Cambodia microfinance: it's not all about credit, savings matter too

Tuesday, 31 May 2011
Guardian.co.uk

Liz Ford: Nobody is too poor to save, insists Care International, which supports community microfinance initiatives that offer safe and efficient ways to put money aside

Sarom Eng, 55, has five children. She perches on a wooden slatted bench in her village, Preytotung, in Battambang province, as she speaks about her business ventures. Family members, including her daughter and one of her five grandchildren, neighbours and animals mill around the garden that surrounds her small stilted wooden house as we talk. Lined up opposite the bench are huge plastic bags full of kapok fibres, which have been plucked from pods that hang from nearby ceiba trees, and are ready for sale.

Eng has developed a good seasonal business, buying the pods from farmers who have the trees on their land, and selling the kapok to companies that make mattresses and pillows. It has been funded through loans she's taken out from the Khum Chrey community-based microfinance organisation (CBMIFO). She's on her third or fourth loan now – the most recent for 1.5m Cambodian riel, about $370. She employs neighbours and family to help pluck and bag the kapok, and she expects to get a 50% rate of return when she sells her goods. "I've never had a problem with paying the money back. I usually pay back before I need to."

The income generated, along with money earned from selling fruit up along the Thai border and from growing rice in a field about 4km from her home, means she can support her children and grandchildren, and save money.

After all the recent controversy surrounding microfinance – such as reports of unscrupulous lenders and the suicides of those under pressure to repay loans, particularly in the Indian state of Andhra Pradesh, and the very public spat between Muhammad Yunus and Grameen, the microfinance bank he founded – Eng offers an example of what can be achieved from the informal banking sector, if it's done right.

La Morm, from Svay Chrum village in another part of Battambang province, offers another. Earlier this year, Morm, 46, borrowed 2m riel ($490) from her local CBMIFO, which she used to buy two sewing machines for the business she runs from her home. Morm started her sewing business years ago to supplement the income generated from the family's fruit farming. People from across the region come to her house to have their clothes made for special occasions, and the space under her stilted house is lined with coloured fabrics and threads twirled around bits of bamboo. She believes the new machines will bring in an extra $75 a month. "It would take a long time to save and buy the sewing machine outright," she says. "I wanted to expand the business because there was more demand. I took the loan out a month ago and I'll pay it back in a year." The new machines will also allow her to train neighbours to sew and employ more people.

Eng and Morm belong to microfinance institutions (MFIs) that are supported by the Cambodian Community Savings Federation (CCSF), an organisation set up and funded by the NGO Care International in 1998, but which now operates as an independent NGO and rural credit operator.

The CCSF helped established microfinance projects for villages around Battambang, in Cambodia's north-west, to develop the area after years of abuse by the Khmer Rouge, which was driven from the region in the late 1990s. Over the past 13 years, small village-based groups have merged to form bigger institutions that now employ their own staff and have their own offices where people can come to discuss loans, make deposits or take out savings at the counter.

The CCSF provides capital to, and oversees the operations of, up to 33 CBMIFOs now set up in 13 districts in Battambang. It also offers support and training to 230 staff employed by the CBMIFOs. The CCSF gets its funding from development institutions, such as the sustainability oriented Rabobank in the Netherlands.

The improved security in the region and better road access from the capital, Phnom Penh, has led to an influx of microfinance institutions to the province. This offers huge opportunities, but also the potential for the problems that we've seen in India.

Pisey Phal, the chief executive of CCSF, emphasises that her organisation is concerned with poverty alleviation, not profits. "The CBMIFOs are like credit banks. They know the community very well, which reduces some of the problems," she says. "Traditional banks are very formal and strict in their repayment schedules. In our case, [CBMIFOs] provide a seven-day allowance for borrowers. If they are busy on the repayment due date, they can pay within seven days without a penalty, which helps our members."

And there's a strict set of criteria that have to be met before a loan can authorised.

Anyone who wants to take out a loan must have a permanent address, an existing legal business, they must be able to demonstrate the ability to repay and have a good credit rating – background checks are made with village elders and, if dealing with large amounts, with commune chiefs (who oversee between 10 and 15 villages) and all loans have to be signed off by the local authorities. Loans for more than $75 require a site visit to the business. Repayment schedules are decided when the loan is taken out, which can be up to two years. In certain cases, borrowers can pay back the money in bulk after crops have been harvested, or pay back within six months. Interest rates on repayments are a maximum of 3% a month.

Crucially, though, a borrower must be saving at least 1,000 riel a month with the CBMIFO.

Savings are often the forgotten part of microfinance, but provide an important safety net for anyone not able to access the formal banking system. CBMIFOs offer a 7% annual interest rate on savings.

Sarom Eng has been depositing money with the CBMIFO for 11 years and would prefer to take out loans than dig into her savings, which she says she wants to keep for emergencies and to help support herself and her husband when she gets older.

Unlike some banks, which require payment to open an account, Eng doesn't have to pay a fee to the CBMIFO to save there.

Ajaz Ahmed Khan, a microfinance adviser with Care International UK, says there is too much emphasis on credit and not enough on savings when people talk about microfinance.

"Nobody is too poor to save, but they can save in inefficient ways. They can save in animals, for example, or store money under the bed. Not all people want a loan, but most people will want savings, especially if you get some interest from it. CBMIFOs provide a safe, secure and accessible way of saving."

New initiative

Cambodia is the latest country to be added to the list of the states supported by Care International UK's new microfinance initiative, Lendwithcare.org, which was launched last year. It wants to encourage supporters from around the world to offer small loans to people in Cambodia, Benin, Togo, the Philippines and Indonesia through local MFIs.

Profiles of the people who have had their loans approved by MFIs in these countries, such as CBMIFOs in Battambang, are published on the Lendwithcare.org website and the public can make loans to specific businesses. Once the full amount of the loan has been pledged, the money is transferred to the MFI to cover the loan, which will have already been given to the borrower. When the borrower pays back the loan, the money is then transferred back to the supporter. The initiative provides another income stream for MFIs, which means they can support more local people, and it also reduces the risk of the loans as they are effectively taken over by Care.

Khan says this could mean CBMIFOs take more risks – such as supporting poorer people, who often miss out on the benefits of microfinance because they have little or no collatoral – as Care is covering the costs. "There is no downside to the MFI," says Khan, who assesses the MFIs before they can be part of the Lendwithcare.org project.

Khan is clearly a supporter of microfinance, but is very much a realist about its potential. "People oversold microfinance. It was never going to be a panacea. But it is a way to help restore people's dignity. People want to help themselves, people don't want handouts.