Cambodia’s microfinance business doomed due to interest rate cut

Microfinance institutions in Cambodia may be driven out of business as a result of the central bank's unprecedented decision to slash and cap the interest rates at 18 percent allegedly on the order of Prime Minister Hun Sen, The Phnom Penh Post Online reported on Wednesday.

Senior consultant at Emerging Markets Consulting, Ngeth Chou predicted that only the kingdom's largest microfinance providers would survive the sudden and drastic interest cut which is due to come into effect on April 1.

Cambodia had 54 licensed MFIs and seven microfinance deposit-taking institutions as of the end of 2016 with a total 1.9 million clients and a combined loan portfolio of $3 billion, according to the National Bank of Cambodia. Several prominent banks such as Acleda Bank and Sathapana Bank provide a large volume of microfinance loans to farmers, small businesses and consumers.

Chou said the central bank's interest rate cut and cap at 18 percent � nearly half the prevalent rate charged by most MFIs � will turn microlending into a loss-making activity.

He said MFIs that focus on small group lending will be hit the hardest as they must lend at rates between 23-25 percent just to cover basic operating costs and the high clost of source funds.

Worse still, he speculated that a collapse of the microfinance sector would have severe consequences on the rural poor, cutting off their access to credit.

Stephen Higgins, managing partner of local Investment firm Mekong Strategic Partners, said even well-managed financial institutions would not be able to survive in the new environment unless they make up for the lower interest rate with higher fees.

Source: Thai Public Broadcasting Service (Thai PBS)