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.

Calling for Savings in the News

Every time one picks up the paper, s/he is likely to flip the page on an article which discretely points to the demand for financial savings products. The Wangzhi Journal recently published an article, Spring Harvest of Debt for Parched Farms in Southern China, documenting drought as another disconcerting indicator of global climate change. The combination of an ongoing surge of dam construction, population growth, and toxic pollutants, has been bad news bearers (to put it lightly) for farmers world over. The example of 37-year old farmer from China's Yunnan Province, Huang Jianxue, whose most recent plot of winter wheat amounted to a mere 5% of his normal crop yield is telling of the unforeseen and extreme cut in cash flow exposing more individuals to extreme poverty. The article cites several cases of individuals resorting to borrowing; however, the hurdle to scratch for another source of income coupled with accumulating current expenses will most likely stifle their ability to meet repayment obligations. With these financial troubles in the foreground, many microfinance practitioners and academics have assigned more value to microsavings to provide leverage to the high saturation of credit provision. Although easier recommended than done, encouraging people to save via financial intermediation would provide them access to liquid cash under dire emergencies.

The problem outlined in the article is not exclusive to China. As I expressed in my last post, Cambodia's microfinance environment is ripe for the availability of diverse savings products designed for its clients according to well-defined profiles, whereby the products respond to the clients' particular savings needs. Cambodia Microfinance Association (CMA) recognizes this need and has set one of the goals to coordinate a public awareness campaign to encourage Cambodians to commit their savings to microfinance institutions. The ADB in collaboration with 3 other MFIs produced an informational and rather entertaining video spot to mobilize savings, however due to financial limitations and user-inaccessibility, the video failed to reach the general public. CMA is currently seeking funding to broadcast the ADB video and looking to launch public radio and newspaper campaigns, both of which would be more effective given Cambodia’s wide audience base for these media forms.

Mobilizing Savings

I just returned from a long weekend in Siem Reap where I spent a wonderful time with Pou Kyry, my uncle who lives in California. Pou Kyry modestly calls himself an amateur photographer but the fact that one of his pictures of a Khmer classical dancer was published in UNESCO's handbook on intangible heritage is testimony of his photographic gift. I had the privilege to visit the dance school located in the village next door to downtown Siem Reap where that very same Apsara (celestial nymphs found in many Hindu legends and courting the walls of Cambodia’s temples) trains amongst her fellow apsaras and hanumans (ape-human general famed for his feats especially in the Hindu epic, the Rayamayana). On the day of our visit, they were rehearsing for an evening performance to be held at Prasat Kravan, one of Angkor's hundreds of temples. The sweat dripping down the young performers' supple bodies as they morphed their hands into lotus flowers and vines was telling of their dedication and passion to bring back the conscience of Khmer classical dance.

On Saturday night, Pou Kyry and I checked out a khmer-barang live band called the Cambodian Space Project (barang originally referred to the former French colonialists but today refers to Western foreigners in general). They infuse a rocky edge to cover popular Khmer songs from the 60s and 70s. The lead singer is a lady in her 30s from Prey Veng province, one of Cambodia’s poorest provinces, and the other band members include a mix of barang and East Asian artists. The bar goers seemed to enjoy their performance which spoke to love, youth, and that wiiiiiiiiiiiiiiild thang. The band is travelling to Hong Kong this weekend for an international music festival so I look forward to seeing them hopefully groove their way up Cambodia's billboard music charts!

To top everything off, literally, we rode a balloon 100+ meters into the sky to get a god’s eye view of Angkor Wat, Cambodia's national treasure. If a Khmer house is not adorned with a painting or wooden sculpture of Angkor Wat, it can be found on the national flag. The ancient Khmer kings were successful in mobilizing the people to build this estate in homage to Vishnu, Hinduism's Supreme God. Waking up before the sun was definitely worth seeing the sacred grounds from a divine perspective: the temple rose from a sensual mist teased with pinkish purple hues, occupying the space of a century's worth of sweat, Angkorean (or herculean) strength and artistic finesse!

Along our travels, I took the opportunity to conduct several interviews to complement my research on savings mobilization in the microfinance sector. For the past two decades, microfinance has certainly picked up institutional gaps left by the financial and banking sectors by providing financial services to low-income populations. Microfinance operators in Cambodia have generally concentrated their efforts in the provision of credit, fueling the rural areas with cash to start businesses, invest in farming machinery, i.e. spend money. However very few microfinance institutions (MFIs) offer savings options despite the demand for savings products. In brief, microsavings provides individuals the opportunity to save small amounts of money by giving them the ability to turn irregular cash flows into lump sums for larger purchases, emergencies and investments.

Take for example Mr. Sok Heng, a Cambodian farmer. His crop yields are subject to the seasonal, recently temperamental, weather. During the harvesting months, Mr. Sok gathers mature rice from the fields and sells them to local markets or export businesses. During the rainy season, he is forced to seek shelter from the torrential downpours and thereby looks to the city to secure a source of income. However, Mr. Sok finds himself in a very competitive market, flushed like a fish in the sea; 80% of Cambodia's over 14 million people are farmers facing the same financial situation. Mr. Sok is very lucky if he can latch on to a job as a tuktuk or motodoup driver, yet even those jobs have already heavily saturated the cities. How can Mr. Sok, a hard-working and healthy individual, do during these times of rainy months yet drying wallets?

In 2007, the National Bank of Cambodia commissioned the Asian Development Bank to complete a technical assistance by conducting set of one qualitative and one quantitative survey each on savings habits in Cambodia. Both survey results suggest that rural and urban Cambodians have a high propensity to save, suggesting in economics terms a demand to save. However, given the irregular and piecemeal inflow of cash, a large majority safeguard their assets in the purchase of gold, land, and livestock, also suggesting a demand to save. Unfortunately, not everyone saves their money wisely and easily because it requires people to override a natural instinct to satisfy current wants and needs over future ones. For instance, how can I resist one of (fill in the blank here for whatever devilish treat you fancy) Oma’s homemade chocolate chip cookies and a shot of espresso, even after I’ve had plenty to eat?

Cravings and stomach rumbles aside, in December 2007 the NBC passed a PRAKAS (government edict) on Licensing of Microfinance Deposit Taking Institutions allowing MFIs to collect savings from the general public. This marked a big step in the development of Cambodia’s microfinance sector for both the MFIs as well as their clients. MFIs now had access to a cheaper source of financing and decrease their operational dependency on expensive foreign investments while clients could not only save money but also earn interest on every dollar/riel put aside. The 4 MFIs, who have obtained a deposit license since the inception of the PRAKAS, namely SATHAPHANA, Amret, HKL, and Amk, have surely benefited from expanding their product catalogue but also face new challenges. MFIs have to meet a list of stringent requirements, including a minimum reserve and 3 consecutive years of healthy operations, set to ensure depositor protection. In addition, MFIs need to market their savings services and build trust and credibility in the financial sector.

My goal for the interviews is to gauge the awareness of microfinance operations, familiarize myself with local savings habits and identify best practices to respond to the demand for savings products. With a voice recorder in hand and Pou Kyry by my side, I was able to survey a refreshment vendor on the Angkor Wat grounds and two tuktuk drivers in a nearby village about their savings habits. Subjects 1, 2, and 3 expressed a desire to save, with only Subject 3 actually having a savings account with ACLEDA, one of the biggest commercial banks. Subject 3 also has friends who are clients of MFIs but was not so clear on what microfinance is while Subjects 1 and 2 had no knowledge of microfinance. This sample is obviously too small for me to make any conclusions yet, but the general trend and their asking for MFI locations in the area are indicators that there is a demand for savings products. MFIs have indeed responded by developing appropriate savings products but also must concentrate on marketing efforts to inform the public on the availability of their savings products.

The interviews gave me a dry run to practice conducting interviews and pointed to the techniques I need to fine-tune. They also helped me to come up with a list of activities I need to do to complement my research on savings mobilization, so please stay tuned!

Phnom Penh Provincial Branch Meeting

The provincial branch meeting (PBM) is a forum for CMA members to share and discuss current developments within their respective operational area. They are held on a quarterly basis and as needed with all middle management representatives invited to participate including branch managers and authorized decision-making staff. As of December 2009, CMA had conducted 71 PBMs with 637 participants in 15 provinces.

The Phnom Penh Provincial branch managers met on Wednesday, February 17th 2010 at the Amret Head Office to review the terms of reference (TOR) which provides guidelines for conducting PBMs. Only 7 out of 20 member MFIs attended the meeting. Those MFIs which were not represented had prior commitments while a few may not value the benefit in joining PBMs. Despite the small turnout the attendees proceeded with the session with comments on the TOR, raising issues concerning the representation of Phnom Penh’s microfinance network. The group drew up stricter parameters to define the duties of member MFIs in maintaining a healthy and sustainable microfinance sector. One such amendment was the shared responsibility of the chairperson to notify the CEO of the MFI whose representatives missed a determined number of PMBs. The group also iterated that CMA does not have an authoritative role, that which belongs to the National Bank of Cambodia, but rather serves as an independent and neutral coordinator for Cambodia’s microfinance sector. The signing of the TOR will take place next month to ensure that all members have the opportunity to contribute their comments.

National Bank Grants AMK Deposit License

On February 5th, the National Bank of Cambodia (NBC) issued a deposit license allowing AMK to collect voluntary savings from the public. AMK is the third MFI, along with Amret and Sathaphana, equipped with a deposit-taking license. The MFI will offer 11% for riel currency and 8% for dollars as savings account rates and lower yet still competitive rates for current accounts. These figures are considerably more attractive than those offered by commercial banks as many have excess liquidity and have lowered their interest rates.

Since the global financial crisis hit, deposits have become a high commodity for many MFIs financed by international lenders as they provide a more accessible (cheaper and faster) source of financing. Mobilizing savings has however presented a challenge for MFIs as clients in Cambodia's rural provinces continue to be suspicious of financial institutions, thereby traditionally storing their savings in kind viz. in gold and livestock.

Let me get 'em dollar dollar bills

I thought I had found a bargain deal when I hailed down a tuktuk to take me from the Independence Monument to the Central Market for 2.5 riels. After I handed him 3 USD, he asked me if I minded getting change in KHR. He really meant 2 USD, womp womp.

Cash money (preferrably USD) makes the world go round

Today, 1 USD will buy you 4,100 KHR but unless you want to have a wallet overflowing with KHR, there is no need to swap these currencies. Cambodia’s economy is heavily dollarized with most entrepreneurs and businesses preferring to make transactions in USD.

The dollarization of an economy is almost expected in the aftermath, of a post-conflict country, and longer thereafter. The destruction of the financial and banking sectors coupled with the lack of trust in the government make for a weak local currency. In Cambodia's case, the 1975-9 Khmer Rouge regime left the national bank baseless and the Khmer people looking elsewhere for income. It was the large influx of international aid after the signing of the 1991 Paris Peace Agreements which supplied the country with the more stable USD, enabling the country to rebuild itself. Thus today's payments in USD is simply business as usual.

What are the implications of a dollarized economy for the Cambodian microfinance sector?
1. Those who use neither USD nor KHR

Microfinance is generally applied as a poverty-alleviating tool in developing countries. It has been very successful with poor micro-entrepreneurs but is not a one-size fit all solution to end poverty. Many Cambodians who are unaccounted for in national surveys, make in-kind transactions rather than use cash either because they do not have access to hard currency or do not have the means to earn income. So USD or KHR, keep in mind that microfinance does not address the needs the Cambodians who line the bottom of the pyramid.

2. If the global economy is living la vie en rose, so is the microfinance sector - and vice versa

During the 1990s NGOs, such as the GRET and ACLEDA, first provided small microcredit loans as a poverty-alleviating tool. Most of these programs were of course funded by international donors in USD throughout the course of the decade. When the National Bank of Cambodia (NBC) finally issued the law on banking and financial institution in 1999 to grant legal status to the NGOs turned microfinance institutions, private investment and international assitance programs continued to finance the MFIs in USD. The microfinance sector experienced more than a decade of unyielding growth ...until the global financial crisis brought on its havoc.

As integral players in Cambodia's economy, the microfinance operators and their clients move in tandem with the macro-level policy and regulations in which they function. Thus, today’s particular crisis has surfaced the damaging yet corrigible arrears of Cambodia's heavily dollarized economy. With the curtailing of international investments, the supply of the USD has run tight. Thus MFIs have faced increasing interest rates while their clients have been unable to meet their payment schedules.

Despite the injuries caused, crises like these create opportunities for microfinance institutions to restructure themselves and to realign their operations with their social mission.

Bird's Eye View

Hailed as the solution to commercial banks’ exclusion of the poor and the alternative to moneylenders’ rapacious interest rates, the microfinance sector has fueled optimism, and cash, into all corners of the world. It has particularly saturated Southeast Asian markets where the need to stimulate local economies from the ground up was and still is pressing. The current economic crisis however, has fervently shaken up the Cambodian microfinance industry, including its clients, while surfacing many of its innate yet corrigible weaknesses. To this end, the crisis presents an invaluable opportunity for the sector to reinvest in its mission to ensure the sustainable delivery of financial services to the poor.

Volunteering at the Cambodia Microfinance Association (CMA) during the last two months has given me a bird’s eye view of Cambodia’s microfinance sector. Prior to taking the full dive into my research, I naively assumed that Cambodia’s economy would benefit tremendously from Yunus’ highly-acclaimed Grameen Bank model. Unbeknownst to me Cambodia’s microfinance sector is already one of its claims to fame, whose business approach to microfinance would however not be endorsed by Yunus. Approximately 860,000 borrowers strong, the microfinance institutions (MFI) operate as private limited companies. The sector is bolstered by a continuously amending legal framework, international investors, and free-market competition. Having been bestowed multiple awards by the Consultative Group to Assist the Poor (CGAP), HE Prime Minister Hun Sen declared 2006 as Cambodia’s Year of Microfinance.

Laudable, yes; financial crisis-proof, no. Today’s global financial crisis is striking across all sectors of Cambodia’s economy and poignantly challenging the sustainability of its microfinance sector. I’ve landed right into the sector’s fight to tread water; most of my research is focused on the sector’s efforts to establish a private credit bureau in order to dampen the mounting cases of multiple loans. I recently attended a workshop wherein CMA invited 150 leaders in the Cambodian microfinance sector to participate in its third annual Healthy Competition Workshop in Sihanoukville in effort to strengthen the Cambodia microfinance industry. The workshop was presided over by Mr. Kim Vada, Deputy General Director of the NBC, and participants included leaders from the National Bank of Cambodia (NBC), Ministry of Economy and Finance (MEF), Rural Development Bank (RDB), ACLEDA Bank, CMA, 19 MFIs and 9 registered NGOs.

Healthy Competition Workshop Participants

The two-day workshop focused primarily on the prevalence of multiple lending, whereby an individual has taken out loans from more than one MFI, and thereby unable or unwilling to commit to the terms of his or her multiple loans. These cases limit the involved MFIs to resort to suboptimal options, which include selling the client’s collateral, writing-off the respective loan outstanding as bad debt, restructuring or rescheduling the loan, or bringing the client to court. During the workshop participants outlined the root causes of this mounting problem as follows:

*Lack of a thorough preliminary credit assessment – Currently, loan officers are providing loans without conducting detailed assessments of clients’ credit history. Loan officers may lack proper capacity building and training or may feel pressure to reach a loan quota in order to receive commission and earn favorable opinion from their branch managers.

*Weak credit-reporting system – Today, the Cambodian financial sector is equipped with a dismal and incipient Credit Information Sharing System (CIS). It is based on a single database owned by the NBC, which MFIs have very limited access to, and is not user-friendly. Furthermore, the system provides only negative information and consumer rights regarding data are not properly addressed. The NBC is currently drafting a law to implement a credit bureau for use by both the banking and microfinance sectors. The credit bureau will include both positive and negative information of the client.

*Issuing of multiple land titles by local authorities – The Ministry of Land Management recently issued a Land Law to manage the issuing of land titles by local authorities. However loosely enforced, multiple land titles for the same land lot to villagers continue to be issued in return for kickback pay and constituent support. Clients often provide these duplicate land titles as collateral for their loans knowing that MFIs are unable to verify the authenticity of the land title. Hereby, in the event the client is unable to repay his or her loans, multiple claims on the same collateral will make it hard for MFIs to minimize their loan outstanding.

The workshop adjourned with CMA and its members drafting a Memorandum of Understanding (MOU) on healthy competition to address the problems at hand. The MOU included outlined alternative solutions to deal with existing cases of multiple loans and how to prevent future cases, improve capacity building for MFI staff, and strengthen relationships with potential competitors who operate within the same communities. The MOU will be agreed upon and signed by all CEO members in the next CEO meeting.

Beach Diversion in Sihanoukville with CMA Team

Stay tuned as I will continue publishing posts, random and research-related. Any suggestions will be highly appreciated!