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National
Bank Moves to Shore Up Microfinancing Sector
The head of the National
Bank, Asian Development Bank advisers and members of microfinancing
institutions met Thursday to discuss a draft subdecree designed to
create more transparency in the small-loans process.
Specifically,
the draft subdecree requires microfinancers to provide clients with
clear explanations of interest rates and the payment plan.
The
subdecree also requires that interest charged on a loan "must
be calculated taking into account the repayments of principal
already made on that loan."
Currently,
interest rates presented by some microfinancing institutions do not
accurately reflect the actual amount of interest the borrower will
have to pay.
Certain
types of loans, for example, carry with them a much higher actual
annual interest rate than others, though both of them could seem to
have the same nominal interest rate.
For
example, if a farmer borrows 1 million riel for nine months at a 5
percent nominal interest rate and pays that interest each month
calculated against the original principal, he will pay back a total
of 1,449,999 riel. This is know as a flat rate loan and is commonly
practiced by microfinancers in Cambodia's provinces.
But if the farmer's interest is calculated against the principal
owed after each monthly payment, he will save 200,000 riel.
Jean Plamondon, an ADB adviser to the National Bank, said the flat
rate is unfair to borrowers.
He said microfinancers are a "critical, key" part of the
national financial system, with as many as 120 operating lenders.
Many of these agencies have an "excessive reliance" on
outside money such as grants, which can make their operations
unstable, said National Bank Director General Tal Nay Im.
The subdecree is designed to prevent unfair lending practices of
some institutions, such as the use of flat rates, Tal Nay Im said.
Some microfanancer, however, said elements of the subdecree were
confusing to villagers and could create unnecessary difficulties for
agencies.
Paul Luchtenburg, a representative from World Relief, an
international organization that makes small loans, said he was
"baffled" by some portions of the draft.
He said flat rates can be lowered so that the farmer pays back the
same amount
of money as he would with other repayment plans. And flat
rates, Luchtenburg said, are easier for the agencies
to handle and easier for villagers to understand.
The
subdecree would be "a big burden for organizations," he
said, and make "a negative impact on the market."
He
suggested that the National Bank should set more realistic goals.
"Keep it simple," he said. His concerns were echoed by
other members present.
Plamondon
said the subdecree is not designed to punish institutions that loan
money with good will, but to create an enforcement mechanism for the
National Bank. Some institutions make loans that actually charge as
much as 300 percent interest oh the amount borrowed, he said, but
until the subdecree is approved, the National Bank has no means to
stop them.
Meanwhile,
other microcredit lenders are trying to keep their interest rates
low while struggling with operating costs.
The
Rural Development Bank, which makes loans to smaller institutions,
is one such lender.
'We
have lots of loan requests from farmers in the rural areas and are
trying to work with farmers to reduce that interest rates,"
said Son Koun Thor, president of the RDB.
In 1992, many financial institutions charged farmers about 10
percent to 15 percent interest per month for loans, which is an
annual interest rate of approximately 120 percent to 180 percent,
Son Koun Thor said.
That is sometimes higher than what the money lenders would charge,
Now, the interest rate for people in the rural areas who receive
loans from microfinancing institutions is between 2 percent and 5
percent per month, he said.
Annual
interest rates, therefore, would be between 24 percent and 60
percent. This is still very high fo many farmers.
"But the problem with loaning in rural areas is that there is
such a high operating cost and the farmers borrow a very small
amount sometimes only $200," Son Koun Thor said. "So if
the loaner takes a trip out to the provinces to check on a $200
loan, the interest rate we charge them won't even pay for
petrol."
(Additional reporting by David
Kihara
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