‘Like Using a Wall to Stop a Runaway Bus’: Cambodian Microcredit is Overheated, But Rate Caps Aren’t the Answer

next billion, 10 May 2017

There is nothing so convenient as arguing against a straw man. You dress it up in whatever way you want, then tear it down, feeling great about the accomplishment.

That’s what Milford Bateman does in his recent NextBillion article, “Don’t Fear the Rate Cap: Why Cambodia’s Microcredit Regulations Aren’t Such a Bad Thing.” He starts with the rather startling – and entirely unsupported – assertion that the rate cap announced in Cambodia is an effort to “to avert an otherwise inevitable and destructive meltdown.” He then proceeds to raise an entire army of strawmen in the form of arguments I apparently made in my article in the Phnom Penh Post, none of which are there.

Did I “steer blame away from those responsible for the current crisis in Cambodia”? Where did I write that “the supply of microcredit will completely dry up as a result of government intervention”? Did I write “if the microcredit sector is constrained in some way or its growth halted, the poor will flock to the local money-lender to satisfy their huge thirst for microcredit”?

It may work in today’s political environment, but for a credentialed academic, such license with truth and facts is simply not acceptable. The trouble is that this approach pervades the entire article.

more ->

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Categories: next billion

Interest rate cap will hurt rural families

Phnom Penh Post, 21 March 2017

On March 13, the National Bank of Cambodia announced a major new policy. Starting April 1, all microfinance institution operating in Cambodia will be required to lend at interest rates no higher than 18 percent per year. This is a deeply misguided regulation that will undo over a decade’s worth of successful financial policies.

At the dawn of this century, Cambodia’s financial sector was largely nonexistent. There were no ATMs, few bank branches, and equally few customers. In rural areas, there were no banks at all, and moneylenders held a monopoly on lending.

How times have changed!

Today’s village household has far greater control over its finances and is deeply connected to Cambodia’s growing economy. A farmer can borrow from a microfinance lender to buy seeds and fertiliser and set aside savings to help pay for his kids’ school fees. He can finance a solar panel to charge the phone that lets the family stay in touch with older children in the city, who themselves can send money home to the parents cheaply and reliably. None of this even requires the three-hour trip to town – a loan officer from a microfinance institution visits the village each week, while the village shopkeeper doubles as a microfinance agent who can send and receive payments. This picture is repeated in house after house, village after village, from the outskirts of Phnom Penh to the remotest corners of Cambodia. Today, in rural areas alone, half a million clients hold savings at microfinance institutions, and over a million borrow from them.

The new regulation puts all that under threat. more →

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Microenterprise Economics: High returns, low incomes

e-MFP, 13 January 2013

It’s a question that comes up at nearly dinner discussion of microfinance:  why are the interest rates so high, and how can poor clients afford them?  So, you have the answer – interest rates are high because operating in difficult environments is costly, and because those costs have to be recouped from small loans.  After a few examples (it costs the same $10 to make a $100 and a $1000 loan…), you eventually set your questioner at ease that most MFIs might not be ripping off the poor after all.  But after all that, you’ve largely forgotten then main point of the question – how can the poor afford it?

After reading yet another article questioning the affordability of microfinance loans, it occurred to me:  microfinance clients face the same economics as the MFIs.  Consider your typical market trader.  She buys stock to resell.  The cost of the stock, together with some fixed assets, constitutes her investment capital. What are her returns?  I propose that they must be high as a matter of principle.  More →

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The Day After Chiapas: Imagining a repayment crisis in Mexico

Financial Access Initiative, 27 March 2013

A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis.  No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start.  In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help.  But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness.

Let’s be blunt:  not all countries are created equal.  Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh.  Back then I compared a possible crisis in India to the crisis in Bolivia a decade before:  “India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling.”  Well, Mexico is no India.

A full-blown crisis in Mexico would be unlike anything we’ve seen, easily surpassing the negative impact of Andhra Pradesh. more →

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Categories: Financial Access Initiative