Will Move to Cap Microfinance Interest Rates Backfire on CPP?

The ruling CPP doubled down on Tuesday on its decision to cap interest rates on microfinance loans as a way to help the poor get out of debt, even as analysts called it a political move that would have long-term negative effects on the rural economy.

With the new policy, CPP spokesman Sok Eysan said the ruling party and the government were putting people’s livelihoods over microfinance institutions’ (MFIs) profit margins.

The new logo for Acleda Bank is seen at the bank’s headquarters on Monivong Boulevard last month. (Hannah Hawkins/The Cambodia Daily)

“When the borrowers can’t pay back the money, the debt increases cumulatively and leads to the MFI taking away their land and home,” Mr. Eysan said.

Others, however, said the move was one of electoral expediency in the months before the June 4 commune polls that was unlikely to help reduce poverty, and could throw the country’s microfinance system into disarray.

The National Bank of Cambodia (NBC) announced on Monday that it would cap annual interest rates on all new or restructured loans from MFIs at 18 percent beginning April 1. However, the National Bank said in its own report in November that such a policy could result in lenders “refusing to provide credit to the poor.”

Mr. Eysan said the CPP and the government had examined the issue and consulted with the National Bank—which in turn talked with MFIs—to consider all the aspects of microlending in devising its policy.

However, Huot Ieng Tong, chairman of the Cambodia Microfinance Association and president and CEO of microfinance lender Hattha Kaksekar Limited, said the government did not consult with the country’s MFIs before deciding on the rate ceiling.

“The day they signed and issued the rule is the day they informed us about it,” he said.

The issue quickly became mired in politics on Tuesday.

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

Mr. Eysan, echoing similar claims by CPP officials in recent weeks, including Prime Minister Hun Sen, said the new measure was a response to alleged claims by the opposition CNRP that the party would erase borrowers’ loan debts if they won elections.

“This is the government’s policy after seeing many people were suffering from believing what the opposition party said, that when they win the election they will remove all the bank debts,” he said.

CNRP lawmaker Son Chhay on Tuesday denied the opposition had ever made such campaign promises. “We never said that,” he said. “It’s not our policy.”

Before the interest rate rule was announced earlier this week, Mr. Chhay said the government was shirking its responsibility to prevent MFIs from exploiting borrowers and should better regulate the industry—including by capping interest rates.

The CNRP on Tuesday said it did not have an official position on the National Bank’s interest cap.

Yang Saing Koma, co-founder of the Grassroots Democracy Party, on Sunday cited several other steps the government might take to help reduce indebtedness, including restructuring loan payments, creating tax incentives for MFIs operating in rural areas and reducing interest rates.

Rather than politicizing the issue, the government should properly study the problem and find a policy solution, he said.

A Sathapana bank branch in Phnom Penh without its logo last February (Matt Surrusco/The Cambodia Daily)

“The government may worry because they think the problem of indebtedness can cause them to lose some votes,” Mr. Saing Koma said. “If you want to get more votes from the people, help the people solve their problems of indebtedness.”

The number of households receiving credit from MFIs and NGOs nearly doubled in five years, from about 1.1. million in 2011 to about 2.1 million as of November, according to National Bank data. After total outstanding loans increased by almost 50 percent in 2015, analysts began warning of a credit bubble forming within the sector.

Kem Monovithya, deputy public affairs director for the CNRP, said in an email on Sunday that “the microfinance crisis we have now is due to a lack of proper information and regulations.”

The party has suggested a number of reforms, including: creating personal bankruptcy and consumer protection laws; limiting the number of collateral-based loans for borrowers with no income; and limiting loans to no more than one-third of the borrower’s disposable income, Ms. Monovithya said.

After the rate cap announcement, analysts said on Tuesday that rather than crafting sound economic policy, the CPP was trying to score political points among low-income borrowers—and failing to take into account the larger economic implications of the new regulation.

“Whenever caps on interest rates are imposed, this interferes with the market. When interfering with the market, the usual suspect is politics,” said Sophal Ear, associate professor of diplomacy and world affairs at Occidental College in Los Angeles, in an email.

“The reason any decision like this…is made prior to an election is to be populist,” he said.

With some MFIs operating in the country’s more remote areas currently charging between 20 and 30 percent in annual interest to cover costs, industry experts have said the cap would likely push them to stop giving small loans to farmers who find it hardest to access capital.

Stephen Higgins, a managing partner at investment and advisory firm Mekong Strategic Partners, said on Monday that some people might welcome the lower interest rates at first, but would be disappointed in the long run.

For the CPP, “there will be a short-term political boost as people think they will pay a lower interest rate,” Mr. Higgins said. “However, once they realize they are not going to be able to get a loan, there will likely be a political cost.”

Miguel Chanco, lead analyst in the Asean region for the Economist Intelligence Unit, said he was convinced the cap was a political move, and a bad one.

“We received some clarity on the NBC’s motivation today—and, plain and simply, it appears that the government has pushed the central bank into imposing this interest rate ceiling,” he said in an email. “As such, it is clearer to me that political considerations are likely at play, with the move coming just before key elections this year and next.”

But with the rate ceiling likely to limit low-income borrowers’ access to credit, he said people would eventually have no choice but to turn to unregulated options like loan sharks.

“If anything it is likely to prove counterproductive over the long run,” he said of the rate cap. “Many MFIs won’t be able to afford extending loans at this rate, which will in turn force borrowers to go to informal lenders who are likely to charge even higher interest rates.”

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