Microfinance plays an important role in national economic development by providing the poor with access to capital. Where as commercial banks typically operate in urban areas and serve an urban clientele, microfinance institutions (MFIs) generally service a rural population who lack access to comprehensive banking services.

Microfinance evolved in Cambodia in two distinct phases, before and after the year 2000. Prior to 2000, microfinance was largely unsuccessful. P e ople did not understand the role of microfinance and there was little cooperation with the international community. The international community, which provided the funds for many microfinance banks, did not providing good support to bank operators.

The turning point in Cambodian microfinance can be attributed to the implementation of t he Microfinance Management Law, which was passed in 2000. The law allowed the microfinance sector to grow through January 2006.

Under the guidance of Prime Minister Hun Sen , the Cambodian Microfinance Association (CMA) conducted the National Conference on Microfinance in 2006, to bring together various stakeholders to study the success of the microfinance sector. The CMA recognized that “microfinance is the key to break ing the cycle of poverty .”

The conference identified four reasons for microfinance's success:

1. Clients learned the role and purpose of microfinance to increase capital for small businesses . Clients followed procedure s to pay back interest and principal on time.

2. Microfinance operators have strengthened their capacity through implementing increased professionalism and transparency. Loans were given to people for the correct purpose. It also stressed cash management through on time payment.

3. International financial institutions have built trust and recognized the success of microfinance in Cambodia over other countries in Southeast Asia. Cambodia received 7 of 17 available awards in 2005-2006 among 17 for financial transparency from Consulting Group Assist to the Poor, CGAP (New York, USA).

4. The Royal Government of Cambodia created the National Bank of Cambodia to organize the proper legal structure to manage and assist the microfinance sector. Particularly, the government implemented a free economic market policy.

Currently, Cambodia has 18 MFIs and one commercial bank that reach 24 provinces through 623 branch offices. According to a report from Cambodia Microfinance Association (December 2008):

Should microfinance banks seize collateral or payment from its clients?

When the global financial crisis began to affect the Cambodian economy, microfinance operators were concerned about defaulting payments or the need to seize client collateral. The purpose of microfinance is to improve people's living standard and participate in economic development. Therefore, confiscating clients' property or collateral does not follow the intended purpose and also does not allow for the sustainability of the microfinance sector.

While there may be mortgage agreements between lenders and borrowers, in the real practice, MFIs do not confiscate any collateral from defaulting clients. This often occurs as a result of legal collection issues, particularly in court. The principal of microfinance states that the success of clients is the success of microfinance institutions. Microfinance cannot be successful if its clients fail. It is not in the best interest for an MFI to seize client collateral.

How should banks approach defaulted loans?

Microfinance banks make profit by getting money from interest rates and other fees from their client. It is important that a microfinance bank receives the full principal and interest from each of their clients to ensure sustainability. Each loan contract should clearly mention loan terms and the payment amount for each payment. To build trust in borrowers, MFIs should fulfill their obligation by paying all loans on time. This is how Cambodia has gained the trust of international investors who provided capital to the Cambodian microfinance industry.

To ensure adequate and on time payment, MFIs need to ask their clients to pay back loans on time and in full. When clients do not pay their loans back on time, many MFIs must in turn pay back their investors late. Some people believe that payment should be delayed because of the current economic situation. The argument for this policy is understandable, but its implementation is very risky. Many countries, including Cambodia, have implemented delayed payment policies and encountered further problems. This is one reason for Cambodia's low success rate with microfinance in its first phase, from 1993-1999.

Are defaulting payments caused by the f inancial crisis?

Historically, default rates are between 1% - 5% of a client portfolio. Late payments have always been present and, therefore, are not necessarily a product of the global financial crisis. Some degree of default will always be present in microfinance.

In the experience of financial operators, late payments are often caused by mismanagement of capital or the use loans for reasons other than intended. Some clients may lie to credit officers about their debt in order to receive loans from multiple microfinance institutions; having simultaneous loans with different microfinance institutions will increase a client's risk. Many microfinance loans are used toward agricultural or small business loans, which are local in nature and are not affected by the global economy.

Entrepreneurship is the best solution to improve the lives of the poor. The entrepreneur, or loan recipient, must be responsible for the success of his or her business, including expenses, income and debt. Any temptations to evade responsibility will not only hurt their business but cause other stakeholders/business to lose trust. This may cause them to remain in poverty. To ensure success, loan recipients should take responsibility for their business and for make payments on time and in full.

To build trust in the Cambodian financial market and to ensure the sustainability of the microfinance sector, operators should hold their clients responsible to abiding by their loan contract. To meet this commitment, microfinance operators must improve the quality of each loan. For example, MFIs should refine client assessments to avoid giving loans to clients with outstanding loans at other banks.

Using microfinance for development is challenging. Cambodia would not be successful today if not for the efforts of people, microfinance operators, international financial agencies and the government. Together, these parties bring new technologies to respond to the growing needs of people to develop economically. On behalf of Cambodia, its prosperous culture and civilized country, we should feel privileged to stand as other countries in the world.

People who evade debt and responsibility are weak; they lose trust and the opportunity to develop their country. On the contrast, if we take responsibility for our finances, we will show the world the strength of Cambodia, and we gain trust, respect and make progress in development.