Asia Times Online
Mar 5, 2009
By Stephen Kurczy
PHNOM PENH - Cambodia's microfinance sector is one of the fastest growing in the world. There's just one snag: nobody knows if it actually helps the poor who receive the loans and whether its lending practices are sustainable.
While the percentage of Cambodians living below the poverty line dropped from 47% to 35% between 1996 and 2006, without an independent assessment of the causes behind rising incomes, microfinance outfits charged with alleviating poverty can't necessarily take the credit.
"We can't say for sure why people are better off [in Cambodia]," says Paul Luchtenberg, chief executive officer of Angkor Mikroheranhvatho Kampuchea (AMK), a microfinance institution
which over the past two years has tripled its number of borrowers to 188,000 and quadrupled its amount of outstanding loans to US$23 million.
"Is it because of microfinance or it is because GDP was increasing at more than 9% a year? We don't know. We can only say people are better off. We can't say it's because of us."
Microfinance institutions (MFIs) have recently proliferated in impoverished Cambodia, with 104 organizations, including 60 non-profit lenders, operating in the country. Since 2003, they have attracted about 100,000 new borrowers each year and currently an estimated 1 million Cambodians hold $440 million in outstanding micro loans, according to the Cambodia Microfinance Association (CMA).
Yet none of Cambodia's MFIs have hard empirical data to show that their small loans actually help reduce poverty. It's important to know, Luchtenberg says, as microfinance grows in popularity and loan providers channel millions of dollars in interest-free loans into Cambodia's MFIs.
Floated by below-market interest rate loans from organizations such as Kiva.org, MFIs have the resources to provide small loans to sections of the poor that normal banks neglect. MFI customers often use the credits to buy motorbikes to transport their goods to market, purchase livestock to raise for slaughter, or mortgage a plot of land to grow rice. Repayment rates are extremely high in Cambodia, with delinquency rates of less than 1%.
Amid the mounting global economic crisis, some MFIs have reported rising default rates. That's putting the system under new strains. For instance, villagers from Kampot province in southern Cambodia complained this week to the National Assembly that a dozen microfinance companies took possession of their homes and farmland because they could not repay their loans.
Mu Sochua, the National Assembly parliamentarian representing the villagers, said they were taking out new loans to pay off old MFI debts, leading them to borrow from exploitative moneylenders. Defaults on microfinance loans will become more widespread, she says, as the global economy causes a decline in crop values and Cambodian farmers earn less from their harvests. "The economic crisis impacts differently, it's like a wave. Here, the wave is hitting the small entrepreneurs."
In Cambodia, non-profit and for-profit MFI's compete for the same market. AMK and Acleda Bank, two of the country's more prominent MFIs, exhibit the sector's shifting dynamics. Out of 652 MFIs surveyed worldwide, in 2008 the Washington-based Microfinance Information Xchange ranked AMK the 19th best in terms of transparency, efficiency and outreach, ahead of Acleda which came in at 70th.
Their philosophies differ starkly. Acleda Bank says it merely provides access to loans to Cambodians, whose responsibility it is to use the funds wisely. AMK says it strives to improve standards of living for the poor, the original mission of Nobel Peace Prize winner Muhammad Yunus, who in the 1970s first popularized microcredit in Bangladesh through his Grameen Bank.
However, the industry he popularized has shifted incentives. Most MFIs in the world today are for-profit entities with no obligation to uphold Yunus's vision. The Center for the Study of Financial Innovation found in a March 2008 report that MFIs worldwide rank "mission drift", or the divergence of MFIs from their original mission of poverty alleviation and financial inclusion, as one of the industry's biggest and fastest rising problems.
"We noticed this a decade ago, when it seemed that half the microfinanciers in the world really wanted to be full-service bankers," the study found. "Now many of them seem to be shifting from servicing the poor to flogging high interest rate consumer finance products. The profits may be more attractive, but the mission has changed - with a potentially adverse reputational impact."
MFIs "are increasingly recognizing that even with a sincere dedication to a social mission and a committed staff, they do not know whether they are achieving their desired social goals without having information or evidence," wrote Laura Foose and Amelia Greenberg in the Autumn 2008 MicroBanking Bulletin.
Mixed results
That's certainly the case in Cambodia, where experts say the industry has achieved mixed results. For-profit MFIs charge annual interest rates of anywhere between 24% and 36%, while the nation's non-profit microlenders, such as the Lutheran World Federation, charge as little as 5%. Poor Cambodians are often willing to pay the higher interest rates because non-profit microlenders have limited funds and outreach.
A year ago, most industry leaders boasted that their lending helped to reduce poverty and fuel grassroots micro-businesses. Those claims are now coming into question. "We need to know how we can change, how we can improve," Bun Mony, former Cambodian Microfinance Association president, said last month at the Cambodia Banking 2009 conference in Phnom Penh.
This assessment marked a reversal from his statements the previous year, when he told this correspondent that, "through unofficial observation, we accept that microfinance has been playing a very important role in poverty reduction." The CMA is now seeking funds to conduct a $100,000 impact study on the industry.
Some micro lenders baldly argue that it is not their responsibility to alleviate poverty. When asked if his bank has strayed from Muhammad Yunus's original vision of microfinance, In Channy, chief executive officer and president of Acleda Bank, says: "He's wrong ... It's wrong if you say microfinance is for poverty alleviation. Microfinance is for economic development. And economic development is a powerful tool for poverty alleviation."
Acleda Bank attracted 40,000 new micro- and small-loan borrowers in 2008 while doubling its profits to about $21 million. The bank has opened three international branches in neighboring underdeveloped Laos, with five more planned to open there in 2009. Acleda started as a non-profit non-governmental organization (NGO), but morphed into a full-fledged commercial bank in 2000 and now provides medium-sized and large loans to a wide range of customers.
To complete the non-profit to for-profit circle, Acleda plans an initial public offering on Cambodia's forthcoming stock exchange, scheduled to open at the end of this year. In Channy says Acleda will avoid activist criticism through a plan to pay out only 40% of the previous year's profits to shareholders. The remaining 60%, he says, will go back into the company to reduce interest rates, increase customer services and open more branches. "It's not mission drift. We can guarantee much more than if we were an NGO," he said.
AMK reports small profits - about $800,000 in 2007 and $926,000 in 2008 - all of which were reinvested into the company. "We shouldn't be about just making profits; that's straying from what the organization was set up to do," says AMK's Luchtenberg. "Microfinance is about reaching down to the poorest."
Such obligations are a matter of choice in Cambodia's unregulated context. The government does not mandate that MFIs help the poor, but regulates only whether the country's 18 licensed MFIs have adequate capital reserves. The 26 registered and 60 NGO-administered MFIs - which do not have minimum capital requirements and are exempt from profit taxes - are even less regulated. That differs from, say, neighboring Thailand, where the central bank has imposed interest rate caps on credit cards targeting subprime borrowers.
Charles Waterfield, a microfinance expert and professor of international and public affairs at Columbia University, says that unregulated MFIs, including the ones in Cambodia, could act as exploitative as Mexican microfinance institution Banco Compartamos SA, which came under fire in March 2008 for skimming hundreds of millions of dollars in profits made from poor borrowers.
The Compartamos case, Waterfield says, is a cautionary tale for how easily MFIs can "raise interest rates, make large profits, and then follow a path that allows them to extract those profits into their own pockets". "I do see this as a warning call for the industry," Waterfield wrote to this correspondent in an e-mail message last year. Waterfield has organized a coalition of MFIs known as MicroFinance Transparency to police the industry and monitor annual interest rates and profits among the world's MFIs.
Grameen Bank, the original Bangladeshi MFI whose poverty-alleviating work was awarded a Nobel Peace Prize, was one of 11 MFIs serving about 26 million people worldwide that initially signed onto the watchdog initiative. Alarmed by the direction of the industry, Yunus said at the initiative's launch last July: "I made this thing and they came in and abused it. What a way to discredit a whole idea!"
Costs and benefits
AMK has joined the MicroFinance Transparency initiative and has allocated some $42,000 to study whether its loans actually achieve Yunus' poverty-alleviating aims. The study, which started early last year and brought in leading academics in the field, is Page 2 of 2
Micro-lenders run reality check
By Stephen Kurczy
Grameen Bank, the original Bangladeshi MFI whose poverty-alleviating work was awarded a Nobel Peace Prize, was one of 11 MFIs serving about 26 million people worldwide that initially signed onto the watchdog initiative. Alarmed by the direction of the industry, Yunus said at the initiative's launch last July: "I made this thing and they came in and abused it. What a way to discredit a whole idea!"
Costs and benefits
AMK has joined the MicroFinance Transparency initiative and has allocated some $42,000 to study whether its loans actually achieve Yunus' poverty-alleviating aims. The study, which started early last year and brought in leading academics in the field, is
tracking 1,400 existing clients over a two-year period while monitoring changes in income, assets and livelihood. "I've seen a lot of really sloppy studies," says AMK's Luchtenberg. "We don't want to be presumptive and assume that we are helping. A loan is a two-edged sword - it's a tool, but it's also a debt."
When his bank's study is completed in mid-year, it will be the first time a Cambodian MFI can point to concrete evidence that its micro-credit definitely aids the poor - if that is what the study shows. The study could also reveal that AMK, and perhaps the industry as a whole, has largely failed Cambodia's poor by saddling them with unsustainable debt. "I think we do have an obligation to know if we are fulfilling our mission," says Luchtenberg. "If we're not, then I think I've got to get out of this business."
Syed Hashami, a microfinance specialist with the Consultative Group to Assist the Poor, a consortium of 33 public and private development agencies including the World Bank and Bill and Melinda Gates Foundation, argues that a more independent randomized control experiment would be unethical since it would involve trials that deliberately withhold services to people who have are in need. Studies of MFI borrowers in other countries already show that micro loans help alleviate poverty, Hashami says.
For instance a study in Ghana found that MFI clients' incomes were $36 compared to $18 for non-clients. In Indonesia, another comparative study found borrowers increased their incomes by 12.9% compared with 3% for the control group. A detailed impact assessment in Bangladesh found that members who stayed in the micro-credit program for more than four years increased household expenses by 28% and assets by 112%.
A number of the industry's proponents in Cambodia argue that anecdotal evidence shows that micro-loans have indeed helped Cambodia's poor. "Although we have not conducted comparative or impact studies in Cambodia ourselves, we have good evidence to believe that Cambodia's commercial microfinance industry is effective and well managed," says Margarete Biallas, a manager at the Mekong Private Sector Development Facility of the International Finance Corporation (IFC), which helped to establish the Cambodian Microfinance Association in 2004 and owns a 12.5% stake in Acleda.
Adds Martin Holtman, head of the World Bank-affiliated IFC's department of Microfinance Global Financial Markets, says there is ample evidence of a positive link between access to money, growth, and reduction of poverty. "Microfinance has proven to be one of the more salient success stories in the development area," he says.
Before the advent of the MFI, capital-hungry Cambodians were limited to loans from moneylenders who charged annual interest rates often higher than 100%. Those usurious terms sent the average borrower over their heads in debt. Experts in Cambodia say the rapid expansion of microfinance has put most, though not all, of the old moneylenders out of business. Biallas cited Cambodian MFIs' high number of borrowers, low default rates and decline in average monthly interest rates from 5% in 1998 to 2.5% today as proof the industry has uplifted Cambodia's masses.
With Grameen Bank founder Yunus winning the 2006 Nobel Prize and Hollywood star Natalie Portman touting microloans as a surefire road out of poverty, it sometimes seemed as if a microfinance bank could be plopped in any village in the world and locals would suddenly become wealthy businessmen.
"It was a mistake everyone made [in the 1990s] to think that Grameen could be replicated, which never really worked," Luchtenberg says. Varying population densities, economies and cultures impact the most effective forms of microfinance. For instance, while Bangladeshi villagers perform well in solidarity groups, Cambodians dislike working in large groups and the Grameen model inevitably fell short here.
"It would be imprudent to issue a blanket statement that 'microfinance works', for the simple reason that there is no one microfinance to test," wrote Nathanael Goldberg in "Measuring the Impact of Microfinance", a 2005 study commissioned by Grameen. Different people respond differently to microfinance, Goldberg found, while different banks do microfinance differently. Microfinance has in certain circumstances been known to have negative impacts.
"The recent examples of subprime borrowers in the US show that people are often driven to take on more debt than they can handle in the long run. This, together with ambitious growth targets from MFIs' Board of Directors transmitted to loan officers, could be a recipe for a 'bubble'," wrote investment analyst Catalina Robledo in the most recent MicroBanking Bulletin.
David Mueller, Cambodia representative for the Lutheran World Federation, one of the country's 60 NGOs that provide microfinance, is an open critic of the claims boasted by commercial MFIs. Whereas MFIs give small loans and maybe send out a monitor to collect the interest, development agencies such as LWF provide training and support from a full-time LWF community worker at each of the bank's 200-odd sites.
"We don't believe that access to credit is the biggest contributing factor to reducing poverty. If they only have credit, but they don't have technical support, how will they do it?" Mueller said LWF village banks are more sustainable because a part of every loan comes directly from another villager's pocket.
Villagers then self-police among themselves, denying loans if they so choose to the town drunk or other deemed high-risk borrowers. Annual interest rates for LWF village banks are less than 5%, owing to the absence of overhead and labor costs. Mueller attacks the very premise that Cambodia's MFIs, some of whose average loan size is more than $1,000, are even servicing the poor. "We're filling a gap. If somebody else was servicing the absolute poor, we wouldn't even be there."
Stephen Kurczy is an Asia Times Online contributor based in Cambodia. He may be reached at kurczy@gmail.com.
