Cambodian MFI Sector In Goldilocks Zone

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Mekong Strategic Partners, an investment, corporate advisory, and risk management firm covering the Greater Mekong Region, has issued its latest report detailing the current status of the Cambodian Microfinance Institution (MFI) sector.

The report reveals that Cambodia’s MFI sector is one of the best performing globally, arguing that the Cambodian MFI sector has achieved a “Goldilocks scenario”.

Like Goldilocks’ porridge in the famous fairy tale—not too hot and not too cold—the local MFI sector has achieved a Return on Equity (ROE) that is “just right” for Cambodia’s current level of development and growth.

The report states that MFI interest rates are “fair and reasonable”, and are at the lower end of global interest rates for comparable institutions.

Credit losses on Cambodian MFI loans are well below the global average, according to the report, and this has boosted the ROE.

This low default rate is partially due to what Mekong Strategic Partners terms a “High cultural willingness to repay in Cambodia,” and this is seen in the “low loss rates that are around 1.6% below the global average.”

The report explains that while some may argue that an industry ROE of 22% is unjustifiable in a developing country like Cambodia, “in a high growth market like Cambodia, decent returns are essential to help fund the ongoing growth of the sector.”

Mekong Strategic Partners argues that an institution achieving a higher ROE is able to expand faster and, in doing so, increase access to finance for the poor at a faster rate: “This is clearly a far better outcome,” the report states.

The report cites a recent IMF study to assuage readers who would argue that people would be better off with reduced access to finance if it meant lower interest rates (and therefore lower ROEs):

“The poor generally consider ongoing access to credit more important than its cost, as the alternatives (including moneylenders, local saving circles, etc.) are usually more expensive.”

The report opines that with MFI clients often being essentially an entrepreneur in need of capital, a mutually beneficial balance needs to be struck between ROE for the MFIs and access to capital for the borrower.

Mekong Strategic Partners boils this down to a simple supply and demand equation; nobody will borrow if the rates are wrong, and nobody will lend if the ROE isn’t attractive.

In this regard, the report argues, our Goldilocks would be very happy with her current financial porridge.

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