Bright Borrowing

MFIs provide non-traditional loans for small businesses
MFis helping the financially marginalised access business loans

MFis provide access to non-traditional loans for small businesses

Microfinance provides thousands living below the poverty line in Cambodia with a lifeline each year. As the market develops across the region, countries are looking to the kingdom’s successful model for inspiration. BY MARISSA CARRUTHERS

When it comes to microfinance, cambodia is leading the way in ASEAN, with a total of 45 registered organisations providing vital funding to some of the country’s poorest.

“Microfinance institutes (MFIs) provide finance to entrepreneurs or households with no access to traditional financial services,” says Christophe Forsinetti, CEO of local venture capital fund, Devenco.

With more than three billion people in the world unable to access banking services and 40 percent of the population struggling to gain finances, Dr Muhammad Yunus decided there were simple steps that could be taken to alleviate the poverty that surrounded him in Bangladesh.

In 1976, during a trip to the village of Jobra, he came across some women who were making bamboo furniture. However, they were burdening themselves with debt from loan sharks offering high interest rates, which meant the women were forced to use all their profits to repay lenders. Traditional banks were reluctant to hand out small loans to the poor, who are at high risk of defaulting, so he stepped in and lent $27 of his own money to the women. They made a small profit and paid Yunus back.

A few months later, Yunus secured a loan from the government’s Janata Bank to lend to Jobra’s poor, and by 1982 it had 28,000 members. In October 1983, a pilot project was launched as a bank for the poor in Bangladesh and was renamed Grameen Bank. In October 2006, Grameen Bank and Yunus were awarded the Nobel Peace Prize for the efforts to “create economic and social development from below”.

Grameen Bank’s success sparked a wave of MFIs across the developing world, with the first landing in Cambodia in the form of ACLEDA in 1993. Operating as an NGO for micro and small enterprise development, the organisation started off providing small loans to the underprivileged with help from donors, including USAID and UNDP.

In 1998, ACLEDA launched a three-year programme to transform into the bank it operates today. It was granted a specialised banking license in October 2000. “ACLEDA is probably one of Cambodia’s best MFI success stories,” says Forsinetti.

Today, figures from the Cambodia Microfinance Association (CMA) reveal that Cambodian MFIs have a gross loan outstanding portfolio of $1.978 million and a borrower base of more than 1.9 million accounts, predominantly located in the capital of Phnom Penh and other urban areas. And the kingdom’s MFIs are diversifying as they enter a new era that presents new demands. Many are branching out into savings, micro-insurance and micro-leasing to cater for these new customer needs.

“The majority of the big MFIs started off in the early 1990s as NGOs, like ACLEDA,” says Forsinetti. “They have to grow with their customers and their growing needs, and that is what they are doing.”

Traditionally, MFIs loan small sums of money to entrepreneurs needing a boost to start or operate their business. This may be for a farmer to buy equipment, a budding beautician to set up her shop or a young graduate to buy a motorbike to carry out their work. To access loans, rules vary, but in general the borrower must be able to prove address and identification.

Peer pressure and the fear of loss of face are contributing factors to the impressive repayment statistics – 99.39 percent, according to the latest CMA figures from December. “The repayment rate in Cambodia is very high in relation to other countries,” says Andrew Crawford, a consultant for CMA from Monash University, Australia.

This factor instills confidence in the country’s MFI market, which is reliant on a combination of local investment from wealthy Cambodians and foreign investment from mainly European and US investment funds. Those investing their money in MFIs receive an attractive return of about 20 percent – much higher than savings rates offered in the West. Some MFIs also receive grant funding from foreign NGOs, such as AFD, Planet Finance, Kiva and Good Return.

“Concern about paying back loans can sometimes increase the anxiety of borrowers,” says Crawford. “The system needs to stay reliable, capital supported and risk managed. A financial crisis could have major impacts that could flow through the economy to the poorest villagers. For example, if savings accounts became unavailable.”

With so many MFIs serving the country, it has been suggested that market consolidation could improve efficiency. However, Crawford claims the top nine organisations serve more than 90 percent of borrowers making the remainder “quite small and less relevant to the overall market”. And with microfinance still only reaching 62 percent of the total population, and demand continuing to rise annually – there was a 14 percent increase in borrowers and 25 percent in savings accounts in 2014 – the need for MFIs is growing. “Demand still exceeds supply, especially in more remote areas,” adds Crawford.

As the MFI market develops in emerging countries, such as Myanmar, organisations there are looking towards Cambodia to lead the way.

“The market in Cambodia is more developed than other countries,” says Forsinetti. “The reason it developed here was because of the conflict, and in the 1990s a lot of international organisations set up in Cambodia to support the country. In Myanmar, there were no loans until a couple of years ago. A few MFIs are now emerging, but it’s very different there because of the legal framework.”

In 2013, ACLEDA launched its first MFI in Myanmar offering loans to individuals and groups. By the end of 2014, it had $11 million in outstanding loans, proving the need for microfinance in developing markets. “This is a very successful way to address the needs of the population,” says Forsinetti. And as the use of technology continues to spill out into rural areas, microfinance looks set to spread even further.

“People are becoming more connected with smartphones,” Forsinetti adds. “This will enable access to financial services for the people living in the countryside. It will become even more accessible.”

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