Debt fears for farmers Calls for lower microfinance rates

Government officials yesterday said high interest rates at Cambodia’s microfinance institutions were unsustainable and posed risks for social instability among the country’s farming population.

MFIs, however, said loanees were well informed of default risks, and that the institutions provided a service unavailable elsewhere in the Kingdom.

Small loans at Cambodia’s MFIs carry monthly interest rates as high as 4 per cent, Kalyan Mey, a senior advisor to Cambodia’s Supreme National Economic Council, told the Post yesterday. 

At the highest, yearly rates on the loans can hit nearly 50 per cent without compound interest, which is unsustainable for Cambodia’s rural economy, he said.

“It’s too high to justify any productive gain from the farmer who raises pigs or grows rice,” Kalyan Mey said of the more than US$500 million MFI industry.

“Most farmers can’t assess the associated risks, and they don’t foresee the [possibility] of losing the property they have mortgaged,” he said. 

“At the end of the day, many farmers will lose their houses and land. It can become a big social problem for the rural community.”

While some rural borrowers take loans for farming inputs such as fertiliser and rice seeds, others go into debt on hospital bills and wedding expenses, said Kalyan Mey. 

Default in the countryside translates into social instability as some farmers become landless. MFI operating costs are high. Each individual farmer must be consulted for loans, which average at about $500. In addition, a majority of Cambodia’s microfinance has foreign backers who demand higher profit margins.

These free-market forces are a “very big problem” for farmers who take loans from MFIs, Son Koun Thor, president of Cambodia Rural Development Bank, said yesterday. 

Given the Cambodian government’s commitment to an open market, increased competition among MFIs, and continued decreases in rates, is a solution to debt pressure on farmers, he said.

Cambodia Rural Development Bank was originally established to fund MFIs, and it is negotiating with the 10 institutions it supports to continue lowering rates, Son Koun Thor said. 

A stronger government hand in the industry may be required to keep interest rates down, he said.

Sim Senacheert, general manager at Prasac Microfinance Institution, denied that rural borrowers were unaware of lending-practice risks. 

During a consultation process, as well as at the time of lending, the MFI reviews the details of the loan, he said.

“I don’t believe they are uninformed. Our clients have been taking loans from us for 10 years,” Sim Senacheert said, adding that 30 per cent of Prasac’s loan portfolio was in agriculture. The default rate across Prasac’s entire loan portfolio was 0.14 per cent, he said.

“They know how to calculate the interest rate.”

Although interest rates have fallen since 2004, Sim Senacheert said operating costs still kept MFI rates high. Prasac has 24-per cent annual interest rates with an average loan size of $900, he said. If interest was too high, he said customers would go to other lenders.

Some farmers do go to unofficial lenders who are more accessible in their communities. 

Ly Thet, a corn and cassava farmer in the Stung Kach commune of Pailin province’s Sala Krao district, said he recently borrowed $350 with an interest rate of about 48 per cent from a local businessman.

Farmers in the community are generally unaware of borrowing practices and often take to the simplicity of high-interest loans from unofficial lenders, according to Ly Thet. 

“People here normally receive loans from businessmen because it is easy,” he said. 

Many farmers who borrow from MFIs have seen profits disappear this year, a source familiar with the industry told the Post on condition of anonymity.

“In a good year, [farmers] might be making 40 per cent return, which is then eaten up with interest repayments. If you have a really bad year you could conceivably get a negative return,” the source said.

Floods in September and October threatened to push higher the rate of nonperforming MFI loans in the fourth quarter of 2011, the Post reported last year, although some industry insiders said diversified portfolios at big institutions would mitigate the effect.

Efforts to reform MFI lending have been “slow and inadequate”, Kalyan Mey said. 

Farmers need more education regarding the benefits and risks of MFI lending. MFIs must make sure loans will lead to productive increases in the agriculture sector. Commercial banks should also be encouraged to pay more attention to rural finance, he said.

Farmer associations could reduce MFI and commercial bank operating costs. As the number of loans processed by banks falls, so will transaction costs, and the market would become more attractive to commercial banks, Kalyan Mey said.

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