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Small and medium enterprises (SMEs) are crucial to the economy, contributing to both economic and social development. However, gaining access to capital from commercial banks is not always easy or viable for SMEs. This is where Microfinance Institutions (MFIs) come into play, offering alternative access to micro-loans for business creation or development that can be used as working capital or for investment purposes.

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According to the Cambodian Microfinance Association (CMA), there are 37 licensed MFIs and five Rural Credit Operators that function in Cambodia, predominantly located in Phnom Penh and large provincial towns. However, because MFIs borrow money from international financial institutions to on-lend to borrowers, their interest rates can be very high compared to the commercialised banks. But that doesn’t stop the lenders from coming.

A Preference for Microfinance
“The higher interest rates do not affect lending growth rates very much,” says Hout Ieng Tong, CEO and chairman of Hattha Kaksekar Limited (HKL). “There’s still a lot of demand within the MFI sector. Because of the competition in the sector, interest rates are being adjusted and getting lower. Stronger competition means more benefits to the user.” The average interest rate of a loan is approximately 16% to 18% per annum, making MFIs more expensive than commercial banks. However on a global scale, Cambodian interest rates are considered competitive.

“MFI interest rates in Cambodia are one of the lowest globally,” says Stephen Higgins, managing partner of investment advisory firm Mekong Strategic Partners and former ANZ Royal CEO. “You can get MFI interest rates as high as over 80% in countries such as the Philippines.”

Top performing MFIs such as HKL are also licensed to collect public deposits, which they can then on-lend to borrowers at lower rates.

New Image Needed
However, in order to encourage more people to save their money in MFIs, these firms will need to place more importance on their image and brand to assure public confidence. Grant Knuckey, CEO of ANZ Royal Cambodia, agrees. “MFIs currently have limitations in terms of deposit raising because there’s still a perception that they are more risky. Therefore, people are less inclined to place deposits with MFI and they have a narrower range of off-shore investors than a bank.” The largest MFIs, such as AMK, PRASAC, Amret, HKL and Sathapana, are licenced to take public deposits.

Ieng Tong agrees that Cambodians still hold reservations about saving money with MFIs. “There is still a mistrust of financial institutions other than banks,” he says.

“Regarding savings, it is true that people trust banks more than MFIs. But this is due to historical factors where people understand that a bank is used for saving their money. MFIs are known as the place to get credit. This is the habit of the Cambodian people. But when they want to borrow money, they always come to microfinance institutions. People have more confidence in MFIs when it comes to credit and loans.”

Share the Cash, Share the Responsibility
Accessing credit through an MFI is often a straightforward procedure, providing microloans to groups or individuals, as well as small to medium loans for investment and working capital purposes.

Group lending involves a small team of people (no more than five) from within the same community applying collectively for a loan. Within the groups, it is up to the members to decide how much each individual receives, while the group as a whole is responsible for repayment.

The use of one or two personal guarantors, often respected community leaders, is generally required by MFIs for individual loans. Microloans can finance up to $3,000 and small to medium enterprise loans can service up to $30,000. Loan terms are flexible in both Khmer riel, US dollars and Thai baht, with catered repayment options. Interest rates are generally calculated on utilised debit balances only.

Fast Money
“Taking a loan from an MFI is processed very quickly,” says Ieng Tong. “At HKL, an application can take only one or two days. It’s also very convenient to pay back the loan. With several offices around the country, customers can pay back the loan at any branch. This is not always possible with a commercial bank.”

Loans through MFIs are also more flexible to repay with fewer penalties and no complicated fee structures, unlike commercial banks.

A general requirement for all loans is that the applicant must have adequate identification, such as a passport or family book, a residential address, good personal records, land certificate or title, and documentation to confirm income and capacity to pay. Entrepreneurs must own at least 20% of their business and be able to prove this.

Thus MFIs offer SMEs uncomplicated access to credit to suit all business needs, flexible repayment choices and good options for depositing savings that remain competitive against the commercial banks. However, when considering any financial transactions, it is advisable to always do your research so an informed decision can be made.


Words by Jessica Sander | Fotolia