Page 1 of 2 Micro-lenders run reality check
By Stephen Kurczy
PHNOM PENH - Cambodia's microfinance sector is one of the fastest growing in
the world. There's just one snag: nobody knows if it actually helps the poor
who receive the loans and whether its lending practices are sustainable.
While the percentage of Cambodians living below the poverty line dropped from
47% to 35% between 1996 and 2006, without an independent assessment of the
causes behind rising incomes, microfinance outfits charged with alleviating
poverty can't necessarily take the credit.
"We can't say for sure why people are better off [in Cambodia]," says Paul
Luchtenberg, chief executive officer of Angkor Mikroheranhvatho Kampuchea
(AMK), a microfinance institution
which over the past two years has tripled its number of borrowers to 188,000
and quadrupled its amount of outstanding loans to US$23 million.
"Is it because of microfinance or it is because GDP was increasing at more than
9% a year? We don't know. We can only say people are better off. We can't say
it's because of us."
Microfinance institutions (MFIs) have recently proliferated in impoverished
Cambodia, with 104 organizations, including 60 non-profit lenders, operating in
the country. Since 2003, they have attracted about 100,000 new borrowers each
year and currently an estimated 1 million Cambodians hold $440 million in
outstanding micro loans, according to the Cambodia Microfinance Association
(CMA).
Yet none of Cambodia's MFIs have hard empirical data to show that their small
loans actually help reduce poverty. It's important to know, Luchtenberg says,
as microfinance grows in popularity and loan providers channel millions of
dollars in interest-free loans into Cambodia's MFIs.
Floated by below-market interest rate loans from organizations such as
Kiva.org, MFIs have the resources to provide small loans to sections of the
poor that normal banks neglect. MFI customers often use the credits to buy
motorbikes to transport their goods to market, purchase livestock to raise for
slaughter, or mortgage a plot of land to grow rice. Repayment rates are
extremely high in Cambodia, with delinquency rates of less than 1%.
Amid the mounting global economic crisis, some MFIs have reported rising
default rates. That's putting the system under new strains. For instance,
villagers from Kampot province in southern Cambodia complained this week to the
National Assembly that a dozen microfinance companies took possession of their
homes and farmland because they could not repay their loans.
Mu Sochua, the National Assembly parliamentarian representing the villagers,
said they were taking out new loans to pay off old MFI debts, leading them to
borrow from exploitative moneylenders. Defaults on microfinance loans will
become more widespread, she says, as the global economy causes a decline in
crop values and Cambodian farmers earn less from their harvests. "The economic
crisis impacts differently, it's like a wave. Here, the wave is hitting the
small entrepreneurs."
In Cambodia, non-profit and for-profit MFI's compete for the same market. AMK
and Acleda Bank, two of the country's more prominent MFIs, exhibit the sector's
shifting dynamics. Out of 652 MFIs surveyed worldwide, in 2008 the
Washington-based Microfinance Information Xchange ranked AMK the 19th best in
terms of transparency, efficiency and outreach, ahead of Acleda which came in
at 70th.
Their philosophies differ starkly. Acleda Bank says it merely provides access
to loans to Cambodians, whose responsibility it is to use the funds wisely. AMK
says it strives to improve standards of living for the poor, the original
mission of Nobel Peace Prize winner Muhammad Yunus, who in the 1970s first
popularized microcredit in Bangladesh through his Grameen Bank.
However, the industry he popularized has shifted incentives. Most MFIs in the
world today are for-profit entities with no obligation to uphold Yunus's
vision. The Center for the Study of Financial Innovation found in a March 2008
report that MFIs worldwide rank "mission drift", or the divergence of MFIs from
their original mission of poverty alleviation and financial inclusion, as one
of the industry's biggest and fastest rising problems.
"We noticed this a decade ago, when it seemed that half the microfinanciers in
the world really wanted to be full-service bankers," the study found. "Now many
of them seem to be shifting from servicing the poor to flogging high interest
rate consumer finance products. The profits may be more attractive, but the
mission has changed - with a potentially adverse reputational impact."
MFIs "are increasingly recognizing that even with a sincere dedication to a
social mission and a committed staff, they do not know whether they are
achieving their desired social goals without having information or evidence,"
wrote Laura Foose and Amelia Greenberg in the Autumn 2008 MicroBanking
Bulletin.
Mixed results
That's certainly the case in Cambodia, where experts say the industry has
achieved mixed results. For-profit MFIs charge annual interest rates of
anywhere between 24% and 36%, while the nation's non-profit microlenders, such
as the Lutheran World Federation, charge as little as 5%. Poor Cambodians are
often willing to pay the higher interest rates because non-profit microlenders
have limited funds and outreach.
A year ago, most industry leaders boasted that their lending helped to reduce
poverty and fuel grassroots micro-businesses. Those claims are now coming into
question. "We need to know how we can change, how we can improve," Bun Mony,
former Cambodian Microfinance Association president, said last month at the
Cambodia Banking 2009 conference in Phnom Penh.
This assessment marked a reversal from his statements the previous year, when
he told this correspondent that, "through unofficial observation, we accept
that microfinance has been playing a very important role in poverty reduction."
The CMA is now seeking funds to conduct a $100,000 impact study on the
industry.
Some micro lenders baldly argue that it is not their responsibility to
alleviate poverty. When asked if his bank has strayed from Muhammad Yunus's
original vision of microfinance, In Channy, chief executive officer and
president of Acleda Bank, says: "He's wrong ... It's wrong if you say
microfinance is for poverty alleviation. Microfinance is for economic
development. And economic development is a powerful tool for poverty
alleviation."
Acleda Bank attracted 40,000 new micro- and small-loan borrowers in 2008 while
doubling its profits to about $21 million. The bank has opened three
international branches in neighboring underdeveloped Laos, with five more
planned to open there in 2009. Acleda started as a non-profit non-governmental
organization (NGO), but morphed into a full-fledged commercial bank in 2000 and
now provides medium-sized and large loans to a wide range of customers.
To complete the non-profit to for-profit circle, Acleda plans an initial public
offering on Cambodia's forthcoming stock exchange, scheduled to open at the end
of this year. In Channy says Acleda will avoid activist criticism through a
plan to pay out only 40% of the previous year's profits to shareholders. The
remaining 60%, he says, will go back into the company to reduce interest rates,
increase customer services and open more branches. "It's not mission drift. We
can guarantee much more than if we were an NGO," he said.
AMK reports small profits - about $800,000 in 2007 and $926,000 in 2008 - all
of which were reinvested into the company. "We shouldn't be about just making
profits; that's straying from what the organization was set up to do," says
AMK's Luchtenberg. "Microfinance is about reaching down to the poorest."
Such obligations are a matter of choice in Cambodia's unregulated context. The
government does not mandate that MFIs help the poor, but regulates only whether
the country's 18 licensed MFIs have adequate capital reserves. The 26
registered and 60 NGO-administered MFIs - which do not have minimum capital
requirements and are exempt from profit taxes - are even less regulated. That
differs from, say, neighboring Thailand, where the central bank has imposed
interest rate caps on credit cards targeting subprime borrowers.
Charles Waterfield, a microfinance expert and professor of international and
public affairs at Columbia University, says that unregulated MFIs, including
the ones in Cambodia, could act as exploitative as Mexican microfinance
institution Banco Compartamos SA, which came under fire in March 2008 for
skimming hundreds of millions of dollars in profits made from poor borrowers.
The Compartamos case, Waterfield says, is a cautionary tale for how easily MFIs
can "raise interest rates, make large profits, and then follow a path that
allows them to extract those profits into their own pockets". "I do see this as
a warning call for the industry," Waterfield wrote to this correspondent in an
e-mail message last year. Waterfield has organized a coalition of MFIs known as
MicroFinance Transparency to police the industry and monitor annual interest
rates and profits among the world's MFIs.
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