not so relevant to representing the interests of MFIs. CMA largely functions with voluntary support from its members and receives funding from the Mekong Project Development Facility and the French bilateral programme. 3

11 Figure 1: Structure of the Banking System in Cambodia The Banking System in Cambodia As of June 30, 2006 NATIONAL BANK OF CAMBODIA (CENTRAL BANK) 15 Commercial Banks 5 Specialised Banks Micro Finance Institutions 21 NBC Provincial Branches 3 Foreign Branch Banks 1. First Commercial Bank 2. Krung Thai Bank 3. May Bank 12 Locally incorporated Banks 1. Foreign Trade Bank 2. Advanced Bank of Asia 3. Cambodia Asia Bank 4. Canadia Bank Ltd 5. Cambodia Commercial Bank 6. Cambodia Mekong Bank 7. Cambodia Public Bank 8. Singapore Banking Corporation 9. Union Commercial Bank 10. Vattanac Bank 11. ACLEDA Bank Ltd 12. ANZ Royal Bank Cambodia 1 State Owned Rural Development Bank 4 Privately owned 1. Peng Heng S.M.E Limited 2. Cambodia Agriculture Industrial Specialized Bank 3. First Investment Specialized Bank 4. Anco Specialized Bank 16 Licensed 1. AMRET Co Ltd. 2. Hatthakaksekar 3. Tong Fang Micro Finance Ltd. 4. Thaneakea Phum Cambodia 5. Cambodia Entrepteneur Building Ltd. 6. Seilanithih 7. Angkopr Microheranhvatho Kampuchea 8. Vision Fund (Cambodia) Ltd. 9. Credit Co Ltd. 10. Prasac Micro Finance Institute 11. Farmer Union Dev Fund 12. Cambodia Business Integrated Rural Development 13. Maxima Mikroheranhvatho 14. Enatean Poalroach Rongroeung 15. CHC Limited 16. PISETH Akphiwat Sethakech 1. Krung Phnom Penh 2. Kampong Cham 3. Sihanouk Ville 4. Siem Reap 5. Battambang 6. Svay Rieng 7. Kampot 8. Kandal 9. Prey Veng 10. Kampong Thom 11. Takeo 12. Pursath 13. Kampong Chhnaing 14. Kampong Speu 15. Koh Kong 16. Preah Vihear 17. Kratie 18. Ratanakiri 19. Mondolkin 20. Stung Treng 21. Banteay Meanchey 2 Representative Offices NGOs Exchange Bureau 1. Standard Chartered Bank 2. Vietnam Bank for Agriculture and Rural Development Registered 23 Unregistered around 60 Registered 2,158 - Phnom Penh Provincial 1,895 From National Bank of Cambodia Review No rd Quarter

12 1.3 Summary of MFI and Credit Providers in Cambodia There are currently 17 registered microfinance providers, including ACLEDA Bank, in the microfinance market in Cambodia, with a total of KHR 753,458 million (US$188 million) in outstanding loans as of 30 June 2006 issued to 520,000 borrowers. Only one of these (ACLEDA) is a commercial bank, the others are licensed microfinance institutions (limited liability companies). In addition there is one registered organisation the Cambodian Community Savings Federation (CCSF), a credit union federation which operates in the Battambang and Banteay Meanchey region as an apex institution for around 40 member owned and operated savings banks. ACLEDA is by far the largest microfinance provider followed by AMRET in second place and PRASAC in third place. These top three providers account for 80% of the amount of money loaned. There are several newly licensed MFIs (Tang Fang Micro-finance) and several other MFIs (Credo and Maxima) with much smaller portfolios which were created directly as limited liability companies, rather than going through a NGO or project transformation stage, as was the case when the sector was developing. In addition to the registered MFIs there are approximately 60 unregistered small providers, and hundreds of informal schemes and credit providers. A summary of the main features of the microfinance operators is shown in Table 1 below. With respect to savings, according to CMA information, as of June 2006 there was reported to be 220,000 depositors with the 17 MFIs with a total of US$93 million held on deposit. ACLEDA Bank again dominates, but the TPC MFI stands out has having a significant number of small depositors. 1.4 Funding of Microcredit in Cambodia ACLEDA and most licensed MFIs have access to the ADB and IFAD wholesale funds channelled through the RDB, which provides wholesale credits to microfinance providers. There are currently no alternative private wholesale funds in Cambodia and the commercial banks are very reluctant to provide funds for MFIs. In addition the leading microfinance providers have access to international funds such as the Microfinance Alliance Fund, SIDI, Triodos, Oikocredit, BlueOrchard, Share Cap, etc, or are supported by International NGOs. Although the ACLEDA and the larger MFIs are not limited by access to capital, for many MFIs expansion of their outreach growth is said to be constrained by the lack of funds available to them. Some MFIs have tried to attract new international investors in taking an equity participation in their capital as a means of increasing their access to funds. ACLEDA in particular have said that although access to additional capital is not a constraint to expansion, they would like access to cheaper funds than that which is currently on-lent by RDB. The average cost of capital for the main MFIs varies from zero when funding is all provided by grants, to 6-8% depending on the source. 5

13 Table 1: Summary of Microfinance Operators as at 30 June 2006 No. MFI Provinces Number of operating areas Loans Outstanding Deposits Districts Communes Villages US$ m Male Female Total US$ m Male Female Total 1 ACLEDA ,473 9, , ,101 2 AMRET , , , , PRASAC , ,066 56,410 78, , ,401 4 CEB , ,823 5 TPC , , ,206 6 HKL , , ,045 7 Vision Fund C , ,650 24,003 29, CREDIT ,948 9, ,138 10,138 9 AMK , ,819 41,764 48, ,017 2,264 3, SEILANITHIN ,256 2,776 4, ,308 2,881 4, CBIRD ,236 1, ,550 2, CHC ,997 3, ,739 1, MAXIMA ,249 1, TFMF CREDO ,666 2, ,221 1, IPR , Total ,781 24, , , , ,540 20, ,733 Source: Cambodian Microfinance Association, based on information extracted from Commercial Bank, Licensed MFIs and registered NGOs. 6

14 1.5 Cambodia Credit Information System The lack of information on borrower s credit rating and performance has been identified as a weakness of the Cambodia banking system and its attendant high risk environment. Credit officers and agents employed by the commercial banks often have little experience in conducting credit checks during loan appraisal. The introduction of a credit information system is considered necessary for the banks to become more efficient in managing their credit and in expanding their customer base. Because of the deficiencies of the present monitoring systems some borrowers have obtained multiple loans from several banks. Accordingly the establishment of a credit information sharing system (CIS) was identified by the ADBfunded Cambodia SME Development Program as a main area of reform needed. In August banks out of the total of 17 banks in Cambodia signed a MOU with NBC to establish an independent web-based credit information system, initially on a pilot basis. However the CIS is to be used by the commercial banks and will not be available to MFIs. It has also been proposed that a similar type of data base should be established for the MFIs. The main use of the CIS is to collect negative information about borrowers, such as unpaid loans and loan defaults which will be available to be shared amongst the member banks to help assess credit worthiness. Eventually it is planned that the CIS will carry information on individual, company and foreign loans that are in arrears and other default information. Each member bank will be responsible for contributing and maintaining their information in the database. Eventually it is planned to expand the CIS to include other financial information, but the implementation of this is constrained as currently in Cambodia the law does not allow the disclosure of private banking information. Changes to the legal framework are necessary to provide authorisation to the CIS, especially if the CIS is to become part of a fully privatised credit bureau. The ADB is assisting with this process. 1.6 MFI Rating Reports The performance and capability of MFIs in Cambodia are regularly assessed by international micro-credit rating agencies, such as Micro- Credit Rating International Ltd (M-CRIL) and others. They prepare a Micro- Finance Rating Risk Assessment reports on a regular basis for the main MFIs internationally and the information is freely available from the website The assessment reports give an overall rating grade for the MFI such as alpha and provides an assessment of its performance. Their reports make recommendations according to three main criteria governance aspects, managerial factors and financial performance. The report includes an assessment of the volume of loan funds that the MFI could absorb for on-lending to its borrowers in the future. The reports have a validity of around one year, or until the next loan proposal application is made by the MFI for further funding. Key risk factors are identified, such as 7

15 coverage of internal audit, and portfolio diversification and the report provides the key financial ratios for the institution. MFI Rating reports are available through the Internet for the main MFIs operating in Cambodia. Table 2 provides a summary of the recent reports that are available and the rating received by the MFI. The full reports are available from The Rating Fund s website as noted above. 8

16 Table 2. Summary of Micro-Finance Rating and Risk Assessment Reports for Cambodian MFIs MFI Rating Report prepared Vision Fund Cambodia α- alpha minus Validity WACOF Portfolio yield February 2007 AMRET α alpha August 2006 CREDIT PRASAC HKL Seilanithih 1/ Β+ beta plus α- alpha minus α- alpha minus D September 2004 October 2005 Repayment rate Average loan ($) Loan interest Key Risks 6.3% 38.4% 99.6% $168 36%-42% single source of finance underdeveloped MIS and Internal Audit system foreign exchange risk 7.7% 41.6% 99.1% $87 36%-42% inadequate coverage of internal audit lack of adequate diversification of portfolio July % 39.7% 95.8% $273 36%-42% second line of leadership underdeveloped operating systems March 2006 September 2005 October % (no external capital) 33.3% 86.3% $161 36%-42% uncertainty about equity mobilisation and Supervising Board weak discipline at Credit Officer and client level 6.3% 31.3% 92% $420 24%-36% weak internal audit geographical concentration 8% 35% n.a. $354 36%-48% internal control systems (major fraud in 2004) lacks competitive advantage compared to other MFIs Source: Micro-finance rating reports prepared by Micro-Credit Ratings International Ltd.. Notes 1. Seilanithih s rating was prepared by Planet Rating Transparency for Microfinance Development. Their rating and report has a different format. 2. WACOF = weighted average cost of finance. 9

17 2 CREDIT SERVICES IN TSLSP AREA 2.1 Credit Providers in Tonle Sap Area There are currently ten registered microfinance providers, including ACLEDA Bank, operating in the Tonle Sap area, with a total of KR260,072 million (US$65 million) in outstanding loans as of 30 June 2006 issued to 151,600 borrowers (which represents around 765,000 people at 5 people per HH on average). 3 Only one of these MFIs (ACLEDA) is a commercial bank, the others are licensed microfinance institutions (limited liability companies). In addition there is one registered organisation the Cambodian Community Savings Federation (CCSF), a credit union federation which operates in the Battambang and Banteay Meanchey region as an apex institution for around 40 member owned and operated savings banks. With respect to savings, according to CMA information, as of June 2006 there was reported to be 87,526 depositors with the 10 MFIs with a total of 86,213 million (US$21.55 million) held on deposit. ACLEDA Bank again dominates, but the TPC MFI stands out has having a significant number of small depositors. A summary of this information is provided in Table 4. The main MFI providers are well represented in the TSLSP s potential project area in the six provinces surrounding Tonle Sap Lake, although not all have branch offices, or a presence in all six provinces. A summary of the MFIs operating in the TSLSP potential areas is provided in table 3 below. ACLEDA Bank has the most comprehensive coverage in the TSLSP area with provincial offices in each of the six provinces and branch offices distributed through the six province as follows Kampong Chhnang 6 Pursat 9 Battambang 10 Banteay Meanchey 9 Siem Reap 12 Kampong Thom 7 Total 52 In addition they also have a number of branch post offices in some of the more remote communes. 3 These data exclude the Pailin area as it is outside of the Tonle Sap area. 10

18 Table 3. Summary of credit providers in Tonle Sap Lake area Organisation Provinces in TSLSP area 1. ACLEDA Bank (The largest rural credit provider in Cambodia) Kampong Chhnang Pursat Battambang Banteay Meanchey Siem Reap Kampong Thom 2. AMRET Siem Reap (new office opened in Chi Kraeng, in July 2006) 3. Angkor Mikroheranhvatho (Kampuchea) Co. Ltd. (AMK) 4. Cambodian Community Savings Federation (CCSF) 5. Cambodian Entrepreneur Building Limited (CEB) 6. Cambodia Rural Economic Development Initiatives for Transformation (CREDIT) Banteay Meanchey Pursat Battambang Banteay Meanchey 14 offices in 5 provinces Kampong Chhnang Siem Reap 7. Hattha Kaksekar Limited (HKL) Pursat, Banteay Meanchey Siem Reap Kampong Thom 8. PRASAC Microfinance Institution Limited 9. Thaneakea Phum (Cambodia) Ltd (TPC) Kampong Chhnang Pursat Kampong Thom Battambang Banteay Meanchey Siem Reap Services provided Credit loans, savings, money transfer, cash management, money exchange and letters of guarantee Credit (group loans and individual) and deposits Credit (group and individual) and savings Credit union model for community savings banks, and savings Credit (group and individual lending), and savings Loan and savings products targeted to poor women Individual microcredit and microsavings (compulsory) Loans (group and individual), no savings Credit (group and individual) and savings 10. Vision Fund Cambodia (VFC) Kampong Chhnang Battambang Kampong Thom Source: CMA reports Credit (group and individual). Savings to be introduced in 2006 Breakdown of loans from MFIs The information from CMA shows that ACLEDA and the other nine MFIs that operate in the greater Tonle Sap area have outstanding loans of $65 million with 151,600 borrowers. Most of these loans are for the trading and service sectors and loans to agriculture make up only around 10% of the loans portfolio. A summary of the use of loans by sector for ACLEDA and two other MFIs on a nationwide basis is shown in Table 5. 11

19 Table 4. Summary of loans and deposits in the Tonle Sap Lake area Number of Loans Outstanding Deposit Balances Province Districts Communes Villages Amount No. Borrowers (KR mill) Male Female Total Amount No. Depositors (KR mill) Male Female Total Kampong Chhnang ,151 27,364 3,306 11,897 22,345 7, ,304 8,025 Pursat ,108 25,900 2,639 11,096 23,172 1,967 1,337 2,307 10,421 Battambang ,092 32,322 2,379 9,155 22,794 14, ,007 14,924 Banteay Meanchey ,434 49,756 2,421 13,957 29,941 28,142 1,374 3,273 19,608 Siem Reap , ,824 1,329 10,277 32,005 16,378 1,344 5,432 22,197 Kampong Thom ,383 23,906 3,478 9,963 21,353 17,640 2,536 4,169 12,351 Total 229 1,487 7, ,072 15,552 66, ,610 86,213 7,247 18,492 87,526 Source: Cambodian Microfinance Association reports June

20 Table 5. Use of MFI loan funds Sector ACLEDA CEB HKL Agriculture 8% 18% 12% Manufacturing 3% 5% 0% Trading 69% 32% 12% Services 20% 38% 16% Other1 0% 7% 1 60% 2 Total 100% 100% 100% Source: CEB and ACLEDA Annual Reports 2005, and HKL s report on Banteay Meanchey province August Note 1. For food 2. Other includes construction, transportation, and household/family. These data are for the breakdown of loans for all Cambodia, but are indicative of the use of funds in the Tonle Sap area. ACLEDA is by far the biggest lender in Tonle Sap accounting for $46 million of the $65 million of loans (71%). As can be seen in the table, ACLEDA s loans for agriculture are only 8%, with the bulk of the funds going to the trading (69%) and services (20%) sectors. These two sectors are largely urban based so the actual amount of funds for agriculture disbursed by ACLEDA are likely to be only in the order of $4 million. Loans to the agricultural sector by the other MFIs who make up the other 29% of loans in Tonle Sap could have proportionally more to the agricultural sector, but this is unlikely to be more than an additional $3 million, or a total disbursement for agriculture of say $7 million in total. Some of the disbursement for the other sectors (trading, services etc) will also be to rural HHs but it is likely that the bulk of these loans are to the urban sector and business sector as well. What this means is that credit from the formal sector banks and MFIs for agriculture makes up a minority of their lending portfolio. This is because of the preference for urban and non-agricultural lending through the constraints MFIs have in minimising their risk and transaction costs, for example the higher costs of servicing remoter areas with poor communication, the higher risk of agricultural production, lack of collateral, and less assured cash flows to make repayments. This is expected to lead to a high level of unsatisfied demand for credit in the rural areas that in the absence of formal credit from FMIs has to be met from the informal sector. This aspect was confirmed by the survey of rural HHs that was conducted as part of the TSLSP PPTA as described in the next section. 2.4 Demand for Rural Credit in Tonle Sap Area The Household Resources and Livelihoods Survey (HRLS) that was conducted in the six provinces surrounding Tonle Sap Lake in October 2006 as part of the TSLSP PPTA gathered some information on rural credit from the surveyed households. For the survey a purposive sample of

21 households distributed across four wealth groups (rich, middle, poor and poorest) in 12 villages was surveyed to gather information about household income and expenditure, income generating activities, assets and the seasonal distribution of income and expenditure. The survey also included questions about the savings and credit situation for each household. Although the survey was not based on a statistically reliable sample, from the information collected it is possible to make as estimate of the total demand for credit and the current sources of credit to meet the demand from rural households. The survey showed that 65% of the households surveyed had recent experience with borrowing money with an average loan of KR700,000 each ($175), but with a range from KR270,000 ($67.50) for the poorest HHs to KR2.86 million ($715) for the rich HHs. In terms of the source of loans 22% were from the formal sector (banks and MFIs), 24% were from the NGOs and S&L organisations, while the informal sector (money lenders, merchants, neighbours and relatives) provided 54%, of which neighbours were the most important source. According to the Seila database 2005, the total population in the six provinces surrounding to Tonle Sap Lake which makes up the overall project area is 3.34 million. At an average household size of 5.30 people this indicates that there are around 630,000 households in total. The RRA survey that was also conducted as part of the TSLSP PPTA provides an estimate of the number of HHs in the four wealth groups in the potential project area for TSLSP. By combining this information with the distribution of the loans numbers and values from the HRLS it is possible to produce a crude estimate of the total current amount of credit in the six provinces surrounding Tonle Sap Lake that could be part of the TSLSP. This information can also be compared with the amount of loans and deposits handled by the MFIs as discussed in the section above. Combining the number of households and the distribution of HHs within the four wealth rankings with the data from the HRLS survey indicated that there are 417,000 households with an average loan of KR575,000 making an estimated total annual demand for credit of KR239,488 million ($59.8 million). The distribution of the number of loans follows that indicated by the HRLS: 23% from banks and MFIs, 23% from NGOs and S&C schemes and 54% from the informal sector (merchants, neighbours, relatives and money lenders). It is clear that the HRSL survey data can not be used to indicate total demand for credit in anything other than an indication of the grossed up amount. The sample is not representative of the population and excluded urban communities. For example ACLEDA is underrepresented in the HRLS survey as only 2 of the 17 loans from the banks and MFIs were recorded as being provided by ACLEDA, when we know that ACLEDA are providing 70% of the credit in the Tonle Sap area. Moreover the grossed up survey data indicate that the formal sector is only providing around $15 million to around 100,000 clients when the MFIs have currently have $65 million of loans to over 150,000 clients, although most loans are for nonagricultural purposes. However despite the crude estimates, because of the limitations of the data and the need to generalise for the whole potential TSLSP area, this exercise does indicate the relative magnitude of the current use of credit by 14

22 rural HHs and the importance of the informal sector in satisfying the present need. It can be concluded that because of the lack of accessibility to formal credit for most HHs (as evident by the reliance on informal credit and its higher interest rates) there is likely to be a large amount of unsatisfied demand for credit that may exist for those HHs who are not able to borrow money or service the relatively high levels of interest that apply, both in the formal and informal sectors. However it is not possible to use the HRSL results to indicate just how much this might be. 2.2 Credit Systems in Use Credit methodologies applied in Cambodia have shifted over time from experimentation with village banking models between , to an emphasis on solidarity credit groups from 1995 to 2002, and more recently with a continuing trend to more individual lending from 2002 to now. Never the less, the majority of the MFIs offer a mix of lending products covering group and individual loans and savings schemes, while some are still using an adapted village banking structure to channel the funds more efficiently at the grass roots level. However most of the MFIs in Cambodia are almost entirely focused on credit and there is a lack of emphasis on mobilising savings and providing savings services. The source of funds still relies on outside capital. Loans the rural sector are provided through two general models: group credit and individual credit. Village Banking and Integrated Programmes Integrated rural development programmes in Cambodia have included the establishment of village banking and group credit as part of the set of development activities. Frequently these types of programmes are implemented by NGOs and cover broad social objectives including promoting community participation and empowerment and health and education aspects in addition to economic advancement. The establishment of mutually supporting groups from the poorest and most disadvantaged households in the community and women has been encouraged as part of poverty alleviation objectives and to facilitate micro credit. While these programmes have been shown to have had a considerable social and economic benefit to the disadvantaged HHs, this kind of approach with a focus on vulnerable groups can be criticised for not always adhering to commercial, sustainable micro finance delivery principles and are not sustainable once the finance and support comes to an end. Where micro finance is combined with subsidised services and weak insistence on the need for repayment of credit this can become counterproductive to the development of sustainable micro finance services by the specialist MFIs at a future time. Highly subsidised or free credit can instil an attitude that the borrowers do not really have to pay their loans back, and subsequently make it more difficult to manage commercially orientated micro finance services. Although this type of integrated programme can achieve social and economic objectives in the short term, it is generally not a cost effective 15

23 means of delivering credit and is not sustainable in the long term. Such programmes are usually administered by NGOs that are not specialist credit delivery agencies and have multiple tasks and activities in addition to promoting village banking and group credit. Current development thinking considers that micro credit is best left to be delivered by MFIs and the role of NGOs should restricted to supporting and facilitating related capacity building and training, as part of a two-pronged approach to micro credit. Furthermore savings and credit has not been applied as widely in Cambodia as other countries and there is a low level of savings associated with micro credit, which is an aspect that must be addressed in the future. The MFI AMRET uses Village Associations as the key element of its credit delivery system. Each VA consists of members in groups of five, depending on the size of the village. AMRET has a clearly laid out process for village selection and group formation, which is carried out by the Credit Agents (CAs), the interface between the clients and AMRET. Each CA is responsible for six to eight VAs. The role of the VA is to approve the loan application, prepare the loan contract, monitor loan utilisation and follow-up repayments and bad debts. Each VA has two credit committees. These credit committees effectively take care of all the functional roles of VAs. In turn, AMRET pays a commission to the credit committee members of 11.76% (including withholding tax) of interest earned to the committee for the first cycle, and a lesser amount of 9.41% for subsequent cycles. It is paid at the end of each loan cycle. Group credit. Under the group security credit system several borrowers form a group and agree to guarantee and be jointly liable for the repayment of debt by each group member. Group credit usually does not require any collateral as security and is more accessible to low income households with limited assets use as collateral. The number of borrowers forming the group typically range for three to ten members, but can include more, especially when it is incorporated into a village banking model. Sometimes group loans are combined with compulsory savings, that may be a precondition to receiving a loan, but this model is not applied so much in Cambodia as in other countries. The loans are usually for a relatively small amount, (typically $50 to $100) usually denominated in riel, but also in US$ (and in some locations in Thai Baht) with repayment over a relatively short term period of normally less than 12 months depending on the conditions of the model adopted by the various lenders. After the first cycle subsequent loans may be larger as the borrower demonstrates their capability to repay their loan. Interest rates are currently around 2-4% per month, according to the lender and the loan modality which does result in quite high interest rates of 24% to 48% per annum being charged to borrowers. Interest is paid on the declining balance. Some MFIs require progressive payments during the term of the loan rather than all at the end which can cause difficulty when 16

24 credit is used for crop production when income is received after the harvest. Some MFIs concentrate exclusively on group credit, some such as AMTRET provide both group and individual credit, and others such as HKL concentrate on individual credit products only. However the trend for the larger MFIs is a reducing importance of group loans with more funds being loaned as individual loans. One reason for this is that borrowers are said to be reluctant to act as guarantor for group loans and prefer to borrow as an individual. The transaction costs of administering small group loans are also higher than larger individual loans. Generally speaking in Cambodia due to historical reasons there is less social cohesion and there is a reluctance to cooperate in groups, compared to in other countries where group credit is successful applied, which is reflected in a less effective group credit in Cambodia. Moreover the larger MFIs prefer to provide individual loans to the more affluent borrowers because the amounts of the loans are usually more, they can be protected by collateral and have greater efficiency through lower transaction costs. Savings and credit associations During the period 1995 to 2001 the EU-funded PRASAC project 4 established more than 800 savings and credit associations (SCAs) serving 45,000 families in the six provinces surrounding Phnom Penh. An assessment of the performance of the project in May 2001 made some insightful comments on the performance and impact of SCAs in Cambodia: 5 The SCAs were established in remote locations with average loans of around $50 and achieved repayment rates exceeding 95%. The impact was to provide an alternative to money lenders and resulting in a lowering of money lender interest rates. Access to credit generated a more positive attitude to income generation and engendered agricultural development. Funds were utilised to both support micro-business activities and emergency needs. The establishment of the SCA as a CBO fostered village unity and supported community development. SCA were not able to operate autonomously and did not generate sufficient internal savings to eliminate a reliance on outside capital and were expected to be dependant on continuing MFI loans (demand outstrips supply). They suffered from weak leadership, exacerbated by high rates of illiteracy in the community. SCA could be developed into a more multi-purpose organisation, for example supporting income generating activities and group marketing, but initially SCAs should have a single, clear and simple objective. 4 Support Programme for the Agricultural Sector in Cambodia. 5 Report prepared by Dr. Wolfram Hiemann and Dr Rita Gebert Savings and Credit Associations in PRASAC II: Assessment and Proposals for Reform, Phnom Penh and Berlin, May

25 Disbursement of part of the profit to members increases the attraction of the SCA to members and promotes transparency and internal supervision. Booking keeping and accounting functions could be out-sourced It was anticipated that the SCA would eventually be taken over by a MFI Individual loans. Loans provided to individuals are increasing and some MFIs are raising the level of loans that they are prepared to provide to an individual lifting the threshold of a micro-finance loan. For an individual loan collateral is usually required (such as a land certificate) and some MFIs require the borrower to also receive training in credit management and running a business as a condition to receiving a loan. Compared with group credit, the loan amount for individual loans is higher, (up to $5,000 for AMRET) repayment periods longer (24 months for AMRET) and monthly interest rate lower, especially for larger loans. In Battambang province the ACLEDA branch office has experienced a decrease in the number of group loans and an increase in individual loans in recent years, largely as a result of increased competition from other smaller MFIs who do not have as strict loan conditions and require less paperwork to get a loan. The trend is to provide larger individual loans for the more commercial clients. The downside to this is that the poorer sectors of the rural community are often excluded as they cannot meet the conditions for obtaining a loan. Both group and individual loans may be provided for consumptive and productive purposes. Repayment rate Loan repayment in Cambodia is stated as being in the high 90% (repayment rates of 98% are quoted by some MFIs) with very low levels of loan default, for example ACLEDA Bank claim that their default rate for group loans is less than 1%. The other main MFIs also claim a similar low rate of loan default. In September 2006 HKL s Banteay Meanchey branch office stated that 4.41% of their loan portfolio classified as overdue. In 2004 CEB claimed that their repayment rate on a loan portfolio of $3.5 million was 99%. Some more information on the loan repayment rates for a cross section of MFIs is included in Table 2. Other types of credit schemes In addition to the group and individual monetarised loans promoted by the MFIs, there have been several other credit models applied in Cambodia, including rice banks, cow banks, buffalo banks, pig banks and group credit through the village banking model. These models were first introduced in the early 1990s when there was an urgent need to support rural people with basic food security and production inputs to stimulate agricultural production when people were first resettled on the land. The development 18