Microfinance in Cambodia
A few human rights groups issued reports saying that MFIs in the country are violating human rights, seizing collaterals of the clients who became over-indebted and thus cannot repay the loans.
To be clear, Gojo’s group company in Cambodia, Maxima Microfinance has never taken such actions to those who unfortunately became insolvent. We understand that not letting the customers be overindebted and thus insolvent is the most important responsibility as a financial institution — we work to improve our clients’ lives. Our credit assessment process is more stringent than others and thus our delinquency ratio is less than half of the counterparts. Also, Maxima is one of the 100 certified organizations which obtained Smart Campaign Certificate.
However, I am deeply concerned about the microfinance situation in the country. The industry is evolving in a quite different way from any other nations. Let me explain why it happened.
Cambodia’s main currency is USD, which accounts for 90% of the entire transaction in the country. The country also has a very flexible foreign capital investment regulation. The two factors made Cambodia an attractive investment destination. It is a legacy of the history — the country, which was devastated by the Pol Pot regime and the war, needed to tap the foreign capital and brain. Until the early 2000s, US-EU investors were dominant in the microfinance sector. These days, they were replaced by the East Asian players, mainly China. The microfinance market piled up almost $5 billion loans in 15 million population country where per capita GDP is just above $1,000.
On top of that, the government recently came up with the interest rate ceiling (18%), making a small-size microcredit loan not commercially sustainable. Given the unit economics of the typical MFIs, the break even loan size is around $2,000, i.e., small loans cannot make profit. $2,000 is not a typical microcredit loan size — 10 times higher than that of Myanmar, by the way.
So what’s happening right now is some people are heavily over-indebted and some who just need small loans are being excluded from financial services. Several months ago, I casually visited the fields with a translator only (I explained to the villagers that I’m a student), and I found that many people who are living with just $200 salary a month were borrowing $10,000+. It was like a “Big Short” movie where investment bankers visit the subprime mortgages and get shocked. The lowest income segments these days find it difficult to obtain the small loan to deal with their sudden cash needs, ending up borrowing the money from illegal money lenders.
We are working on a pilot to address the challenges. I hope that by the early next year we will be able to launch the product. We hope that it would be a game changer.