Since Cambodia opened its doors to the banking sector, microfinance institutions (MFIs) have proliferated in Cambodia and, for them, business is still booming. The MFI sector grew from $1.3bn in 2013 to over $2bn in 2014. As a point of comparison, the FDI grew from $1.3bn to just $1.7bn during the same time period.
According to Christophe Forsinetti of JSM Indochina Ltd, the MFI sector “will continue to thrive, as microfinance institutions have developed an extensive network of branches throughout the country, thereby allowing them to reach out to the rural population and provide the relevant products to suit their needs: savings, money transfer, insurance products, consumer lending.”
“Moreover, they now start to have access to a broader range of refinancing options, such as syndicated loans and bonds, a critical point to allow them to continue their growth,” continues Forsinetti.
However, small, unlicensed MFIs have also been accused of causing instability within the sector. One recent measure taken to protect customers is the drafting of the Cambodian Code of Banking Practice. The document outlines a set of best practice industry standards encouraging financial institutions to be more open with their customers, aiming to foster confidence in the banking system and encourage a corporate culture of fair dealing.
This voluntary code of practice has received fairly widespread adoption in the industry. Indeed, Forsinetti remains positive about the sector, as some MFIs are implementing security safety nets. “Even though their policies are not very sophisticated, the banks are still implementing strict collateral policies for their lending activity, which protects them to some extent,” says Forsinetti.
“In the microfinance space, the largest 8 MFIs use reliable credit assessment and risk mitigation tools (use of credit bureau, personal cash flow assessment, repayment ratios on disposable income and use of funds). However, smaller and unlicensed MFIs are not using them and they represent a weakness for the whole system. Their current loan portfolio size does not make it a major threat but the regulator will soon have to improve this situation.”
Growth or Oversaturation?
Askhat Azhikhanov of ABA Bank agrees that MFIs are changing the banking landscape. “The role of MFIs in the Cambodian economy cannot be overestimated,” he explains. “At the same time, it is clear that the microfinance market is oversaturated. As a result, MFIs may face many new challenges with sources of funding and increasing competition in the coming years.”
However, “as a whole, the MFI sector should see continued high growth in the short and medium term” adds M Invest’s Matthew Tippetts. “I think you will see a certain decantation within the industry, let’s not forget that there are over 40 MFIs in Cambodia, which is quite a bit.”
“The larger players capture most of the industry’s growth, as they benefit from available and favourable funding sources,” he continues. “Seven MFIs can take deposits and international debt financing to grow their loan book, leveraging their scale and diversify their services, while the 3rd tier and some of the 2nd tier players will suffer from lack of access to such funding sources to grow their business.”
The Future of MFIs
According to Tippetts, the industry is due for a change. “In the medium and long term, considering the amount of MFIs and the size of certain of the leaders and the average size of their loans, some will consider becoming banks. This may reduce the MFI sector size, which is in my view the natural positive consequence of successfully lifting their clients out of poverty and fulfilling their original mission purpose. You should also see consolidation, which would also be a good thing. But in the short term, the industry will continue growing, building on its exceptional profitability, with a ROE of 22% achieved in 2013 and will see further innovation such as the mobile payment initiatives of AMK. So the future will continue being bright for the industry.”
So for now, what is the best way to ensure a safe loan? “Use a widely known bank, and you will always want to use a bank that is responsible with its own business and has concern for financial stability,” advises Hong Sokleng of Canadia Bank. “Choose a bank that will protect and keep your deposits safe. A high level of service and attention to the customer is an important criteria as well. You will want to work with a bank that is happy to have you as a customer and serve your interests.”