Cambodian Law on the Calculation of Interest Rate on Microfinance Loans
Since 2001, the use of the flat interest rate calculation method on microfinance loan products has been prohibited in Cambodia through the National Bank of Cambodia‘s Prakas on the Calculation of Interest Rate on Microfinance Loans. As a result of this legislation, all microfinance institutions (MFIs) in Cambodia charge interest on the declining balance of the loan amount.
The Prakas on the Calculation of Interest Rate on Microfinance Loans set an important guideline for the practice of transparent pricing. Banks, licensed MFIs, registered and unregistered NGOs, and mutual savings and credit associations are all subject to this set of regulations.
For the NBC, this policy achieved two objectives:
- It drastically improved the environment for competition among MFIs in Cambodia. In a transparent market institutions can begin to set prices based on those of their competitors, ultimately leading to more efficient pricing and in an overall decline in costs for borrowers.
- The Prakas was also an important first step toward improved consumer protection, enabling microfinance clients to both act as informed consumers as well as benefit from the decline in prices that resulted from the policy.
MFTransparency highlights the Prakas as a simple but effective pricing disclosure policy solution. The full text of this important policy can be read in the attached briefing.