Savings-Led and Self-Help Microfinance in Cambodia - Lessons Learned and Best Practices
Microfinance is a powerful tool to fight poverty and transform lives. When poor people have access to financial services, they can earn more, build their assets, and cushion themselves against external shocks. Poor households use microfinance to move from everyday survival to planning for the future: they invest in better nutrition, housing, health, and education. Microfinance can also serve as a means to empowerment.
To reach its full potential, however, microfinance must build permanent local institutions which deliver long-term services at scale. Achieving scale, in turn, is a function of lowering transaction costs to the point where the majority of client segments can be served in a cost-effective manner. It also means offering services that are more useful to clients. This includes not only credit but also savings (and one might add complimentary services which make microfinance more accessible and impactful for a wider circle of clients, including literacy and business training.) These points represent the global consensus on the future direction of microfinance, recently captured in the statement of “Key Principles of Microfinance” developed by the Consultative Group to Assist the Poor (CGAP) and endorsed by Group of Eight leaders at the G8 Summit on 10 June 2004.
This report was commissioned by Pact Cambodia’s WORTH initiative with two objectives. It studies three existing programs in Cambodia with similar characteristics, drawing out lessons learned and best practices for WORTH’s design, though the conclusions should be of interest to a wider community of practitioners. The study also analyzes the current state of microfinance in Cambodia, assesses shortfalls in meeting demand, and suggests that an innovation like WORTH may be a necessary complement to the current microfinance models practiced in Cambodia.
The full promise of microfinance has not yet been fulfilled in Cambodia. This study finds that the majority of Cambodians remain unserved, despite rapid growth in the provision of services over the past decade or recent emergence of a strong group of financially self-sufficient institutions. Some 77 percent of Cambodians lack access to institutional financial services. There is an estimated shortfall of US$120 million in rural credit supply, and the US$1.3 million in savings on deposit with microfinance institutions represents three percent of total potential savings that can be mobilized from rural households.
It is not yet clear how these shortfalls will be made up from among current players in the Cambodian market. This report describes how leading microfinance institutions face real challenges in lowering operational costs in order to reach new segments of the population. Meanwhile, NGO microfinance programs in Cambodia have, in most instances, failed to achieve significant scale or demonstrate the internal management capacity necessary to control costs and develop market-driven products. They also remain dependent on donor funds. Finally, few institutions of any type – bank, MFI or NGO – are working to deliver a safe, liquid savings mechanism for ordinary Cambodians, which is potentially the greatest unmet need of all.
Pact’s WORTH initiative offers a way to reach more of the unbanked poor via a low-cost, savings-led model packaged with complimentary services including literacy, business training and empowerment for rural Cambodian women. This report summarizes findings from a study of three similar programs in Cambodia – Cambodia Community Savings Federation, People’s Association for Development, and the Self-help Group program of Church World Service. Lessons learned are identified in the areas of: limitations and innovations with credit and savings components; accounting systems; forming strong groups at the village level; developing sustainability, trust and ownership; and strategies for driving to scale. The report closes with recommendations for enhancing the WORTH model for implementation in Cambodia.