Development of a Credit Mechanism dedicated to Farmer ...sccrp.iram-fr.org/classified/HORUS_-_Credit_to_FO... · Mutual Guarantee Company . MoI . Ministry of Interior . MSMEs . Micro,

Supreme National Economic Council

Development of a Credit Mechanism dedicated to Farmer Organizations

Unit 1 final report

July 2014

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Development of a credit mechanism dedicated to farmer organizations – Unit 1 final report 1 / 90

TABLE OF CONTENTS

Executive Summary .................................................................................................. 5

1. Introduction ................................................................................................... 14

2. Analysis of FOs’ needs for financing ........................................................... 17

2.1.1 Overview of the rice value chain ............................................................................................. 17

2.1.2 Overview of FOs and their Federations ................................................................................... 17

2.1.3 FOs’ Financial situation and sources of funding..................................................................... 19

2.1.4 FOs’ Credit schemes, with or without savings ......................................................................... 21

2.1.5 FOs’ Input supply activities ......................................................................................................... 22

2.1.6 FOs’ Paddy trade activities ........................................................................................................ 22

2.1.7 FOs’ Rice banks ............................................................................................................................ 24

2.2 FOs’ and their members’ present access to finance ........................................... 24

2.2.1 Relationships with financial institutions ..................................................................................... 24

2.2.2 Supplier and buyer credit ........................................................................................................... 27

2.3 FOs’ needs for financing ........................................................................................ 29

2.3.1 Working capital ............................................................................................................................ 29

2.3.2 Equipment ..................................................................................................................................... 31

2.3.3 Pilot SCCRP actions requiring credit to FOs ............................................................................ 31

3. Existing and emerging financing for FOs .................................................... 39

3.1 RDB ........................................................................................................................... 39

3.1.1 Overview of RDB’s situation ........................................................................................................ 39

3.1.2 Credit activities ............................................................................................................................. 41

3.1.3 Present activities with FOs ........................................................................................................... 43

3.2 Agriculture Support and Development Fund ....................................................... 44

3.2.1 Goal ................................................................................................................................................ 44

3.2.2 Present situation and operation ................................................................................................ 45

3.3 Other financial institutions ...................................................................................... 47

3.3.1 The microfinance sector in Cambodia .................................................................................... 47

3.3.2 VisionFund ...................................................................................................................................... 51

3.3.3 AMRET ............................................................................................................................................. 52

3.4 Leasing .................................................................................................................... 53

3.5 Guarantee Funds .................................................................................................... 54


4. Synthesis on key issues to be addressed by financing schemes for FOs 56

4.1 Maturity of demand ................................................................................................ 56

4.2 Collateral requirements ......................................................................................... 58

4.3 Costs - Economic model ....................................................................................... 59

4.3.1 FO level ........................................................................................................................................... 59

4.3.2 FI level ............................................................................................................................................. 62

5. Possible risk mitigators .................................................................................. 64

5.1 Support from development programs / technical partners ................................ 64

5.2 Federations of farmer organizations ..................................................................... 64

5.3 Guarantee funds ..................................................................................................... 65

5.3.1 General remarks ........................................................................................................................... 65

5.3.2 Creating a dedicated guarantee mechanism in Cambodia ............................................ 68

5.3.3 Existing guarantee fund: ARIZ .................................................................................................... 70

5.4 Other options .......................................................................................................... 70

6. Recommendations for loan products ......................................................... 73

6.1 Product features ..................................................................................................... 73

6.2 Interest rates............................................................................................................ 74

6.3 Collateral ................................................................................................................. 77

7. Recommendations for financing scenarios ............................................... 79

7.1 Choice of financial institution(s) to implement the credit mechanism .............. 79

7.2 Description of the scenarios .................................................................................. 80

7.2.1 Common elements in all scenarios ........................................................................................... 80

7.2.2 Scenario 1: Partner FI credit based on RDB refinancing from ASDF funds ........................ 81

7.2.3 Scenario 2: RDB credit from ASDF funds .................................................................................. 82

7.2.4 Scenario 3: Partner FI credit from ASDF funds ......................................................................... 83

7.3 SWOT analyses of the different scenarios ............................................................. 83

7.3.1 Scenario 1: Partner FI credit based on RDB refinancing from ASDF funds ........................ 85

7.3.2 Scenario 2: RDB credit from ASDF funds .................................................................................. 86

7.3.3 Scenario 3: Partner FI credit from ASDF funds ......................................................................... 87

8. Pilot phase ..................................................................................................... 88

8.1 Recommendations ................................................................................................. 88

8.2 Next steps ................................................................................................................ 89


List of annexes :

1. Description of the rice value chain

2. Recapitulation of pilot innovative actions in 2013 (SCCRP table)

3. SCCRP’s Draft economic analysis: Sromok Sok Sen Chey AC – Investment in truck and harvester

4. SCCRP’s Draft economic analysis: Sromok Sok Sen Chey AC – Investment in Dryer and warehouse


ACRONYMS

AC Agricultural Cooperative

AFD Agence Française de Développement

CO Credit Officer

DAE Department of Agricultural Extension (MAFF)

FI Financial Institution

FO Farmer Organization

GF Guarantee Fund

LFI Licensed Financial Institution

MAFF Ministry of Agriculture, Forest and Fishery

MEF Ministry of Economy and Finance

MFI Micro Finance Institution

MGC Mutual Guarantee Company

MoI Ministry of Interior

MSMEs Micro, Small and Medium Enterprises

PSG Paddy Selling Group

RDB Rural Development Bank

RGC Royal Government of Cambodia

RMA Rice Millers’ Association

SCCRP Support to the Commercialization of Cambodian Rice Project

SNEC Supreme National Economic Council


Executive Summary 1. Introduction

The rice sector accounts for 15% of Cambodia’s GDP but the value added retained in the country is limited, due to several bottlenecks along the value chain. The Royal Government of Cambodia, via the SNEC, has defined a policy dedicated to the promotion of rice production and export. The “Support to Commercialization of Cambodian Rice Project” (SCCRP), funded by AFD, aims at supporting the implementation of this policy.

In this context, the Supreme National Economic Council has entrusted HORUS with the assignment of defining adequate financing schemes for Farmer Organizations’ commercial activities, and testing them through the implementation of pilot operations. One challenge of this assignment is to think out a sustainable credit mechanism that can support a larger scale development of credit operations to farmer organizations (FOs) while the present need concerns a small number of SCCRP pilot operations.

2. Analysis of FOs’ needs for financing

2.1 FOs’ present situation and activities

There are four groups of farmers organizations (FOs) based on the level of formality and responsible government authority. The target group for the potential credit mechanism shall be on FOs that are recognized legal entities with good governance, and technical and economic capacities. At present, there are at least five farmers’ federations in Cambodia, of which the SCCRP Project is working with three (FCFD, FAEC and FWN). FCFD has developed a scoring method to assess the quality of FOs, which is used to evaluate credit eligibility for their internal credit scheme and guide support interventions. FAEC has received training from FCFD on this tool and begun implementation.

Financial situation. The main source of funding for agricultural cooperatives, which is one type of FO and most likely to be the target of the credit mechanism, is share capital (64% of total resources) followed by external support (35%) and membership fees (2%). Among the 486 registered Acs, the average capital base is USD 4,648. In order to launch commercial activities, FO members sometimes set up sub-groups who pool capital for a specific business that provides a service to all FO members and sometimes also non-members, and lead it as a common private venture. In this case, dividends are then distributed based on the number of shares each member brought for the business.

At the Federation level, the financial sources are quite different. Whereas share capital represents 64% of the funding sources for FOs, FO Federations are not based on a share principle, but work like associations with membership fees. External support, such as from NGOs, represents a bigger part of the sources of income of Federations than for FOs.

FOs’ activities.

Credit provision is one of the main activities of most FOs, in various forms, and represents the top service needed by members. When an FO provides credit, it leads to a reduction in moneylenders’


interest rates. At the Federation level, funds are lacking to cover their members’ credit needs. FCFD lent a total of USD 23,000 to 35 member FOs in 2013. FAEC does not provide credit because they have no revolving fund.

Many FOs trade inputs, especially fertilizers, helping to reduce the production costs of their members. A large proportion of these fertilizers are sold on credit.

Paddy trading is a fairly new activity of FOs and aims to improve the incomes of farmers through increasing their bargaining power with millers and traders. However, FOs are able to engage in this activity only at a small-scale because of limited funds. Investing in harvesting and post-harvesting equipment would increase crop quality and enable the producers to get better prices for their production.

There are over 3,000 rice banks in Cambodia, and FOs manage many of them.

2.2 FOs’ and their members’ present access to finance

One factor limiting the ability of FOs to access loans from financial institutions is their low level of assets. All of the FOs interviewed expressed that the prevailing interest rate is too high relative to the gross margin of their business activities. A financial analysis rather suggests that the ability of an FO to bear the commercial rates for their commercial activities varies from one case to another. Most FOs lack credible business plans and an accounting system, two factors that can hinder a relationship with a financial institution. The majority of FOs do not have bank accounts. The practice now is for board members of the FOs to take out personal loans using personal collateral on behalf of FOs, usually from an MFI or ACLEDA Bank. The risk is entirely on the individual members. In some cases, MFIs and banks also give out loans to FOs and associations based on board members’ individual collateral.

Farmers however have a financial relationship with various stakeholders along the value chain, with trade credit representing an important part of the system.

2.3 FOs’ needs for financing

Working capital. FOs need very short-term loans of roughly USD 5,000-26,000 to initiate or expand their paddy rice trading business. They need short term loans of about USD 1,000-5,000 to grow their fertilizer trading business.

Equipment. FOs need long term loan of about USD 10,000-80,000 to invest in improved equipment and facilities.

Pilot SCCRP actions requiring credit to FOs. Under Component #3, the SCCRP initiated 7 pilot actions in 2013, of which 2 projects require credit to FOs in the next phase.

• Among the actions linked to the Takeo feasibility study, profit analysis shows that the investment project on truck and harvester can cover commercial interest rates, but the dryer and warehouse project cannot be financed on a loan for 80% or at extremely subsidized conditions over a long duration.

• Another pilot action of SCCRP that will require credit is the partnership with BRICo (Battambang Rice Investment Co., Ltd), in which the project is facilitating a contract between the miller and an FO to secure the production and supply of paddy rice. The contemplated conditions do not make the project profitable enough to be financed on loan.


3. Existing and emerging financing for FOs

3.1 RDB

The Rural Development Bank (RDB) is a small specialized public bank acting as policy bank for the RGC, that was set up to service and refinance loans to licensed financial institutions. The RDB has no branch network, 68 staff (2012) and a loan portfolio of USD 61 million to 111 clients (01/2014). The ASDF is the RDB’s main source of funding representing over half of total resources. RDB’s own funds come next with over one third, then China Development Bank with 10%. The RDB’s risk management remains very weak, resulting in poor portfolio quality. In March 2012, the RDB’s Board had made the decision to create mobile units as a preparation to setting up a branch network but no such unit has been created since then. The RDB’s CEO has been appointed special counsellor to the Prime Minister, which might lead to changes in the Bank’s mode of operations.

Credit activities. The RDB’s credit experience is mainly that of wholesale lending, combined in recent years with a small experience in lending to rice millers and farmers in the very secured rubber value chain. The RDB’s credit department has 10 staff, of whom 3 credit officers, who monitor the loan portfolio in the field through 1-2 day missions every 3 months. This entails high transportation costs and limits the possibility of close follow-up. The rice sector accounts for 71% of the RDB’s total loan portfolio. For the rubber sector, a specialized unit has been set up in Kampong Cham in order to collect rubber planters’ repayments of loans given out under AFD Project for the Development of Smallholder Rubber Production. Its sole activity is collecting repayments.

Present activities with FOs. The RDB has adopted a credit policy for cooperatives, associations and rural communities in 2010. It is aimed at refinancing these organizations’ internal cash lending activities and provides that the client pays the cost for the bank’s monitoring. The RDB’s present activity with FOs is very low (2 clients, USD 140,000) because of RDB’s low presence in rural areas and because most of them do not comply with RDB’s eligibility criteria (size of own funds, collateral, information quality).

3.2 Agriculture Support and Development Fund

The Agriculture Support and Development Fund (ASDF) is a USD 36 million credit facility managed by the MEF and implemented by the RDB. The USD 26 million MEF Partial Credit Guarantee Scheme for Rice Millers has been temporarily allocated to an increase in ASDF. Although the ASDF’s present financing policy provides that associations and communities are eligible to ASDF financing, there are no FOs in the ASDF portfolio as yet. Giving out loans to FOs from ASDF thus does not require a further political decision. Eligibility criteria to access ASDF loans include having a legal personality, successful experience in business, own capital covering at least 25% of project cost and collateral valued over twice the loan amount.

Present situation and operation. The ASDF’s loan decision process is quite long. Loan applications are presented to the ASDF’s credit committee and approved by the ASDF’s steering committee chaired by the Minister of Economy and Finance. The ASDF’s official interest rates are low but length of decision making leads some agro industries to prefer dealing with commercial banks. The MEF has revised ASDF loan conditions to face competition from commercial banks in 2013. The USD 36 million


are however almost totally committed, with an ASDF loan portfolio totaling USD 33 million as at January 31st, 2014. The RDB does not bear the losses in ASDF: it is in a role of service provider to the MEF. No cost accounting is available to assess the profitability of ASDF.

3.3 Other financial institutions

The microfinance sector in Cambodia has been a priority in the RGC’s rural development policy since the 1990’s. It is a healthy sector that has achieved a large outreach, with more than 94% of villages having operations from one of the ‘big eight’ MFIs and the total number of borrowers of the sector representing 57% of Cambodian households. Among the big eight, AMRET and AMK stand out in terms of number of clients. AMK, PRASAC, HKL and Sathapana stand out in terms of number of districts covered. The latter three have a much higher average loan balance per client, evidencing a higher-income client target. Outside RDB, the potential financing partners for FOs the mission met with are VisionFund, AMRET, Chamroeun, ACLEDA, AMK and PRASAC. Most of them are not ready to serve FOs, because of their present methodologies and targets, except two. All precise that they do not wish to refinance the FOs’ internal credit schemes.

VisionFund, a World Vision affiliate, is the 4th MFI in Cambodia in terms of number of clients and the 8th in terms of loan portfolio, with over USD 60 million outstanding to almost 200,000 clients and an average loan of USD 321. It is highly socially oriented and has 95% of its portfolio in rural areas. VisionFund has launched an Agricultural Cooperative loan pilot in November, due to end in April. VisionFund sees lending to farmer organizations as a promising sector to diversify their activities and a priori welcomes the idea of becoming a project partner.

AMRET is the second MFI in Cambodia both in terms of number of clients and of loan portfolio, with 310,000 clients and over USD 200 million loan portfolio. AMRET’s vision and mission combine financial and social performance. AMRET is piloting an Agrifin Program aimed at improving its services to farmers and developing its activity with agriculture. So far, this Program has not worked with farmer organizations. It is in the process of developing partnerships to diversify its offer. AMRET could a priori be interested in partnering with SCCRP in the framework of the Agrifin Program.

3.4 Leasing

Leasing and micro-leasing of equipment is a new industry in Cambodia. It mainly provides finance for motorbikes and cars but also has a small agricultural equipment activity.

3.5 Guarantee Funds

Cambodia has no specialized guarantee institution and a small and unsuccessful experience with guarantee funds. The main lesson learnt about structuring a risk sharing mechanism is that it needs to be managed by a specialized financial institution. Once such an institution exists, it is critical to strike the balance between (i) making it prudent so that it will not be decapitalized by its operations and (ii) making it attractive for FIs.


4. Synthesis on key issues to be addressed by financing schemes for FOs

4.1 Maturity of demand

Many FOs have never carried out the activity they require the loan for, or at a much smaller scale. This entails a higher risk, both for borrower and lender. Moreover, new activities are difficult to finance for FIs. FOs need backstopping in order to be able to design economically sound projects, analyze their financial balance and implement them. The quality of a client FOs’ governance and management are key to building an FI’s trust. FO Federations are setting up regular assessments of their members that will put them in a situation to provide input on their capacities. Lack of clear records requires ability to appraise loan applications based on field observations.

4.2 Collateral requirements

The financial sector in Cambodia has a very prudent approach and high collateral requirements. This does not prevent it from being very dynamic. Its risk profile is excellent. FOs have little own property that they can pledge. When they are granted loans by financial institutions, it is most often based on individual collateral brought by Board members. This ensures that board members are really committed, believe in the project and have carefully assessed its risks.

4.3 Costs – Economic model

FO level. The level of interest rates is not a key determinant of an FO project’s profitability: it has a marginal impact on those projects that are barely profitable. The level of interest rates will have an impact on the proportion of profitable investment projects. For low profitability FO projects with a high development value, outright subsidies from Project may however be necessary. Three elements have a significant impact on the weight of interest rates on a project’s costs and hence on the impact of interest rate subsidies: (i) The duration of the loan, that needs to be tailored to that of the financed activity; (ii) The speed of capital turnover; (iii) The own funds the borrower invests in the project.

FI level. Lending generates costs that need to be covered by the interests generated. Three main elements impact financial institutions’ costs and thus their break-even interest rate: (i) Cost of resources, (ii) Transaction costs, (iii) Cost of risk.

5. Possible risk mitigators

5.1 Support from development programs / technical partners

Given the lack of maturity of FOs in Cambodia and the newness to them of the contemplated activities, a key element to secure their activities is having a strong technical partner to backstop them: development program, NGO or other.

5.2 Federations of farmer organizations

A scheme based on sub-lending by Federation puts too much risk on the Federation and should be avoided. Involving Federations in pre-screening their members’ loan applications can reduce risks and transaction costs insofar as it increases the proportion of applications that can be transformed into


loans. The loan fee could thus be split between Federation and FI. In order to build trust such a scheme would require that the Federation bear a portion of the risk.

5.3 Guarantee funds

General remarks. Using a guarantee fund can comfort FIs to finance new activities and reduce their collateral requirements. It however generates a cost and should only be used if it is necessary to access credit. International as well as Cambodian experience shows that setting up a guarantee fund with a set of rules is a short term solution: without a specialized institution to take it in charge and adapt its rules, a guarantee fund dies. Defining a guarantee fund’s rules is a delicate operation and has to strike a balance between the two challenges of guarantee funds: (i) the borrowers and credit providers feeling exempted from liability, which results in eating up the fund, (ii) the financial institutions not feeling protected enough, which results in the guarantee fund not being used. A risk generated by the use of a guarantee fund is that it sometimes leads to decreased vigilance in loan appraisal. In order to avoid this, normal collateral measures need to be taken, at a reduced level. Mutual guarantee schemes are a specific form of GF that involve the guarantee beneficiaries in the ownership and the management of a GF, thus leading to better sustainability perspectives. This form seems interesting to build on the Federations’ existence and their knowledge of their members’ situations.

Creating a dedicated guarantee mechanism in Cambodia. In order to both involve the Federations in the screening process, leverage their funds and boost these through additional support, a guarantee mechanism with two components could be considered depending on targeted outreach. It would include a mutual guarantee company and a public guarantee fund.

A mutual guarantee company is a time-tried solution, and could be an option to support the development of a credit mechanism for FOs in Cambodia.

In order to support the Federations, increase the leverage on their funds and limit the risks they need to take to reduce the collateral burden on their members, a public guarantee institution could complement the mutual guarantee company’s guarantees.

It has to be taken into account that setting up a sustainable guarantee mechanism requires creating full-fledged financial instiutions, which implies a consequent investment in technical assistance. A GF’s financial sustainability is based on income from investment of funds plus guarantee fees covering guarantee claims disbursed and operating costs.

Existing guarantee fund: ARIZ. ARIZ is a risk-sharing mechanism set up by AFD to facilitate SME financing, that offers a portfolio guarantee to eligible financial institutions covering up to 50% of the risk for an annual fee of 1.6% of the outstanding guarantee, for loans between USD 14,000 and 412,000.

5.4 Other options do not seem adequate in the current Cambodian context:

A guarantee mechanism based on contract farming may not be feasible in the current context because of the lack of incentives for farmers to follow through on the agreement.


Warehouse receipt financing is a new concept in Cambodia and is still being considered by FIs. At the moment, it is not a feasible option because of the absence of commercial, well-managed storage facilities.

Using the Federations’ loans to their members as subordinated debt could theoretically lessen FIs’ risk and thus ease FOs’ access to finance. Such a system would however be difficult to implement in such a way that it would really increase FIs’ trust.

6. Recommendations for loan products

6.1 Product features

Two main types of loans will be necessary to cater to the needs of FOs in the rice value chain:

Short term balloon repayment loans for working capital ranging from USD 1,000 to 26,000.

Medium term loans for equipment ranging from USD 10,000 to 80,000.

6.2 Interest rates

Subsidizing loans is a political decision and requires a high level of funding over a long period. It can be justified to support selected stakeholders and to finance investments leading to a change in the beneficiary’s business structure. Interest rate subisidies are a type of subsidy and as such need to abide by the “smart subsidies” principles. In order to have impact, they need to be sustained over a sufficient period of time and be progressively removed. If the decision to subsidize interest rates is confirmed, different options could be explored to finance this subsidy.

The decision to subsidize interest rates, or not, is independent from the choice of the implementing FIs.

6.3 Collateral

The recommended approach to collateral combines different elements:

Accept soft collateral (soft land titles).

Explore other secondary collateral options (moveable assets, stock, rice in the field, collection account management agreement1…).

Set up a guarantee mechanism to decrease collateral to loan ratio.

Set goal of reducing collateral coverage as the relationship develops.

1 A collection account management agreement is one whereby the borrower commits to have his revenues paid on a specified account


7. Recommendations for financing scenarios

7.1 Choice of financial institution(s) to implement the credit mechanism

In the long term, in order to avoid distorting the financial market, the credit mechanism should be offered by several FIs, who should thus all have the possibility of accessing the necessary resources to offer subsidized credit.

The main advantage of choosing the RDB as credit provider to FOs is that it is clearly in line with its mission as a development bank. The main disadvantage is that at present the RDB lacks the systems and processes to build and manage a credit portfolio.

7.2. Description of the scenarios

Common elements:

A mutual guarantee mechanism may be created with funds from the Federations and SCCRP and a possible strengthening by MEF funds in a second phase.

The role of FO Federations is central and does not involve direct credit: (i) Committing their own funds to the mutual guarantee company; (ii) Appraising the loan applications to decide whether they accept to guarantee them; (iii) Supporting their member FOs to establish the business plans for their projects.

Each financial institution involved has a direct relationship with the FO to appraise the loan application and disburse and monitor the loan.

In order to keep investment loans’ interest rate as low as possible, soft funding from ASDF is made available to finance the FOs.

Scenario 1: Partner FI credit based on RDB refinancing from ASDF funds. This scenario builds on a partner financial institution’s far-reaching network in rural areas to give out the loans to the FOs. The RDB manages the guarantee fund and refinances the partner FI at a preferential interest rate.

Scenario 2: RDB credit from ASDF funds. Here the RDB gives out the loans to the FOs with a mobile unit. The guarantee fund is hosted in another bank.

Scenario 3: Partner FI credit from ASDF funds. In scenario 3, a small portion of the ASDF, dedicated to FOs, is entrusted directly to a partner financial institution.

7.3 SWOT analyses of the different scenarios

SWOT analyses have been carried out for each scenario as a basis for comparison in order to give elements to MEF, SNEC and AFD for making their decision on the scenario they want to support. All scenarios have common weaknesses and threats that need to be addressed in the design of the setting up of the financing mechanism as well as strengths and opportunities to build on. Scenarios 1 and 3, involving a partner FI, share a lot of strengths and opportunities linked to leveraging an existing field network, good risk management practices and sound management systems as well as building the RDB’s GF management capacities to develop its tools to serve its mission.


Scenario 1’s specificities are linked to involving RDB as a wholesale lender, which builds on RDB’s existing capacities and opens the possibility of easily opening the participation of other FIs in the future and therefore foster competition on the market of loans to FOs. At the same time, it leads to generating costs for this intermediation and possible time lags to set up the funding.

Scenario 2’s specificities come from involving as retail bank a weak public bank with no branch network and insufficient risk management capacities, whose mission is to implement policy decisions in the field of rural finance. This creates a number of weaknesses and threats as well as some specific strengths and opportunities. The main strength of this scenario is that is makes it easier to charge low interest rates as profitability is not targeted and a subsidy mechanism could easily be implemented.

Scenario 3 is very close to scenario 1 except that it is based on a direct commitment of ASDF funds.

Its specific strengths are that it does not require a decision from RDB to start the loan process that can thus be more efficient, and the direct contract with MEF will make it easier for the MEF to monitor through direct information.

The specific threat is the time it could take to obtain the MEF’s decision to transfer part of ASDF to a partner FI.

8. Pilot phase

8.1 Recommendations

SCCRP’s support is essential for the success of FOs’ projects. The Project has adequate FO and Federation institution building, agronomic and economic skills to support the FOs’ maturation and build their projects with them. The Project needs strengthening in financial skills to define business plans taking all financial elements into account and discuss with financial institutions.

Given the small number of FO projects that need to be financed in the pilot phase, it should be launched with one FI only while making sure that in the longer term the mechanism is open to other FIs.

FOs should be encouraged and required to provide part of the project’s resources as their own contribution. This should both reduce the risk for the FO and make it easier to convince an FI to finance an FO’s project.

Complementary TA needs may be necessary (i) to set up specialized guarantee institutions and (ii) to set up new types of securing mechanisms (warehouse receipt / contract farming).

8.2 Next steps

Prior to implementation of the credit mechanism, the decision needs to be made as to which financing scenario is chosen. At FI level, the pre-requirements differ depending on choice of scenario. The decision on interest rate subsidization and corresponding sources of funding needs to be clarified. The decision and timeline for setting up a specific guarantee mechanism can be clarified in a later stage.


1. Introduction (1) The rice sector accounts for 15% of Cambodia’s GDP but the value added retained in the country is limited, due to several bottlenecks along the value chain.

There are many bottlenecks along the rice value chain limiting its commercialization and potential to add value to the local economy. Firstly, low productivity limits the surplus of paddy rice. The main challenges on the production side are irrigation system, research and extension services, availability and affordability of quality inputs, and land management. Consequently, the vast majority of farmers are able to crop only once a year.

Secondly, exportable surplus of rice (3-4 million tons per year) is processed abroad, either in Vietnam or Thailand. This situation arises because of two reasons: 1) foreign millers are able to offer more competitive prices for paddy rice to farmers, and 2) domestic millers lack capital to purchase paddy at the higher prices.

Indeed, if processing could be retained in the country, it could have important spillovers to help diversify and expand the economic base. For instance, broken rice, husk and bran could spin off other economic activities such as cooking oil production, aquaculture and animal husbandry.

Thirdly, access to international markets and weak export facilitation are also major obstacles for the commercialization of the rice sector. Hard system including transport infrastructure, seaports, warehouses as well soft system including trade facilitation, support institutions, and quality standards are issues that needs to be tackled. Furthermore, milled rice is a protected market with complicated mechanisms responding to different terms and requirements specific to each importing country.

(2) The Royal Government of Cambodia, via the SNEC, has defined a policy dedicated to the promotion of rice production and export. The “Support to Commercialization of Cambodian Rice Project” (SCCRP), funded by AFD, aims at supporting the implementation of this policy.

(3) Access to finance is a major challenge faced by Farmer Organizations (FOs) to increase their weight in the value chain and grow their economic activities, primarily commercialization.

Due to the low level of their management and accounting systems and to their limited capacity to provide real collateral, FOs do not easily access loans from formal financial institutions. Whereas farmers can individually access loans from MFIs to finance production (inputs), or can receive credit from rice millers or collectors for the same purpose –with the counterpart that they lose in bargaining power on prices–, commercial activities managed by FOs are currently not financed by formal institutions. This results in farmers having to sell their production at low prices with no possibility to wait for better sales opportunities.

Two components of SCCRP hence aim at enhancing FOs’ access to finance:

• Through the promotion of Contract Farming and the increased role of FOs in the value chain.


• Through a support provided to the Rural Development Bank, considered as the main supplier of credit for FOs.

(4) In this context, the Supreme National Economic Council has entrusted HORUS with the assignment of defining adequate financing schemes for Farmer Organizations’ commercial activities, and testing them through the implementation of pilot operations.

The assignment is to be carried out in two phases:

Phase 1: Preparatory study to propose a credit mechanism

The assignment starts with Unit #1: Confirm the option of a credit mechanism hosted by RDB. Unit #1 is a preparatory survey, aimed at taking stock of the situation: FOs’ demand for loans, present offer of financial services liable to cover this demand, economic analysis at different levels, capacities of the different actors, in order to propose adequate financing scenarios. This includes a preliminary development of the credit offer, a validation of scenarios regarding risk management, the assessment of the possibilities and conditions required to channel a portion of the existing ASDF for the credit to FOs, and an assessment of the costs and the economy of the portfolio of loans to FOs (refinancing costs, transaction costs…) and cost coverage (interest rate, structural subsidies required or balance of the cost based on the overall management of the Agriculture Development Fund Portfolio).

Phase 2: Implementation of pilot operations for the financing mechanism that will be chosen based on Unit #1 results

The conclusions of Unit #1 will lead to specifying the pilot operations that will be set up in the second phase of the assignment; the TORs identify two possible options, to be determined by the steering committee following presentation and discussion of Unit #1 results:

• Unit #2: Set up the implementation of the credit mechanism hosted by RDB.

• Unit #3: Assess and develop alternative scenarios with micro-finance institutions.

This report concerns the first part of this assignment, aimed at assessing the FOs’ needs, developing scenarios for a credit mechanism, proposing options for risk management, resources and economy of the portfolio of loans, in order to confirm or invalidate the option of a credit mechanism hosted by RDB. This final report has been amended following presentation of the first results to the steering committee (see minutes of restitution meeting in appendix 5).

(5) One challenge of this assignment is to think out a sustainable credit mechanism that can support a larger scale development of credit operations to farmer organizations (FOs) while the present need concerns a small number of SCCRP pilot operations.

The SCCRP has very concrete immediate needs to finance the pilot operations it is defining with its partner FOs. This is a small number of specific operations. These are the first pilot operations defined by the Project that is starting to build its experience in that matter.


At the same time the SNEC’s and AFD’s expectations from the Consultant is to think out and set up a sustainable mechanism to finance FOs in Cambodia, in the rice value chain and also in other activities.

The priority focus of this assignment is on the setting up of a sustainable mechanism to finance FOs in Cambodia.


2. Analysis of FOs’ needs for financing 2.1.1 Overview of the rice value chain

The rice sector is a major part of the Cambodian economy, but a number of factors stifle its transformation from subsistence farming to a commercially-oriented value chain. Paddy collectors are farmers’ main buyers (88% sell to collectors), who then export most of the unprocessed commodity overseas. Only 10% of farmers sell to millers and just 2% sell to Farmers’ Organizations. Contract farming is still not a common practice in Cambodia, primarily because there are no mechanisms and limited incentives to ensure that farmers will not default on their contracts. The SCCRP is currently working with 4 ACs in Battambang to set up contract farming for the production of a high quality rice variety. While the price of crop is an important criterion, farmers’ decision on who to sell their paddy to is heavily dependent on the seed variety, opportunity for credit and/or advance payment and speed of payment. Farmers Organizations could play an important role in increasing the incomes of farmers and vibrancy of the commercialization of the rice sector, but currently lack the capacity and resources to quickly respond to the needs of both members and buyers.

A more detailed description of the rice value chain is presented in appendix 1.

2.1.2 Overview of FOs and their Federations

(1) There are four groups of farmers organizations (FOs) based on the level of formality and responsible government authority. The target group for the potential credit mechanism shall be on FOs that are recognized legal entities with good governance, and technical and economic capacities.

Farmers’ organizations can be classified into four groups based on the level of formality and responsible government authority, as following:

Agriculture cooperatives (AC): According to the Department of Agriculture Extension (DAE), which is the responsible authority for registering ACs, there are 486 ACs in Cambodia as of 2013, with 46,330 members. The total capital involved is USD 2,223,276, of which 65% is share capital and 35% is external support. Membership fees amounted to USD 35,931. The common activities of an agriculture cooperative, to varying degree, are: 1) buy and sell fertilizers / inputs, 2) buy and sell paddy rice (or other agricultural products), 3) savings-credit scheme and 4) management of rice bank.

Farmer Water User Communities (FWUC): FWUCs are legal entities established to support agricultural water users to operate and maintain the irrigation systems. There are currently more than 300 FWUCs registered at the Ministry of Water Resource and Meteorology (MOWRAM) and a few are registered at the commune level. The legal base of FWUCs’ operation is set by Circular n°1, commenced in 1999 (and Prakas 306 of MOWRAM). The Circular recognizes FWUCs as a legal entity with the rights to make rules, enforce sanctions, have a bank account, loan money and enter into legal contracts.


Federations, Unions, and Associations: These types of farmer organizations are registered with the Ministry of Interior.

Informal producer groups, savings group, and other groups: In addition, there are a number of informal groups set up by donors and NGOs. These groups have different objectives, ranging from economic empowerment, gender, and poverty reduction.

(2) At present, there are at least five farmers’ federations in Cambodia, of which the SCCRP Project is working with three (FCFD, FAEC and FWN).

The farmers Federations in Cambodia are:

Federation of Cambodian Farmer Organizations for Development (FCFD). Established in 2010 and registered with the Ministry of Interior. Presently have 80 members – 61 associations and 19 ACs – in 5 provinces (Prey Veng, Takeo, Kampong Thom and Battambang, Siem Reap). The main activities of the federation are: provision of credit, facilitating meetings between member FOs and fertilizer company, providing technical training on credit management and procedures. When the federation has surplus cash from operation, the money is lent to member FOs.

Federation of Farmers Associations Promoting Family Agriculture Enterprise in Cambodia (FAEC). The federation was established in 2009 strengthening capacity of their members on production technique and business management in order to improve the family economy. Currently, FAEC has 46 farmers organization members composed of 33 associations and 13 cooperatives from 10 provinces with more than 2,500 family members. FAEC’s main programs include: 1) strengthening family agricultural enterprise; 2) training adults in agriculture; 3) increase and strengthening agriculture cooperatives; 4) environment and national resource production; and 5) linking farm products to markets. FAEC does not provide credit because they have no revolving fund.

Farmer and Water Net (FWN). Established in 2011, this network is made up of 12 FWUC in 8 provinces, covering 206 villages, 23,000 hectares coverage and 26,000 families. Its vision is to see Cambodia, in which farmers are in the position to manage, maintain and operate their own irrigation scheme in a sustainable manner. The mission of FWN is to undertake operation and maintenance of irrigation systems at the local, regional and national level. The General Assembly, which is the highest legislative and decision-making body of FWN, has 12 members. Each member has to pay 50,000 Riel (USD 12.50) membership fee.

Farmer and Nature Net (FNN). Since 1998, farmers (mostly rice farmers) have started to organize themselves into village-based associations and network, with support from CEDAC. As of 2009, there are 1,107 village based farmer associations in 1,104 villages of 11 provinces of Cambodia with around 40,292 members (23,591 of them women) established with support from village based farmer association and CEDAC. The associations are linked together in an independent national network or confederation registered under the name “Farmer and Nature Net” or FNN. The associations are playing an important role in promoting mutual help, solidarity and cooperation among villagers, as well as coordinating and undertaking collective action in developing ecological agriculture, natural resources management, cooperative business practices and community development. The typical activities of the associations are agricultural extension, community led savings and credit schemes, group marketing, training for young farmers, capacity


building for women groups, support for poorest families, awareness raising on issues related to conservation of natural resources, advocacy with local authorities etc.

Cambodian Farmers Association Federation of Agriculture Producers (CFAP). Started in 2007 in Svay Rieng province, CFAP-Cambodia is an association registered with the Ministry of Interior (MoI). The federation is a member of the International Federation of Agricultural Producers IFAP since 2002. CFAP-Cambodia is working to represent small group producers in the rural Cambodia. CFAP-Cambodia is organized into a tree-tiered structure: producing level, Saving groups, rice producer groups, vegetable/crop growing groups, poultries/animal rearing groups, fish raising groups, village women association (VWA), Commune Farmers' Association (CFA) and community-based organizations. As of date, there are 818 producer groups in 99 villages participating in the association.

(3) FCFD has developed a scoring method to assess the quality of FOs, which is used to evaluate the credit eligibility for their internal credit scheme and guide support interventions. FAEC has received training from FCFD on this tool and begun implementation.

With the support of AVSF, FCFD developed a scoring tool to evaluation the quality of their FO members. The scoring tool is built on five components and 35 criteria: (1) management, (2) Finance, (3) Identity, (4) Communication and (5) Activities. The scores are used by FCFD to (1) prioritize loans (given to FO members with highest scores) and (2) guide technical assistance (for FO members with lower scores). FOs with a score of 60 points or higher are eligible for loans. The scoring is conducted annually. An evaluation committee made up of board members, Federation staff, local authorities and agriculture extension officers is set up to review documents, records, accounting and activities of the FO. Of the 80 FO members evaluated in 2013, over 60% have scores over 60 points. FCFD uses its own operation budget to cover the costs of the evaluation. Extension officers and other members are volunteers.

FCFD provided training to FAEC on how to use the tool. FAEC started implementing this tool this year. Before implementing this tool, FAEC used a less formal method to evaluate its members’ situation, including criteria such as degree of formality, membership, activities and partners, existence and effective implementation of annual planning, distribution of responsibilities among leaders, sources of budget, SWOT.

2.1.3 FOs’ Financial situation and sources of funding

(1) The main source of funding for agricultural cooperatives, which is one type of FO and most likely to be the target of the credit mechanism, is share capital (64% of total resources) followed by external support (35%) and membership fees (2%). Among the 486 registered ACs, the average capital base is USD 4,648.

According to the DAE, the total capital in ACs as of 2013 is USD 2,259,207, of which 64% is share capital, 35% is external support and 2% from membership fees. This represents an average capital base of roughly USD 4,648 per AC.


Table 1: Sources of Funding for Agriculture Cooperatives

Sources of Capital (USD) Percent Share

Membership Fees 35,931 2%

Capital Shares 1,442,253 64%

Sponsors / External Support 781,023 35%

Total Capital 2,259,207 100%

Total Capital per AC 4,649

Source: Department of Agriculture Extension, 2013

(2) In order to launch commercial activities, FO members sometimes set up sub-groups who pool capital for a specific business that provides a service to all FO members and sometimes also non-members, and lead it as a common private venture. In this case, dividends are then distributed based on the number of shares each member brought for the business.

Capital shares are the main source of funds for FOs for financing commercial activities such as trading fertilizers, petroleum or paddy rice, and lending. Members who are interested in engaging in the business form a sub-group within the AC and purchase shares. The price of shares varies by AC and can range from 50,000 KHR - 200,000 KHR (USD 12.50-USD 50) per share. There is usually a ceiling on the number of shares per person, such as 10 shares maximum. The profit from the business is distributed to members at the end of the season or end of the year based on the number of shares.

Other sources of funds are loans from Farmer Federations, NGOs, or MFIs. One FO had a loan from VisionFund Cambodia, an MFI. These loans are borrowed on behalf of the FO. In other cases, members of the board take out an individual loan from an MFI or private lender, and funnel the money into the FO. Activities financed with such funds are led at the FO level by the board members.

Capital shares are also sometimes raised among sub-groups of voluntary members to finance a specific business activity of the FO, in which case the net profit generated by the activity is shared among shareholders as dividends at the end of the season, Leaders see this type of capital investment in sub-groups in the FO as part of their role to demonstrate the interest of leading trade activities at FO level and hope to convince more members to join in order to raise more capital.

(3) At the Federation level, the financial sources are quite different from the FO level.

Whereas share capital represents 64% of the funding sources for FOs, FO Federations are not based on a share principle, but work like associations with membership fees. External support, such as from NGOs, represents a bigger part of the sources of income of Federations than for FOs. For example, FCFD has financial sources as follows:

AVSF support for operation: USD 30,000

Membership fee: USD 20 per member FO per year (USD 1,600 in 2013)

AVSF support for project implementation: USD 6,000

Total capital in 2013: USD 32,000

Surplus cash after deducting expenses is then lent out to member FOs. (See below in Table 2)


2.1.4 FOs’ Credit schemes, with or without savings

(1) Credit provision is one of the main activities of most FOs, in various forms, and represents the top service needed by members. When an FO provides credit, it leads to a reduction in moneylenders’ interest rates.

The origin of many FOs is savings groups. Farmers would come together and pool their savings, which would then be lent out to members. On the savings side, savings are usually voluntary with a maximum saving amount per member, such as 10,000 KHR per month. The interest rate on savings is roughly 2.5% per month.

On the credit side, the interest rate ranges from 2.5%-3% per month for members, 3%-3.5% for non-members. Loan size varies. In some cases, a loan of 300,000 KHR (USD 75) requires no collateral and loans over 1 million KHR may require physical collateral such as land title. Due to limited funds, maximum loan size may be capped at KHR 5 million (USD 1,250). The duration of loan can be around 6 months – 12 months for members, and 1-2 months for non-members. The loans taken out by members are used primarily for rice production such as purchasing fertilizers, hiring labor, etc.

Most of FOs’ other activities, described in the following parts, include a credit component, evidencing the cash shortage farmers face.

FAEC notes that farmers access local money lenders for “balloon credit” at the rate of 4% per month when there is a cooperative that has its own saving and credit scheme and up to 8% per month in a rural context where there is no cooperative.

(2) At the Federation level, funds are lacking to cover their members’ credit needs. FCFD lent a total of USD 23,000 to 35 member FOs in 2013. FAEC does not provide credit because they have no revolving fund.

As their members’ demand is very high, providing them with credit is one of the Federations’ major goals.

FCFD currently lends to its members using cash surplus from their operation, which varies year by year. Almost all the credit taken by FOs is to purchase fertilizers, while 2 FOs borrowed to trade paddy rice. The federation has no problems with repayments.

FCFD’s credit activity is proportional to the capital they collect and what is left from operations. This leads to fluctuations in the volume of loans they are able to give out and loan amounts much smaller than their members’ needs:

Table 2: FCFD’s Loan Portfolio to Members (2011-2013)

2011 2012 2013loan fund (USD) 4,500 24,500 23,000# loans 3 24 35average size of loan for a member FO 1,500 1,021 657


Loans offered are 6 and 10 months and bear a 1% per month interest rate. FCFD requires its members to provide minutes of meeting specifying use of loan and present a basic business plan. The Board members are individually committed to repaying their FO’s loan.

FAEC’s preference would be to facilitate their members’ relations with a FI rather than setting up their own credit scheme, in order to avoid putting the Federation at risk for lack of capacities to manage a credit scheme. They have received support from the French NGO AFDI to set up a guarantee fund for FO credit from financial institutions but as there was no mechanism that could make use of a guarantee fund, these funds have been used to subsidize the interest payments on loans taken by the cooperatives, including loans from formal institutions and informal money lenders (that is, interests are paid from AFDI funds, and FO only repays principal). Since last year, 4 members have received grants of USD500-1000 each to cover interest payments.

2.1.5 FOs’ Input supply activities

(1) Many FOs trade inputs, especially fertilizers, helping to reduce the production costs of their members. A large proportion of these fertilizers are sold on credit.

Buying and selling of inputs is one of the main activities of many agriculture cooperatives, specifically the trading of fertilizer. Commonly, AC sells to both members and non-members, but members get a discount price. The business is funded through share capital, as described above in 1.2.2. Fertilizer selling starts in April-May during the start of the planting season, and repayment is made at harvest time, which is typically in July. The fertilizer company delivers the fertilizers to the village. In one example, the AC pays 50% upfront, and 50% is on credit.

The price of the fertilizer depends on whether the member pays in full upfront or whether they purchase on credit. For those who pay in cash upfront, the FO will mark up the price to earn a profit of around 1,000-5,000 KHR (USD 0.25-1.25) per 50 kg bag, depending on the FO (a margin of roughly 0.3%-1.7%). If the purchase is on credit, the markup is around 3,000-10,000 KHR (USD 0.75-2.50) per 50 kg bag (1% - 3.3% per month), with duration of around 3 months – 6 months. A large proportion of sales are made on credit, around 70% in the FOs interviewed, while 30% is in cash.

In addition to fertilizers, some ACs also trade petroleum and diesel, which is arranged in the same way as the fertilizer business.

2.1.6 FOs’ Paddy trade activities

(1) Paddy trading is a fairly new activity of FOs and aims to improve the incomes of farmers through increasing their bargaining power with millers and traders. However, FOs are able to engage in this activity only at a small-scale because of limited funds.

Many FOs interviewed expressed desire to get into paddy trading, but are restrained by limited funding. The few FOs who are currently active in this activity are usually only trading at a small-scale. One FO in Kraing Banteay, Tramkak District is currently buying dry paddy from farmers and selling it to a domestic miller. The FO purchases based on their available funds and deliver straight to the miller; the current volume is only 1 ton and worth 2 million KHR (USD 500). The FO does not have a


warehouse to store paddy. Farmers selling to the FO could get more profit if they sell directly to traders rather than the FO, but they sell to the FO because they can get advance cash when needed.

A cooperative in Tipath Commune, Tramkak District is also engaging in rice trading. The FO buys from members and non-members based on the prevailing market rate. The paddy is sold to traders to export to Vietnamese millers. The traders are responsible for transport and loading. The main challenge Tipath AC faces to develop this activity is funding. The AC took out a loan of USD 2,500 from PRASAC in 2013 to fund the activity and finds that the activity can afford the interests charged (1.9% per month). The loan was borrowed individually under the Chief’s name and collateral, for a term of 24 months.

The pre-Union of Cooperatives in Tramkak District, officially made up of 2 ACs including Tipath, and also including 7 farmer associations and 2 other ACs whose members join individually, has a USD 15,000 worth rice mill provided by JAPAMAH. The Union is currently milling and trading organic rice. The Union buys from its members, mills the paddy, packages the products, and sells to buyers in Phnom Penh. The Union purchases pure seeds from an NGO and distributes it to its members. The Union then purchases the paddy rice from members at a premium price of 50 KHR (USD 0.13) above the market rate. Union members can produce 17 tons of the organic rice; however, the Union is able to purchase only 9 tons, in 3 rotations. The remainder is sold to traders. In general, members prefer to sell to the Union because the price is higher than what is offered by traders, and they get a share of the profit based on their share in the Union.

Another FO in Takeo has engaged in paddy trading with the support of CEDAC. They traded 87 tons in 2013, based on funding from ACLEDA and PRASAC (USD 17,000, 24 months term, monthly interest payments, four-monthly capital repayments, 2% monthly interest rate, collateral: houses and rice fields of 4 board members) and from CEDAC savings groups and moneylenders (KHR 33 million, i.e. USD 8,500, 6 months term, 3% monthly interest rate, balloon repayment, no collateral). They bought wet paddy in 2013: this is more profitable but increases the workload so for lack of labor they turned to dry paddy the next season. They bought paddy from their members at a premium price 13% higher than the local collectors’ price and made a small profit from the operation.

(2) Investing in harvesting and post-harvesting equipment would increase crop quality and enable the producers to get better prices for their production.

Harvesting equipment such as harvesters and threshing machines can enable producers to better control the quality of the crops. Post-harvesting equipment such as dryers and warehouses could allow producers to store their crops while maintaining quality for a longer period of time, reducing the pressure to sell immediately to millers or traders at harvest when supply is at its highest. These factors can give producers more bargaining power with buyers provided that they have enough working capital or can access loans to cover their needs for cash, and help increase the prices for their production. However, under market conditions, producers’ bargaining power would remain limited in comparison with millers’ by the fact that millers benefit from subsidized loans at 6% per year.


2.1.7 FOs’ Rice banks

(1) There are over 3,000 rice banks in Cambodia, and FOs manage many of them.

Many FOs also manage rice banks. There are over 3,000 rice banks in Cambodia2. Members can access seed and food from the rice banks, which enables poor farmers to have food security during the shortage period, especially during the critical period of transplanting season (August-October). In the past, farmers borrowed rice from private lenders with high interest rates. Rice banks are not only to help each other during periods of food scarcity, but also to mobilize financial resources for community projects (such as infrastructure development) and other collective action. Many rice banks try to put aside 5-10% of the interest earned to increase their financial resources.

During the field visit in Takeo province, the team interviewed one AC with a rice bank. The volume is around 11 tons. The limit is 100-150 kg of paddy rice per household. The original stock was provided by AVSF in the form of donation (5500 kg of milled rice). This amount was lent to members as food and repaid in paddy with interest. The interest was 20% of principal for 6 months duration. The conversion was 1 kg of paddy equaled 0.54 milled rice. The second round consisted of paddy to paddy. The rice bank is only for consumption purposes, not commercial. Lending occurs once per year. Households can borrow in July, and repay in January.

2.2 FOs’ and their members’ present access to finance

2.2.1 Relationships with financial institutions

(1) One factor limiting the ability of FOs to access loans from financial institutions is their low level of assets.

There are no data available on the total assets owned by FOs. However, based on the field visits in Takeo province with a number of cooperatives, we can summarize that the common assets of most FOs are: raw material stocks (paddy rice, fertilizers), cooperative land and in some cases, warehouses and machineries owned by the cooperative (such as hand tractor, milling machine). These assets tend to be insufficient to cover the financing needs of FOs (RDB and MFIs request collateral of 200% of loan amount).

In Angkor Borey District, one FO owns cooperative land with an estimated value of USD 10,000 with soft land title. Another FO in the same district received land from the government worth USD 8,000 and a newly constructed warehouse valued at USD 11,000. Another cooperative in Kraing Bateay, Tramkak District also possess cooperative land with a pond. They also have rice stock in the rice bank worth 10,340,000 KHR (USD 2,585). The Cooperative Union in Tramkak District owns one milling machine worth USD 15,000.

2 GIZ, 2011. Rice Bank Survey.


(2) All of the FOs interviewed expressed that the prevailing interest rate is too high relative to the gross margin of their business activities. A financial analysis rather suggests that the ability of an FO to bear the commercial rates for their commercial activities varies from one case to another.

To no surprise, all the FOs interviewed requested for the lowest interest rate possible, with most quoting an ideal rate to be 0.5% per month. The ability of an FO to bear the commercial rates varies by FO and commercial activity.

For fertilizer trading, one FO in Angkor Borey District, Takeo Province can earn a gross margin of just 1.4% per month for a 3-month cropping cycle. For this particular FO, their initial fertilizer purchase at the start of the cropping season is 2 tons, roughly USD 1,000. Of this amount, 70% of sales are made on credit to members and 30% in cash. The FO earns a profit of 3,000 KHR (USD 0.75) per 50 kg bag for sales on credit (roughly USD 0.015 per kg), and 1,000 KHR (USD 0.25) per 50 kg bag for sales in cash (about USD 0.005). Money from the cash sales is used to buy another round of fertilizers. This process repeats for about 4 times per cropping season. With the effective lending rates of formal financial institutions ranging from 1.6% to 2.3% per month for small loans, this FO would not be able cover the commercial rates. However, they would be able to afford an interest rate higher than the requested rate of 0.5% per month.

However, another FO in Tramkak District, Takeo province would be able to sustain their fertilizer business at commercial rates. This FO runs in an area with a 6-month cropping cycle. The profit from sales on credit is 10,000 KHR (USD 2.50) per 50 kg bag (about 0.05 per kg). For sales in cash, they profit 5,000 KHR (USD 1.25) per 50 kg bag (around 0.025 per kg). Within the 6-month cycle, the FO can rotate the cash purchases 4 times also. The profit margin per month is 2.67%, slightly above the effective lending rates.

Table 3: Net profit Estimates for Fertilizer Trading Business of FOs

3 month production

cycle* 6 month production

cycle** 3 6 Price per kg ($) 0.5 0.5 Initial volume purchased (tons) 2 2.5 Purchases ($) 1000 1250 Profit per kg - on credit 0.015 0.05 Profit per kg – cash 0.005 0.025 % cash sales at start of production cycle 30% 30% # cycles cash sales for whole production cycle 4 4 Profit on credit sales 30 125 Profit on cash sales 12 75 Remuneration of staff, including travel costs ($) 40 40 Total profit 2 160 Net profit over capital invested % 0.2% 12.8% Net profit % per month 0.07% 2.13%

Note: *FO in Angkor Borey District, Takeo Province and **Kraing Banteay FO in Tramkak District, Takeo Province


For paddy rice trading, two FOs reviewed appear to be capable of bearing the commercial lending rates. The Pre-Union of Cooperatives in Tramkak District, Takeo province can earn a gross margin over capital invested of 10.1% per month. Likewise, an FO in Battambang can earn 12.3% per month.

Table 4: Net profit Estimates for Paddy Rice Trading Business of FOs

Pre-Union of Cooperatives,

Tramkak Battambang

Purchase price ($ per kg) 0.33 0.30 Total volume purchased (tons) 40 80 Purchases ($) 13,000 24,000 Sales Price ($ per kg) 0.34 0.31 Total Sales 13,500 25,120 Remuneration of staff, including travel costs ($) 10 10 Total Profit 490 1,110 Net profit over purchase % 3.8% 4.6% # Rotations per cycle 4 4 Net profit over capital invested % 15.1% 18.5% Duration of cycle (months) 1.5 1.5 Net profit % per month over capital invested 10.1% 12.3%

(3) Most FOs lack credible business plans and an accounting system, two factors that can hinder a relationship with a financial institution.

During the field visits, it was apparent that FOs lack proper accounting systems. Most of the cash flows were written in notepads and in some cases by consecutive dates. In terms of business plan, most of the FOs interviewed have an idea of the expected costs and revenues of their planned activities, but it is not concrete yet. The SCCR project has helped some FOs in developing their business and financial plan in the meantime. Further support and capacity building in the filed of financial management and business planning will be necessary in order to support the development of a creditworthy demand from FOs, and sustain the gradual expansion of the targeted credit mechanism.

(4) The majority of FOs do not have bank accounts.

In general, most FOs do not have a bank account. During a EU funded project in 2007-2010, small grants were provided to 181 FOs across 4 provinces (Takeo, Prey Veng, Battambang and Kampong Thom) to develop their activities. In this project, FOs approved for a grant were required to open a bank account at ACLEDA Bank, which helps developing relationships between FOs and financial institutions.


(5) The practice now is for board members of the FOs to take out personal loans using personal collateral on behalf of FOs, usually from an MFI or ACLEDA Bank. The risk is entirely on the individual members.

For instance, in Sraey Kwow Cooperative, Tramkak District, the Cooperative Chief borrowed from PRASAC the amount of USD 2,500 in 2013 as an individual using his personal collateral and guaranteed by members on the Board. The loan had a tenor of 24 months with an interest rate of 1.9% per month. The loan was used to finance the cooperative’s fertilizer and paddy trading businesses.

In Trapeang Sangke Cooperative, also in Tramkak District, the Cooperative Chief borrowed money for the farmers’ organization (before they were formalized into a cooperative) from PRASAC using his own collateral. The money was used to finance a mushroom cultivation business. However, poor management by the implementers resulted in damaged crops and the responsible members stopped the activities. The Cooperative Chief was left with the burden to repay the loan on his own. From this experience, the Cooperative Chief expressed that he would still be willing to take out a loan under his name for the cooperative but with conditions. For example, members involved with the specific business should deposit their collateral to the cooperative for holding as well. In addition, other precautions such as written and signed meeting minutes related to the loan should be made, clarifying that losses must be equally covered by the members based on shares, not solely by the borrower.

(6) In some cases, MFIs and banks give out loans to FOs and associations based on board members’ individual collateral.

One of the FOs that has set up a paddy commercialization activity with the support of CEDAC borrowed to finance this activity:

USD 17,000 from ACLEDA and PRASAC, bearing 2% interests per month, with provision of collateral from 4 board members and capital repayments on a four-monthly basis.

KHR 33 million (USD 8,200) from savings and credit associations and local money lenders, at 3% monthly interest, 6 months duration and balloon repayment.

It is RDB’s common practice to give out loans to associations in their names, mostly for their savings and credit activities, as for example the rice miller associations. These loans are mostly based on collateral pledged by board members. This is also the case of their 2 FO loans.

2.2.2 Supplier and buyer credit

(1) Farmers have a financial relationship with various stakeholders along the value chain, with trade credit representing an important part of the system.

Farmers have financial relationships with various actors along the value chain.


Input suppliers:

Between farmers and input suppliers, especially for fertilizers and pesticides, input suppliers sell to farmers on credit. In the case of fertilizers, roughly 46% of total purchases are bought on credit3. The interest charged varies by location and product, which can range from 5,000KHR – 10,000 KHR (USD 1.25-USD 2.50) for 50 kg bag for duration of 1-3 months (equivalent to an interest rate of 1.7%-3.3% per month). Repayment is made at harvest time. Similarly, 51% of pesticides used are purchased on credit from suppliers, with a similar arrangement as for fertilizers.4 For the provision of seeds, farmers usually do not purchase seed but use stock saved from the previous season (over 90% is own stock) 5. Indeed, a problem with the quality of production is the lack of pure seeds. Farmers mentioned that they have access to improved high yield seeds, but cannot afford it. The price can be as high as 3,000 KHR per kg (USD 0.75).

Many cooperatives have started engaging in input trade, which has often led to a decrease in input suppliers’ credit sales conditions. In one of the villages visited in the field, before the cooperative started to sell inputs, farmers bought individually from private input suppliers, who charged a high price and high interest rate if bought on credit (10,000 KHR or USD 2.50 per 50 kg bag for 3 month period, equivalent to an interest rate of 3.3% per month). In another village, private lenders/suppliers were charging 5,000 KHR of interest per bag per month (5% per month).

Input suppliers provide trade credit to some FOs. One FO interviewed in Angkor Borey District receive 50% of fertilizer purchase on credit from suppliers and 50% is made on cash. The trade credit is short term, and the FO is able to make repayment to the input supplier within 7-10 days when they receive cash payments from their members. The supplier does not charge any interest on the credit because of the short duration. This cycle continues for about 4 rotations per cropping season.

Buyers

Paddy collectors, the main buyer of farmers, also provide credit, advance payment, seeds, fertilizers and/or pesticides to farmers sometimes. This can be in the form of seed loan, or advance payment on orders. Contracts are usually verbal, in which the farmers agree to sell to paddy collectors at harvest. The price is typically set by the buyer and is usually the prevailing market price at the time of sale. The relationship between farmers and paddy collection is generally long-term, spanning 10 years even. Farmers tend to sell to the same collector. Paddy collectors are business people with strong financial capacity, and tend to be quick to respond to the cash flow needs of farmers as well as in organizing transportation and other logistics, a trait that makes them more competitive and attractive than farmers’ organization and millers in the eyes of farmers.

3 Kang, C and Liv, D. (2013). Farmers Investment Climate, ADB. 4 Kang, C and Liv, D. (2013). Farmers Investment Climate, ADB. 5 Kang, C and Liv, D. (2013). Farmers Investment Climate, ADB.


2.3 FOs’ needs for financing

2.3.1 Working capital

(1) FOs need very short-term loans of roughly USD 5,000-26,000 to initiate or expand their paddy rice trading business.

One of the key business activities that many FOs plan to initiate or expand is the trading of paddy rice. The FO needs capital at harvest time to purchase paddy from farmers. Harvest can occur 3 times per year (2 times for wet season rice and 1 time for dry season); however, most farmers in Cambodia only crop one time per year. Given the diversity in the scale and maturity of various FOs as well as the differences by region, the minimum volume of trading is about 80 tons per season, and at the higher end, around 400 tons per season. Capital can be rotated 4 times during the 1-1.5 month trading period. The estimated total cost for financing one rotation of paddy trading ranges from USD 6,192 for 20 tons of paddy to USD 32,010 for 100 tons of paddy. Of the total capital required, it seems reasonable that FOs should finance 20% from share capital and 80% from a loan.

Table 5: Investment Cost of Paddy Rice Business Operation Costs Volume of paddy per rotation, tons 20 50 100 Staff Costs 52.00 130.00 260.00 Transportation 140.00 350.00 1,750.00 Purchase Paddy from Farmers, USD0.30 per kg 6,000.00 15,000.00 30,000.00 Total Operation Costs for 1 rotation 6,192.00 15,480.00 32,010.00 Financing Share Capital, 20% 1,238.40 3,096.00 6,402.00 Loan, 80% 4,953.60 12,384.00 25,608.00

According to data from the DAE, the 486 registered ACs cover a production area of 84,322 hectares. This would translate to a production volume of about 168,645 tons of paddy rice (for one cropping, based on the assumption that yield is 2 tons per hectare). About 46% of the volume (77,576 tons) would be commercial, as farmers would save 54% for consumption6. If FOs were to purchase all of the surplus paddy at a purchase price of 1,300 KHR per kg (USD 0.33), and assuming 4 rotations per cropping season, they would need over 25 billion KHR (about USD 6 million), a little over USD 13,000 per AC. However, this figure only represents the prospective financial need, while the realistic amount in the short term will be much lower given that at the moment, not all cooperatives are involved in the rice business. Furthermore, of the existing 486 cooperatives, only a small proportion would be eligible to receive loans considering the requirements in terms of managerial capacities and accounting standards.

6 Farmers who join cooperatives have often (in average) slightly bigger farms than the average of Cambodian farmers. According to MAFF figures, the average farmland size would be around 1.8 ha. Based on ADB study, larger farms (with farmland of 1.5 ha to 10 ha), sell roughly 46% of their production volume.


(2) FOs need short term loans of about USD 1,000-5,000 to grow their fertilizer trading business.

FOs also need financing to expand their fertilizer trading business. Capital is needed at the beginning of the season during planting time. FOs purchase fertilizers from input suppliers and sells to farmers. Some input suppliers offer FOs a trade credit of 50% of purchase; this may not be the case for all FOs. On the sales side, around 70% of purchases by farmers are on credit and 30% in cash. Farmers who purchase on credit repay the loan at harvest with interest. On the low end, the demand for fertilizers for smaller FOs may be 4 tons of fertilizer per rotation; on the higher end, demand could be about 20 tons per rotation. Based on these figures, the total investment cost is around USD 2,000 to over USD 10,000. FOs would need loans to cover 50% of the total cost; most of the FOs visited are already financing about 50% of their capital needs from share capital. This capital can cover one rotation. During a cropping season, which can run from at least 3 months to at most 6 months, FOs can rotate the capital 4 times.

Table 6: Investment Cost of Fertilizer Trading Business Investment Costs Volume per rotation, tons 4 10 20 Staff Costs 37.00 92.50 185.00 Transportation - will be covered by input supplier - - Cost of fertilizer, USD500 per ton 2,000.00 5,000.00 10,000.00 Total Operation Costs for 1 rotation 2,037.00 5,092.50 10,185.00 Financing Share Capital, 50% 1,018.50 2,546.25 5,092.50 Loan, 50% 1,018.50 2,546.25 5,092.50

On average, farmers spend around USD 90 per hectare on fertilizer.7 The amount is higher in the dry season than in the wet season, which can reach about USD 165 per hectare. Taking into account the total land area covered by registered AC (84,322 hectares), the total expense on fertilizers for one rotation is USD 1.9 million, around USD 4,000 per AC.

The fertilizer credit is intended to be reimbursed at harvest time (for the part sold to farmers on credit), when the crop is then purchased by the FO. Hence, in case the FO is involved both in fertilizer trading and paddy selling, financing needs for fertilizer trading and for paddy trading will not be simultaneous, but successive. Moreover the revenues earned from fertilizer trading, in particular for the part sold on credit – at a higher price, will increase FO’s own working capital and reduce financing needs for paddy trade.

7 Kang, C and Liv, D. (2013). Farmers Investment Climate, ADB.


2.3.2 Equipment

(1) FOs need long term loan of about USD 10,000-80,000 to invest in improved equipment and facilities.

Some FOs express plans to purchase agriculture machines and invest in warehouse as a strategy to increase the quality of their products, bargaining power and scale. But some FOs mentioned that investing in a warehouse is too risky because (1) they lack technical skills to ensure that the paddy is properly dried to prevent spoilage and (2) prices do not always rise or do not rise enough to ensure profit will cover commercial interest rates. The uncertainty on price evolutions is all the higher as rice is the main staple food as well as the first crop produced by farmers, in Cambodia as well as neighboring countries. This makes it subject to political interventions generating a high risk of erratic price fluctuations: policies can either set low prices to subsidize urban consumption or set high prices to support farmers. It has been observed in the past years that Thailand and Vietnam have had such interventions, together with border closure at certain times of the year, which impact rice buying prices in Cambodia. Such interventions can create opportunities but are also a factor of uncertainty which makes planning difficult.

The types of machines needed are drying, threshing, harvester and truck. The cost of equipment can range from USD 10,000 to USD 50,000 and for facilities around USD 20,000-80,000. Based on profitability data (presented in section 2.4.3), the duration to service the loan is estimated at 2-9 years.

2.3.3 Pilot SCCRP actions requiring credit to FOs

(1) Under Component #3, the SCCRP initiated 7 pilot actions in 2013, of which 2 projects require credit to FOs in the next phase.

The SCCRP Project has rolled out a number of pilot actions to promote Farmers Organization and the Commercialization of the Rice Sector, as following:

Contract for rice seed multiplication between Loran Group and Nikum Krao Preah Sihanouk Agriculture Cooperative (NPAC) in Battambang province. Implemented by SCCRP with DAE and PDA involvement. The main objective is to facilitate a contract between Loran Group with NPAC (2 farmers on 2 ha of land size) for Phkar Rumdoul rice seed multiplication. The contract covers the period from 1st August 2013 to 31st January 2014; however, the contract has been automatically cancelled due to the rice seed multiplication fields were flooded and completely destroyed in October 2013.

Support to the creation of “Paddy Selling Groups” within Stung Chinit and Teuk Chhar FWUCs in Kampong Cham and Kampong Thom provinces. Irrigation Service Centre (ISC) implemented the pilot from May 2013 to January 2014. The objective was to support FWUCs (Farmer Water User Communities) to use their potential and existing capital to mobilize Paddy Selling Group and build up models to promote collective marketing of paddy for mutual benefit of farmers and millers or exporters. 17 PSGs were founded with 359 members. Up to the end of 2013, a total of 430 tons of paddy rice was sold through the PSGs. Each member of the PSGs was able to earn an additional 10 USD per ton from selling to the PSG compared to selling to local collectors.


Support to organic paddy production cooperatives in Preah VIhear province. COrAA (Cambodian Organic Agriculture Association) was the implementing partner for this action, which ran from 1st July 2013 to 31st January 2014. There are 5 objectives for this project: (1) The lead firm manages the organic rice value chain; (2) The internal control system (ICS) of the targeted cooperatives are functional and can be successfully certified; (3) Certification of the cooperatives for the domestic market and internal market (selected cooperatives only) is provided; (4) Farmers supply organic paddy of good quality; and (5) The domestic and internal demand for Cambodian organic rice has increased.

Feasibility study for support to storage and commercialization by cooperatives in Takeo. This study started in September 2013 and is still in progress. SCCRP project is carrying out the study with notably involvement of DAE. This study focuses on “Rice collection and commercialization for agricultural cooperatives in Takeo province”. One of the key objectives is to identify potential agricultural cooperatives and define with them a viable business model in order to support them to improve paddy commercialization. For the next phase of the project, FOs will need credit. Details are elaborated in the next section.

Partnership with BRICo (Battambang Rice Investment Co., Ltd) is a project implemented by the SCCRP Project and aims to facilitate a contract between the rice miller/exporter and an FO to secure paddy production and supply. Up to end of 2013, the contract has been drafted and still need time to improve and finalize in early 2014. The credit need identified for this project was a short-term cash flow credit at the time of harvest, so that the FO can pay its members cash when they deliver the paddy, whereas the FO will be paid by BRICo 2-3 days after by bank transfer. The credit need for finance is equivalent to the value of three days of harvest at the peak of harvest (USD 5,000 - 10,000) on a very short term basis. BRICo has agreed to provide this financial advance. Indeed, for such short-term needs, commercial credit inside the value chain is an appropriate option. Details are elaborated in the next section.

Potential partnership with Golden Rice (Cambodia) Co., Ltd: On September 24, 2013, Golden Rice has signed with Proparco (Proparco is a branch of AFD specialized in loans to the Private Sector, with an objective of combination of business activities and sustainable development) a USD 10 million loan agreement. As part of the condition of the loan, Golden Rice took the commitment to source a small portion (2,000 tons of paddy sourced from FOs in 2014) of its paddy supply from FOs. AFD has invited Golden Rice to establish a relation with SCCRP project in order to take the opportunity of Component #3 of the project to support the implementation of this objective. The first meeting between Golden Rice and FOs has been organized at Golden Rice factory on 2nd December 2013.

Potential Partnership with Golden Daun Keo Rice Mill in Takeo province. While gathering information in Takeo as part of the feasibility study for an intervention there and during the mission of Christophe Boscher, international backstopping support of Component #3 on 12th November 2013, the project met with Golden Daun Keo rice mill, who expressed interest to explore possible commercial partnership with FOs.


(2) Among the actions linked to the Takeo feasibility study, profit analysis shows that the investment project on truck and harvester can cover commercial interest rates, but the dryer and warehouse project cannot be financed on a loan for 80% or at extremely subsidized conditions over a long duration.

One pilot action is a feasibility study for support to storage and commercialization by cooperatives in Takeo. Four ACs in Angkor Borei District and 5 ACs in Tramkok District were identified. SCRRP organized a number of meetings with the ACs to help define the business plans for investment in equipment and storage facilities. In Tramkok Districts, the study will work with the pre-Union of Cooperatives rather than individual ACs, which is still undergoing. In Angkor Borei, 2 of the 4 cooperatives in Angkor Brei are interested in taking out a loan to finance their investment projects.

Harvester machine & truck: Sromok Sok Sen Chey AC in Angkor Borei plans to invest in a harvester machine and truck for their paddy trading business. The total investment cost is estimated to be USD 57,000. Of this amount, USD 2,000 is working capital to purchase paddy from farmers, USD 45,000 is to purchase a harvester and USD 10,000 is to purchase a 10-ton truck. The FO expects to raise share capital of USD 6,500 from its members, and seeks to get a loan to cover the remaining USD 50,500. A profit analysis reveals that the business can be profitable, with a projected annual net income of USD 25,495. The table below (Table 9) shows the pay back periods required according to FO’s payment capacities, in 3 cases: at annual interest rates of 6% (highly subsidized rate), 12% (subsidized rate), and 18% (average commercial rates) per year, with monthly instalments. It shows that the FO would be able to pay back the principal and interest in about 2.2-2.6 years from the cash-flow generated (Table 8). Thus, the harvester and truck project would be able to cover interest rates ranging from 6%-18% per annum.


Table 7: Profit Analysis of Paddy Business with Harvester and Truck (annual figures)

I. Income Earning from harvester (500ha/year) $ 37,440.00

Earning from truck $ 15,750.00

Total income $ 53,190.00 II. Material expenses

2.1. Harvester Fuel cost $ 5,491.20

Depreciation $ 9,000.00

Repair and maintenance cost $ 1,200.00

2.2. Truck for transportation Fuel cost $ 5,400.00

Depreciation $ 2,000.00

Repair and maintenance cost $ 600.00

Insurrance $ 600.00

Tax on road use $ 120.00

2.3. Total material cost $ 24,411.20

III. GROSS PROFIT/LOSS $ 28,778.80

IV. Operating expenses 4.1. Harvester 1 driver + 1 staff $ 4,992.00

4.2. Truck for transportation 2 drivers $ 3,600.00

4.3. Others expenses Meeting of BoD $ 480.00

Staff (Accountant?) $ 1,800.00

Laptop + printer + copy $ 700.00

Total overhead cost (stationary, etc.) $ 720.00

Others expenses 10% $ 1,992.00

Total expense (USD) $ 14,284.00

V. Loan 8% for 5 years $ 879.96

VI. NET PROFIT (USD) $ 13,614.84

Net profit before interests $ 14,495 Net cash flow $ 25,495

SOURCE: SCCRP+ consultant calculations


Table 8 : Payback Period for Investment in Paddy Business with in Harvester and Truck

INTEREST RATE PER YEAR 6% 12% 18%

INITIAL INVESTMENT (LOAN P&I) $53,530.00 $56,560.00 $59,590.00

PERIODIC CASH FLOW $25,494.80 $25,494.80 $25,494.80

PAYBACK PERIOD (YEARS) 2.17 2.39 2.66

Drying machine and warehouse: Sromok Sok Sen Chey AC also considered investing in a drying machine and warehouse to store paddy. The total investment was estimated to be USD 33,144, of which start up capital for paddy purchase was USD 11,144, construction of warehouse USD 12,000 and purchase of drying machine USD 10,000. They planned to finance 80% (USD 26,515) with a loan. Taking a look at the profit analysis, the annual net income from the business activities would be slightly under USD 3,000 and the annual cash-flow a bit over 4,000. At an interest rate of 6% per year, it would take the FO over 8 years to repay the loan from the cash-flow generated by the activity. At 12% interest rate, it would take the FO over 13 years. At a commercial interest rate (18%), the cash-flow cannot repay the loan whatever the duration. Thus, the dryer and warehouse project cannot be financed on a loan for 80% or will require extremely subsidized conditions over a long duration (Table 10).


Table 9: Profit Analysis of Paddy Business with Warehouse and Dryer (annual figures)

I. Income

Earning from warehouse (50 tons of paddy rice at 18% of moisture) $ 3,750

Earning from dryer (375 tons) $ 7,500

Total income $ 11,250 II. Material expenses

2.1. Storage cost Repair and maintenance cost $ 120

Depreciation $ 600

2.2. Dryer cost Fuel cost $ 1,875

Rice hull $ 1,875

Repair and maintenance cost $ 120

Depreciation $ 500

2.3. Total material cost $ 5,090 III. GROSS PROFIT/LOSS $ 6,160

IV. Operating expenses

4.1 Warehouse 1 staff (full time) $ 600

Monthly meeting of board members (5 members) $ 60

Buying service $ 66

Transportation cost $ 1,180

Drying service $ 787

Total overhead cost (stationary, etc.) $ 120

4.2 Dryer 1 staff (part time) $ 300

Monthly meeting of board members (5 members) $ 30

Total overhead cost (stationary, etc.) $ 60

Total expense (USD) $ 3,202

V. Loan (8%) for 5 years $ 530

VI. NET PROFIT (USD) $ 2,428

net profit before interests $ 2,958 net cash flow $ 4,058

SOURCE: SCCRP + consultant calculations


Table 10 : Payback Period for Investment in Paddy Business with Warehouse and Dryer

INTEREST RATE PER YEAR 6% 12% 18%

INITIAL INVESTMENT (LOAN P&I) $28,105.69 $29,696.58 $31,287.46

PERIODIC CASH FLOW $3,457.95 $3,457.95 $3,457.95

PAYBACK PERIOD (YEARS) 10.58 22.30 -not affordable

Truck: The other AC, Ta Ey Rung Roeung AC, is interested in borrowing USD 15,000 to purchase a truck for transporting paddy for a term of 5 years. The researchers did not have data to analyze the profitability of this case.

(3) Another pilot action of SCCRP that will require credit is the partnership with BRICo (Battambang Rice Investment Co., Ltd), in which the project is facilitating a contract between the miller and an FO to secure the production and supply of paddy rice. The contemplated conditions do not make the project profitable enough to be financed on loan.

In Battambang, SCCRP is facilitating a contract between an FO and Battambang Rice Investment Co., Ltd. (BRICo) for the production and supply of paddy. BRICo first expressed interest to develop contact farming with FOs in October 2013 and reconfirmed it again in the first workshop between BRICo and FOs on November 25, 2013. Many meetings have been organized subsequently in 2013 with the support of SCCRP. At the end of 2013, a contract has been drafted and a final version is expected in early 2014. In this pilot, FOs need a short term loan of USD 6,000 for 1 month to buy and sell paddy. This capital could be rotated 4 times during the month (however, the frequency could be higher as BRICo would pay after each delivery on a nearly daily basis, except when the banks are closed). The net income is very marginal, just USD 18 per rotation (0.3% gross margin), which is insufficient to service a loan, even with a highly subsidized interest rate of 6% per year (0.4% for 1 rotation). As planned, this activity thus cannot be financed on loan. Adjustments to operating conditions may be explored.


Table 11: Profit Analysis of Paddy Selling Business of FO (Case in Bavel District and BRICo Rice Miller, Battambang)

Units Amount (USD)

FIXED COSTS STAFF

Services of board members (8 members) per working 20 tons 8 32.00 Marketing and communications (1 person) per working 20 tons 1 5.00 Accountant (1 person) per working 20 tons 1 5.00 Paddy quality assessment/ procurement (2 persons) 2 10.00 Labors (load & unload) per working 20 tons

50.00

Foods for all staff incl. laborers per working 20 tons

17.00 Total Fixed Costs

119.00

VARIABLE COSTS Transportation (one truck for 20 tons, hire private) 1 140.00

Paper, bank checks, invoices, delivery certificates

3.00 Buy paddy rice from members, price of USD0.3 per kg

6,000.00

Total Variable Costs

6,143.00 TOTAL COSTS

6,262.00

INCOME

Income from selling 20 tons, price of USD0.314 per kg

6,280.00 Net Income

18.00

Number of rotations per season

4.00 Net income per season

72.00

PROFIT MARGIN

0.3% DURATION (DAYS)

22.50


3. Existing and emerging financing for FOs

3.1 RDB

3.1.1 Overview of RDB’s situation

(1) The Rural Development Bank (RDB) is a small specialized public bank acting as policy bank for the RGC, that was set up to service and refinance loans to licensed financial institutions. The RDB has no branch network, 68 staff (2012) and a loan portfolio of USD 61 million to 111 clients (01/2014).

The Rural Development Bank was established by the Royal Government of Cambodia in 1998 as a public and autonomous enterprise and is authorized to operate as a specialized bank. The RDB was set up to service and refinance loans to licensed financial institutions – banks and MFIs – involved in the provision of financial services to rural households and small businesses. Its activities have been extended by sub-decree in 2007 to include implementing of development projects upon request from implementing partners, where such projects may not be implemented by a microfinance operator, funding the implementation of special development projects from the Government or other special development projects upon authorization of the MEF. The RDB thus now finances partners associations, development communities and MSMEs that take part in rural development in Cambodia in this framework.

The RDB’s products and services are:

Loans: short term, medium term, long term and overdraft. Gross loan portfolio as at 12/31/2012: USD 54.7 million, of which 65% are long term and 99.8% have an interest rate under 10%; as at 01/31/2014: USD 61.6 million.

Deposits: savings accounts, fixed deposits, checking accounts: USD 1.3 million as at 12/31/2012

Services: remittances, inter-bank transactions: commission income USD 171,000.

(2) The ASDF is the RDB’s main source of funding representing over half of total resources. RDB’s own funds come next with over one third, then China Development Bank with 10%.

SOURCE: RDB

as at 01/31/2014, in million USD:Sources of fundsASDF 32.9 53%RDB 21.7 35%CDB 6.0 10%AFD 0.8 1%IFAD 0.2 0%Total 61.6


External funds are mostly earmarked towards specific sectors or types of clients:

ASDF funds go prioritarily to the rice sector and to SMEs, although they are available to other actors (see below).

CDB funds finance the rice sector.

AFD funds finance rubber family plantations.

IFAD and ADB funds are dedicated to wholesale lending to MFIs.

(3) The RDB’s risk management remains very weak, resulting in poor portfolio quality.

The RDB engaged KPMG in May 2013 for a support to strengthen the governance and improve the functioning of the Bank. The debriefing meeting was held during the mission. KPMG’s work evidenced a number of gaps in the risk management framework compared to local risk management regulations and standards for banks. KPMG provided recommendations that have not as yet been implemented.

Portfolio at risk at the end of 2012 was at 10% doubtful loans (over 180 days late) after write-off and restructuring and was said to be higher in 2013 though no precise figures were provided, although information was requested on the share of non performing loans in the portfolio and the aged trial balance of loans. The auditors’ report included in the 2012 annual report notes some elements showing that the portfolio at risk figure may be underestimated in the financial statements: 16% of the portfolio consisted in 31 loans with insufficient or no financial information that should be classified as non performing and covered by a specific 3% provision but have not been.

(4) In March 2012, the RDB’s Board had made the decision to create mobile units as a preparation to setting up a branch network. No such unit has been created since then.

RDB’s Board approved the creation of branches in Battambang and Siem Reap on 9/3/2012 but due to regulatory and budget constraints decided to start with mobile units that could be turned into branches once the activity would be sufficient. This however has not been set up as yet. It is to be noted that the fact that it has not been set up is partly a AFD/project decision, as it is envisaged that the SCCR Project could contribute to set up these mobilie units, but it was decided to first have the KPMG banking support mission completed before moving further on this subject.

(5) The RDB’s CEO has been appointed special counsellor to the Prime Minister, which might lead to changes in the Bank’s mode of operations.

H.E. Son Koun Thor has been the RDB’s CEO and Chairman of the Board ever since its creation in 1998. He has been appointed as special counsellor to the Prime Minister at the end of 2013. The organization of his succession was not yet clarified at the time of the mission.


3.1.2 Credit activities

(1) The RDB’s credit experience is mainly that of wholesale lending, combined in recent years with a small experience in lending to rice millers and farmers in the very secured rubber value chain.

The RDB’s credit policies and procedures are mainly defined to give out loans to institutions who onlend to final borrowers, be they financial institutions, NGOs, associations such as the RMAs or some FOs. In the framework of ASDF (see below section 3.2), the RDB has extended its activities towards a few private companies and farmers. With the taking over of the AFD Project for the Development of Smallholder Rubber Production’s loan portfolio it has acquired a portfolio of loans to small individual farmers (see below, same section).

(2) The RDB’s Credit Department has 10 staff, of whom 3 credit officers, who monitor the loan portfolio in the field through 1-2 day missions every 3 months. This entails high transportation costs and limits the possibility of close follow-up.

The Credit Department’s staff includes a credit director, 2 deputy credit directors, 2 bureau chiefs, 2 deputy bureau chiefs and 3 credit officers. The credit officers and deputy credit directors are based in the head office. They are dispatched as one for microfinance clients, three for SME clients and one with administrative functions.

RDB credit officers monitor the loans in the field, 1.5 and 6 months after disbursal. For wholesale loans, the monitoring is based on monthly reports from borrowers and a random check of a few end-borrowers in the field.

The total cost of the RDB’s Credit Department is:

USD 82,875 for salaries & benefits

USD 49,748 for mission costs.

(3) The rice sector accounts for 71% of the RDB’s total loan portfolio.

SOURCE: RDB

Loans to the rice sector are given out either directly to rice millers, both for working capital and investment purposes, or to rice millers’ associations – RMAs – (USD 7.2 million for RMAs, i.e. 12% of loan portfolio). In the latter case, the collateral provided can be either the chairman’s own property or

as at 01/31/2014, in million USD:SectorsRice 43.8 71%MFIs 7.1 12%SMEs 6.9 11%Rubber 2.3 4%Cassava 1.3 2%Other 0.2 0%Total 61.6


his personal guarantee, through a promissory note, with their Federation providing a guarantee letter. Loans through the National Federation of Rice Millers Associations and Provincial RMAs are wholesale loans to SMEs.

Some loans also go to import / export companies and to rice markets (USD 1.5 million for 3 paddy market associations).

Loans to MFIs now concern only small-sized MFIs (registered and licensed MFIs).

(4) A specialized unit has been set up in Kampong Cham in order to collect rubber planters’ repayments of loans given out under AFD Project for the Development of Smallholder Rubber Production. Its sole activity is collecting repayments.

AFD has implemented a series of projects for the Development of Smallholder Rubber Production since 1999 in Kampong Cham. To support these projects, AFD set up a long term credit facility through a credit line to RDB whose implementation was delegated to a French NGO, GRET, due to the RDB’s lack of physical branches and specialization in wholesale lending. The credit group was led by GRET via a service contract between the RDB and GRET. This group, based in Krek, was comprised of five Cambodians and one part time foreign technical assistant. It managed the implementation and monitoring of loans, including: financial assessment of proposed farmers, implementing loan contracts, proceeding with the land title pledging process, producing and distributing annual accounts, and collecting early repayments for the RDB. The initial plan was to transfer the portfolio to an institution that would specialise in the long-term financing of rubber production in Cambodia. The feasibility study of the third phase (CIRAD and SOFRECO, 2006) notably argued for financial products better suited to poor farmers and more similar to the loan products of microfinance institutions. If a successor could not be identified, it was expected that the rubber credit line would become a capital contribution to the RDB, which conflicted with its function as a wholesale bank. The transfer, organised in 2007, was not completed: microfinance institutions argued that the conditions on loans to rubber producers differed too greatly from those they offered to their clients. Beyond this, a number of organisations expressed doubts about the veracity of borrower lists and questioned the existence of dummy names. Lastly, it emerged that since 2004, the RDB had argued for being able to undertake the management of this line of credit and as a result, it would have been reluctant to relinquish it.

As no microfinance institution was thus interested in taking over the loan to smallholder rubber planters, the RDB manages the portfolio on its own since April, 2007, upon expiration of the agreement with GRET, and has internalized the credit group as a specialized unit. This unit collects loan repayments but does not continue to give out new loans. It has not been possible to confirm precisely whether this unit generates sufficient income to cover its costs of operation but the level of its portfolio outstanding (USD 0.8 million) and that of its costs (salaries & benefits 38,680 + other direct costs 18,653) suggests that it probably covers its direct costs only: a portfolio yield 7% per annum would enable it to do so.


3.1.3 Present activities with FOs

(1) The RDB has adopted a credit policy for cooperatives, associations and rural communities in 2010. It is aimed at refinancing these organizations’ internal cash lending activities and provides that the client pays the cost for the bank’s monitoring.

The RDB’s credit policy for cooperatives, associations and rural communities states as a requirement that the borrowing organization have a savings mobilization program and defines the purpose of the loan as enabling the borrowing organization’s members to operate their business. The loan agreement also specifies under the obligations of the Client to ‘use the loan to sub-lend’. The client is required to do bookkeeping properly (with accounting system and financial report – balance sheet, income and expense report), including ensuring their loan loss provision is enough to cover potential losses on loans.

Characteristics of the loans are:

For short term loans (up to 12 months), overdrafts and credit lines: Amount from USD 5,000 to 5% of the bank’s capital, not exceeding 4 times the organization’s own capital, bearing a 12% per annum interest rate in USD (+5% in KHR).

For long term loans (in excess of 12 months): Amount from USD 1,000 to 2% of the bank’s capital, for a duration up to 20 years, not exceeding 4 times the organization’s own capital, bearing a 6-10% per annum interest rate in USD.

Collateral required listed in the eligibility criteria includes fixed asset or guarantee letter or mutual guarantee among members; in the terms of loans however only fixed asset or guarantee letter are mentioned, plus purchased equipment in the case of long term loans.

The loan approving authority is the Chairman and CEO for loans up to USD 50,000, the Credit Committee for loans from USD 50,000 to 100,000 and the Board of Directors above.

The loan agreement has a provision under which the Client is to be responsible for all expenses including the expenses on petroleum, mission, accommodation and other expenses for the auditing working group every year by the RDB. This can lead to high amounts when compared to small loans. This may be what has been referred to by some FOs encountered as costs for training by RDB incurred when awarded an RDB loan, amounting to USD 600.

(2) The RDB’s present activity with FOs is very low (2 clients, USD 140,000) because of RDB’s low presence in rural areas and because most of them do not comply with RDB’s eligibility criteria (size of own funds, collateral, information quality).

The RDB has two FOs among its clients, in Kandal and Banteay Meanchey, whose members are engaged in corn and cassava production and petty trading. Loan duration is 12 months and the loan amounts are USD 100,000 and 40,000 in total for each FO, disbursed in unit loans of USD 15,000 to 50,000 between September 2012 and March, 2013, one of which was restructured.


The head of community manages the on-lending to members. They charge members a 12% service fee, of which 2% goes to the head of the community as management fees, 3% to the head of association who controls the credit activities of several communities, and the remaining 7% is the bank’s interest rate. A further loan is being discussed to finance a common activity, that could be gasoline trade to sell to members. The RDB analyzes that a difficulty of this type of lending is that it relies heavily on the honesty of the Head of the community.

Presently, the RDB finds it difficult to assess loan applications from farmer communities for lack of records and small size of own funds. The RDB is used to refinancing MFIs and relies on their good recording and management capacities.

3.2 Agriculture Support and Development Fund

3.2.1 Goal

(1) The Agriculture Support and Development Fund (ASDF) is a USD 36 million credit facility managed by the MEF and implemented by the RDB. The USD 26 million MEF Partial Credit Guarantee Scheme for Rice Millers has been temporarily allocated to an increase in ASDF.

The Agriculture Support and Development Fund (ASDF) has been set up by the Royal Government of Cambodia as a special Government project to support the private sector in the agriculture value chains, especially SMEs. It is managed by the MEF who approves credit applications submitted by RDB.

It was established in 2009 with USD 18 million and increased to USD 36 million in 2011. The MEF’s Partial Credit Guarantee Scheme for Rice Millers (see section 3.5) has been closed and the decision was made in February 2014 to temporarily allocate its funds to RDB for use under ASDF.

The ASDF is entirely under the MEF’s authority who could thus decide to entrust part of it to another financial institution.

(2) Although the ASDF’s present financing policy provides that associations and communities are eligible to ASDF financing, there are no FOs in the ASDF portfolio as yet. Giving out loans to FOs from ASDF thus does not require a further political decision.

The ASDF’s goals are to maintain price stability, ensure food security and increase in-country processing, through loans to agriculture and agro-industry:

Short, medium and long term loans.

To associations, communities, dealers/traders, rice and agriculture products mills, agro-enterprises.

There are no FOs in the ASDF’s portfolio, for the reasons described above that make it difficult for the RDB to serve FOs.


(3) Eligibility criteria to access ASDF loans include having a legal personality, successful experience in business, own capital covering at least 25% of project cost and collateral valued over twice the loan amount.

Exceptions are possible if agreed to by credit committee and Board.

The ASDF financing policy paper provides that eligible collateral includes land, building, warehouse, production equipment and paddy stock.

In line with the RGC’s Rice policy, the ASDF mostly focuses on processing, with short term loans meant for working capital and medium and long term loans for equipment.

3.2.2 Present situation and operation

(1) The ASDF’s loan decision process is quite long. Loan applications are presented to the ASDF’s credit committee and approved by the ASDF’s steering committee chaired by the Minister of Economy and Finance.

The ASDF’s credit committee is chaired by the RDB’s CEO and includes the Director General of the MEF’s Department of Finance and Industry. The ASDF’s steering committee is chaired by the Minister of Economy and Finance and includes the Ministers of Rural Development and of Agriculture, Forestry and Fishery as well as the Vice Chairman of the SNEC and representatives from the rice millers’ association. Even though the final approval is usually made by the chairman alone, the high position of the committees’ members leads to very busy agendas. The decision process can thus be quite long, which is one of the RDB’s weaknesses as compared to its competitors.

(2) The ASDF’s official interest rates are low but length of decision making leads some agro industries to prefer dealing with commercial banks. The MEF has revised ASDF loan conditions to face competition from commercial banks in 2013.

ASDF loans carry 5-6% annual interest rate + 1% service charge. The interests are divided in reserve for increase in ASDF and reserve for increase in RDB’s capital.

In order to face competition from commercial banks for loans to rice millers, the government revised ASDF loan conditions in the beginning of 2013:

Decrease in interest rates on ASDF loans by one point.

Decrease the service charge on long term loans from 1% per year to 1% one time.

Allow giving out long term loans for working capital in order to mitigate the fact that no credit lines are given out under ASDF.

Decrease in collateral requirements for repeat clients, from 50% loan to collateral ratio to 70% - i.e. collateral as a percentage of loan amount decreases from 200% to 142%.

However both RDB and a commercial bank analyze that the main reasons some clients are leaving RDB to go to competing banks is the time required for loan application processing and the lack of


flexibility in repayment terms (at maturity, rice millers must repay the total principal before processing a new loan application, which makes it difficult for them to manage their cash flow as at the same time they need to stock paddy rice for continuous operation). Some banks (mainly Canadia Bank which is the largest financier of rice millers) attract the best clients for these reasons, offer them higher amount loans and buy back their loans with RDB (per RDB, this has happened with three clients for USD 3 million).

ACLEDA Bank mentions that its rice millers often take a loan from ACLEDA first because the decision process is fast and then has it refinanced by RDB where the interest rate is lower.

(3) The USD 36 million are however almost totally committed, with an ASDF loan portfolio totaling USD 33 million as at January 31st, 2014.

The USD 33 million ASDF loan portfolio as at January 31st, 2014 comprises:

7 provincial rice miller associations (RMAs) onlending to 66 members (1 other RMA has repaid their 2013 loan).

7 private companies (rice mills and exporters).

7 non-company rice millers.

1 rubber farmer.

1 cassava farmer.

1 cassava processor.

3 rice markets (infrastructure), including a pilot project with a common warehouse for 4-5 rice millers.

Loan applications from RMAs specify a list of rice millers that will be the end-beneficiaries of the loan, with value of collateral, own capital, last loan received from provincial association. They bear approval from the association’s chief and from the Federation. They are set up as wholesale loans.

At present, the rice sector thus accounts for the majority of ASDF with 91% of the outstanding portfolio, aimed mostly at rice millers and a few companies producing rice at a large scale.

# borrowers# final

borrowers

outstanding Jan 31, 14

MUSDcompanies: rice production & exportation 6 15.9rice millers, direct loans 7 5.5RMAs -> onlending to rice millers 7 66 7.2rice market associations 3 1.5cassava 2 1.3rubber 1 1.5

Total 26 85 32.9


(4) The RDB does not bear the losses in ASDF: it is in a role of service provider to the MEF.

The RDB manages the MEF’s ASDF account on behalf of MEF, without bearing part of the risk:

Final loan decisions are made by MEF.

Loans are disbursed from the ASDF account.

When a client repays a loan, RDB repays to the MEF’s account.

If a client does not repay, RDB does not repay, which leads to a decrease in the MEF’s ASDF account. This loss may be compensated by interest rates or fees up to a certain amount.

Regarding ASDF, the RDB thus is in a role of service provider to the MEF rather than of financial institution bearing full responsibility. The fact that no risk is borne by the RDB on this portfolio limits their incentive to go through detailed risk analyses before presenting the loan applications.

(5) No cost accounting is available to assess the profitability of ASDF.

3.3 Other financial institutions

3.3.1 The microfinance sector in Cambodia

(1) The microfinance sector in Cambodia has been a priority in the RGC’s rural development policy since the 1990’s. It is a healthy sector that has achieved a large outreach, with more than 94% of villages having operations from one of the ‘big eight’ MFIs and the total number of borrowers of the sector representing 57% of Cambodian households.

The microfinance sector in Cambodia comprises of 35 MFIs and 4 NGOs members of the Cambodian Microfinance Association, and a bank with a microfinance activity, ACLEDA Bank (Small Loan). The microfinance sector as a whole counts 1.9 million borrowers as of 13/12/31. This represents 60% of Cambodia’s 3.2 million households, although cases of multiple borrowing reduce this figure.

It is very well managed, with an extremely low portfolio at risk ratio, under 1% overall (loans with arrears exceeding 30 days over total loan portfolio) and good profitability ratios.

The ‘big eight’ account for 55% of portfolio and 74% of total borrowers of the microfinance sector (89% & 91% excluding ACLEDA Bank). They alone cover over 94% of Cambodian villages, as evidenced in CIDS’s Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in Cambodia based on the big eight’s village-level data. In most villages, more than one of the big eight operate.


SOURCE: Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in Cambodia, CIDS, March 2013

(2) Among the big eight, AMRET and AMK stand out in terms of number of clients.

The graph below includes the big eight + Chamroeun who has been visited by the mission because there was information that they might be contemplating going into FO lending.

SOURCE: CMA’s Microfinance, Network Information Exchange (NIX)

as of December 31, 2013

AMK

AMRET

PRASAC VisionFund

TPC

HKL

Sathapana Kredit

Chamroeun

Distribution of clients among main MFIs (13/12/31)


(3) AMK, PRASAC, HKL and Sathapana stand out in terms of number of districts covered. The latter three have a much higher average loan balance per client, evidencing a higher-income client target.

SOURCE: CMA’s Microfinance, Network Information Exchange (NIX)

as of December 31, 2013

(4) Outside RDB, the potential financing partners for FOs the mission met with are VisionFund, AMRET, Chamroeun, ACLEDA, AMK and PRASAC. Most of them are not ready to serve FOs, because of their present methodologies and targets. All precise that they do not wish to refinance the FOs’ internal credit schemes.

All of the FIs encountered expressed that they are not ready to refinance the FOs’ internal credit schemes because they finance farmers directly and that activity competes with their own provision of agriculture finance to small farmers. Although the goal of SCCRP is not to promote and refinance the FOs’ retail lending schemes, except if the credit to members is embedded within another economic activity of the FOs (such as input supply), the fact that savings and credit schemes form a large part of the FOs’ activities is known to the FIs and they therefore will look closely at the purpose of the loans to FOs.

Most of the institutions the mission has met are not ready in the short term to structure a specific product for FOs:

ACLEDA, formerly a microfinance institution, is the retail bank in Cambodia with the largest network, with 238 offices present in 23 provinces and 31% of Cambodia’s 194 districts. ACLEDA offers both microfinance loans and bank loans. Their total portfolio is USD 1.5 billion to 336,000 borrowers, of which 20% of portfolio goes to agriculture for 45% of borrowers.

0

500

1 000

1 500

2 000

2 500

0

50

100

150

200

250

300

350

Outreach and average loan of main MFIs (13/12/31)

# clients (000) # districts avg loan balance / client

Total # districts in Cambodia

# USD


ACLEDA is a very large institution and does not consider tailoring a specific product to FOs’ needs in a first stage: collaboration would be possible based on ACLEDA’s existing products and methodology, at local office level. ACLEDA had earlier contemplated using AFD’s ARIZ guarantee fund for water and electricity supply but finally declined because repayment period in case of arrears (360 days) was deemed too long by management.

PRASAC is Cambodia’s first MFI in terms of loan portfolio. They have 173 offices in Cambodia’s 24 provinces and 98% of Cambodia’s districts. PRASAC’s total portfolio is USD 430 million to 200,000 borrowers. Contrary to what was reported to the mission in another MFI, they do not provide any warehouse receipts like products nor lend to farmers organizations. They accept only physical collateral on loans and have no policy or plans to accept movable assets such as rice stock. PRASAC have no intention of developing such products as they are in translation into bank with a strategy to focus on the SME segment.

AMK is Cambodia’s first MFI in terms of number of clients. They have 128 offices covering all Cambodian provinces and districts. AMK’s total portfolio is USD 80 million to 325,000 borrowers. 70% of AMK’s loan portfolio is invested in agriculture. AMK recently launched a health and accident insurance with FORTE insurance company and they have entered into preliminary discussions with them about a possible partnership on weather insurance. However, AMK most likely will not go with it because it is too complicated and not in AMK’s market segment (lowest income rungs). They do not currently lend to FOs nor have plans to.

Chamroeun is Cambodia’s 9th MFI in terms of number of clients, with a very strong social orientation and a strong technical partnership with NGO ‘Entrepreneurs Du Monde’, and an AFD partner. Chamroeun’s credit offer is focused on business loans; Chamroeun’s Board has decided to move towards the agricultural sector but Chamroeun is still in a very preliminary phase: a study on different agricultural value chains will be launched in 2014 and for the moment the approach is more likely to be to work with individual producers, possibly in partnership with a commercial bank to include wholesalers and exporters in the credit schemes.

VisionFund and AMRET could be interested in partnering with SCCRP to set up a specific offer for rice FOs.

as at 01/31/2014, in million USD:

Sectors # borrowers portfolioAnimal husbandry 12,100 24 2%

Crop 130,000 259 17%

Fishery 7,500 11 1%

Rice mils 440 15 1%

Rubber plantations 2,500 41 3%

Total agriculture 152,540 350Non agri portfolio 183,460 1,151 77%

Total 336,000 1,500SOURCE: interview with ACLEDA


3.3.2 VisionFund

(1) VisionFund, a World Vision affiliate, is the 4th MFI in Cambodia in terms of number of clients and the 8th in terms of loan portfolio, with over USD 60 million outstanding to almost 200,000 clients and an average loan of USD 321. It is highly socially oriented and has 95% of its portfolio in rural areas.

VisionFund operates in 21 of Cambodia’s 24 provinces and 65% of all districts in Cambodia. It is a highly rural MFI with a large portion of its loan portfolio invested in agriculture.

(2) VisionFund has launched an Agricultural Cooperative loan pilot in November, due to end in April.

VisionFund Cambodia has for long offered Association Loans to two rice miller cooperatives, one in Takeo and another in Kompong Chhnang. The cooperatives were supported by CEDAC. Another such loan was extended to another rice miller cooperative (185 households) in Kompong Chhnang.

In order to cater to World Vision’s partner agriculture cooperatives’ and associations’ credit needs, VisionFund has decided to broaden these spot actions and launched a pilot for AC loans in November. 10 loans had been disbursed in February, for amounts from USD 3-5,000 to USD 25,000.

Purpose financed: AC’s business activities, excluding their internal savings and loan schemes.

Eligibility criteria: official registration with MAFF.

1-2 years experience after registration (this requirement can be reduced if the AC has very strong recommendations).

Discounted interest rate: 1.6-1.8% per month (depending on quality of collateral and amount).

Collateral requirement: 200% of loan amount. Soft collateral is accepted for loans up to USD 10,000. From 10,000 to 25,000, hard collateral is required with cadastral registration. The collateral is usually provided by Board members.

For VisionFund, the biggest challenges to lending to Acs are (i) accessing soft resources so as to be able to provide loans at reasonable interest rates for cooperatives’ activities and (ii) getting the collateral necessary to secure the activity.

(3) VisionFund sees lending to farmer organizations as a promising sector to diversify their activities and a priori welcomes the idea of becoming a project partner.

VisionFund’s first reaction to the possibility of financing the FOs supported by SCCRP is positive. VisionFund could consider negotiating interest rate and collateral requirements if they receive support such as soft resources and guarantees. Their operating costs are around 16-17% on average and would probably be somewhat lower for higher amount loans such as AC loans.


3.3.3 AMRET

(1) With 310,000 clients and over USD 200 million loan portfolio, AMRET is the second MFI in Cambodia both in terms of number of clients and of loan portfolio. AMRET’s vision and mission combine financial and social performance.

AMRET operates in 18 of Cambodia’s 24 provinces and 74% of all districts in Cambodia. Also a very rural MFI, agriculture loans account for 52% of their loan portfolio.

(2) AMRET is piloting an Agrifin Program aimed at improving its services to farmers and developing its activity with agriculture. So far, this Program has not worked with farmer organizations. It is in the process of developing partnerships to diversify its offer.

AMRET’s Agrifin Program started in February, 2013. It is supported by the World Bank with matching funding by AMRET financing specific TA. 14 branches are involved in the first two pilots started in July and August, 2013, in Kampong Cham, Kandal, Takeo, Battambang and Beantey Manchey provinces. 18 specialized agri-credit officers and 14 hybrid credit officers manage both Agrifin and non-Agrifin loans. Their activities are supervised by a dedicated Agrifin unit in head office. As at Jan 31, 2014, 416 loans had been disbursed under the Program for a total of USD 2.5 million.

Loan conditions under Agrifin are:

1.2% to 1.9% interest rate per month depending on loan amount (USD 5,000 to over 15,000).

Standard collateral requirements, i.e. 150% of loan value as main collateral made up of soft or hard land titles, plus 50% secondary collateral for Individual loans for which moveable assets are accepted.

A third pilot is due to start in March, 2014 and roll out in the whole network is planned to be completed by end of 2014.

Under the Program, a partnership with IDE has been signed to finance their farmers business advisers through a specific product. Another partnership is being discussed with an agricultural equipment vendor.

In the framework of the Agrifin Program, AMRET is seeking to develop other technical or business partnerships.

(3) AMRET could a priori be interested in partnering with SCCRP in the framework of the Agrifin Program.

First contacts between AMRET and SCCRP were not conclusive, apparently due to communication misunderstandings. AMRET still seems to be open to discussing a partnership. AMRET’s concerns after the first discussions were:

They do not want to refinance the FOs’ internal credit schemes.

Who can put collateral for the loan in the name of the FO.


Amret could consider reducing their interest rate if access to soft resources is provided and to take into account the Federations’ involvement that could lead to reducing Amret’s work to appraise a credit application. They could also reduce their collateral requirements if a guarantee fund is made available.

Amret’s SME loans are between USD 15,000 and 50,000. They are thus roughly in the same amount range as projected FO loans, which should thus generate comparable costs at cruising speed (= when a methodology will have been set up, tested and brought to productive volumes). Their cost to AMRET was 18% in 2013, including 6.3% financing costs.

3.4 Leasing

(1) Leasing and micro-leasing of equipment is a new industry in Cambodia. It mainly provides finance for motorbikes and cars but also has a small agricultural equipment activity.

As of date, there are two leading companies in the market. Some MFIs are also looking into entering this market soon, such as Aeon Microfinance.

GL Finance

GL Finance Plc. Started its operation in Cambodia in May 2012. It is a subsidiary of GL Holding in Singapore, which has commercial presence in Thailand and Cambodia.

The strategy of the company is to establish partnerships with market-leading brands (Honda, Kubota) – linking their leasing products with specific products and distributor. GL Finance installs its retail outlets directly within its partners’ dealers. Currently it partners with 46 official Honda dealers throughout Cambodia.

Today, GL Finance has presence in nearly every of the Kingdom’s provinces, with 250 employees.

Leasing activities include motorcycles (Honda) and farming equipment (Kubota).

For farming equipment: GL Finance offers financing on tractors and combine harvesters in all partnering Kubota dealers – Kampong Thom, Pailin.

The interest rates on agricultural machines are 1.35% per month for tractors and 1.8% per month for combine machines. Term ranges from a minimum of 12 months to 36 months. Personal collateral is not required, just proof of income.

Mega Leasing

Mega Leasing PLC. Is another leasing company recently established with the mission to enable Cambodian People to access credit solution in order to bring about sustained improvements to their living standards. Their current services covers motorbike loans, car loans and electronic equipment loans.

Interest rates starts from 1.5% per month.

Maximum loan size is USD 5,000.

Personal collateral is not required, just proof of income, with minimum salary requirement of USD 100 per month.


RMA Agricultural equipement Lease

RMA is another leasing company which has started agricultural equipement lease in 2007. Associations, organizations, companies and individuals can apply for the leasing option (Hire-Purchase). RMA offers tractors and sugarcane harvesters. The conditions are the following:

• 50% down payment,

• Interest rates between 1.5% and 2% per month, depending on equipement price

• Duration: up to 2 years

My Property

This is another leasing company operating in Banteay Meancheay. However, they have not officially received their leasing license. They provide leases on motorcycle loans, car loans and agriculture loans.

The possibility to use leasing for FOs to purchase agricultural or transport equipment can be further looked into.

3.5 Guarantee Funds

(1) Cambodia has no specialized guarantee institution and a small and unsuccessful experience with guarantee funds.

The main guarantee funds (GFs) that have been in operation in Cambodia in the recent past are:

The MEF’s Partial Credit Guarantee Scheme for Rice Millers

This was the first GF implemented by the Government of Cambodia and it has been designed prudently in order to avoid the too-frequent end of GFs due to poor selection of clients leading to large losses and decapitalization of the GF. It was endowed with USD 26 million.

Unfortunately, no bank applied for coverage, which led the Government to close down the scheme in February, 2014. Foreign banks did not apply because the credit rating of the Cambodian Government led the due diligences to give bad scores, disqualifying the GF from partnering with them.

Main features were:

• Portfolio guarantee only.

• First-loss up to 1.5% of guaranteed portfolio is borne by the Bank.

• The GF will pay losses equaling 1.5% to 8% of the portfolio.

• 2 options to build up portfolio: closed end (by which the portfolio is built during 3 months and then closed) or open-ended (in which new loans can be included up to portfolio limit.

• Guarantee fee 0.5% p.a.

• Maximum limit for outstanding guarantee for one Bank: USD 50 million.

• Eligible loans: short term loans to rice-millers for domestic processing, excluding overdrafts.

• Ceilings on unit loan size (USD 4 million) and on average loan size (USD 1 million), in order to avoid concentration of risk.


• Repayment of claims after loans have been classified as loss (360 days), with six-monthly review of losses and subject to initiation of legal action by Bank.

• Guarantee Fund fully funded in a bank account (which was an asset to make it operational).

IFC’s Risk sharing facility for agribusiness

This Facility could guarantee short, medium and long term loans to agribusinesses, for working capital or investment. The facility had difficulties attracting FIs to partner with it: only ANZ Royal Bank applied, and had a very low utilization of the fund. Communication problems combined with a disagreement on the terms and conditions leading to the payment of claims led the Bank to lose confidence and stop using the Facility.

(2) The main lesson learnt about structuring a risk sharing mechanism is that it needs to be managed by a specialized financial institution.

No specialized guarantee institution exists in Cambodia. It has been observed throughout the world that in order to set up a sustainable guarantee mechanism it is indispensable to entrust it to a specialized financial institution that develops specific procedures, internal rules and skills, and has the target of making the guarantee mechanism sustainable as well as sufficient autonomy to be able to adapt its governance structure according to needs. The Cambodian experience confirms this overall observation.

Once such an institution exists, it is critical to strike the balance between (i) making it prudent so that it will not be decapitalized by its operations and (ii) making it attractive for FIs.The two recent Cambodian GFs had different characteristics that limited their attractivity to banks:

Portfolio guarantee: Individual loan guarantees offer banks more security. Risk-sharing should be specified from the onset and a 50/50 distribution of risks is most often the best solution.

A portfolio guarantee with a first-loss borne by the Bank that exceeds the Bank’s loan loss ratio.

Delay for claiming loss coverage: Banks are not so interested in GFs repaying claims after a loan has been classified as loss because by that time, the income statement has been affected; they requested honoring claims after 90 days default.

Characteristics of eligible loans (e.g. for the MEF’s Partial Credit Guarantee Scheme, eligible banks’ loans to rice millers were mostly overdraft and superior to USD 4 million, thus were not eligible to be covered by the Facility).

Thus when setting up a guarantee fund:

Eligible loans need to be consistent with target FIs’ practices.

Prudence to protect the funds committed needs to be balanced so as not to deter FIs from using it.

Care has to be taken to build up FIs’ trust and communicate very clearly on the process for building claims.

Moreover, in order to enable it to cover its costs, the GF’s rules should not prevent it from investing unused funds in low risk interest bearing investments (which was the case of the MEF’s Partial Credit Guarantee Scheme for Rice Millers whose term sheet provided its funds should be kept in a specially designated NBC account).


4. Synthesis on key issues to be addressed by financing schemes for FOs

4.1 Maturity of demand

(1) Many FOs have never carried out the activity they require the loan for, or at a much smaller scale. This entails a higher risk, both for borrower and lender. Moreover, new activities are difficult to finance for FIs.

It is one of the objectives of the Project to enable FOs to start new activities, as a basis for scaling up and in line with the Cambodian Government’s policy. Starting a new activity involves discovering the effective conditions to operate it, which in most cases are for a significant part not provided for in a business plan. This is the reason why, throughout the world, the failure rate of newly created businesses is much higher than that of established businesses. This points to the importance of a good preparation to launch a new activity, as much as possible including someone with experience in the sector.

This reality applies to FOs as to any other business actor. On top of this, FOs can also encounter specific governance difficulties linked to their collective way of operating. The FO Board members need to be aware of this and gauge their decision to engage in borrowing based on a detailed assessment of the risks they might encounter and their financial implications.

This is the first reason why financial institutions are wary of financing new activities – many microfinance institutions to not accept to finance the launch of new activities in their regular operations. Another element of difficulty is that in order to assess a loan application, especially for a small activity, a financial institution generally uses a cash-flow-based lending methodology based on the analysis of the business’ past cash flows, which obviously encompass only a business’ existing activities.

Policy-wise, this higher risk linked to piloting new activities in line with the Government’s policy is an argument for Government support. This support can be offered through a public development bank like RDB, that can set a relatively higher (yet measured and reasonable) risk appetite, linked to policy goals. It is also feasible through partnerships with the private sector through risk sharing mechanisms, provided the private FIs are interested in developing this activity. It seems more likely that private FIs will be ready to extend finance to FOs in the long term if they have benefitted from a first phase of partnership with the Project to build their confidence in these institutions than if they observe that RDB has already financed them. Under present conditions having accessed loans with RDB does not necessarily guarantee that adequate risk assessment measures have been carried out nor that the client has been educated to the requirements of commercial finance.


(2) FOs need backstopping in order to be able to design economically sound projects, analyze their financial balance and implement them.

FOs are relatively recent in Cambodia and have little capacities to set up new activities. Their Federations are young and have scarce resources.

In the longer term, FO Federations might be in a position to support their members to design their projects, or they could help identify private consultants to do this job. In the meantime, in most cases FOs will need technical assistance provided by technical development partners such as projects or NGOs in order to be able to set up and implement their projects. This will be a part of the FIs’ assessment of loan requests.

(3) The quality of a client FOs’ governance and management are key to building an FI’s trust. FO Federations are setting up regular assessments of their members that will put them in a situation to provide input on their capacities.

When financial institutions assess a loan application, their main aim is to review the risk related to the financed activity and liable to impact a loan’s repayment. Given the risk highlighted above and the specificity of FOs’ governance, FOs’ governance and management skills are key elements an FI will want to gauge.

The evaluation and scoring systems Federations are setting up (see section 2.2.1) can therefore be interesting arguments to present to FIs as a basis for preselecting well managed FOs with sufficient capacities.

(4) Lack of clear records requires ability to appraise loan applications based on field observations.

One of the difficulties RDB mentions to work with FOs is the fact that they most often lack clear and verified reports. This is also one of the major obstacles to accessing finance identified by the agribusinesses interviewed in the WB study8, more impacting than collateral requirements: More than 90 percent of agribusinesses indicated the lack of proper accounting systems and audited financial statements. More than half the firms did not have proper business plans that could be submitted while applying for loans. Compared to these obstacles the lack of collateral or assets were not viewed as a major handicap for borrowing.

As most banks working with standard banking procedures, RDB is not used to looking beyond the records to appraise a client’s situation and loan application. This ability is one of the bases of MFIs’ approach. The RDB could also acquire it but will need adequate human resources and procedures, as well as a change in its culture to do so.

8 Study on Access to Financial Services for Small and Medium Agribusiness Enterprises in Cambodia, a technical working paper, World Bank, Aus Aid, November, 2013.


4.2 Collateral requirements

(1) The financial sector in Cambodia has a very prudent approach and high collateral requirements. This does not prevent it from being very dynamic. Its risk profile is excellent.

All formal financial institutions require some form of collateral for their loans. Commercial banks use a mix of land and buildings/ fixed assets. Commercial banks typically require hard land titles registered at national level (74 percent) but also sometimes accept land titles recognized at the district level (26 percent). They give out loans with low loan to collateral ratios: these usually are at 40-50% for regular clients and can go up to 70% for good clients.

MFIs provide micro group loans with no other collateral than the peers’ joint liability, for small loan sizes not exceeding USD 300 – 1,000. For bigger loans, collateral is required, mostly in the form of land titles. MFIs are more flexible than banks in the types of titles that are accepted: property certificate certified by commune level are accepted for the smaller loans (typically under USD 10,000) while property certificates certified by district governor or Land Titles issued by district cadaster are required for bigger loans. MFIs usually require 150% - 200% of loan amount as collateral.

Both sectors are experiencing a high growth with small portfolio at risk: 2.45% for the banking sector (2012 Annual Supervision Report) and 0.3% for the microfinance sector.

The high collateral requirements in both the microfinance and banking sectors probably contribute to the excellent credit repayment culture in Cambodia. Financial institutions are very reluctant to lift them and this must be taken into serious consideration.

Moreover, as presented above (section 2.2.3), many FOs use soft land titles as collateral in their internal loan schemes for loans exceeding a given amount, showing that this is accepted in rural areas.

If it is sought to decrease collateral requirements, this may prove easier to negotiate with a development bank, which has a mission of reaching the Government’s policy objectives, than with commercial FIs. The development bank’s role may be to give a chance to new actors to develop new activities (with a higher “risk appetite”); this may in the end “validate” the capacities of these actors and their business model and help (aside with other technical/managerial support that FOs may access) them to gain the experience and good practices (book keeping, etc.) that will make these actors bankable. Graduating from a development bank to a commercial FI would however not necessarily be easy (see discussion below in financing scenarios section).


(2) FOs have little own property that they can pledge. When they are granted loans by financial institutions, it is most often based on individual collateral brought by Board members. This ensures that board members are really committed, believe in the project and have carefully assessed its risks.

Some FOs have a small plot of land, sometimes with a warehouse, that can be used as collateral. In all the FOs met during the mission’s field visit, Board members proposed to pledge their own land as collateral on top of the FO’s property, as has already been done in different FOs (see section 2.2.2).

Many FOs have already taken credit, either in their own name or through board members based on board members’ collateral; all the board members the mission discussed with saw it as part of their role and their commitment to support their FO by providing their own collateral. As long as soft land titles are accepted, it seems it will not be so difficult for FOs to be able to gather collateral from their members.

While in some cases the Board members say they would just provide their collateral to support their FO, with nothing in return, in other cases, they think it is fair that providing collateral to enable the FO to access funding should be paid some kind of remuneration – this is also what FAEC has concluded to in their round of meetings around access to finance, and this seems logical.

In order to mobilize finance for their FO, many of the FOs’ leaders have taken individual loans to finance FOs’ activities, either by handing the funds over to the FO or by investing them as shares in a specific FO activity funded by individual contributions and whose net income is then shared among these shareholders.

Diverse experiences, good and bad, have been reported to the mission. In no case has an FO leader said he would not be ready to provide collateral any more. (see section 2.3.1. above)

In light of these elements it is advised that collateral requirements should not be lifted altogether as they can play a role in improving the quality of demand by making sure the FO leaders carefully assess the risks of their projects before taking a loan. Reducing them is however desirable so as to not overburden the leaders’ households.

4.3 Costs - Economic model

4.3.1 FO level

(1) The level of interest rates is not a key determinant of an FO project’s profitability: it has a marginal impact on those projects that are barely profitable.

The analysis of the different activities and investments on which data has been collected during the mission shows that the level of interest rate is not in most cases what turns a project from non profitable to profitable. The analysis has been led with interest rates at:

1.5% per month (i.e. 18% per annum), which is what one could expect to be negotiable with an FI under commercial conditions without specific support;


1% per month (i.e. 12% per annum), a reasonably subsidized rate (6% subsidy per annum);

0.5% (i.e. 6% per annum), a heavily subsidzed rate (12% subsidy per annum).

In the short term activities analyzed, the one that barely breaks even if financed on own funds without cost generates loss when carried out with funds bearing interests, be the level 0.5% or 1.5% per month, as shown in table below.

For the investments analyzed, the one that can be financed on loan sees its payback period decreased from 2.7 to 2.2 years with e heavy interest rate subsidy. The other one could be financed on loan only at very low interest rate and with a very long loan maturity (11 years with annual interest rate 6%).

(2) The level of interest rates will have an impact on the proportion of profitable investment projects. For low profitability FO projects with a high development value, outright subsidies from Project may however be necessary.

The profitability analyses presented in section 2 above are based on examples; conditions can vary very much on a case by case basis, especially for investments, which impacts profitability. Therefore, the level of interest rates will be an element that will impact the proportion of FO projects that can bear commercial interest rates and be profitable. As shown above, this impact will be much higher for investment projects.Outright subsidies are often preferred to interest rate subsidies from a financial system point of view, because they make the subsidy apparent and do not convey the hidden message that lending money is costless and that FIs charge interests unduly. In some cases however it is easier to provide interest rate subsidies than outright subsidies and this can be counterbalanced by adequate communication.

If an FO project with a high development value is not profitable enough to afford interest rates, a subsidy from the SCCRP may be necessary to come as a complement to a loan, thereby increasing the own contribution and reducing the cost of funds over the total project cost. This will increase the leverage effect of the subsidy.

Elements on profitability of FOs' activities + impact of IRs

location

Duration of cycle (months)

Net profit % per month

Net profit after

interests at

Net profit after

interests at

Net profit after

interests at1.5% 1.0% 0.5%

Fertilizer Trading Business Takeo 3 0.07% -1.43% -0.93% -0.43%Takeo 6 2.13% 0.63% 1.13% 1.63%

Paddy Rice Trading Business Tramkak 1.5 10.10% 8.60% 9.10% 9.60%Battambang 1.5 12.30% 10.80% 11.30% 11.80%

Payback period for SCCRP pilot investment projects depending on interest rate level

Payback period (years)6% 12% 18%

Paddy Business with Harvester and Truck 50,500 11% 2.17 2.39 2.66Paddy Business with Warehouse and Dryer 33,143 20% 10.58 22.3 never

Annual interest rateInvestment cost

Own contribution


(3) Three elements have a significant impact on the weight of interest rates on a project’s costs and hence on the impact of interest rate subsidies:

The duration of the loan, that needs to be tailored to that of the financed activity.

The speed of capital turnover.

The own funds the borrower invests in the project.

In order to assess the level of interest a project can bear, assessing the net profit it generates or, in a first approach, the gross margin, is a good starting point. A key element that needs to be taken into account in order to avoid errors is the duration of one cycle (= one rotation of capital). Although margins on commercial activities are often low, if it is generated in a week’s cycle, the monthly margin generated by capital invested in the activity will be 4 times the activity’s overall margin.

For a working capital project with a high rotation of capital, the interest rate thus needs to be compared to a much higher level of activity than the loan amount. It is important to understand this in order to size the loan appropriately so as to reduce interest rate charges. It will be the role of the advisors to FOs (which can be projects, Federations, or other…) to understand this clearly so as to avoid indebting the FOs unnecessarily, and to convey this message to the FOs. The FI staff should also participate in explaining the rationale to determine the appropriate loan amount, so as to reduce risk, both for the FO and for the FI.

The impact of the level of the interest rate on an activity’s turnover varies a lot depending on the speed of capital turnover:

It is negligible for fast rotating capital activities such as selling. It is still to be compared to the activity’s margin, which is often itself quite small.

It is low for short term activities with one rotation over the duration of the activity, such as inputs sale on credit or paddy storage.

For investments, the logic is different but the impact of interest rate will necessarily be much higher, related to the duration of the loan.

The impact of the level of the interest rate on an activity’s turnover is directly proportional to the proportion of the project financed on own funds.

The impact of interest rates on a project’s costs differs significantly depending on whether it is a working capital (short term) project or an investment (medium to long term).

Based on this analysis, it does not seem indispensable to consider subsidizing interest rates for short term projects. It does however make sense for longer term projects such as investments.

From a strictly financial point of view, the higher the own contribution of a borrower to a project the lower the weight of loan interests.


4.3.2 FI level

(1) Lending generates costs that need to be covered by the interests generated. Three main elements impact financial institutions’ costs and thus their break-even interest rate:

Cost of resources.

Transaction costs.

Cost of risk.

Interest rates charged by financial institutions are often deemed very high by comparison to other contexts in which costs are very different. The costs a financial institution incurs in a lending operation should be clearly communicated to FOs and Federations so they understand that they cannot just be waived or reduced without careful financial analysis. The main elements of the cost of lending are:

Cost of resources

Financial resources are the ‘raw material’ FIs work with and they have to pay for it in proportion of funds borrowed.

• MFIs’ present cost of resources ≈ 6%.

• RDB’s cost of resources on ASDF: 2%.

Transaction cost

Transaction costs include salaries, transportation and overhead costs. The proportion of transaction costs as compared to loan size depends on (i) size of loans, (ii) ability to use resources for a sufficient volume of loans, which depends on an FI’s existing portfolio in an area

• Transaction costs for MFIs’ SME loans that are in the same size range as FO loans ≈ 12%.

• RDB: no precise information (no cost accounting and all structure not yet implemented for sound management at the headquarters).

A gross estimate of a credit officer’s direct costs lead to ≈ 14% direct transactions costs at cruise level (including a high cost of transportation, in line with the present costs incurred by the Credit Department). This does not include the indirect costs for the structures that do not exist yet at the head office (internal control, audit, MIS…): these first need to be set up (investment) and will then incur running costs that will need to be added to these 14% to reach the total transaction costs.

Estimate of direct operational costs of a confirmed CO/month /year

CostsSalaries & benefits 279Travel costs 1,000

(10 days/month - gasoline, depreciation of car, driver, accomodation, perdiems)Total costs 1,279 15,346

Loan portfolio 112,500 112,500(5 loans of USD30,000 each at disbursement, 9 months, bullet repayment)

Direct operational costs ratio 1.1% 14%


Cost of risk

Cost of risk is the final cost for the institution of loan losses. It depends on quality of risk management.

• MFIs’ present cost of risk is very low, around 0.1% on average.

• RDB’s present cost of risk is difficult to assess because the share that is linked to funds managed for the account of a third party, as ASDF funds for instance, does not appear in the RDB’s financial statements because it is borne directly by the MEF. The cost of risk in this case is in fact 100% subsidized by the Government. Moreover, information on write-offs & restructured loans is lacking. In 2012, loss loans accounted for 0.9% of the loan portfolio.

It should however be stressed that some loans may be riskier than others and therefore have a higher cost of risk. In particular, loans for setting up new activities usually bear a higher risk than the regular loan portfolio.

Thus in total MFIs’ costs for giving out SME loans (i.e. higher amount loans, over USD 10,000) are around 18% per annum, i.e. 1.5% per month. This includes no profit to feed capital and enable portfolio growth. This also does not take into account the investment period during which the MFI tests and refines its methodology and cannot amortize it over a sufficient volume of loans. The RDB’s cost for FO loans is not known – it can be evaluated at around 17% per annum for direct costs only, including 1% cost of risk (which is most probably a much lower figure than the present situation) and subsidized resources; to this, indirect costs must be added, notably to cover the structure and systems that need to be set up for a sound management.


5. Possible risk mitigators

5.1 Support from development programs / technical partners

(1) Given the lack of maturity of FOs in Cambodia and the newness to them of the contemplated activities, a key element to secure their activities is having a strong technical partner to backstop them: development program, NGO or other.

To deal with new clients, a partnership is an important element for a FI to reduce both cost and risk. The partnership ensures that:

A pre-screening is done on governance as well as project quality issues, leading to a decrease in transaction costs because a higher proportion of loan demands will translate into loans.

The FO receives technical and management support while implementing the activity, which reduces risk.

This is all the more important in the Cambodian context with rather weak FOs, and also to mitigate the risk generated by a high proportion of new-comers to the activities finance is requested for.

This is VisionFund’s approach who is building on their privileged relationship with World Vision to develop their FO portfolio and seems very open to working with new partners to develop their FO portfolio.

In this respect collaboration with SCCRP will be one of the key elements in negotiating with FIs.

5.2 Federations of farmer organizations

(1) A scheme based on sub-lending by Federation puts too much risk on the Federation and should be avoided.

International experience shows that keeping lending schemes to member FOs within Federations most often weakens the Federations and makes it difficult for them to keep fulfilling their mission. This is (i) because the Federations have other relationships with members which makes it difficult for them to refuse to lend if the FO or its project is not judged safe enough and later to require repayment if a member meets a difficulty in their activity and (ii) because specific skills and methods are required to manage loans. Problems usually faced are:

Technical (not the right skills).

Financial (low repayment rate).

Ideological (interest rates too low to ensure sustainability).

Political (lobbying inside the Federation / the FO leading to giving out credit favouring Board members / FO Leaders and excluding some members).


The best option is thus to build a partnership with an existing FI. This is also what FAEC has concluded and been trying to do. It should however be noted that one reason that has led to the fact that FAEC and FCFD did not reach the same conclusion is that FAEC has no capital to lend and FCFD has a revolving fund (granted by AVSF) that they use to lend money to members. It is indeed very tempting for any FO or Federation to set up credit systems that generate interests when they are intensely looking for sources of revenue to finance their fixed costs.

(2) Involving Federations in pre-screening their members’ loan applications can reduce risks and transaction costs insofar as it increases the proportion of applications that can be transformed into loans. The loan fee could thus split between Federation and FI.

The possibility of the FI sharing the loan fee with the Federation can be discussed and has logic. It may be difficult to obtain in the short term especially if the Federations want to negotiate preferential interest rates. FIs will probably want to test the collaboration to confirm that working with the Federation improves loan application quality before considering providing them a remuneration in a second step.

But on the other hand it might be difficult to negotiate a remuneration later on for what the FI will have gotten used to having for free… And to provide it for free does not contribute to enhance the value of this input. It would probably be preferable to set up the principle of a remuneration for FOs’ involvement from the beginning. Such a remuneration could be required by the MEF as condition to the obtention of soft funds with a view to promoting the Federations’ role. This will impact the overall cost of the credit and will in the end have to be paid for by the borrower.

(3) In order to build trust such a scheme would require that the Federation bear a portion of the risk.

Showing they are ready to take part of the risk will legitimate the Federations’ involvement in the credit scheme. This is necessary for their involvement to be seen as an element of risk mitigation by the FI.

5.3 Guarantee funds

5.3.1 General remarks

(1) Using a guarantee fund can comfort FIs to finance new activities and reduce their collateral requirements. It however generates a cost and should only be used if it is necessary to access credit.

The two issues discussed above (section 4.1 and 4.2) create a rationale for setting up a guarantee fund:

Immaturity of demand increases the risk and thus justifies that the FI should be comforted by the support of a third party.

Lack of collateral at FO level.


A guarantee fund (GF) generates costs for its operations. It therefore needs to collect fees, which can either be upfront or yearly, based on the amount guaranteed. Using a GF thus increases the cost of credit. It is desirable only if a borrower cannot access credit without it or if credit conditions are softer with the GF in a proportion justifying the cost. This will probably be the case to develop FO loans in Cambodia, at least in a first phase.

(2) International as well as Cambodian experience shows that setting up a guarantee fund with a set of rules is a short term solution: without a specialized institution to take it in charge and adapt its rules, a guarantee fund dies.

Extinction of GFs can come either from loan losses (see above) or from unsuitable rules that prevent its usage, as in the recent Cambodian experience (see section 3.5).

If the goal is to set up a sustainable tool that will ease access to finance for FOs (and possibly other targets) over the years, the GF needs to be clearly the responsibility of a financial institution. Failure to set it up as a financial institution will not allow it to adapt to its environment and become a perennial, soundly managed tool. This is a major endeavor that requires working on the regulatory environment, governance matters and control processes on top of guarantee fund rules.

(3) Defining a guarantee fund’s rules is a delicate operation and has to strike a balance between the two challenges of guarantee funds: (i) the borrowers and credit providers feeling exempted from liability, which results in eating up the fund, (ii) the financial institutions not feeling protected enough, which results in the guarantee fund not being used.

Guarantee funds are often set up to attract FIs to provide loans to a target group but if they are not well defined they can have adverse effects. The main principles that need to be respected are as follows:

GFs need to provide limited coverage, reaching at most 50% of the risk.

In order to be sure to avoid abusive use, a GF needs to be hosted at an FI that it does not cover.

Setting up a recourse to a complementary guarantee (second level reinsurance mechanism) secures the GF.

A distinction needs to be made between the loans covered based on their risk (innovations, new activities and medium to long term loans are riskier).

The GF should be accessible on a decreasing basis so as to facilitate the first credit to clients and incite FIs to provide an increasing part of the loans to clients at their own risk.

Sustainability of credit supply requires that serving the target clientele be part of the partner FIs’ strategy.

Capacity building at FI level to appraise the target loans facilitates continued operations and control of risk.

A GF’s financial sustainability is based on income from investment of funds + guarantee fees covering guarantee claims disbursed & operating costs.


In order to maximize efficiency a leverage effect should be sought at a reasonable level, e.g. limit on guarantee portfolio at 3 times GF capital.

(4) A risk generated by the use of a guarantee fund is that it sometimes leads to decreased vigilance in loan appraisal. In order to avoid this, normal collateral measures need to be taken, at a reduced level.

International experience is full of extinct GFs that have been decapitalized by the losses of the loans they guaranteed. In order to maintain a sufficient level of prudence, at FI level as well as at borrower level, the following rules need to be respected:

The GF should only cover the residual risk partially, leaving the FI and borrower with partial responsibility.

The loan should be treated as a normal loan, with proper collateral measures for its non guaranteed portion.

The GF should be invested in a different bank from the one who gives out the guaranteed loans, so as to ensure there is no abusive use of GF to face claims.

(5) Mutual guarantee schemes are a specific form of GF that involve the guarantee beneficiaries in the ownership and the management of a GF, thus leading to better sustainability perspectives. This form seems interesting to build on the Federations’ existence and their knowledge of their members’ situations.

A mutual guarantee company is a financial company set up along cooperative rules which provides guarantees to its members to access loans. Such companies are usually set up by persons or enterprises with a common bond such as field of activity. It is a peer model in which the beneficiaries (here the FOs) participate in guarantee granting decisions and in portfolio monitoring. As it is set up by the stakeholders in a specific economic sector, they have a very good knowledge of this sector. They often provide their members not only with guarantee but also advice in their business and investment decisions. A mutual guarantee sheme thus can bring expertise for loan appraisal.

The financial involvement of members in a mutual guarantee company is usually threefold:

Shares in the cooperative company.

Subscription to the MGC’s GF, proportional to the amount guaranteed. This subscription is usually refundable after a given period after deduction of the claims the GF has had to cover.

Administrative fees.

In the case of Cambodia’s rice FOs, such a mutual guarantee company could be set up using Federations’ funds as initial contribution and involving them based on their existing monitoring of their members’ situations.


5.3.2 Creating a dedicated guarantee mechanism in Cambodia

(1) In order to both involve the Federations in the screening process, leverage their funds and boost these through additional support, a guarantee mechanism with two components could be considered depending on targeted outreach. It would include a mutual guarantee company and a public guarantee fund.

One possible way to reduce the risk of FIs is to set up a guarantee fund, which will repay part of the debt to the FI in the event a borrower defaults. The two Farmers’ Federations interviewed expressed the willingness to contribute to a guarantee fund to help their members access loans. They are willing to share risk with the FI for the benefit of their members. FCFD mentioned that they may be able to contribute around USD 24,000, which is the surplus cash after deducting administrative and operation costs. FAEC needs to discuss with their board. Further contributions to scale up the guarantee fund may be contemplated as needed.

Creating a dedicated mutual guarantee company (MGC) using Federations’ funds would make it possible to involve the Federations in the credit process. This answers the above requirement that Federations bear a portion of the risk and thus makes pre-screening by the Federations an option to improve the credit scheme’s efficiency.

In order to support the Federations’ and their members’ limited financial capacities, a complementary public guarantee fund could be set up to take over a portion of the risk. There could be a synergy between the two guarantee mechanisms:

The public GF will benefit from the Federations’ guarantee demand (volume of operations) and pre-screening based on their intimate knowledge of their members’ situations (portfolio quality).

The MGC will benefit from the GF’s financial capacities to increase the funding it can support its members to access.

Complementary rules of operation could be defined based on related criteria.

Administration could be done by the same unit for economies of scale.

(2) A mutual guarantee company is a time-tried solution, and could be an option to support the development of a credit mechanism for FOs in Cambodia.

For the Federations, investing their funds in such a mutual guarantee company would bring several advantages:

It creates a double leverage on their funds to make it possible to answer their members’ credit needs:

• Attracting outside funding in the external GF to support their members’ access to credit.

• Building on these funds to access a higher amount of credit.

It avoids them having to set up internal credit schemes, with the risks involved.

It makes it possible to negotiate a reduction in cost of credit for Federation members.

This in turn strengthens the Federations.


It must be kept in mind however that MFIs do not want to fund the FOs’ internal savings and credit schemes, which is part of the Federations’ members demand and which at present FCFD do fund. This is also not the intention of the Project to support the development of credit and saving activities of cooperatives, but to develop their commercial involvement in value chains (input supply, marketing of products, possibly storage and processing). The risks described above regarding internal credit schemes for federations also apply at FO level so the decision to support this activity can be discussed inside the Federations. However, as most FOs have been built on existing savings and credit groups, it would probably be difficult for them to stop these activities. The Project should not encourage the development of such activities through refinancing.

(3) In order to support the Federations, increase the leverage on their funds and limit the risks they need to take to reduce the collateral burden on their members, a public guarantee institution could complement the mutual guarantee company’s guarantees.

Sources of funds could be:

Project Funds to increase the GF’s guarantee capacities.

In the long term, if the mechanism proves useful and further guarantee capacities are needed, allotting part of the funds formerly invested in the MEF’s Partial Credit Guarantee Scheme for Rice Millers, which have been temporarily included in ASDF to this mechanism could be requested. This would be in line with their original goals: support the development of the rice sector through provision of guarantee to facilitate rice value chain stakeholders’ access to credit. The funds earmarked in the SCCRP’s budget should be sufficient in the short to medium term but a small contribution of MEF funds would be a clear signal to demonstrate the MEF’s commitment for the proposed mechanism. This could come in a second phase, when the credit mechanisms will have proved their efficiency and when the volume of bankable projects will exceed the capacity of the original funds.

It would clearly be in the mandate of a public development bank like the RDB to operate such a guarantee scheme. This however requires adequate skills to set up and operate it. Such skills could be brought to RDB through technical assistance. This option is incompatible with that of providing direct loans to FOs. A choice will need to be made between these different forms of involvement.

(4) Setting up a sustainable guarantee mechanism requires creating full-fledged financial instiutions, which implies a consequent investment in technical assistance.

It will be important to use GF specialists to clearly analyze the legal and regulatory framework and define institutional set-up, management and governance as well as articles of association, financial and accounting rules and claim rules, both for the public GF and for the MGC. The goals of these will be to set up a sound institution and define a clear and operational mechanism, not too complicated so as not to deter usage.

In the long run, the guarantee mechanism should be able to contract with any financial institution, so as to open competition and incite to providing FOs with a better service.


(5) A GF’s financial sustainability is based on income from investment of funds plus guarantee fees covering guarantee claims disbursed and operating costs.

This will need to be looked into in the next phase, depending on the options chosen.

5.3.3 Existing guarantee fund: ARIZ

(1) ARIZ is a risk-sharing mechanism set up by AFD to facilitate SME financing, that offers a portfolio guarantee to eligible financial institutions covering up to 50% of the risk for an annual fee of 1.6% of the outstanding guarantee, for loans between USD 14,000 and 412,000.

An eligible financial institution’s FO loans portfolio could be covered by the ARIZ portfolio guarantee, for loan amounts above the USD 14,000 threshold.

The USD 14,000 threshold is expected to be higher than a large part of the FO loans, which would require defining different procedures for loans eligible to ARIZ guarantee and loans not eligible. It could however make sense to increase the guarantee for the bigger loans by using ARIZ as a complement to the mutual GF.

Only one Cambodian financial institution is currently eligible to the ARIZ guarantee mechanism: FTB. ACLEDA Bank, who would be eligible, is not interested. RDB has been assessed and is not eligible. AMRET, TPC, HKL and AMK, who are already AFD partners, could probably also be eligible within a short time period (to be confirmed).

If the SNEC does not wish to set up a specific guarantee fund as presented above in section 5.3.2, discussions could be led with ARIZ to explore under what conditions it could provide a guarantee for FO loans.

5.4 Other options

(1) A guarantee mechanism based on contract farming may not be feasible in the current context because of the lack of incentives for farmers to follow through on the agreement.

Contract farming is not easy to set up, mainly due to the fact that farmers and millers in most cases want to keep the freedom to negotiate prices at harvest and often do not honor their contracts (see section 2.1.2). When such contracts are set up, the lack of incentives for farmers to follow through on the agreement remains a weakness, all the more so as no efficient contract enforcement mechanism exists. As mentioned, there is no mechanism to prevent farmers from side selling. This is especially a problem for rice varieties that can be easily sold in domestic markets. During interviews, Golden Daun Keo Rice Miller in Takeo province expressed willingness to help reduce the transaction cost of FIs by making the loan repayment on behalf of the FO to the FI directly from the sales. However, this can only work if millers are secured that FOs will sell their paddy to them.

In this overall not very favorable context the SCCRP is working on setting up contract farming in different pilot projects in specific environments. Using contract farming as collateral however requires


sufficient confidence in the effective respect of contracts, either through a value chain with a limited number of potential buyers or because the contracts have been operating successfully over time, none of which is present for the rice value chain in Cambodia.

(2) Warehouse receipt financing is a new concept in Cambodia and is still being considered by FIs. At the moment, it is not a feasible option because of the absence of commercial, well-managed storage facilities.

Warehouse receipt financing is a form of inventory financing in which loans are made to manufacturers and processors on the basis of goods or commodities held in trust as collateral for the loans. The goods may be held in public warehouses approved by the lender, or may be held in field warehouses located in the borrower's facilities but controlled by an independent third party. A financial institution engaged in warehouse financing will usually designate a collateral manager who issues a warehouse receipt to the borrower that certifies the quantity and quality of the stored goods or commodities. There were no collateral managers in Cambodia that the mission has had knowledge of, and it seemed uncertain whether any international firms wish to move into the country9. However, CWT Commodities is now coming to Cambodia and offers trade facilitation through the storage, handling, financing and delivery of various commodities such as tobacco, rice, rubber etc. It remains to be confirmed with them whether their services can be adapted to FOs’ needs, as a formal warehouse receipts system does not seem adapted to FOs’ needs (small quantities, scattered).

ACLEDA Bank currently accepts stock inventory as collateral for rice millers on a case-by-case situation. Rice millers must get insurance from FORTE to be eligible. There is a stock block using 2 locks, one held by the bank and one by the borrower. Depending on the level of trust between the bank and borrower, the checking of stock may be daily, weekly, or monthly. The maximum loan size for loans backed by stock is 50% of collateral value. The loan is made on an individual basis.

While many FOs manage rice banks, the quantity of paddy and warehouse infrastructure is not up to standard, and therefore, not sufficient to bridge trust with FIs. Community warrantage could be contemplated with these rice banks in the future, but requires constant field presence, takes time to implement, is costly to operate and needs a large enough market to turn profitable. It thus would be impossible to implement for RDB for lack of field presence. MFIs could look at the subject but it requires a real investment with specialized support and they do not seem ready for it for the moment.

(3) Using the Federations’ loans to their members as subordinated debt could theoretically lessen FIs’ risk and thus ease FOs’ access to finance. Such a system would however be difficult to implement in such a way that it would really increase FIs’ trust.

FCFD Federation has an internal lending scheme to its member FOs. This portfolio is an asset that could potentially be used to reduce the risk of FIs’ loans: existing loans could be used as subordinated debt to carry the first loss. This is an alternative to investing the Federation’s funds in a guarantee fund. Although this option seems interesting at first, it is less attractive than the latter: For equal

9 Source: World Bank (2012). “Review of Potential and Constraints for Warehouse Receipts Financing in Cambodia.” Internal Report – in Study on Access to Financial Services for Small and Medium Agribusiness Enterprises in Cambodia p.47


coverage, this would increase the Federation’s risk because there would be no risk-sharing: the Federation would bear the whole first loss whereas by using a GF the risk is shared with the FI and with the other investors in the GF.

It also seems difficult to operate: it would make the process more complex for the FI and the Federation, with 2 commitments that need to be managed at both levels. Moreover, it is not so likely to build trust as a guarantee fund that will be deposited in a financial institution.


6. Recommendations for loan products

6.1 Product features

(1) Based on the mission’s analyses presented in section 2, the main financing needs identified are summarized in the table below.

Let us note that very short term loans (<3-4 months) are not profitable for FIs because they do not generate sufficient interest income to cover the costs. They could probably only be considered either (i) as overdrafts, but that would imply regularly using a bank account, which seems difficult for FOs as for now, (ii) as part of an overall banking relationship where the client uses a variety of products and services, or (iii) with higher interests or upfront fees or (iv) as part of a combined loan product (see below). Another appropriate solution to cater to very short term financial needs is trade credit from client

(2) Two main types of loans will be necessary to cater to the needs of FOs in the rice value chain:


Medium term loans for equipment ranging from USD 10,000 to 80,000.

To address the above financing needs, FIs need to offer two kinds of loans:


To deal with the difficulty for FOs of giving out very short term loans, it is proposed to group answer to the two short term needs: a single loan could be disbursed in tranches: first tranche at the beginning of the season for the fertilizer trade and second tranche at harvest to add to input loan repayments to FOs (cash or in kind). This would lead to 4 – 8 months loans that are more manageable. If the FI’s MIS does not enable disbursements in tranches, two loan files can be filed and presented at the same time, thus limiting transaction costs (same loan appraisal & loan decision).

Medium term loans for equipment.

This is a more classic type of loan. A case by case analysis will be necessary:

• To determine the necessary term for an FO to generate sufficient revenue to repay the loan.

FOs' financing needs

paddy trade fertilizer trade storage investment

amount range ($) 5,000 - 26,000 1,000 - 5,000 3,000 - 10,000 10,000 - 80,000duration (months) 1 - 2 3 - 6 3 - 6 36 - 60

periodicity of cash-flows

beg & end of period

beg & end of period

beg & end of period

depending on equipment


• To confirm sufficient profitability to finance the investment on loan and bear interests.

• To set an adequate repayment schedule, that will very much depend on the seasonality and organization of the activity (-ies) that will generate the revenue to repay the loan.

The partner financial institution will adapt and further refine the loan products based on their skills, present way of operating and operational and technical constraints.

6.2 Interest rates

(1) Subsidizing loans is a political decision and requires a high level of funding over a long period. It can be justified to support selected stakeholders and to finance investments leading to a change in the beneficiary’s business structure.

A lot of countries have subsidized their agriculture’s modernization through interest rate subsidies. It has proven efficient in cases where it was one of several policy tools supporting mutations in agriculture and have been part of a policy that has been sustained in the long run. In all cases it has entailed a very high cost for the State budget. The cost is double: subsidy amount + subsidy management. Managing open market interest subsidy schemes is indeed costly, mainly because of the controls it requires to set up. Providing interest rate subsidies to develop agriculture is therefore a strong political decision.

The rationale for interest rate subsidies is:

To enable the beneficiary to change their business structure so as to be able to afford market interest rates in the future.

To support a given type of stakeholder to develop their activities. Here:

• The FOs’ profitability would be boosted, enabling them to earn higher profits and thus strengthen their financial situation, and be in a better position to access commercial credit in the future.

• Having a priviledged access to credit based on a specialized mechanism can enable FOs to gain experience in a new business and thus gain in credibility for a future loan application with an FI.

Proposed loan products

fertilizer trade fertilizer & paddy trade

storage & paddy trade

investment

amount range ($) 1,000 - 5,000 5,000 - 26,000 5,000 - 26,000 10,000 - 80,000duration (months) 3 - 6 4 - 8 3 - 6 36 - 60

disbursementsingle tranche

direct to supplier?

2 tranches single tranchedirect to supplier

payment schedule balloon balloon balloon depending on equipment

Own contribution 25-50% 25-50% 25-50% 20-25%


This mechanism can thus play a role of springboard to boost FOs’ businesses in the first years

To increase the solvent demand for credit by reducing the costs so that some actors whose profitability was not sufficient to cover their costs with market interest rates become profitable with subsidized interest rates.

In both cases, interest rate subsidies have a development impact only if they are given out to finance activities that are sustainable in the long term. This needs to be analyzed based on a business plan.

Interest rate subsidies are generally better adapted and more impactful for long term loans as for short term working capital loans. In order for them to reach their policy objectives, they need to be precisely targeted, in terms of beneficiaries as well as in terms of purpose.

In the specific case of Cambodian rice FOs who compete with rice millers for the trade of paddy rice, the fact that rice millers benefit from interest rate subsidies is also an argument pleading for providing FOs also with similar support.

(2) Interest rate subisidies are a type of subsidy and as such need to abide by the “smart subsidies” principles. In order to have impact, they need to be sustained over a sufficient period of time and be progressively removed.

In order for commercial FIs to be willing to participate in a subsidized credit program, the conditions must enable them to cover their costs and generate a sufficient return on the funds they invest in the program. The rationale for the RDB is different as its main driver is the support to policy implementation.

Advantages of interest rate subsidies as compared to direct subsidies is that (i) they bring a leverage effect through the commercial funds they enable the beneficiaries to access and (ii) they make it easier to sustain the impact of a scheme after the end of subsidy as beneficiaries have relationships with an FI that can continue providing them with credit, at commercial interest rates.

Moreover, as in any subsidy mechanism, in order for the beneficiaries to make good use of the funds obtained it is important that they also commit some of their own funds in the investment that is financed (smart aid principles).

If a decision is made to give out loans at subsidized interest rates, the subsidies need to be kept as low as possible to ease transition towards market interest rates.

Complementarily, after a sufficient time period to gain sufficient momentum to have impact, the level of subsidy can be progressively reduced over time when the FOs will have turned int a solvent market for FIs.

Regarding working capital loans, the same level of subsidy should be offered to all FOs in a given period of time so as to avoid distorting the competition between FOs to negotiate with buyers.


(3) If the decision to subsidize interest rates is confirmed, different options could be explored to finance this subsidy.

Different possible sources of funds to subsidize interest rates can be explored:

Soft resources. The ASDF is soft resources; it can be used in the credit mechanism to FOs as financing FOs is already part of its goal. Other soft resources could also be leveraged (e.g. AFD).

Further decrease in ASDF cost of funds from MEF could be considered to compensate higher cost of lending than for rice millers.

To further lower the interest rate, direct subsidies could partly cover the partner FIs’ transaction costs. This usually takes the form of a compensation disbursed to FIs based on eligible loans outstanding. It is a form of result-based subsidy.

Depending on the type of resources available and the level of subsidies, there are 2 possible options to subsidize operational costs:

• Using an increased volume of soft resources, with a proportionality to the portfolio financed, based on an agreement with the FI on the decrease in interest rates as compared with the FI's general interest rates with comparable clients.

• Paying to the FI a subsidy of the % of the target portfolio corresponding to the decrease in interest rates as compared to the FI's general interest rates with comparable clients.

For the second option, a possibility could be to generate funds for interest rate subsidies by marginally increasing the exit interest rates to present ASDF clients. Based on our assumptions, a 0.1% increase in RM interest rates would generate sufficient funds to reduce interest rates to FOs to 1% per month during the first three years and could generate ¼ of such a subsidy at cruising speed, as shown in the following table. This cross-subsidizing would be easier if RDB manages both schemes.

The table projects the outstanding portfolio for loans to FOs at cruise level, once FOs have developed their business activities throughout Cambodia. The hypothesis is that 200 FOs will take a loan every year, for an average of USD 30,000 over 9 months. On this basis, the subsidy required to bring down the interest rate to 1%/month would be USD 270,000 per year. The 0.1% increase in rice millers’ interest rates could cover 1/4th of this amount.


The MEF could allocate a specific budget to subsidize the credit mechanism’s transaction costs.

(4) The decision to subsidize interest rates or not, is independent from the choice of the implementing FIs.

Both public and private FIs are capable of providing subsidized loans provided they receive the corresponding funding to cover the costs generated.

The subsidy mechanism may be different depending on the FI’s status.

6.3 Collateral

(1) The recommended approach to collateral combines different elements:

Accept soft collateral (soft land titles).

Explore other secondary collateral options (moveable assets, stock, rice in the field, collection account management agreement10…).

Set up a guarantee mechanism to decrease collateral to loan ratio.

Set goal of reducing collateral coverage as the relationship develops.

Collateral requirements should not be lifted altogether, so as to make sure FOs really measure the risk they are willing to take to start new activities. In the Cambodian context, it seems acceptable to Board

10 A collection account management agreement is one whereby the borrower commits to have his revenues paid on a specified account

000$2014 2015 2016 cruise

# Farmer Organizations (FOs) 3 10 25 200avg loan amount 10 18 22 30avg duration (mths) 6 7 9 9

FO needs 30 180 550 6,000FOs' avg loan oustanding 15 105 413 4,500

Rice Miller (RM) loans 33,000 33,000 33,000 62,000Increase in RM interest rates, per annum 0.10% 0.10% 0.10% 0.10%

Possible interest rate subsidy from RM loans 33 33 33 62

Commercial interest rates (estimate), per month 1.5% 1.5% 1.5% 1.5%

Subsidy required to come down to 1%/month 1 6 25 270% coverage by additional interests from RMs 3667% 524% 133% 23%

KEY: green: Funds generated by RM portfolio cover subsidy requirementred: Funds generated by RM portfolio do not cover subsidy requirementblue Inputs


members to pledge their own property to access funding, based on clear agreements among themselves. This should not be discarded. Depending on the provinces however, the collateral they have is often only soft collateral.

Given the higher risk linked to launching a new activity and keeping a good cooperative governance of activities, as well as the necessity to materialize FO leaders’ involvement, it is important that a significant collateral requirement remain. A progressive decrease in collateral requirements could thereafter be sought, so as to make it possible to continue funding developing FO activities based on the same collateral.

Working with guarantee funds can make it possible to negotiate a decrease in collateral requirements with FIs and thus ease access to finance and reduce FO Board members’ individual risk: Although it is important that Board members be ready to invest their own collateral to access funding, too high collateral requirements can put them in a difficult situation if they do not have enough collateral left to borrow for their household’s needs.

Therefore, based on the above discussion, the credit mechanism could aim at:

Reducing collateral requirements from FOs to 50% of FI’s usual practice through the involvement of a guarantee fund.

Accepting soft land titles as collateral whatever the size of the loan.

Progressively reducing collateral requirements while introducing new forms of collateral.


7. Recommendations for financing scenarios

7.1 Choice of financial institution(s) to implement the credit mechanism

(1) In the long term, in order to avoid distorting the financial market, the credit mechanism should be offered by several FIs, who should thus all have the possibility of accessing the necessary resources to offer subsidized credit.

In order to provide FOs with good quality financial services, it is important to create a competitive market:

Competition incites FIs to provide good services sustainably.

This in turn enable FOs to choose between different providers.

Therefore, in order to avoid distorting the financial market, it is recommended to enable all FIs to access the necessary resources to offer subsidized credit. Even if the credit mechanism starts with one partner FI, it should be designed from the start with a perspective of opening up to other FIs. In this case, it is possible to avoid unfair competition due to privileged access to soft funds and to promote the supply from diversified sources so competition can contribute to improving service to clients and reducing cost.

(2) The main advantage of choosing the RDB as credit provider to FOs is that it is clearly in line with its mission as a development bank. The main disadvantage is that at present the RDB lacks the systems and processes to build and manage a credit portfolio.

A preliminary to setting up the credit mechanism in the RDB that it is upgraded to be able to soundly manage a credit portfolio.


7.2 Description of the scenarios

7.2.1 Common elements in all scenarios

(1) In all scenarios, a mutual guarantee mechanism may be created with funds from the Federations and SCCRP and a possible strengthening by MEF funds in a second phase.

Setting up a credit mechanism is also possible without a guarantee mechanism as FIs seem ready to give out loans to FOs based on Board members' soft collateral even without such a scheme.

A guarantee mechanism can make it easier to negotiate favourable conditions with the FIs. In cases where it is possible to make use of an existing credit mechanism such as ARIZ, this lighter option should be preferred to that of setting up new guarantee institutions. The latter option should only be considered when the targeted outreach of the credit mechanism will be large enough.

Elements of the guarantee mechanism’s mode of operation are discussed in section 5.3.2 (creating a dedicated guarantee mechanism).

(2) The role of FO Federations is central and does not involve direct credit:

Committing their own funds to the mutual guarantee company.

Appraising the loan applications to decide whether they accept to guarantee them.

Supporting their member FOs to establish the business plans for their projects.

All schemes thus rely on and strengthen the FO Federations.

(3) Each financial institution involved has a direct relationship with the FO to appraise the loan application and disburse and monitor the loan.

It is important that the loans are not disbursed through the Federation but directly from the FI in order to ensure that a professional external eye assess the FO’s project and to avoid the risks linked to internal credit schemes (see section 5.2).

In its role of investor in the mutual guarantee company, it will be part of the Federation’s role to appraise the project building on its knowledge of the sector and of its members.

(4) In order to keep investment loans’ interest rate as low as possible, soft funding from ASDF is made available to finance the FOs.

Precise rules will need to be defined regarding the target beneficiaries for subsidized lending (see recommendations regarding interest rates in section 6.2).


7.2.2 Scenario 1: Partner FI credit based on RDB refinancing from ASDF funds

(1) Scenario #1 builds on a partner financial institution’s far-reaching network in rural areas to give out the loans to the FOs. The RDB manages the guarantee fund and refinances the partner FI at a preferential interest rate.

It could clearly be in line with the RDB’s mission as a public development bank to the rural world to manage a public GF aimed at facilitating FOs’ access to finance. Managing the GF alongside the MGC moreover reduces overall costs.


7.2.3 Scenario 2: RDB credit from ASDF funds

(1) In scenario #2, the RDB gives out the loans to the FOs with a mobile unit. The guarantee fund is hosted in another bank.

In this scenario, as the RDB lends out to FOs, it is not advisable that the GF be managed by the RDB. It is therefore hosted in another specialized financial institution to be created.


7.2.4 Scenario 3: Partner FI credit from ASDF funds

(1) In scenario 3, a small portion of the ASDF, dedicated to FOs, is entrusted directly to a partner financial institution.

If the MEF entrusts to a private FI the management of a portion of the ASDF dedicated to FOs, this FI should manage it as a resource in its own responsibility and bear the credit risk.

In this case, the GF can be entrusted to any bank except the partner FI. It is advised that it should be the RDB who would play the role of guarantee institution.

7.3 SWOT analyses of the different scenarios

(1) SWOT analyses have been carried out for each scenario as a basis for comparison in order to give elements to MEF, SNEC and AFD for making their decision on the scenario they want to support.

The choice of a scenario will be the basis for the next phase of the work which will lead to setting up a financing mechanism concretely to enable to disburse the first pilot loans.

In order to facilitate comparisons, a color key has been used to differentiate strengths, weaknesses, opportunities and threats according to whether they are common to all scenarios, specific to one of the scenarios or common to two of them.


(2) All scenarios have common weaknesses and threats that need to be addressed in the design of the setting up of the financing mechanism as well as strengths and opportunities to build on.

The different issues have been discussed in the respective sections of the report. The SWOT analysis synthesizes them.

Common weaknesses and threats that need to be taken into account to design the financing mechanism are:

Lack of maturity of farmer organizations. This is a driver of the proposal to set up a dedicated mechanism to provide financial services to them, considering the fact that FOs are currently rarely financed by commercial FIs and considering also the policy objective of developing FOs as economic actors.

Lack of experience in activities to be financed at FO level. This will be mitigated by Project support to FOs.

Lack of financial skills at SCCRP level to support Federations to build these skills. Once the decision is formally taken to support the implementation, SCCRP can decide to mobilize / recruit HR with more specialized expertise.

(3) Scenarios 1 and 3, involving a partner FI, share a lot of strengths and opportunities linked to leveraging an existing field network, good risk management practices and sound management systems as well as building the RDB’s GF management capacities to develop its tools to serve its mission.

Scenarios 1 and 3 are built on the idea of building on the strength, professionalism and high rural presence of the Cambodian microfinance sector. The microfinance sector is an asset in the Cambodian economy; its development has been prioritized in Government policy over the last decades. It seems to be in the best position to efficiently serve FOs in the short and long term. These scenarios also make it possible to strengthen the RDB in its role of public bank with a mission to facilitate finance to the rural economy by adding a new financial role to its present activities: that of guarantee institution, if deemed appropriate by the Cambodian Government.


Common strengths and opportunities of scenarios 1 & 3 are:

• Existing field network.

• Used to working with clients with little records & training them.

• Good risk management framework.

• Very low PAR.

• Existing skills to adapt & roll out new products.

• Good MIS & reporting processes.

• Existing relationships with local authorities & partners.

• COs recruited from local communities.

• Opportunity to build RDB’s GF management capacity, in line with its public mission.

• Possibility to use ARIZ guarantee scheme if the partner FIs answer its eligibility criteria..

7.3.1 Scenario 1: Partner FI credit based on RDB refinancing from ASDF funds

(1) Scenario 1’s specificities are linked to involving RDB as a wholesale lender, which builds on RDB’s existing capacities and opens the possibility of easily opening the participation of other FIs in the future and therefore foster competition on the market of loans to FOs. At the same time, it leads to generating costs for this intermediation and possible time lags to set up the funding.

If this mechanism were to be set up, attention would need to be paid to defining its processes so as to avoid possible time lags due to RDB’s decision making process.


7.3.2 Scenario 2: RDB credit from ASDF funds

(1) Scenario 2’s specificities come from involving as retail bank a public bank with no branch network and insufficient risk management capacities, whose mission is to implement policy decisions in the field of rural finance. This creates a number of weaknesses and threats as well as some specific strengths and opportunities. The main strength of this scenario is that is makes it easier to charge low interest rates as profitability is not targeted and a subsidy mechanism could easily be implemented.

For the implementation of subsidized lending, setting up the subsidization mechanism will be easier with a public bank that already is subsidized by the MEF than with a private FI (no negotiation necessary).


7.3.3 Scenario 3: Partner FI credit from ASDF funds

(1) Scenario 3 is very close to scenario 1 except that it is based on a direct commitment of ASDF funds.

Its specific strengths are that it does not require a decision from RDB to start the loan process that can thus be more efficient, and the direct contract with MEF will make it easier for the MEF to monitor through direct information.

The specific threat is the time it could take to obtain the MEF’s decision to transfer part of ASDF to a partner FI.


8. Pilot phase

8.1 Recommendations

(1) SCCRP’s support is essential for the success of FOs’ projects. The Project has adequate FO and Federation institution building, agronomic and economic skills to support the FOs’ maturation and build their projects with them. The Project needs strengthening in financial skills to define business plans taking all financial elements into account and discuss with financial institutions.

SCCRP support is an essential component of supporting FOs to build viable projects:

In the planning phase, to define the project, identify the different options and make good technical and economic choices and then build a business plan to make it sustainable.

In the implementation phase, to support implementation, identification of markets and buyers, negotiations at all levels, management of project, technical readjustments if needed.

Throughout the whole process, to support the FOs’ and their Federations’ maturation.

It seems that the project team has excellent technical and capacity building skills, as well as a vast experience in working with FOs to build projects with them and ensure ownership by the FO, strengthening their governance and supporting them to set up and strengthen their Federations and at the same time lacks financial skills to finalize the financial analysis of the projects it seeks to define. Therefore it is important to bring this skill to the Project. An alternative would be to localize this support with FO Federations to improve the sustainability of the support to FOs to develop projects, business plans, financial plans…

(2) Given the small number of FO projects that need to be financed in the pilot phase, it should be launched with one FI only while making sure that in the longer term the mechanism is open to other FIs.

The Project’s projections are that 3 FO projects might be ready for financing in the first year of the pilot phase, 10 in the second year and 25 in the third year11. Such a limited number of projects would make it inefficient to develop specific systems in different FIs:

Negotiations with an institution necessarily take time, for both parties to get acquainted and understand each other, then to negotiate the terms of a partnership and have it approved by Management / Board.

From the FI’s perspective, setting up systems for such a small market is really a long term vision, with no perspective of covering their costs in the short run – except if the FI will use the same methodology for other clients, e.g. with other partnerships with development partners.

11 See terms of reference for this assignment


A small number of clients scattered in different locations moreover makes it difficult to build specific staff capacity for lack of exercise.

Whereas there would be advantages to partnering with the RDB to address the above concerns, the pros and cons highlighted in 7.1. still apply.

(3) FOs should be encouraged and required to provide part of the project’s resources as their own contribution. This should both reduce the risk for the FO and make it easier to convince an FI to finance an FO’s project.

FOs have very limited own resources and these are totally invested in their activities that still lack sufficient funding to grow to a level where the FOs cater to the demand of their members and non members. When they want to launch a new activity, they often fund it by raising specific share capital from their members.

Providing an own contribution to an activity’s funding has a double advantage:

By reducing the amount borrowed it reduces the cost of credit, which in some cases can be a determining factor to make borrowing for a project profitable.

It is an important element to build a financial institution’s trust by showing that FO members believe in the project enough to invest their own scarce resources in it.

This contribution can come:

from existing activities,

by creating more share capital based on members’ contributions.

(4) Complementary TA needs may be necessary:

To set up specialized guarantee institutions.

To set up new types of securing mechanisms (warehouse receipt / contract farming).

8.2 Next steps

(1) Prior to implementation of the credit mechanism, the decision needs to be made as to which financing scenario is chosen. A two-step approach would seem appropriate given the situation.

As discussed in the restitution meeting, a two-step approach could be contemplated, beginning with a credit mechanism through a partner FI (scenarios 1 or 3), while the RDB is rehabilitated, and involving the RDB in a second stage (scenario 2).

(2) At FI level, the pre-requirements differ depending on choice of scenario.

In Scenario 1: partner FI credit based on RDB refinancing from ASDF funds, the next step si to identify interested partner FIs and come to an agreement with them.


In Scenario 2: RDB credit from ASDF funds, the pre-requirement is to rehabilitate RDB to set up its basic banking structure so it is capable of leading a new lending activity on a sound basis.

In Scenario 3: FI credit from ASDF funds, the source of soft funds need to be confirmed, either by a MEF decision to entrust a portion of ASDF to partner FIs or by identification of other soft funding available.

(3) The decision on interest rate subsidization and corresponding sources of funding needs to be clarified.

The different types of sources of funding and subsidization mechanisms are discussed in section 6.2.

(4) The decision and timeline for setting up a specific guarantee mechanism can be clarified in a later stage.

Documents

Development of a Credit Mechanism dedicated to Farmer ...sccrp.iram-fr.org/classified/HORUS_-_Credit_to_FO... · Mutual Guarantee Company . MoI . Ministry of Interior . MSMEs . Micro,