Central Bank Sets Interest Rate Ceiling, Sparking Fears

The National Bank of Cambodia announced on Monday that it would set an annual interest rate ceiling of 18 percent for all microfinance institutions (MFIs), sparking concerns that lenders would stop offering smaller loans that often keep the most financially vulnerable afloat.

The measure, set to come into effect on April 1, contradicts conclusions drawn by a National Bank researcher in a report released last year that advises against establishing interest rate ceilings, citing harmful effects on small-scale borrowers.

Motorists drive past the National Bank of Cambodia in Phnom Penh last year. (Siv Channa/The Cambodia Daily)

With the average annual rate on high-risk, small loans currently running from 20 to 30 percent, the new ceiling will “prevent heavy indebtedness and reduce poverty, prevent clients from being charged too high interest rates by microfinance institutions and encourage the effective use of loans,” the bank announced in a statement on Monday.

A second statement released by the central bank said the new rules would only apply to new or restructured loans. Central bank officials could not be reached for comment.

According to a National Bank report by Leng Soklong, then a deputy chief at the bank, released in November, the imposition of an interest rate ceiling may result in “banks refusing to provide credit to the poor.”

The report says rate caps may increase non-interest costs for borrowers, decrease access to smaller loans and ultimately expand the market for illegal and predatory lending.

Analysts on Monday echoed many of the concerns raised in the report, with some saying the mandatory reduced interest rate could have far-reaching effects on MFIs and borrowers alike—especially the very people the government says it is aiming to help.

Chou Ngeth, senior consultant at Emerging Markets Consulting, predicted the measure could cause half of all MFIs operating in the country to go bankrupt.

“When you set a new policy like this, their revenue will decrease, but their fixed costs like salary, rent and the financial costs of borrowing from foreign countries stay the same,” Mr. Ngeth said.

“The smaller the loan, the higher the interest rate, which can be up to 2 or 2.5 percent per month, which adds up to 24 to 30 percent of interest per year. Some might be higher depending on the institutions,” he said.

“Even when we see the rate to be so high, especially some [MFIs] that operate in smaller communes in rural areas, it is supposed to be that way because they need higher operation costs to set up in such rural areas.”

Stephen Higgins, a managing partner at investment and advisory firm Mekong Strategic Partners, said most of the large MFIs have operating and other costs that exceed income from an average 18 percent interest rate on their loan portfolio.

“At 18 percent, that means it will be loss making for most MFIs,” Mr. Higgins said. The result: Lenders will stop offering smaller loans of about $500 or less, cutting off access to credit for many poor people.

“From the first of April, it’s going to be incredibly difficult for small farmers to get a loan,” he added. “Anyone who wants a small loan will not get one unless they go to a loan shark.”

The residual effects on the national economy “will be quite severe,” he said, as MFIs pump an estimated $1 billion into the rural economy annually. The gross domestic product was about $18 billion in 2015.

“A lot of people are going to struggle to buy fertilizer, struggle to buy seeds, unless they go to a loan shark that is unregulated,” he said.

Microfinance loans also pay for things like home improvements, he noted, which means sales for local material suppliers and work for local laborers.

“All that economic activity will come to a halt,” Mr. Higgins said.

However, Prime Minister Hun Sen posted a message to Facebook on Monday evening claiming that the interest rate ceiling would help alleviate the problems caused by high interest rates.

Some people, he said, “borrowed money from private financial institutions, which have a high interest rate of up to 20 to 30 percent in one year, which causes them problems.”

The 18 percent annual interest rate would be established “to push the pace of poverty reduction and improve the lives of the people,” he said.

The decision comes amid a public relations blitz by the government to distance itself from MFIs, most notably through ringtones deployed by major mobile operators telling people that the institutions are private and in no way controlled by the state.

Those messages were necessary, the prime minister explained, because some politicians were promising to erase MFI debt if they came to power, which he noted would cripple the banking system.

(Additional reporting by Matt Surrusco and Van Roeun)

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