> Posted by Daniel Rozas, Independent Microfinance Consultant

The following post was originally published in The Phnom Penh Post.

On March 13, the National Bank of Cambodia announced a major new policy. Starting April 1, all microfinance institutions operating in Cambodia will be required to lend at interest rates no higher than 18 percent per year. This is a deeply misguided regulation that will undo over a decade’s worth of successful financial policies.

At the dawn of this century, Cambodia’s financial sector was largely nonexistent. There were no ATMs, few bank branches, and equally few customers. In rural areas, there were no banks at all, and moneylenders held a monopoly on lending.

How times have changed!

Today’s village household has far greater control over its finances and is deeply connected to Cambodia’s growing economy. A farmer can borrow from a microfinance lender to buy seeds and fertilizer and set aside savings to help pay for his kids’ school fees. He can finance a solar panel to charge the phone that lets the family stay in touch with older children in the city, who themselves can send money home to the parents cheaply and reliably. None of this even requires the three-hour trip to town – a loan officer from a microfinance institution visits the village each week, while the village shopkeeper doubles as a microfinance agent who can send and receive payments. This picture is repeated in house after house, village after village, from the outskirts of Phnom Penh to the remotest corners of Cambodia. Today, in rural areas alone, half a million clients hold savings at microfinance institutions, and over a million borrow from them.

The new regulation puts all that under threat.

Interest rate caps are a type of price control. Like all price controls, they have a predictable effect – if something can’t be sold at a profit, it won’t be sold at all. If there’s any doubt, just take a look at the empty store shelves in Venezuela, where price controls have created a major food shortage. After all, even the most socially-oriented business has to cover its costs.

The results in Cambodia won’t be empty shelves, but it will mean fewer and more costly financial services for the very people the law is intended to help – the rural poor. To understand why, consider two loans: one for $500 and one for $5,000.

To read the rest of this post, visit The Phnom Penh Post.

Daniel Rozas is an independent microfinance consultant based in Brussels.

Image credit: World Bank

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