Progress Achievement of

Sustainability of Microfinance in

Cambodia

Mr. CHOU VANNAKMr. CHOU VANNAKHeat of Division, Microfinance & SME Heat of Division, Microfinance & SME

Division, Financial Industry Dept. Division, Financial Industry Dept. Ministry of Economy and FinanceMinistry of Economy and Finance

TBLI Conference Asia – May 25-26, 2006TBLI Conference Asia – May 25-26, 2006The Landmard Bangkok, ThailandThe Landmard Bangkok, Thailand

Contents

1. Definition of Microfinance (MF)2. Vision of MF3. History of transformation of Microfinance

operations from NGOs to regulated MFIs4. The impact of MF5. Key elements for sustainability of MF6. Success story of MF: ACLEDA bank7. Environment for MF8. Strategy for strengthening Microfinance

sector

Definition of Microfinance

Microfinance is:

Involving the provision of financial services to low-income clients: from loans and savings to insurance and money transfer.

Individuals, groups and community banking.

Vision of Microfinance

Establish viable, pro-poor and effective rural finance system for providing affordable financial services to enable the poor to enhance rural income and reduce poverty.

History of Transformation of MF Operations from NGOs to Regulated MFIs

Cambodia still suffers from the legacy of 20 years of civil unrest that occurred between 1970 to 1990.

1988-1995: Start-up Phase. The start-up phase began in the late 1990s, when multilateral and bilateral donors and international NGOs began financing projects to deliver credit to poor households and poor micro entrepreneurs.

History of Transformation of MF (Cont.) Operations from NGOs to Regulated MFIs

1995-1999: Institutionalization Phase. This is the separation of credit components from integrated program structures and the institutionalization of NGO microfinance activities.

1999-2004: Commercialization Phase. The success of NGOs in providing credit to poor and largely rural populations encouraged the Central Bank/NBC issue regulations establishing a special license for MFIs and a registry for NGOs. (As of December 2004 there are 10 licensed MFIs).

History of Transformation of MF (Cont.) Operations from NGOs to Regulated MFIs

2004-Present: Financial Systems Integration Phase. Microfinance Stakeholders have made remarkable strides in taking a commercial approach to expanding pro-poor financial service in Cambodia.

There are also ongoing commitment and decisiveness of all stakeholders is needed to ensure that poor people continue to be the focus of Cambodia’s financial system.

Impact of Microfinance

1) Household level- Increase in household income- Better access to education, healthcare, sanitary,

infrastructure, food supply etc.- Higher savings than non-clients, to cope with economic

shocks- Building assets- MFIs often support them in acquiring basic skills and

financial knowledge- Enables poor people to better manage risk and take

advantage of business opportunities- Empowerment of women, who are often preferred

clients of MFIs.

Impact of Microfinance (Cont.)

2) Local community level- Create of jobs- Higher quality of jobs (i.e. labor conditions,

productivity, skills base, empowerment)- Higher and more stable income of the community- Savings/credit groups, members start educating and

helping each other- Can trigger entrepreneurship and a healthy competition

among community members- Entrepreneurship usually leads to increased trade with

neighboring communities and regions, in turn improving the economic base and resilience of the community.

Impact of Microfinance (Cont.)

3) Country level- Creation of jobs- Strengthening of the micro enterprise sector which

represents the back-bone of the economy- Support income and employment generation in rural

area, 85% of rural people- Mitigate the pressure on the environment and natural

resources- Can help to reduce migration flows to urban areas- Strengthening of the financial sector as a whole,

widening its scope and outreach.

Key Elements for Sustainability

Firstly, the Royal Government of Cambodia (RGC) is working closely with donors and the MFIs reduce interest rates to increase access by the poor to credit. The reduction of the interest average rates from 5-percent to 2.75-percent per month in Cambodia.

Secondly, the RGC is working with microfinance institutions to ensure that community-based partners have access to the best know-how, credit, technical advice, training and capital.

Key Elements for Sustainability (Cont.)

Thirdly, balance between client coverage and sustainability. Rural Development Bank (RDB) was established by the Government in 1998 to support MFIs to achieve greater scale, outreach by providing wholesale loan to them and financial self-sustainability to make a significant impact on poverty reduction;

Key Elements for Sustainability (Cont.)

However, for the poor who do not meet financial criteria, there is still room for not-for-profit microfinance organizations, supported by grants and contributions of NGOs and donors.

Finally, MF has serious strides are made to support rural households and communities. Greater community level prosperity can build strong economies;

Success story: ACLEDA Bank

Association of Local Economic Development Agencies (ACLEDA) was established in 1993 by the RGC seeding capital coming from UNDP and the Danish Government to provide small-enterprise lending to bolster entrepreneurship and create job;

In 2004, ACLEDA was transformed into bank with 137 branches, ranking third in the country. It makes 136,000 loans totaling US$87 million, accounting for 14-percent of the market share;

Environment for MF

In July 2000, RDB received loan from ADB through RGC for implementation of Rural Credit and Savings project for 5 years (2001-06). ADB required RDB to comply with the environmental issues to subproject appraisal and implementation of the project, such as:

i. appoint an Project Environment Officer;ii. carry out environmental awareness

programs for MFIs;

Environment for MF (Cont.)

iii. make monitoring of compliance with environment laws, regulations and practices an integral part of its periodic supervision of MFI operations;

iv. the details and schedule of environmental awareness programs;

v. conduct environmental awareness programs for the MFIs receiving MFI loans to enable them to educate their sub-borrowers to take appropriate mitigation measures;

Environment for MF (Cont.)

In the project implementation, RDB cooperated with the Ministry of Environment (MoE) organized a two day training course on “Environmental Impacts Assessment on Social Environment for MFIs” in April 2005.The purpose of this training is to build awareness to both of MFI managers and staff to provide credit efficiently to their clients without affecting social environment negatively.

After this training, MFIs understood that the Environment issue is also important part for their credit activities. And then, some of MFIs appointed their Environment Officer to in charge of this task.

Environment for MF (Cont.)

Next step, RDB and the MoE will continue to follow up and monitor the environment issues of RDB’s partners under the project, and encourage them to consider the Environmental Due Diligence in their credit policy. Moreover, we also planned to conduct trainings in place to build awareness to both MFIs and their clients.

Strategy for Strengthening Microfinance Sector

1. Government’s strategy to promote microfinance as a means of private sector-led growth and poverty reduction;

2. to allow to attract financial resources and technical assistance from domestic and foreign countries;

3. to reduce tax burden related to MF activity, such as saving tax, withholding tax, and income tax …;

4. to connect farm products to domestic and international market with the provision of credit support;

Strategy for Strengthening Microfinance Sector (Cont.)

4. to strengthen infrastructure, especially in the rural areas;

5. to promote domestic savings; and 6. to promote local authorities to act as facilitators

in collaboration with MFIs and NGOs.

At the present, the Government/NBC received TA from ADB for assisting MFIs to collect public saving to ensure adequate of fund resource for their future operations.

Thank You for Your Kind Attention !!!