Cambodia’s Largest MFIs Eye Future as Commercial Banks

Cambodia’s largest microfinance institution, Prasac, underwent a shuffle in shareholders this week as part of a multimillion dollar deal with one goal in mind: to transform into a licensed commercial bank.

Prasac will attempt to join a small club of microfinance institutions (MFIs) that have transitioned into licensed commercial banks, in what has become a recent trend in an industry started more than two decades ago in Cambodia to provide socially minded loans to help the poor generate income.

Three former MFIs—Acleda, Sathapana and Camcapital—have already transitioned from exclusively offering microloans into banks offering a diverse range of services, while Hattha Kaksekar Limited (HKL) has signaled its intention to follow suit.

For Prasac, as with the others, the move to a commercial bank is meant to pave the way for a robust operation capable of serving clients with more assets, placing less emphasis on small loans to rural clients.

The Bank of East Asia (BEA) invested about $78 million to purchase 21 percent of Prasac with plans to focus on their customers who do business in Cambodia as China’s Belt and Road Initiative gains traction here, Peter Yuen, head of strategic partnerships and financial institutions for the bank, said in an email.

“Cambodia is expected to be a favorite destination for Chinese enterprises when they adopt the ‘Go Out’ strategy and expand along the belt and road countries,” he said. “BEA, with its unique presence in Greater China, could play an active role in enabling such trade and investment flows between the two locations on an end-to-end basis.”

The transition from an MFI into a bank is neither quick nor cheap. In Channy, president of Acleda, said the institution invested at least $4 million and spent about two years obtaining a commercial banking license.

BEA will assist the transition process by taking a role in Prasac’s governance, offering resources, such as sharing risk management and treasury management techniques, and referring the bank’s current customers to Prasac, Mr. Yuen said.

Sri Lankan conglomerate Lanka Orix Leasing Company took majority control of Prasac in the deal with BEA, purchasing an additional 48 percent of the company, adding to the 22 percent it already owned. Prasac Staff Company holds the remaining 9 percent of shares.

Chou Ngeth, senior consultant for Phnom Penh-based Emerging Markets Consulting, said new investments from foreign financial giants would accelerate the already rapidly developing banking market.

“There is a good opportunity to bring in new expertise to make the sector more sophisticated,” Mr. Ngeth said in an email.

HKL, Cambodia’s fourth-largest MFI, also proposed to become a commercial bank last January after one of Thailand’s largest banks purchased the institution, though the company has not yet completed the transition.

The transition has recently become more difficult, after the National Bank of Cambodia installed an annual interest rate ceiling for MFIs, said Mr. Channy of Acleda, explaining that investors were unlikely to take an interest in institutions with marginal profits.

“The investors give money to us to make profits, and they would not do that if they can’t make profit, and putting interest rate to 18 percent would make MFIs not earn profits,” Mr. Channy said in an email.

The relatively high annual interest rates charged by MFIs—up to 20 or 30 percent in some cases—is generally justified by the high price of setting up operations in remote areas and overseeing a portfolio full of small and high-risk loans.

Yun Sovanna, general secretary of the Cambodia Microfinance Association, said in an email that the process of converting from an MFI to a commercial bank was a natural progression as they matured.

“When an institution meets a certain level of growth, they need to diversify,” he said, adding that the question was whether these banks continued to lend to lower economic tiers as they grew.

“Some primary banking activities need a commercial banking license to operate,” Mr. Sovanna said. “What needs to be emphasized is whether or not the MFI-converted-bank would keep their double bottom-line mission, which focuses on social elements.”

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