Microfinance Institutions at Risk due to Order to Cap Interest Rates

29
March
2017

The National Bank of Cambodia (“NBC”) has capped interest rates on microfinance loans at a maximum of 18 percent per year, effective from 1 April 2017. The decision could bankrupt dozens of microfinance institutions (“MFIs”) which could have an adverse effect on the rural poor who make up the bulk of microfinance borrowers.

According to the 2016 annual report of the NBC, Cambodia has 54 registered MFIs with nearly 2 million clients. The industry is said to be worth US$4billion. Most MFIs in Cambodia charge 25-30% per year, which although high compared to commercial lending, offers primarily low-income debtors with no collateral, an opportunity to borrow from a formal institution.  The decision to cap interest rates could bankrupt dozens of MFIs with only the largest microfinance providers being able to survive the cap. Insiders say that MFIs can no longer give loans below US$5,000 and there have been allegations that this decision was made without prior public consultation with little time for the microfinance industry to adjust to the transition.

However, some business insiders have argued that the cap may lead to mergers of small MFIs which could lead to an increase in their operation efficiency.

Furthermore, the NBC claims that the measure is aimed at protecting the interest of the people, especially those in the lower income bracket, and preventing them from falling deeper into debt, as well as curbing microfinance institutions and credit operators from charging their customers exorbitant interest rates. In addition, borrowers who are currently charged a higher interest rate are able to refinance their loans at the lower rate.

We are of the view that in the short term, there will be a noticeable number of merger/acquisition activities and bankruptcy declarations in this industry. The market will adjust in the medium to long term.

If you have any questions or require any additional information, please contact SokSiphana&associates (a member of ZICO Law).


This alert is for general information only and is not a substitute for legal advice.