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Cambodian Law on the Calculation of Interest Rate on Microfinance Loans

Published on June 20, 2012

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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:

  1. 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.
  2. 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.

One Comment

  1. Lacey says:

    This is a pretty awful saummry of microfinance institutions and networks. First, let’s get a few things clear:1. Grameen Foundation, ACCION, WWB, and FINCA, and Opportunity International are networks. Unitus is a market accelerator.2. FINCA and OI tend to own all of their MFIs. They become FINCA Uganda, FINCA Tanzania, Opportunity Ghana, etc.3. Different networks provide different types of technical assistance. Grameen Foundation is very strong in social performance, ACCION is great on investor preparedness, Unitus is wonderful and scaling organizations and helping them manage growth.What are the costs to the free TA? Ask any MFI and they will tell you that the reporting entailed in any network relationship is hardly free. There is a feedback loop in organizations evading certain networks (I’ve seen as much in the field) because the cost-benefit analysis isn’t sufficiently favorable.Finally, networks moved to technical assistance in large part to strengthen organizations so that they could attract non-subsidized commercial financing. Pump priming with grants to make an organization sustainable and scalable in the long term may be a great investment, if done right.