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South Korea's KB takes over Cambodia's biggest microlender

Sector hits record profits despite COVID and borrowers' overindebtedness

Prasac Microfinance Institution, Cambodia's largest microcredit lender, is now fully owned by South Korea's KB Financial Group. (Source photos by EPA/Jiji and screenshot from Prasac Microfinance Institution's website) 

PHNOM PENH -- South Korean banking giant KB Financial Group is increasing its bet on Cambodia's microcredit industry, a fast-growing $13 billion sector facing increased scrutiny over concerns about overindebtedness and human rights violations.

New York-listed KB this month announced it had taken full ownership of Prasac Microfinance Institution, Cambodia's largest microlender, completing an acquisition that began in April 2020 when it paid $603.4 million to buy 70% of the company from Sri Lanka's LOLC Holdings.

As part of that deal, the companies included an options contract for the remaining 30% of shares that was triggered early, according to an August filing KB made to the U.S. Securities and Exchange Commission. KB Financial subsidiary Kookmin Bank acquired the 89 million shares for $322 million. One share will be held by Kookmin Bank's Cambodian subsidiary.

The acquisition increases KB's involvement in what has become a highly profitable but increasingly controversial credit segment in Cambodia.

Even before the pandemic, human rights groups were voicing concerns that the for-profit lenders had recklessly pushed microloans to unsustainable levels, trapping borrowers in a cycle of debt.

Such overindebtedness has resulted in coerced land sales, debt-driven migration, child labor and farmers eating less food, according to Cambodia-based nonprofit Licadho, which has released several reports on the sector.

According to Licadho, the average size of a microloan in the country is about $4,280 -- an amount higher than the annual income of 95% of Cambodians. Most loans are collateralized with borrower land titles.

Warnings about the sector's fragility have come from other quarters as well. The International Monetary Fund in 2018 cautioned that the "growing systematic importance" of microfinance institutions (MFIs) in Cambodia posed "risks to financial and macroeconomic stability."

Last year, an independent debt expert described at the United Nations the situation in the country as a "microfinance crisis," with most loans being for "nonproductive purposes" such as spending, paying interest or for health care.

Despite such warnings, the industry and its loan portfolio has continued to grow. Most of Cambodia's largest microlenders have posted record profits even as the pandemic has slammed the country's economic drivers -- garment-making, tourism and construction -- leading to a 3.1% contraction in gross domestic product for 2020.

Net profit in the microfinance sector grew 6.8% in 2020 to around $268 million, according to figures from the National Bank of Cambodia, adjusted to account for the conversion of a microlender to a commercial bank.

Prasac, which has a loan portfolio of more than $3 billion and deposits of more than $2 billion, reported after-tax profits of $32 million for the most recent April-to-June quarter, a year-on-year rise of 150%. That came as Cambodia suffered its first large-scale domestic outbreak of COVID-19, which began in February and led to rolling lockdowns and curfews in the country's capital during the second quarter.

The key to lender profitability, however, was a decision by the National Bank of Cambodia (NBC), the central bank, to allow for the restructuring of loans taken by struggling borrowers until the end of this year, allowing MFIs to avoid classifying some loans as nonperforming. So far, lenders have restructured more than $5.5 billion worth of loans, including more than $1.6 billion from MFIs.

Stephen Higgins, former chief of ANZ bank's joint venture in Cambodia, said the measures were sensible to avoid an economic cliff, but the central bank still has a challenge ahead of it.

"It's a balancing act between not kicking the can down the road forever, but then not tanking the economy by forcing the banks to sell up all these problem clients at once in an economy still recovering from COVID," said Higgins, now a partner at investment management and advisory company Mekong Strategic Partners.

Chea Serey, assistant governor and director-general of central banking at the NBC, responded to questions from Nikkei Asia by writing that the restructuring measures helped maintain the banking system's stability and resilience. She added that in general lenders' profit margins have decreased during the pandemic.

NBC figures, collated by Nikkei, show that while profits at several banks indeed decreased in 2020, four of the country's top five MFIs had record profits.

Serey said the central bank did not expect mass defaults.

"From what we see now," she wrote, "the majority of customers who had their loans restructured can return back to normal after the restructuring period ends. Some others require some more support, including further restructuring or even additional capital to resume their businesses."

"We cannot guarantee that all borrowers will get out financially intact from the pandemic, but we can try to minimize the impact and the number of borrowers impacted through target guidelines."

Requests for comment about the takeover and issues surrounding the sector yielded no responses from KB Financial and Prasac as of publication time.

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