Banking with the Poor Network Article Entry

Sharing a piece I wrote for the Banking with the Poor Network May 2010 Newsletter:

Mounting cases of multiple loans and teetering non-performing loan (NPL) ratios have put the buoyancy of Cambodia’s microfinance sector into question: which mechanisms will ensure the sector’s recuperation from the global financial crisis and, for the long haul, its sustainability? Microfinance stakeholders have responded by highlighting savings deposits as a tool to strengthen the sector as it provides clients with an alternative savings channel while generating a domestic source of loan financing. The benefits of a savings account of any size and type are interesting, but one of the major challenges lies in encouraging clients to open an account and even more so, to keep it active.

As of 31 December 2009, 78% of total borrowers (from ACLEDA Bank Plc. and the microfinance sector combined) had taken loans from MFIs while 22% of total borrowers had taken loans out from ACLEDA. In contrast, 17% of total depositors (also from ACLEDA and the microfinance sector combined) had placed their savings in MFIs while an astounding 83% placed their savings in ACLEDA. These very basic figures suggest that there are more individuals borrowing from MFIs than there are from commercial banks and conversely, there are more depositors placing their savings in commercial banks such as ACLEDA than there are in MFIs. Several assumptions can be drawn from this inverse relationship:

• Only a small number (4 out of the more than 20 licensed MFIs) have applied and been issued a deposit-taking license from the NBC, therefore limiting the microfinance sector’s scope with which it can capture savings from the public.
• The public still attributes MFIs solely as lending institutions and is uninformed about their savings options.
• Lack of trust in the sector’s ability to make payments on demand despite the NBC’s stringent requirement to maintain solvency and liquidity ratios.

The microfinance sector has yet to capture deposits from the public as effectively and efficiently as it should: a result of independent and isolated savings mobilization efforts. Currently, MFIs market their savings products via billboards, radio spots, and other mediums. However, the conditions for a sector-wide savings mobilization campaign in Cambodia are favorable, including a latent demand for a formal savings mechanism, an enabling legal framework, and established government support.

As the sector’s coordinating body and representative, Cambodia Microfinance Association (CMA) is set to leverage these promising conditions by launching a savings mobilization campaign in function of its greater objective to increase microfinance awareness in the public. Based on the existing literature, a public awareness campaign on savings has been a widely recommended tool to capture deposits in the microfinance sector, which will ultimately better shield the MFIs and their clients from the impacts of inevitable financial shocks.

High Saving Propensity: TA4755-CAM: Developing Deposit Services in Rural Cambodia
In 2005, the Asian Development Bank (ADB) launched a technical assistance, TA4755-CAM: Developing Deposit Services in Rural Cambodia, for the Royal Government of Cambodia (RGC) to address the narrow selection of sophisticated savings products. As a component of the TA, the ADB partnered with the Cambodia Institute of Development Study (CIDS) to conduct a national study on the saving habits of poor people in rural and urban Cambodia. The study drew two significant findings on saving habits in Cambodia[1]. First, most rural Cambodians store their savings in kind, i.e. gold, land, livestock, or simply under their pillows, all of which stand the risk of theft or devaluation. Second, many of the study’s participants expressed interest in securing their disposable income in formal savings accounts, however most lack access to or are uninformed of the savings options available and their respective benefits. In relation to the second finding, the ADB partnered with CMA to produce It’s Our Money We’re Talking About, a 30-minute video spot on savings mobilization wherein the presenter interviews local Cambodians regarding their savings habits[2]. She then convenes a meeting with all of the featured subjects together to share with them information on the opportunity for opening a savings account with a MFI. Finally, she concludes with an interview with a NBC representative who asserts that public deposits are protected under the NBC’s regulation and supervision. Although lack of funding and coordination stopped the video short in its tracks from having airtime, CMA accredits it as a stepping stone in mobilizing savings.

Legal Framework: PRAKAS on Licensing of Microfinance Deposit Taking Institutions
On 13 December 2007, recognizing the value of voluntary deposit services for the Cambodian microfinance sector, the NBC issued the PRAKAS on Licensing of Microfinance Deposit Taking Institutions to authorize eligible MFIs to collect deposits from the public. Although the strict prerequisites stipulated in the edict have made applying for a deposit-taking license a rigorous process, including a minimum length of sound operation for at least 2 years and a minimum paid up capital equal to 10,000 million KHR (2.5 million USD), they ensure depositor protection. Up-to-date, the NBC has issued deposit-taking licenses to four MFIs, two of which have experienced a marked increase in their deposit balances compared to their counterparts unequipped with a savings license (the other two MFIs have just recently received their licenses, effectively making it difficult to measure any change). In early 2008, just prior to being granted a deposit-taking license, Amret and SATHAPANA held 3,522 million KHR (845,618 USD) and 5,609 million KHR (1.35 million USD), respectively. As of 31 December 2009, their deposit balances grew to 12,209 million KHR (2.93 million USD) and 12,738 million KHR (3.06 million USD), respectively. The surge in domestic capital was timely as foreign investment, which financed 80% of the sector’s loan portfolios prior to the global financial crisis[3], has curtailed considerably. In addition, domestic deposits provide MFIs with a greater shield from foreign exchange rate risks, thereby making the cost of borrowing more affordable.

Government Support: Financial Sector Development Strategy 2006-2015
The Financial Sector Development Strategy for 2006-2015 (FSDP 2006-2015) delineates the goals and objectives for the development of the financial sector in Cambodia based on the recommendations of a government working group comprising representatives from the NBC, the Ministry of Economy and Finance (MoEF), the Ministry of Commerce (MoC), and development partners. One of the priorities in the document appropriated to the microfinance sector is to establish a funding strategy for MFIs which is independent from international donors or the NBC. It further suggests that microfinance operators consider local deposits as a source of loan financing and accordingly, assigns the supervision and regulation responsibilities to the NBC[4]. The microfinance sector should take heed to the recommendations of the FSDP 2006-2015 as it was produced with the synergy of diverse stakeholders of Cambodia’s financial environment within which MFIs operate.

CMA’s Objective: Raise Public Awareness
A public awareness campaign on savings is a recommended tool to increase MFI deposit balances, which will in turn provide a better shield from the impacts of inevitable financial shocks. Hence, CMA is currently searching for funding opportunities to launch a savings mobilization campaign. CMA members have recommended using the ADB video spot as a model for future savings mobilization materials however steering towards more popular communication media, such as newspaper advertisements or radio shows. CMA will also emphasize the current legal framework to inform the public that measures to protect deposits have been put in place. In addition, CMA will draw from the government support purported in the FSDP 2006-2015 to execute the savings mobilization initiative. In summary, the Cambodian poor have a high propensity to save and will do so soundly with increasing opportunities to make deposits, and with legal backing and government support, strengthening MFI capacity to collect more savings will ultimately promote the sustainability of Cambodia’s microfinance sector.

[1] Chandararot, Kang Ph.D. and Liv Dannet. National Survey on Saving Needs and Opportunities for Poor Households in Cambodia. Asian Development Bank and Cambodia Institute of Development Study. March 2007.
[2] Khmer Mekong Films (Producer), CMA (Commissioner), & ADB (Financial Support). It’s Our Money We’re Talking About. 2007.
[3] Chou Vannak, Deputy Director of the Financial Industry Department, Ministry of Economy and Finance. Personal interview. 17 December 2009.
[4] Royal Government of Cambodia. Financial Sector Development Strategy 2006-2015. 26 March 2007.