Prime Minister Hun Sen last Monday ordered Cambodian microfinance banks to cap their interest rates at 18 per cent a year effective April 1 in an unprecedented move against the advice of the country’s central bank.

Most microfinance banks in Cambodia charge 25 to 30pc a year to borrowers — a high rate compared to commercial lending but relatively low for the industry, according to Mekong Strategic Partners. The monthly rate can amount to 2.5 to 3.8pc.

The policy change is intended to ‘relieve stress’ for borrowers, according to the Phnom Penh Post, but insiders are worried that this will mean lead microcredit banks to curtail lending.

In an unprecedented move, Prime Minister Hun Sen has ordered all microfinance banks to cap their interest rates despite the opinion of the Central Bank

The newspaper reported that as recently as three months ago, the Central Bank warned against an interest rate cap and said it would reduce bank efficiency. Countries with microcredit interest rate caps have seen mixed results, it said, and can push people back into the informal sector if Microcredit banks cut down on lending.

Microfinance is one of the most popular forms of credit in Cambodia and offers primarily poor people with low collateral the opportunity to borrow from a formal institution rather than resorting to a money lender or loan shark.

In exchange, though, interest rates are often higher than commercial banks but lower than on the informal market. Many Cambodian microfinance banks also have internal rules against over lending or selling client assets in the case of default, unlike money lenders.

Critics, however, have pointed to the explosion of growth in Cambodia’s microcredit market, which is one of the most saturated in the world, according to the Microfinance Index of Market Outreach and Saturation. The industry is currently worth $4bn, second only to India.

— ANN News Desk

Published in Dawn, Business & Finance weekly, March 20th, 2017