Cambodia has made it through a tough time and come out the other side with a respectable degree of political stability – and microcredit lending, which provides much-needed loans to the poor, has emerged as a financial front-runner. Simon Montlake reports from Phnom Penh.

Rebuilding a financial system after a major civil conflict is always a challenge for any country, although the case of Cambodia arguably deserves a special mention. During the 1975-79 reign of the extremist Khmer Rouge, not only was money abolished and the central bank dynamited, but also an entire generation of intellectuals and professionals were put to death.

After a decade of civil war and a UN-brokered peace accord in 1991, Cambodia has gradually regained a degree of political stability. A small private sector has grown from the ashes of communist rule alongside a massive international aid effort to raise living standards for its 13.4 million people. As a result, foreign investment has flowed into a few key sectors, notably tourism and garment manufacturing.

Microcredit stands alone

One of the fastest growing industries is microcredit lending, which provides loans to Cambodia’s poor and has stimulated many successful small businesses. After initially tapping foreign donor loans for capital, several microcredit institutions are now able to stand on their own feet as commercial lenders. The combined outstanding loans by licensed microcredit lenders grew from roughly $15m in 1997 to $64m in 2003, according to the International Finance Corporation (IFC). About 400,000 borrowers are beneficiaries of loans as small as $100 or less.

Cambodia’s largest such lender is ACLEDA Bank, which began in 1993 as a non-governmental organisation and is now licensed as a fully-fledged bank with about 100 branches. With an average loan size of $650, its portfolio stood at $75.4m as of March 2005, up from only $27m at the end of 2002.

As well as notching up impressive loan growth, ACLEDA has the distinction of being the only Cambodian lender with an international credit rating from Moody’s Investor Services. In 2004, the bank posted a $2.5m profit on $84m in assets.

General manager In Channy, who helped to found ACLEDA, says he is confident that the bank can expand further into new markets while retaining its commitment to lend to Cambodia’s poor. “Now, we’re not only serving the small and medium-sized enterprises that we used to as a microcredit agency, we’re trying to serve all segments and that includes looking at the corporate sector,” he says.

Corporate bankers face a tougher scenario this year, though, as Cambodian manufacturers are struggling with increased competition from China in the post-quota textile trade. The World Bank predicts that economic growth will fall to 2.6% this year, down from 6% in 2004. The main loser will be the $1.9bn garment industry, though some manufacturers believe that Cambodia can keep its footing in world markets, given unease in Europe and the US over Chinese imports.

Financial hindrances

Cambodia’s financial sector remains largely undeveloped and bankers often struggle to find lending opportunities in a country where laws are poorly enforced, if at all. “Banks are forced to look at not only whether a borrower can afford to repay, but also whether he wants to repay, because some people are above the law,” says a foreign banking expert.

Growth in local and foreign currency deposits has been strong in recent years, though many Cambodians evidently prefer to keep their money under the carpet. The ratio of bank deposits to GDP is less than 20% and the total number of depositors is only 120,000. The minimum capital requirement for banks was raised in 2001 to $13m, prompting several to close their doors.

In the microcredit sector, the lack of local-currency deposits in the system is a long-term hurdle for expansion. Lenders that began with foreign donor grants have gradually shifted to alternative funding mechanisms but say that it is difficult to persuade poor Cambodians to trust their savings to institutions. Only ACLEDA has managed to build a savings network.

“We want to mobilise savings to support our operations because it offers secure, long-term funding for microfinance. This is better than relying on commercial loans from banks,” said Bun Mony, general manager of Cambodia Entrepreneur Building, a microcredit lender that has $4.5m in loans outstanding.

Strict on borrowers

But it would be a mistake to confuse established microcredit lenders with charity hand-outs to the poor. Loan officers are tough on delinquent borrowers and charge commercial rates of interest on loans. Some aid-funded loan schemes undercut the market rates, however, causing a headache for commercially-driven operators.

“Our default rate is very low. Last year it was 0.5%,” says Mr Channy. “The reason is that our individual customer selection is strictly done. We work with [small business owners] on their business development and make sure that we are providing them with the right amount of loans that they need, and no more.”

Adam Sack, a former investment banker who heads the IFC’s Mekong Private Sector Development Facility, a donor-funded project, says microfinancers need particular care on training and equipping staff in Cambodia. “I think the greatest challenge in Cambodia is developing human relations, both the technical skills and the strong culture and ethic of microfinance,” he says.

Most commercial banks in Cambodia focus on servicing the country’s closely-interlocked political and business elite. However, there is also a shift towards greater product range and more ambitious loan portfolios by a few lenders, including Canadia Bank, the largest of Cambodia’s 14 private banks.

Set up in 1991 as a joint venture between the National Bank of Cambodia and overseas Cambodian investors, Canadia Bank has $195m in assets. It recently entered the home mortgage market, spying an opportunity in serving an emerging middle-class living in new suburbs of the capital Phnom Penh. For now, the bulk of its loan book is in the corporate sector, as well as small and medium-sized enterprises.

A newcomer to the commercial banking market is Australia’s ANZ Bank, which has formed a joint venture in Cambodia with a local partner. While few foreign banks have shown much interest in Cambodia since it opened up to investors, ANZ appears keen to make its mark with its $10m investment. It plans to open several branches this year and to build a loan portfolio to compete with domestic lenders.

Only a handful of foreign banks have stuck it out in Cambodia after a flurry of openings in the early 1990s. Maybank and Public Bank, two of the largest Malaysian lenders, have branch offices, along with a unit of Thailand’s Siam Commercial Bank. It may take some time yet before this market attracts the big players, but for now it seems that small is beautiful for a new generation of Cambodian bankers.


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