Banking On Poor Borrowers...While Many Banks Face The Abyss

As owner of an incense stick factory with three workers and profits of $8 a day, Van Saroeun is a thriving entrepreneur. Never mind that in monsoon season, from May to October, her clients have to wade through brown water and navigate a slippery log to get to her shop. While others in her dilapidated Phnom Penh neighborhood scrape by on $1 or $2 a day, her business has tripled in five years. "All my children go to school," says the proud 48-year-old mother of six, seated on the second floor of her stilt house while three workers downstairs roll wood slivers in scented shavings and bundle the sticks into brightly colored packages.

One key to Van Saroeun's success is a micro-loan agency whose mission is to make entrepreneurs of Cambodia's poor. Her first loan from Acleda Bank was for $28. Now, after 13 loans, she's up to $325. And Acleda, with a client base of 58,000 noodle makers, fish sellers, motorbike mechanics, and the like, has become the most active lender in Cambodia's struggling economy. Since 1993, when it began as the Association of Cambodian Local Economic Development Agencies, Acleda's loan portfolio has swelled to $15.6 million, managed by 43 branches. But Acleda is not your average nonprofit micro-loan bank. Last October, it transformed itself into a full-fledged commercial bank--and critics accuse it of gouging borrowers.

The bank does takes a hard line. Interest rates run as much as 5% per month for a six-month loan, a rate Acleda says is necessary for profitability. Borrowers must get guarantors to co-sign loans. If they don't pay on time, a credit officer is on their doorstep the same day. Most of the clients are women. "We want to cut down this idea that women can't do anything," says Nok Samnang, a Phnom Penh branch manager.

Business has been so good that on Oct. 7, Acleda took the plunge into the private sector, no longer dependent on aid from the U.N. and others. The former donors are now shareholders. Says In Channy, Acleda's general manager: "They planted this tree, and now it has grown." The bank reported profits of $2.5 million last year and loan defaults of 1%. In Channy says that soon, Acleda will begin offering fixed-rate savings accounts, bank transfers, and payroll services.

But Acleda's market-rate approach has created a debate in Cambodia's aid community. "Often the poor aren't an appropriate target for micro-financing," says one NGO director. "The very poor require soft loans." These critics think interest rates should be 1% or 2% per month. This year, Oxford Famine Relief produced a study that found two dozen families in the province of Kampong Thom "had to sell their land in order to repay Acleda loans." Acleda's In Channy says the bank never seizes collateral but that it is possible some guarantors have gone after the assets of defaulting borrowers.

Competition might offset the problem. But commercial banks that have dipped into the field have found it a money loser. "We don't have the specialized staff for this," says Sar Kim Lomouth, commercial loan director at Canadia Bank Ltd., which attempted a micro-finance project in two provinces but decided not to expand it. So for now, Acleda has the market all to itself.

Meanwhile, in Phnom Penh, the commercial bank industry that started up in the Wild West 1990s is undergoing a shakeout. By Nov. 30, all 27 banks in Cambodia had to comply with a new law requiring them to prove they have a minimum $5 million in capitalization, rising to $13.5 million in a year. Three banks closed promptly, and in December, the National Bank of Cambodia announced eight more would close.

Some bankers think Cambodia isn't ready for such a strict law, but others say it will dispel suspicions about money laundering. "It's brutal for the local banks that have been running a clean small business. But the unwritten intent is to shrink the number of banks and boost their quality," says John Brinsden, vice-chairman of the banking association.

Most Cambodians don't use banks, either because they are too poor or they don't trust them. "This country has lots of money under the mattress," says one banker. But as the economy revives, more budding entrepreneurs may realize that banks have their uses, too.

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