Cambodian Microfinance Market Records Big Growth. But Is It Healthy?

> Posted by Jeffrey Riecke, Communications Associate, CFI

New data shows the Cambodian microfinance market disbursed $1.79 billion in loans over the first three quarters of 2014, amounting to a 51 percent increase over last year’s Q1-3 figures. The data comes from the Cambodia Microfinance Association (CMA) and includes loans issued by 45 of the country’s MFIs. Last year’s total for the same period was $1.18 billion from 39 institutions. In a country where fewer than 20 percent of the adult population has access to formal financial services, such expansion in activity might be exciting, but is it sustainable for borrowers and institutions?

Some individuals who are unfazed by the rapid growth point to the recent economic strengthening enjoyed by the country. Cambodia’s GDP increased annually on average 7.7 percent between 1994 and 2013, and it’s expected to maintain a nearly equivalent trajectory in the years to come. On distributing this wealth, the country achieved its Millennium Development Goal of halving poverty in 2009. Agriculture in Cambodia is big, constituting about 35 percent of the country’s GDP. About 90 percent of those who are poor or who are vulnerable to slipping into poverty live in rural areas. More small and medium sized entrepreneurs making investments in farming efforts, or other income-generating activities, aligns with an expanding economy.

The worry, however, is that the microfinance lending growth isn’t so much a reflection of an uptick in borrowers or a healthy increase in borrowers’ investment sizes, but a trend fueled by growing overindebtedness. In a 2013 report by the Cambodia Institute of Development Study analyzing overindebtedness levels, 51 percent of respondents indicated that they have struggled to repay their loans on time. Chan Mach, CEO of the Kredit microfinance institution in Cambodia, reports that about one-third of those who apply for a loan at his MFI already have two loans issued from other institutions (it’s against Kredit policy to issue a loan to someone in such a position). These individuals might be seeking a third loan so as to make payments on their two outstanding loans, perpetuating a cycle of overindebtedness.

The Cambodian Microfinance Association indicates that the prevalence of individuals taking out loans from multiple institutions is a severe issue in the market. In some instances individuals might take out more than four or five loans, which in the likely case of inability to repay causes significant problems for all involved. The root causes of multiple lending in Cambodia, CMA shares, include under-use of credit reporting, lack of thorough credit assessments of prospective clients, and the issuance of multiple land titles by local authorities (which can then be used as collateral documents multiple times). In addition, although Cambodia is ranked 9 in the EIU Global Microscope 2014 rankings, it does not score well on client protection. Thankfully, the Cambodian market should see near term progress at least on credit reporting, as there have been appreciable advancements in the country’s credit bureaus in just the past few years, as reflected in its high rating on this indicator in the Microscope.

As Cambodia’s microfinance market continues to expand and work continues to bring in the unbanked population, it will be crucial to keep the issues of client ability to borrow and overindebtedness front and center.

Image credit: KieranBall

Have you read?

Aligning Interests in Cambodia

The ‘Global Microscope 2014’: Results and Surprises

2014 Banana Skins Report Reveals Overindebtedness as Biggest Concern in Microfinance Industry