With only slightly less than 300 Corona cases Cambodia seems so far to be containing the spread of covid-19 without too many tears. Unfortunately this success doesn’t mean Cambodia is immune for an economic storm that has surfaced in the wake of containing measures against the virus. Incofin Investment Management sees the struggle of many Cambodians as their cue to step in as committed impact investor and to come across with a range of loan agreements to strengthen their microfinance partners in Cambodia.
Vuthy Chea, Deputy Regional Manager Asia for Incofin IM, confirms that the timing for the loan disbursements was not accidental at all: “Incofin has been active in Cambodia for many years and has built sustainable partnerships with important, resilient microfinance institutions. Given the impact of the crisis on the Cambodians, we decided to shift up a gear. We are strengthening the liquidity position of our microfinance partners, which in turn gives them the opportunity to show the necessary flexibility for the many Cambodians who suddenly find themselves in difficulties to repay their loan. Many of my compatriots have seen their income at least partially lost due to the consequences of the Corona crisis.”
Vuthy Chea points out that not every sector was hit equally: “We see less impact on the agriculture sector. A lot of Cambodians who chose to migrate before the crisis came back to their home village where there are less restrictions hence a good inflow of potential workforce on the fields. So, for people coming from the cities it is a matter of time to find what they can do in their hometown. At the other hand, a sector in Cambodia which is currently facing some difficulties is the garment sector, footwear and clothing. The sector was not totally unprepared because of the decision of the European Commission in February to withdraw part of the tariff preferences granted to Cambodia. This would turn out nevertheless to be a smaller event in comparison with COVID-19. With a limited demand from Europe and the United States, the supply chain was restructured. For raw materials that go into the making of clothes Cambodia relies on China and those lines were disrupted quite early. Some factories are closed which caused 150,000 jobs to get suspended in the garment sector.”
Also tourism was a sector that was heavily impacted by the pandemic. While Cambodia attracted in 2019 over 6.5 million visitors from abroad, travel restrictions caused a collapse of the tourism industry: attractions such as Siem Reap and the nearby Angkor Wat temple complex were virtually empty in the first half of 2020. The hardest blows therefore fall precisely in those sectors on which the Cambodian economy is based upon. According to World Bank figures, these two sectors, together with the transport sector, account for nearly 40% of all jobs and are responsible for 70% of the economic growth. This caused an economic slowdown and a spillover effect to other economic branches including the financial sector.
Impact of Covid-19 on the Cambodian microfinance sector
“No doubt that there is an impact on the MFI sector”, confirms Kea Borann, CEO of AMK and the Chairman of the Cambodian Microfinance Association (CMA). “We expect that the sector growth will be put on pause and might even experience a small decrease. The impact may stay across 2021 as people need time to recover. Nevertheless we see a pressing need to support the agriculture sector and small trade and commerce businesses to meet the local demands. 60% of the Cambodian population is doing small scale farming. Smallholder rice farmers need for example about USD 800 to prepare for the planting season.”
Therefore, the additional funding that Incofin is now making available to its partners in Cambodia are coming at an appropriate time now that their activities will also come under temporary pressure. At the same time the sector sees in the near future a greater need for microfinance services. Sok Voeun, CEO of LOLC Cambodia, testifies: “We see again more activity, but the credit demand has been down because of less client’s business activities and conservative assessment from microfinance institutions. In terms of loan collection, there is no significant change.”
For Vuthy Chea the resilience of the Cambodian population stands out and she applaudes the continued support from investors in the microfinance sector to strengthen the Cambodians. “Cambodia is a country where a collaborative approach works the best, also thanks to the leadership of the microfinance association and the central bank. On March 27, the National Bank of Cambodia (NBC) urged microfinance institutions via a circular to help clients in need with loan restructuring. According to CMA, 190,000 clients in the microfinance sector came to ask for a loan restructuring and about 90% of the requests were approved. So, as of the end of May, the total value of restructured loans was around USD 880 million. When everything is rosy, it is easy to finance MFIs. It is in turbulent times like these, that you test your own commitment and your relationship with your investees. We pay attention to restructuring needs, provide continuous funding support and emphasize coordination with other lenders in the region. Despite the economic impact, funding support to continue and revive the businesses is very crucial.”
A shift from informal lending to safer formal sources of lending
Microfinance has demonstrated its merits in Cambodia in the past, notably in its contribution to the spectacular socio-economic reconstruction following the bloody civil war of the 1970s-1980s. Micro loans were an important puzzle piece in the success.
Vuthy Chea: “We see also more recently that responsible lending of microloans play an important role in bringing more security and welfare for Cambodian small entrepreneurs and their families. Not in the least for those on the countryside, for whom an easy access to financial services is not self-evident and many of them would otherwise depend on informal sources with often no scruples. Informal lending brings higher interest rates and less protection for the borrower.”
“With more and better financial knowledge people can protect themselves better against usurers and take better borrowing decisions.” – Vuthy Chea, Deputy Regional Manager Asia for Incofin IM
A 2019 report of the World Bank recognizes the same evolution; it calculated that the share of households borrowing from formal sources increased from 8% in 2004 to 30% in 2017, while the share borrowing from informal sources decreased from 32% to less than 6%, while the overall share of households accessing credit has not changed significantly. Cambodian microfinance institutions made it possible for borrowers to shift from informal to formal sources of credit, especially among the poor.
Nevertheless some families were allured into over-indebtedness, usually by rogue market players and looser lending practices, threatening to lose their land and property. Under the guard of CMA and NBC cooperation between local and international community has contributed to the development of more responsible lending practices.
Vuthy Chea emphasizes that one must remain alert to this problem: “We acknowledge that microfinance is a mature sector in Cambodia and that the already existing problem of families putting themselves in too many debts is increasing. But we believe in our investment process and the prudent approach and strong adherence to responsible financing and client protection principles of our partnering institutions. Incofin has pioneered important guidelines for protecting responsible credit servicing. A follow-up to this project is currently being prepared. We can expect the results of this by the end of this year. Another important factor is the financial literacy of the people. With more and better financial knowledge people are better protected against usurers and take better borrowing decisions.” Incofin’s investees in Cambodia are aware of the importance of education and invest in trainings and other learning forms to improve the financial literacy of their clients. Dinn Dos, CEO of Amret: “Amret provided financial literacy trainings close to 4,000 participants over 2 years. These trainings entailed topics like basic budgeting and accounting guidelines, how to manage and separate personal from business expenses, etc. We had plans to accelerate the training programs in 2020 but unfortunately the above plan was disrupted by the Covid pandemic. Soon we will restart the trainings with smaller classrooms.”
LOLC for example just concluded a series of educational radio programs “Idea for Growth” which was dedicated to financial literacy. Also Amret is running since 2015 a financial literacy program and is about to start a new training project on budgeting and saving. More importantly, the NBC has launched various financial literacy campaigns where most recently focus more and more on women entrepreneurs.
While in the past there were moments where Incofin decreased its investments in microfinance in Cambodia, now Incofin is convinced microfinance can help the Cambodians to recover from the economic damage caused by the pandemic. Dina Pons, Co-Regional Director, Asia and Partner at Incofin concludes, “In the past, because we did not want to fuel the market with too much liquidity, this is the reason why Incofin made the concerted decision to reduce its total exposure in Cambodia. Today, we know that there are a number of organizations that maintain responsible lending practices and which might be facing difficult times because of the pandemic. We want to be at their side to help them weather the storm together and ensure that their end clients can be given enough breathing time and new funding to restart their economic activity and move forward.”
Recent lending to Cambodian microfinance institutions directly involving Incofin IM:
• USD 5 million to AMK
• USD 15 million to Amret
• USD 4 million to LOLC
LOLC (Cambodia) Plc. (“LOLC”) is a rapidly growing, regulated microfinance institution with a focus on serving entrepreneurs and families at the base of the socio-economic pyramid with the economic opportunities to transform the quality of their lives. LOLC was established by Catholic Relief Services in 1994 to enable rural women to gain access to financial services that they could use to finance their microenterprises. In 1999, LOLC was the first regulated microfinance institution in Cambodia.
Amret is a leading micro-finance institution and one of the top 10 financial institutions in Cambodia. It is a full subsidiary of the Advans group and has earned a respected national and international reputation as a responsible and innovative institution. Throughout its evolution, Amret has remained true to its mission – to provide underserved clients with financial services tailored to their needs.
To support Cambodian entrepreneurship Amret has developed a suite of financial services, including flexible and easily accessible loans for farmers as well as for medium loans for micro, small and medium enterprises. Moreover, Amret is offering a full suite of deposit, saving, payment, and transfer services for rural and urban households and enterprises to manage their budget and realize their projects all over Cambodia. All these services are delivered in our branches and via several digital channels with the outmost professionalism and with a particular emphasis on high quality customer service and personal relationship.
AMK is a leading microfinance institution in terms of outreach and customers served. As of 31 December 2019, AMK has a coverage of 90% of total villages across Cambodia with a total of client accounts of over 912,000 with a loan portfolio of over USD 326 million, and deposits of nearly USD 178 million.
AMK’s mission is to help large numbers of poor people to improve their livelihood options through the delivery of appropriate and viable microfinance services.
About Incofin IM
Incofin Investment Management (Incofin IM) is a leading emerging markets focused impact fund management company, focused on rural and agricultural finance and driven by a desire to promote inclusive progress. As such, Incofin IM strives to provide the support entrepreneurs need in order to build sustainable businesses and to improve the lives of the more vulnerable or less privileged people. Incofin IM is an AIFM licensed fund manager and has over EUR 1 billion in assets under management. Incofin IM also provides tailored Technical Assistance which aims to improve capacities of its investees to maximize financial and social returns for the benefit of the end client. Incofin IM has a team of more than 60 professionals spread over the headquarters in Belgium and local offices in India, Colombia, Kenya and Cambodia.