Preventing overindebtedness in Cambodia: can self-regulation work?

  • Jessica SCHICKS, Belgian Investment Company for Developing Countries (BIO)
  • Speakers
  • Vanndarong PEN, AMK Cambodia
  • Dina PONS, Incofin Investment Management
  • Daniel ROZAS, MIMOSA / e-MFP
  • Isabelle BARRÈS, The Smart Campaign

    Although the microfinance market situation in Cambodia has been discussed for several years now, it is the first time that objective figures are available on its status. Daniel ROZAS, MIMOSA, kicked off this session by presenting these figures, after which a discussion with all panellists followed. Rozas started his presentation by explaining that the situation on the microfinance market is alarming due to high competition of MFIs, client saturation and re-financing and growth of loan sizes. The high loans are regarded the biggest problem, also because of the increasing longer loan maturity. With regard to refinancing, Rozas explained that it is very common that a borrower has a loan with an MFI, when another (or even the same) MFI offers a bigger loan with which the first loan is repaid. The result is that loan sizes grow fast and borrowers end up with too much debt for them to be able to repay. In 2018, 41% of all disbursements were refinanced loans.

    Rozas continued the session by presenting the recent response to steer the Cambodian microfinance market towards a more sustainable path: a new model for self-regulation. This model consists of three pillars: 1) Metrics; 2) Monitoring and; 3) Sanctions. The metrics are formulated in a lender guidelines dashboard, focused on key aspects of the microfinance market in Cambodia such as multiple lending and refinancing. These metrics are being tracked for each MFI by a monitoring system of the Credit Bureau of Cambodia. Raters also look at the dashboard as part of their assessment process. The sanctions are integrated in the model: The Smart Campaign has taken position that those MFIs that want to be certified also have to comply with the guidelines. Hence, not complying with the standards automatically results in losing your certification. Some investors have also started to use these guidelines as part of their due diligence.

    Rozas concluded by saying that this self-regulation model is not overcoming all problems, as it can be cheated on and outside competition can decide not to participate with the structure. Nevertheless, it is the best structure to date since it has been put in place in April 2018. Formal regulation would in his view eventually be the only long-term solution for the microfinance sector in Cambodia.


    The first question was about the relevance of this self-regulatory system for other countries. Rozas replied that it is always important to take key lessons from these types of exercises. Taking into account the specifics and context in which a solution is implemented. This self-regulatory model has also been based on another structure, from which they learnt that it is key to include sanctions and monitoring systems in the model. 

    The discussion moved on to the credit dynamic in Cambodia. PEN explained that more MFIs and commercial players have entered the market, which increased the competition among MFIs. In order to attract clients MFIs relaxed their requirements and offered higher loans. This has become an important push factor. On the other hand, Cambodia moved from being a low income country to a lower middle income country, meaning that people want to improve their lifestyle. This is a clear pull factor: clients request larger loan sizes and start using it for consumption purposes instead of productive purposes. PONS and Rozas added that the average loan size increases and the growing GDP per capita is not aligned. Otherwise there should not be a reason to extend the lending cycles of loans. The reason that this happens, means that it is hiding expenditure argued Pons. 

    The next question from the audience examined the role of investors in addressing overindebtedness in Cambodia. Pons pointed out that today, with the lender guidelines and dashboards in place, investors can see which MFIs are responsible or aggressive lenders. Hence, Incofin Investment Management will not pull out of the market in Cambodia, but will only invest in responsible lenders. Pons argued that, although several players now use this dashboard, it is still not enough. It is key that other potential big lenders get on board too. 

    BARRÈS reaffirmed this. She added that as soon as the guidelines are officially approved, the Smart Campaign will incorporate them in their certification process. This way they encourage self-regulation of over-indebtedness, because certification is an incentive for an organisation to abide by responsible practices. She argued that without sanctions the model is not going to work. Still, she continued, it is important to see what happens in the market when institutions lose their certification. Will investors care or not? That is what matters she stressed. Pons responded that this dashboard is a risk management tool for investors and that the use of the tool has increased. Nevertheless, using is only the first step, it is now important that regulators and players in the microfinance market respond with serious actions to it. Pons said that a possible next step to reach this level of engagement could be to define which investors share the same concerns, so they can make certain collective decisions and have common conversations with shareholders and MFIs.

    The moderator then asked Pen whether he thought that it is possible for MFIs to stick to the set thresholds. He argued that the mere involvement of MFIs is not sufficient. Commercial banks, investors and lenders should all get involved in order to change the financial market situation in Cambodia. Some players seem to care more about their markets, growth and profit than losing their Smart Campaign certification, Pen continued. Therefore, differentiated actions are necessary to provide a clear-cut view of those MFIs promoting responsible lending and those that do not. The Smart Campaign can absolutely play a role in that, but if self-regulation does not work, regulators should come in. 

    Rozas added that regulators are already aware of this initiative however, they don’t endorse it officially. Rozas explained that he sees it as a question of time and influence: if more investors with a major role in the Cambodian market do not anymore lend to MFIs which have lost their certification, those MFIs will become more isolated. Although regulators are unlikely to take drastic actions that slow down (economic) growth, if the initiative comes from the industry itself it will go a lot easier and faster.

    The moderator then asked the audience if there was anyone who believed that there is still a lot of growth space in the Cambodian microfinance market. An audience member said there is certainly room to grow, but in a more difficult way. He pointed out that MFIs now serve the existing customer base, meaning there is little downscaling and low-penetration. Pen argued that the penetration is not that low, because the number of borrowers does not refer to individuals but to households. Nevertheless, he agreed that there is room for growth in rural areas.