Kingdom of Cambodia

Nation Religion King

Opening remarks by

Sr. Minister KEAT CHHON,
Minister of Economy and Finance

Special Envoy of

the Prime Minister of the Royal Government of Cambodia
 

At the International Conference on

Role of Government in Grassroots Economy Development
and Poverty Eradication

Bangkok, 24-25 November 2005

Excellencies, Distinguished Guests, Ladies and Gentlemen:

At the outset, I would like to express my sincere thanks to the Royal Government of Thailand and Government Savings Bank for inviting me to address this august forum and for its excellent arrangements. I am representing Samdech HUN SEN, Prime Minister of the Royal Government of Cambodia (RGC), who cannot attend this forum, because of his busy schedule at home.

I am honored to be here today to share some of my thoughts and mainly learn from all distinguished participants on the role of microfinance in empowering grassroots economy and reducing poverty.

The dual economic system of developing countries has translated into a two-tracked financial system, i.e. a developed financial sector in urban industrialized areas and an underdeveloped developed financial structure for the less privileged, particularly rural poor. Microfinance traditionally operates in areas abandoned or given less priority by the formal financial sector. The formal banking sector does not provide financial services to the huge numbers of poor and lower-income people. Building an inclusive microfinance sector, therefore, will help to ensure that the poor, in developing countries have access to financial services that can help them work their way out of poverty. Eventually, however, the microfinance institutions will be integrated with the formal financial sector.

This explains the raison d’être of microfinance in developing countries. The development of microfinance is a response to the incomplete legal framework, high-risk environment, the lack of access for the poor to formal financial infrastructures, absence of bank deposit insurance and linking of lending operations in the formal financial sector to client’s credit worthiness and financial history. As a consequence the poor are denied access to financial services and their economic deprivation continues.

Studies have shown that a sound financial system boosts economic development and access to it will especially benefit the poor. For this reason, governments in developing countries have made serious strides to develop the microfinance sector to give hope to poor people, particularly women, by helping to build businesses, revitalizing communities, and creating jobs for lifting millions of people out of poverty.

In this sense, microfinance has become a powerful tool to use in helping to reach the Millennium Goals, particularly those relating to promoting children’s education, improving health outcomes for women and children, and empowering women. Improvements in these areas can be sustained only when households have increased earnings and savings and gain greater control over financial resources.

Thus, the broader concept of microfinance is exactly about helping poor and low-income clients deal with their basic needs and invest according to their own priorities. And with sustainable access to credit and savings, poor households can invest in housing, healthcare, and education for their children.

For this reason, microfinance institutions (MFIs) are sometimes set up by Governments and donor agencies as non-profit organizations to serve social objectives. To ensure sustainability, however, the MFIs should be regulated to enhance their financial soundness. Critically, microfinance should also be eventually fully integrated into the private sector for leveraging its vast resources. In Cambodia two institutions play a key role in the microfinance sector, the National Bank of Cambodia (NBC), the country’s central bank, is the regulator and the Ministry of Economy and Finance (MEF) is the refinancing provider.

What should be an appropriate strategy of the Government for developing microfinance? At this point I would like to share with you some thoughts based on the experience of Cambodia and other developing countries to successfully build and sustain MFIs.

Firstly, increase access to credit. The RGC is working closely with the MFIs in the field to reduce risks and inefficiencies so that the poor may benefit from lower interest rates and have better access to credit. On the one hand, the development of microfinance has diminished the “usury” element in interest rates. On the other hand, the improvement of the micro-financial sector has enabled the reduction of the interest rates from 5-percent to 2.75-percent per month in Cambodia.

Secondly, add value beyond the loan funds they contribute. The government is working with microfinance institutions and networks to ensure that community-based partners have access to the best know-how and sustainable credit. These MFIs are critically important because they are a key source of professional and technical expertise particularly for providing capacity building in non traditional lending. Some MFIs provide specialized advice on how to start and operate business and offer technical services to their clients to strengthen their management and to scale-up micro- and small businesses and to help the asset-less poor to become self-employed.

Thirdly, balance between increasing the client coverage and ensuring sustainability. There are two categories of microfinance providers. The first category consists of microfinance institutions that pursue profit and seek to be sustainable. They provide the delivery of formal banking services to the poor. They have expanded and operate much like conventional financial firms. They no longer rely on donor resources. In this case, the RGC is supporting MFIs to achieve greater scale, outreach and financial self-sustainability to make a significant impact on poverty reduction. We are helping the MFIs to become regulated, more market-based, financial institutions and support their expansion.

However, for the strata of the poor who do not meet the financial criteria of these MFIs there is still room for not-for-profit microfinance organizations and associations, supported by grants, and contributions of NGOs and donors.

Finally, link micro finance operations with the development of rural households and communities. Our operating approach is simple, but powerful in its implications: greater community level prosperity can build strong economies. And microfinance in turn can contribute to the financial and social development of left behind communities.

While acknowledging that microfinance is the only one important element the development policy framework, the Royal Government of Cambodia, under the leadership of Samdech Hun Sen, has made a commitment to promoting microfinance as a means of private sector-led growth and poverty reduction. The development of microfinance was spelt out in the National Program to Rehabilitate and Develop Cambodia (NPRD), which was implemented in 1994-1995. During the start up phase (1990-1995), microfinance was introduced through credit cooperatives and village banks, mainly financed by international organizations and NGOs.

In 1995, the Royal Government of Cambodia established the Credit Committee for Rural Development to develop policies and provide institutional strengthening support for all microfinance NGOs and agencies. In 2000 as a regulatory measure the RGC started the process of licensing of MFIs and registration of microfinance NGOs and associations.

Subsequently, our government adopted in August 2001 a financial sector development plan, entitled «The Vision and Financial Sector Development Plan for 2001-2010», which envisages the development of a sound, market-based financial system.

This financial development plan sets forth the objective of building, in three phases, a pro-poor and effective microfinance system for providing affordable financial services to enable the poor to enhance income and reduce poverty.

During the first phase (2001-2004), our actions focused on strengthening supervision and regulation and building sustainable institutions. As a first step, microfinance operators are encouraged to register as Microfinance institutions. Then, to strengthen the MFIs, since 2003 our government has moved to set standards and to increase accountability and transparency of MFIs. This includes prescription of regulatory standards, preparation of accounting and financial statements, and institution of risk management, audit and control and disclosure practices.

During the second phase (2005-2007), we are working to improve prudential regulations, expand the network, enhance effective intermediation and promote innovative microfinance projects. In 2005, we established an Office of Microfinance and SME Management in the Financial Industry Department of the MEF in order to provide support for microfinance institutions and micro, small, and medium enterprises.

During the third phase (2008-2010), we will take steps to introduce self-regulatory mechanism, upgrade skills and extend the institutional network and integrate community-owned institutions with the formal financial sector.

Let me give you some concrete examples of the work we have done and are doing in the microfinance field.

Distinguished participants, we have come a long way in Cambodia since embarking on the development of microfinance since late 1980s. At the end of 1991, there were only 4,000 borrowers with an outstanding loan portfolio of US$100,000. However, Cambodia has witnessed since then rapid growth in both the numbers of micro institutions serving poor communities and the numbers of individuals and families they have reached. By 2005, there were 400,000 borrowers, accounting for 15-percent of the households, with outstanding loans of over US$80 million. The size of the loans ranges from US$50 to US$2,500. A total of US$20 million of savings have been mobilized. Currently the demand for access to credit and savings products is far from met. The overall demand is estimated at US$200 million, while the supply is just US$80 million. Thus, we have to meet the gap of US$120 million.

At present, the microfinance sector in Cambodia consists of 4 specialized banks, 16 licensed micro-finance institutions, 27 credit operators registered as Non-Governmental Organizations and credit associations. The RGC works with development agencies and International Financial Institutions, particularly ADB, KfW, AFD and IFC, as well as NGOs to promote microfinance. Moreover, a few commercial banks are also involved in both small-enterprise lending and their traditional large-scale lending.

One example of a successful and sustainable microfinance operation in Cambodia that is no longer dependent on donor support is the Association of Local Economic Development Agencies (ACLEDA), which was established in 1993 with seeding capital coming from UNDP and the Danish Government. ACLEDA has been able to build an accountable governance structure and a sound business plan, with transparent reporting and oversight.

ACLEDA provides small-enterprise lending, in amounts a bit larger than traditional micro-finance, and has also proven successful in bolstering entrepreneurship and job creation. In fact, one goal of microfinance is to see the self-employed become small business owners, providing employment to their neighbors and creating greater community prosperity. In 2004 it has been transformed into ACLEDA Bank with 137 branches, ranking third in the country in terms of coverage. In 2005, the ACLEDA Bank has made 136,000 loans totaling US$87 million, accounting for 14-percent of the market share.

Another success case is the Rural Development Bank (RDB), established by the Royal Government of Cambodia in 1998 as a specialized bank to support and strengthen microfinance services in rural areas, including the development, promotion and financing of Small and Medium Enterprises (SMEs). The RDB acts as a wholesale bank providing financing and refinancing to licensed commercial and specialized banks and Micro Finance Institutions (MFIs), which delivered credit and savings services to the rural poor as well as to individuals and SMEs.

Since 1998, the RDB has provided loans amounting to US$30 million to 3 banks, 10 MFIs, and 10 credit operators for on-lending to more than 210,000 households in 15 provinces and cities of Cambodia. The RDB not only provides finance for investments, but also offers a saving vehicle for poor people. For example, the RDB has mobilized more than US$1 million as savings and fixed deposits from the public. It also helps rural communities to meet specific long term financing needs, for example by providing a 20-year loan directly to more than 700 households to promote family rubber plantations.

Moreover, following the Prime Minister’s recommendations, the RDB has provided micro-credit services to help the people in the North West of Cambodia, previously controlled by the Khmer Rouge, to fully integrate into the society. Through micro-credit we have managed to transform former battlefields into an agro-business zone.

Moreover, the RDB has given priority to human resource and capacity development. It has developed an internship program to help university graduates learn the techniques of microfinance. To strengthen its institutional capacity, the RDB has recently signed an MOU with the Bank for Agriculture and A