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Tom
von Weissenberg
Management Adviser
PRASAC MFI Ltd
Phnom Penh 10 August 2006
COMMENTS ON FINANCIAL SECTOR BLUEPRINT 2006-2015
Sir/Madam
I
was happy to participate in the public presentation on 3 August of
the draft Financial Sector Blueprint (FSB) 2006-2015. The
participants were invited to send comments on the FSB and also I
would like to take the opportunity of sharing some thoughts.
It
is surprising that not a single word about the dual currency system
in Cambodia was mentioned in the seminar, and I could not find the
issue mentioned in the FSB either. I have no actual opinions about
the matter, in favor or against, but would expect some kind of
comments or guiding principles to appear in the FSB. As it appears
now, the RGC has no idea what it wants to do – a) a total
dollarization, including dollar-nominated coins to replace the KHR
notes, b) an abandonment of USD as part of priorities related to
‘foundation of finance’ or c) a half-way solution where the present
undetermined policy doubtlessly in the long run would lead to
alternative a), a total dollarization.
In
the presentation of MoEF, Dr. Hang Chuon Naron mentions that the
ministry’s role and duty is to “attract and mobilize financial
resources from the international financial institutions and other
donor countries to support micro finance sector.” On the other hand,
a key issue is the MFIs funding strategy. “MFIs need to continue to
develop commercial funding independent from international donors or
NBC.” Not very clear what the MEF plans to do.
For
MFIs to rely on ‘donors or countries’ should be ruled out
completely. Donor support to startups or NGO based non-licensed
operators would only distort the market, to the disadvantage of
already financially and operationally sustainable licensed MFIs. MFI
are presently already completely relying on international commercial
financial sources and donor interventions should not be encouraged.
Cambodian financial sources can not be used, because MFIs can not
provide the required collateral. International commercial sources do
provide unsecured loans but not in KHR, only in hard currency,
usually USD. At the same time the MFI clients demand loans in KHR
and USD loans must therefore be converted into KHR. In such case the
risk is with the MFI. That risk, on the other hand, is by NBC
limited to 15% of total assets.
When MFIs want to expand, they have to accept funding in USD and,
referring to the above, only extend loans in the same currency. MFIs
are thereby ‘forced’ to contribute to dollarization, by pushing
dollars out even in the remotest villages. Can this be a desired
direction?
The
FSB several times mentions the present imbalance between the over
liquid commercial banks and the demand for increased funding by the
MFIs. Somebody mentioned the amount of 100 MUSD being the immediate
funding demand of MFIs.
The
FSB rightly points out the “sufficient level of liquidity’ of the
commercial banks. In the private discussions it was mentioned that
the depositions with commercial banks are something like 1.1 Billion
USD, while the lending is only 700 MUSD. An over liquidity of some
400 MUSD, or, as Cambodia Daily puts it (New Credit Information
Sharing System Unveiled, 10 August 06) there is 700 MUSD in the
possession of banks that are unwilling to take risks on local
borrowers. What an imbalance! Why then bother foreign resources,
while the own ones are untapped? Would it not solve at least some of
the problems of both commercial banks and MFIs if the FSB would
outline clear measures or actions to enable for local supply and
local demand to meet? It would also assist in reaching “effective
financial resource allocation” as mentioned by Dr. Arner as one of
the objectives of the FSB.
I
think the MEF misses the point by focusing on international
institutions alone, rather than internal resources available in
Cambodia, or both. The FSB should reconsider the issue, and come up
with more concrete proposals and incentives, to promote closer
cooperation between commercial banks and MFIs.
Cambodia Microfinance Association CMA is in many instances in the
FSB mentioned as an important player in the financial sector of
Cambodia. It is actually mentioned many more times than the
Association of Banks in Cambodia ABC. The legislation allows only
one organization to represent the entire industry and presently it
is ABC. CMA has no official role, it exists only as subordinated to
ABC.
Everybody knows that the interests of commercial banks are not the
same as the ones of the MFIs. Some times it is entirely impossible
to air concerns of the MFIs through the ABC, especially if the
matter is against best interest of the ABC. It would actually serve
a good purpose if the FSB would push for, actually make a proposal
to officially recognize CMA as part of the financial sector itself.
Not only ‘support for development’ as the present proposed
priorities states.
Another concern is the priority mentioned under 1.27 on the micro
level. Supporting retail institutions on the level below licensed
MFIs is not the right way forward. There is already 16 licensed MFIs
in Cambodia, and according to the presentation of NBC another 24 are
lining up to be licensed. The present licensing system promotes
license applications from any and all MFIs regardless of their
performance. For an NGO, particularly one supported internationally,
it is very easy to reach 1,000 clients and 1 BKHR in portfolio size,
which actually means that the institution by default is obliged to
apply for a license. The minimum required share capital is 250 MKHR
(about 62,000 USD), not much for a donor to put up in the name of
the NGO. It is already clear that not all of the licensed MFIs are
operationally or financially viable in the long run. Public support
to non-licensed NGO driven MFIs does not help the situation to the
weaker or weakest licensed MFIs. It would only destroy the
commercial conditions for the entire industry.
A
solution could be to adjust the conditions for licensing, i.e.
number of clients and portfolio size, but above all to increase the
minimum required share capital. That would limit the number of new
MFIs and instead promote consolidation of the sector by operators
not qualifying for own license being taken over by stronger already
licensed ones. That would be a much better alternative for the MFI
sector as a whole, would support expansion to new clients much
better than on public support to non-licensed, non-viable operators.
Finally, an additional concern is the next point of priorities
(still 1.27), support for developing links between NGOs dealing with
destitute and MFIs. This is not a good idea. MFI are commercial
entities, and should not be involved in social welfare programs.
Reason for the misconception may be found in the section “Developing
Microfinance, the next stage”, p. 3.67 on page 40. The statement
that “the destitute having no assets or potential income generating
activities, therefore having no deposits which they could make, or
income by which they might repay any loans granted them. If loans
are granted, it places the destitute in a worse position …” is
simply not true. The destitute are not denied loans because they are
‘destitute’ without deposits or income for repayment. The other way
around, when a loan is granted, it is not done only because the
applicant has (existing) cash flow or deposits for repayment. The
loan is granted to destitute and non-destitute in order to CREATE
the cash flow, which, after repayment may give them a surplus and
eventually pull them out of destitution in the long run. Even the
destitute, the poorest of the poor, without any financial resources,
previous income or savings, do qualify as MFI clients. That’s the
essence of micro finance. Destitution is not a disqualifying
criteria.
Of
course, if the reason for the destitution is obvious, disability or
other reasons, such as drinking or gambling problems, the assessment
of a MFI would be that the individual is not credit worthy. In such
case the MFIs should not contribute by increasing the burden,
putting the destitute in an even worse situation. The statement that
only free service or grants – not micro finance - can be used to
assist them is true. And, I doubt free service or grants is the way
of bringing them into the reign of micro finance services.
In
any case, social welfare programs and micro finance does not mix,
and MFIs should no be requested to be providers of “free service or
grants”. Supporting such ideas should not be a financial sector
priority - it’s a matter for a Social Welfare Blueprint.
Tom
von Weissenberg |
