Moral dilemma inescapable if investing in microfinance


An ATM owned by Prasac Microfinance Institution in use at a branch in Cambodia’s Kampong Speu province.  Source: Phnom Penh Post

Imagine that you could earn 4.75% interest for a term deposit of only one month.  Might you prefer a one-year term?  That would get you 9.75% per annum, and shorter or longer terms also are available at commensurate rates.

Do those rates sound too good to be true?  They are not.

With such returns offered by Prasac, one of Cambodia’s leading microfinance institutions (MFIs), the wise investor can ignore appropriate skepticism when making a deposit either in U.S. dollars or the local currency, riel.

In the sense of risk, such returns have been quite safe.  In the sense of the source of that income, well, that arguably suggests a different point of view.

As excellent op-ed analysis in a recent issue of the Phnom Penh Post notes, MFIs emerged basically to do some good:

Nearly all of the country’s biggest banks and MFIs (eg Acleda and Prasac) can trace their roots to small nonprofit organisations in the 1990s that were originally funded by foreign donors who wanted to rebuild the social and economic fabric of the country after decades of civil war.

However, following international trends in the microfinance industry over the past two decades, these organisations have made a dramatic shift in their banking structure by becoming for-profit, commercial ventures not dependent upon donors and that can provide their services to more people.

Unfortunately, doing good for the nation’s populace seems less a goal than doing even better for the investors in micrcofinance institutions.  To attract investments in the country’s economy and provide lucrative returns, Cambodia’s MFIs must charge borrowers — who mostly consist of Cambodia’s desperately poor — what would be considered usurious interest rates elsewhere.

A farmer needing to borrow $5,000 because his crop failed, a family who needs urgent medical care for a son critically injured in a motorcycle accident, a shop owner who suffers fire damage — each will have little recourse beyond a relatively small loan from an MFI or from a private lender at even higher stratospheric rates.

Rarely having savings, they have until recently ended up having to pay generally 20-30% interest for the privilege of borrowing from an MFI.

Moreover, the possibility of meeting the loan’s demands is not great.  The borrowers frequently have no other option than to borrow from another MFI and thus go even more into debt.  It is a cycle that is, for many Cambodians, nearly impossible to break and can jeopardize any modest collateral that sometimes is demanded.


Headquarters in Phnom Penh of ACLEDA Bank, which has a thriving MFI business.  Source: ACLEDA

Concerned about the cost to the poor, the authorities recently capped the rate at 18%, but the MFI industry points out that the ceiling may well reduce profits and the number of investors, then drive out smaller MFIs and thus the number of loans available.  In any case, 18%!  Last year, deposits in MFIs boomed and the institutions are now are pleading for relief from the cap.

Finding a balanced approach to the disparities could not be easy.

Lowering interest rates charged borrowers — if enforced — has to be desirable.  But thereby lowering the rates that investors can earn probably means that not so much money will available to lend Cambodians in desperate need.

For thoughtful investors contemplating a term deposit in an MFI, a moral dilemma is inescapable.

Do they take the moral high ground by refusing to participate in a system that financially rapes poor Cambodians?  Or do they otherwise punish a people whose survival depends on the ability to borrow money at sky-high rates that raise eyebrows in the developed world?

Theoretically, do I when investing in an MFI deprive them by indirectly exacting too high a cost for their loan?  Or do I deprive them by withholding money they could borrow if my investment would make more funds available?

Should I take a portion of my bank account that returns virtually no income in a conventional bank here and invest it in an MFI?  (Since the nation is dollarized, doing so is easy enough.)  I have yet to do so, but I have to say that those rates are tempting along with a possibility of providing the limited good that might result from such an investment.

It must be obvious that I have been wrestling with the question, and I have a feeling that my persistent inertia is already suggesting the answer.



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