The Cambodia Issue

As microfinance investment manager, BlueOrchard holds a privileged position in the value chain of specialist organizations linking microentrepreneurs in developing economies to investors around the world. Our Investment Teams in Latin America, Africa, the Middle East and Asia work with microfinance institutions supporting more than 30 million borrowers and savers in their income-generating activities, while our Investor Relation Teams in Switzerland serve investors in their pursuit of double bottom-line returns. At all stages of the process, sophisticated analytical tools are used to evaluate financial performance and risk, assess corporate governance and measure social performance.

Yet, microfinance requires more than state-of-the art scorecards and procedures. In order to provide appropriate and innovative solutions in inclusive finance, microfinance must be based on an in-depth understanding of both borrowers’ and investors’ needs.

In this publication, we have therefore chosen to portray the numerous institutions and people who interact successfully on a daily basis to build a sustainable financial system in their region. Our journey starts in Cambodia: enjoy your visit.

Editorial

Peter A. FanconiChief Executive Officer and member of the Board of Directors

Microfinance must be based on an in-depth understanding of both borrowers’ and investors’ needs.

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BlueNews 01/2014

Microfinance in Cambodia

With gross national income (GNI) per capita of USD 880 per year and a population of over 14.8 million of which more than 20% live below the national poverty line, Cambodia is a low-income country. According to the World Bank’s Global Financial Inclusion Indicators (Global Findex 2012), only 3.7% of all adults have an account at a formal financial institution. Demand for microfinance services is therefore high.

In the Global Microscope on the Microfinance Business Environment 2013 published by the Economist Intelligence Unit, Cambodia ranks overall 6th out of 55 countries, mainly due to a regulatory framework which is considered to be amongst the top 5 countries worldwide.

In February 2012, Planet Rating reported that the Cambodian microfinance sector’spenetration rate was estimated at 30% of households while the estimated saturation level of the market is between 63% and 88%.

A wide range of credit products are offered by Cambodian microfinance institutions.As a result of increased competition, customers have been able to benefit from lower interest rates and improved customer service. Savings services are less well developed in Cambodia, though rapidly improving.

In the wake of the global financial crisis, the Cambodian microfinance sector became increasingly aware of the possibility of over-indebtedness. Thanks to increased cooperation amongst the MFI to identify areas of high penetration in the country and to the successful launch of an independent Credit Bureau in March 2012, risk mitigants have been put in place to support healthy growth of the sector at a sustainable rate.

Blueorchard in Cambodia

BlueOrchard’s Phnom Penh office, established in 2010, employs a team of investment officers to cover BlueOrchard Finance’s East and South Asian portfolios. The office currently manages in excess of USD 120 million of loans to microfinance institutions in Cambodia, Indonesia, the Philippines, India, and Mongolia.

In 2012, KfW and IFC (member of the World Bank Group) jointly launched the Microfinance Initiative for Asia (MIFA), the first microfinance initiative of its size to exclusively target the poor in Asia, and appointed BlueOrchard to be the investment manager of the MIFA Debt Fund. The investment team in Phnom Penh is in charge of sourcing and managing its investments in the South East Asia region.

In addition to its investment activities, the BlueOrchard Cambodia team has participated in industry-wide initiatives that contribute to responsible microfinance in the region, including funding of research projects on client protection and overindebtedness studies. Amongst other projects, BlueOrchard joined forces with two other microfinance investment managers, Incofin SM and Oikocredit, to fund and help design a study on overindebtedness in Cambodia. Research was conducted by the Cambodian Institute of Development Study (CIDS) and eight of the leading microfinance institutions in Cambodia, with a focus on understanding the drivers of overindebtedness in the most saturated areas of the country. The ultimate objective was to use this information to help identify effective ways to reduce the incidence of overindebtedness among microfinance borrowers. The final report was published in 2013 to wide acclaim and has given rise to numerous local initiatives to mitigate the risk of overindebtedness at the MFI and industry levels.

To date, the microfinance sector comprises one commercial bank (Acleda), 37 licensed microfinance institutions, 29 registered NGOs and some 60 unregistered NGOs.

The top 10 microfinance institutions can beclassified as follows:

The BlueOrchard Cambodia team has participated in industry-wide initiatives that contribute to responsible microfinance in the region.

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“Only 3.7% of all adults have an account at a formal financial institution.

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Commercial: rural and urban, individual lending, larger loan sizes (Acleda, Sathapana, HKL, Prasac)Mixed: rural and urban, individual and group lending (Kredit, Samic, Seilanithih)Social: rural focus, primary group lending (Amret, AMK, TPC, VFC)

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Wedding gowns worthy of a princess

Ms.Doungdara Phan is a serial entrepreneur based near Phnom Penh International Airport. This area is home to many a garment factory, and it is here that she was apprenticed to a tailor who not only taught her the art of fine dressmaking but also recognized her exceptional talent. With his encouragement, she left her position to set up her own tailoring shop, where she caters to both women and men in search for festive clothing.

“Weddings are very important in Cambodia,” explains Ms. Phan. “They usually last several days, and the bride wears up to ten different dresses. Some of them are rented, some of them are bought off the rack, but the last one, the special one, is usually tailor-made”. Consequently, Ms. Phan offers evening dress both for rent and for sale. Her wedding gowns, each handmade and unique, can cost up to USD 250 and take several days to make. In order to meet growing demand, Ms. Phan currently employs 12 seamstresses who come to work at six o’clock in the evening, having already completed a full day’s shift at the garment factories. “I care for my seamstresses,” says Ms. Phan. “This is why I have taken out a house improvement loan recently to build additional rooms in my house. They will be the seamstresses’ quarters, so they don’t take any risk on their way home late at night.”

Never short of additional ideas, Ms. Phan has recently added dry cleaning to her range of services, and even opened a fruit stall in front of her shop. Her serial businesses have become so successful that her husband, a well-seasoned electrician, has decided to quit his job and join the family business. “We are very lucky,” he says. “We get to work together, earn a better living than before, and even see our two children grow up. And all of this by making every bride look her very best on her wedding day. What else can we ask for?”

We get to work together, earn a better living than be fo re , and e ven see our two children grow up. And all of this by making every bride look her very best on her wedding day. What else can we ask for?

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Eleonora Castaldo has been an Investment Officer at BlueOrchard since 2010 and currently serves as the Head of the Phnom Penh office.

Q What makes South and East Asia attractive for microfinance investors?

In my view, there are three main reasons. First, Asia is home to the largest number of today’s poor, with more than 550 million people living below national poverty lines in this region. This population forms the primary client base for microfinance, and unmet demand for financial services is immense. Secondly, many South and East Asian countries rank among the top ten markets globally in terms of the microfinance business environment according to the Economist Intelligence Unit. Microfinance in markets such as Cambodia or the Philippines is governed by strong regulatory frameworks and supported by independent credit bureaus, institutional factors which reduce the risk of overindebtedness, contribute to borrower protection and mitigate risks for investors. Last but not least, BlueOrchard has developed a strong network in this region for many years. This is a necessary condition for building a diversified pipeline of quality investee institutions and for generating performance in our funds.

Q What is your outlook for microfinance in South and East Asia for 2014? Where do you see investment opportunities?

Markets and institutions are growing at a healthy and sustainable rate across the region, and we see opportunities in both old and new markets. Cambodia, for example, where our funds have sizeable exposure, maintains good growth potential of 30 – 40% in 2014. Savings growth has resumed its positive trend following a brief decline in the wake of the 2013 national elections, and borrower demand continues to be high. On the other hand, we see new opportunities in India, where the microfinance market is witnessing a comeback of investor confidence three years after the Andhra Pradesh crisis. Thanks to an improved regulatory framework, enhanced governance and increased borrower protection, microfinance institutions outside of Andhra Pradesh have extended their outreach to previously underserved areas while maintaining excellent portfolio quality.

Q Microfinance is primarily a local business, whereas much of the funding is international. How do you bridge the cultural and language gaps in your region?

At BlueOrchard, our Investment Teams hail from different cultural backgrounds and speak multiple languages. The Phnom Penh team, for example, consists of investment officers representing five different nationalities and speaking seven different languages in addition to English. We all employ the same analytical tools in the research, underwriting and investment process, but we communicate with the microfinance institutions and borrowers in their language, respectful of their cultural context. This is a critical success factor in microfinance, which is a people’s business, just like traditional banking.

Interview

Eleonora CastaldoHead of Phnom Penh office

Microfinance is a people’s business, just like traditional banking.

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A healthy source of income

Ms. Chanthan Roeurn and Mr. Vichea Plong, her husband, live in the Kandal province an hour’s drive away from Cambodia’s capital, Phnom Penh. Far from the hustle and bustle of the city, their house is surrounded by lush farmland, where they grow vegetables for sale.

“Our main sources of income are two types of healthy greens, Amarnathus Blitum and Ivy Gourd. Amarnathus Blitum has a growth cycle of 20 days and can be harvested every day. We also dry the seeds for sale to other households and farms. Ivy Gourd equally grows year-round, and we harvest the quantity requested by our wholesellers several times a week. Usually, we receive about 1,500 riels (equivalent of USD 0.25) per kilogram of Amarnathus Blithum, whereas the price to the end consumer fluctuates between USD 0.75 and USD 1.00 depending on the season,” explains Ms. Roeurn. “It is true that the wholeseller sometimes pockets a handsome margin, but on the other hand, we don’t take a risk as to the quantity sold”. Is she not afraid of any risks related to her vegetable business? “Of course, I am,” she freely admits, adding “Do you see that cow and her calf under the tree there? They are our biggest capital and insurance policy. If something goes wrong with the business, we can sell the cow, repay our debt and still keep the calf.”

Fortunately, this is but an emergency scenario. So far, Ms. Roeurn, currently in her second loan cycle, has always repaid in time, and her business has been flourishing. The chicken that flutter around in her frontyard don’t even have a business purpose: “When my sister comes to visit, we may have a feast and eat one of them. That is when we know that life is good.”

Ms. Roeurn, currently in her second loan cycle, has always repaid on time, and her business has been flourishing.

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News

The Microfinance Initiative for Asia (MIFA)Debt Fund receives the LuxFLAG label 2014

Amret Microfinance Institution

Amret was established in 1991 as a project of the French NGO, GRET, before receiving its microfinance license in 2001. Amret became a “Microfinance Deposit-taking Institution” in 2009. Amret’s mission is to provide a wide range of financial services for low-income people as well as micro, small and medium enterprises, while at the same time achieving a high level of financial and social performance. Amret offers credit, deposits and money transfer services and has successfully created an array of loan products for biodigesters, latrines, water filters and education. Additionally, Amret has contributed to the funding for a variety of projects in society, including a hospital, a road safety project and schools. At present, Amret has assets in excess of USD 250M and employs more than 2,900 staff across its 116 branches, sub-branches and point offices. Amret supports over 285,000 borrowers and 90,000 depositors in 20 provinces.

Photo provided courtesy of Amret Microfinance Institution

Less than a year after it made its first investments, the Microfinance Initiative for Asia (MIFA) – Debt Fund has been awarded the LuxFLAG Microfinance Label for 2014. Created in July 2006, the Luxemburg Fund Labelling Agency (LuxFLAG) is an independent, not-for profit association that aims to promote capital raising for Microfinance and Environment related sectors by awarding a label to eligible Microfinance Investment Vehicles (MIVs) and Environment-related Investment Vehicles (EIVs). Thanks to a disciplined labeling process under the leadership of an independent Eligibility Committee and the LuxFLAG Board, LuxFLAG labels are recognized by investors for their independence, transparency and responsibility.

By granting the LuxFLAG Microfinance Label, LuxFLAG confirms that a microfinance investment vehicle predominantly invests in microfinance and meets internationally recognized standards in the microfinance sector. In addition to quality standards for financial management, LuxFLAG has continuously expanded its list of social performance and governance criteria over the last years, thus certifying that LuxFLAG-labelled microfinance investment vehicles demonstrate a true commitment to the “double-bottom line”.

This is not the first time a BlueOrchard-managed fund has been recognized by LuxFLAG. A pioneer amongst commercial microfinance funds, the BlueOrchard Microfinance Fund was one of the first recipients of the LuxFLAG Microfinance Label and has been awarded the label every single year since 2007.

Microfinance glossaryLoan file review: integral part of the BlueOrchard due diligence and underwriting process. Before submitting an investment proposal to the BlueOrchard Credit Committee, investment officers perform desk research on each potential investee institution as well as on-site due diligence visits. In the context of the desk research, the investment officer analyses all written credit policies and procedures of the MFI as well as loan application forms and credit analysis templates. Following the completion of this desktop review, the BlueOrchard investment officer then conducts an on-site review of selected loan files at various branches of the microfinance institution to ascertain that the institution’s pactice is compliant with its policies and procedures and coherent across branches. Branches as well as loan files are carefully selected by the investment officer according to criteria such as average loan size, interest rates charged to end borrowers, delinquency rates, portfolio growth rates, loan restructuring, etc. By selecting loans displaying extreme values (bigger-than-average loans, loans long overdue, high interest rates, etc.), the BlueOrchard investment officer can evaluate an institution’s adherence to internal rules, but also understand the MFI’s escalation and control processes when they encounter situations outside of policy to ensure that the MFI manages stress situations in the best interest of the microfinance institution and its clients.

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Microfinance institutions assessed for potential

investment

33

New investments made

24

2013 in numbers: the BlueOrchard

team in Phnom Penh

Countries visited for on-site due-diligence

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Miles travelled to visit microfinance institutions outside of Cambodia

62’804

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Geneva · Zurich · Luxembourg · Lima · Phnom Penh · Tbilisi · Nairobi

Microfinance Investment Managers