Financial Crime World

The State of Microfinance in Cambodia: Rapid Growth and Associated Challenges

Introduction

Cambodia’s microfinance sector has experienced rapid growth over the past decade, with a significant increase in credit outstanding and access to financial services. However, this growth has also raised concerns about the inclusiveness and sustainability of the sector.

Rapid Credit Growth

  • The average loan outstanding in Cambodia increased from 24% to 50-80% of consumption expenditure between 2010 and 2016.
  • This rapid credit growth has led to a significant expansion of microfinance institutions (MFIs) in the country.

High Interest Rates

  • Before the interest rate cap was implemented, the average interest rate charged by MFIs ranged from 20-36% per year.
  • High-risk loans could have interest rates exceeding 50% per year, leading to concerns about debt sustainability.

Multi-Borrowing and Debt Saturation

  • Many borrowers have multiple loans, with some taking on loans from different institutions within a short period.
  • This has led to concerns about debt saturation in certain provinces, where borrowers may struggle to repay their debts.

Lack of Income Data and DTI Ratios

  • There is limited information available on household income and debt-to-income (DTI) ratios, making it difficult to assess the level of household indebtedness.
  • This lack of data makes it challenging for policymakers to design effective regulations and interventions.

Emergence of Unregistered Lenders

  • Unlicensed entities have begun engaging in microcredit activities, operating outside of regulatory frameworks and without reporting requirements.
  • This raises concerns about the lack of oversight and regulation in the sector.

Challenges and Concerns

  • The high interest rates and debt saturation issues suggest that some borrowers may be struggling with unsustainable levels of debt.
  • The emergence of unregistered lenders adds to the risks associated with the sector.
  • The limited access to formal loans and saving accounts among Cambodians raises concerns about the inclusiveness of the country’s financial development.

Conclusion

While Cambodia’s microfinance sector has made significant progress, it still faces challenges related to inclusivity, sustainability, and regulatory oversight. Addressing these challenges will be essential for ensuring that the sector continues to grow in a way that benefits all Cambodians.