Sectoral Highlight: Microfinance Investment Opportunities in an under-banked Cambodia

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From our friends at Leopard Capital, a great synopsis on the Cambodian MFI industry.


In recent years, the Cambodian banking sector has experienced dramatic growth due to annual GDP expansion of more than 10 percent and to increasing bank penetration. Bank deposits have grown from $382 million in 2000 to more than $2.5 billion today while bank loans have increased from $310 million in 2000 to more than $2.5 billion. However, Cambodia still remains relatively “unbanked” with total bank assets less than 40 percent of GDP as compared to approximately 160 percent in Korea and 80 percent in Vietnam.


Most Cambodian commercial banks have traditionally focused on the top 20% of the economic pyramid and have overlooked rural communities which comprise more than 80% of the overall population. This is where Microfinance institutions (MFIs) have stepped in with great success.


The Cambodian microfinance sector is generally considered a model microfinance industry and is widely studied by academics and banking professionals. Five Cambodian MFIs are included in the MIX Global 100 Composite Rankings of the top 100 global MFIs. Only India has more MFIs in the index. At the end of 2008, Cambodia had 18 licensed MFIs, up from six MFIs in 2003. Microfinance loans increased by 61% in 2008 and are still expected to grow at a healthy 10 to 20% in 2009 although funding costs could rise as foreign investors scale back their emerging market investments and nonperforming loans will also likely increase as a result of slower economic growth. In 2008, the number of MFI borrowers exceeded one million, up from 970,152 in 2007: healthy growth across the board.


LCF expects consolidation in the banking sector over the coming 12 to 20 months as a result of the National Bank’s tripling of the minimum capital requirement in September 2008. Capital requirements were increased for commercial banks from KHR 50 billion ($12.5 million) to KHR 150 billion ($37.5 million) and for specialized banks from KHR 10 billion ($2.5 million) to KHR 30 billion ($7.5 million). Banks existing prior to September 2008 have until the end of 2010 to meet the new capital requirements. This combination of tremendous growth and of consolidation presents investors with several exciting opportunities and at LCF we are currently evaluating several options to invest in the sector including participating in any pre-IPO capital raising by a leading MFI, acquiring an existing MFI or merging an existing MFI with a smaller commercial bank. Leopard Capital Associate Matt Magenheim has written a report in which he delves in more detail into the rather unique history of Cambodian MFIs and into their structure and he also looks at the tremendous scope for future growth.


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