Cambodia: Central Bank to Put Focus on MFIs
Cambodia, April, 28 2016 -
The central bank’s third annual Macroeconomic Conference in November will have only one topic: microfinance.
“The Microfinance Sector in Cambodia: Opportunities and Risks” is an attempt to get a wider view and deeper insight from various researchers on fostering a robust, stable and sustainable microfinance sector, the National Bank of Cambodia (NBC) said in a statement yesterday.
The NBC said the sector had enjoyed “remarkable growth” since it began in the early 1990s and had been recognized domestically and internationally for its contribution to poverty alleviation and economic growth.
“While the microfinance sector has experienced remarkable growth and accomplished much over the last two decades, it also faces increasing risks within the sector resulting from the rapid expansion of its size and network in line with the development of Cambodia’s economy,” the NBC said. “In order to manage those risks and to continue to support the microfinance sector, the National Bank of Cambodia has been strengthening the legal and regulatory frameworks as well as conducting regular supervision on this sector.”
The bank said regular monitoring of the stability of the sector’s development plays a crucial role in contributing to financial stability as well as fostering the growth of economic activities, especially for small and medium-sized enterprises (SMEs) and the poor.
Cambodia Microfinance Association chairman Hout Ieng Tong also said the rapid growth over the past 20 years could expose the industry to risks and each individual institution must take precautions. “Although we don’t see any risks for the sector while it is still growing, we always keep alert to prevent risks, which can just happen by chance,” he said.
“We are never careless about risks while the sector grows…And our regulator, the National Bank of Cambodia, also recently took action by increasing the minimum reserve requirement for the sector.”
On March 23, the central bank issued a prakas, or proclamation, increasing the minimum capital requirements for deposit-taking microfinance institutions MFIs, requiring them to raise reserves to $30 million from $2.5 million. Other MFIs must increase their reserves to $1.5 million from $622,500 now. MFIs were given two years to meet the new requirements.
According to a report from research firm Mekong Strategic Partners, the move by the NBC will strengthen the financial system. It said that of the eight deposit-taking MFIs, which represent about 90 percent of the market, half already meet the new target of $30 million and the other half are on track to meet it by 2018.
But it sees difficulties for some MFIs meeting the new $1.5 million target. “We believe that around a quarter will struggle to meet the target without a capital injection or merger. As a result, we expect to see some consolidation at the smaller end of the MFI market, although given the very small size of these MFIs, the overall impact on the sector will not be significant,” the report said.
Initially, microfinance institutions were established as NGOs, playing the role of micro-credit providers to improve the living standards of people in rural areas. Since 1999 when the law on Banking and Financial Institutions was promulgated, the sector has developed based more on a free-market mechanism.
The NBC said that total assets of all MFIs was 14.6 billion riel ($3.7 billion), which accounts for 18 per cent of total bank assets.