## Appendix 1: Cross-country experience: Interest rate caps and financial inclusion

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### I. Introduction
- Cambodia’s microfinance sector increased tenfold from 7 in 2004 to 82 in 2019.
- Number of borrowers doubled to 2.1 million between 2010 and 2019.
- Main sector challenges: significant reliance on foreign financing, high costs of funding, concerns of over-indebtedness, and low financial literacy among borrowers.
- In March 2017, the National Bank of Cambodia (NBC) introduced an 18 percent cap on annual interest rate of microfinance loans (both local currency and US dollars).
- Objectives of the cap: alleviate borrowers’ repayment burden and improve efficiency of the microfinance sector.
- Study design: difference-in-difference approach on banks and non-bank microfinance supervisory data, using institution-level and aggregate data from end-2016 to end-2019 to capture short- and medium-term dynamics prior to the Covid-19 pandemic.

Key empirical findings:
- Microfinance institutions increased non-interest fees to offset interest income loss; loan-related commission fees have tripled on average across all microfinance institutions.
- Number of borrowers declined immediately after the cap, while total microfinance loans continued to grow.
- Some microfinance institutions shifted away from small borrowers toward larger ones.
- Impact on number of borrowers varied across institutions depending on operation costs, funding costs, and client segments.
- Microfinance institutions providing larger loans to urban areas tended to be less affected.
- Microfinance institutions adopted a mobile payment network, securing lower funding costs and reducing operation costs.
- Policy caution: enforcing a cap inconsistent with market conditions risks reversing financial inclusion gains and incentivizing unregulated entities to emerge.

Policy alternatives suggested:
- Adjust the cap to reflect market conditions if upheld.
- Enhance borrower protection framework.
- Foster healthy competition.
- Promote efficiency of the microfinance industry.
- Encourage orderly consolidation to reduce overhead and operation expenses.

### II. Banking sector overview (at cap introduction, March 2017 context)
- Financial system composition when cap was introduced: 39 commercial banks, 15 specialized banks, 76 microfinance institutions, and 313 rural credit operators.
- Of 76 microfinance institutions: 69 are non-deposit microfinance institutions (MFIs) and 7 are deposit-taking microfinance institutions (MDIs).
- The microfinance sector is dominated by seven MDIs which account for 84 percent of total assets.
- Overall sector share: microfinance industry accounts for 26 percent of total loans portfolio of the banking industry and captures 68 percent of total borrowers (rural credit operators excluded).
- Historical growth of microfinance:
  - 1992: total loans of 3 million USD (0.12 percent of GDP) and 50,000 borrowers.
  - 2012: about 1 billion USD and 1.2 million borrowers.
  - 2017: 3 billion USD (15 percent of GDP) and 1.9 million borrowers.
- Domestic credit growth driven by microfinance: about 30 percent every year in past decades.
- Total credit to GDP provided by banks and microfinance increased from 24 percent in 2009 to around 105 percent in 2017.
- Regulatory milestones:
  - 2000: Law on Banking and Financial Institutions promulgated.
  - 2009: NBC regulation allowed qualified microfinance institutions to collect deposits (MDIs), subject to stricter regulation.
  - 2010: Economist Intelligence Unit Global Microscope ranked Cambodia number one for regulatory framework for microfinance industry (EIU 2013).

### III. Microfinance institution groupings and characteristics
- Group I:
  - Mostly MDIs and few MFIs.
  - Serve SME and provide relatively larger loans, mainly in USD.
  - Average loan per client usually above 2000 USD.
  - Relatively lower operation costs; clients come to office for disbursement and collection.
- Group II:
  - Mostly MFIs providing small loans and group lending.
  - Average loan size normally less than 500 USD.
  - Higher operation costs due to village-level disbursement and collection.
  - Accept soft title deeds and other forms of personal guarantees as collateral.
- Group III:
  - Provide both small loans and larger loans to SMEs.

Contextual note:
- Cambodia’s GDP per capita is about 1300 USD in 2018.

### IV. Interest rates and costing structure (pre-cap, end-2016)
- Top ten microfinance institutions (about 90 percent of market) charged an average rate of 28 percent.
- Banks’ average lending rate: 12 percent in USD and 21 percent in KHR.
- Microfinance loan interest rates ranged between 15 and 36 percent depending on currency, loan size, and credit risk.
- Interest income as a percentage of total loans among microfinance institutions is well above that of commercial banks.
- Informal lenders can charge over 100 percent per year and use predatory terms.
- NPL rate among MFIs is 3 times higher than that of commercial banks on average.
- Cost composition drivers for microfinance:
  - Higher funding costs (often foreign funding).
  - Higher operation (administrative/overhead) costs.
  - Higher credit risk from small loans and group lending.

Specific cost metrics and comparisons:
- Microfinance operation costs account for 43 percent of total expense.
- Operation cost is about 3 times higher for MDIs compared to commercial banks.
- Operation cost is about 6.5 times higher for MFIs compared to commercial banks.
- Disbursing a 500 USD loan in rural areas costs about 15 percent of total loans (including staff time, transportation, and communication).
- Overhead cost alone accounts for about 8 percent of loan costs.
- Microfinance branches account for 62 percent of total financial institutions’ branches in the country.
- Rental expenses constitute about 11 percent of overall operation expenses.

### V. Observed effects after the March 2017 18 percent cap (short- and medium-term, end-2016 to end-2019)
Fee and pricing behavior:
- Loan-related commission fees have tripled on average across all microfinance institutions.

Client outreach and loan volumes:
- Immediate decline in number of borrowers after the cap was introduced.
- Total microfinance loans continued to grow despite borrower decline.
- Some institutions shifted focus away from small borrowers toward larger borrowers, especially urban and larger-loan providers.

Heterogeneous impacts:
- Institutions’ responses varied depending on operation costs, funding costs, and client segments served.
- Microfinance institutions offering larger loans to urban clients were less affected.

Cost adjustments and technology:
- Adoption of mobile payment networks helped some microfinance institutions reduce funding costs and operation costs.

### VI. Policy implications and alternatives
- If the cap is retained, it needs adjustment to reflect market conditions; enforcing a cap inconsistent with market conditions risks:
  - Reversing financial inclusion efforts.
  - Creating incentives for unregulated entities to emerge and grow, transferring problems outside regulator oversight.
- Suggested policy alternatives to protect borrowers while limiting negative impacts:
  - Enhance borrower protection framework.
  - Foster healthy competition in the microfinance market.
  - Promote efficiency within the microfinance industry.
  - Encourage orderly consolidation to reduce overhead and operation expenses.

### VII. Research contribution and limitations
- This paper is the first known application of a difference-in-difference approach on supervisory data to examine interest rate cap impacts on financial inclusion in Cambodia.
- The Cambodian context is suitable because the cap applied to microfinance institutions only, not to banks, allowing comparison.
- Timeframe excludes Covid-19 period to focus on short- and medium-term dynamics after the cap.

### 2. Funding costs — funding structure, costs, and concerns
Funding structure and funding costs:
- Seven MDIs can take deposits; 69 MFIs cannot take deposits and thus rely more on foreign and domestic borrowings.
- For MDIs, despite domestic deposit taking, 84% of funding are from foreign investors and 16% from local funding.
- Deposit rates are usually higher in MDIs than in banks, contributing to higher interest expense by MDIs.
- Fixed-term deposit rate at MDIs is 7.5 percent, compared to 4.4 percent at commercial banks.
- The one-year fixed term deposit at MFI in 2017 is about 7 percent.
- The interest rate for foreign borrowing by microfinance institutions ranges between 2.5 and 5 percent, depending on currencies and borrowers.
- For non-deposit-taking MFIs, funding costs vary significantly because some MFI financing is partly subsidized by donors, charities and/or social-oriented investors at lower market rates.

Concerns on microfinance: mission drift and over-indebtedness:
- Rapid sector growth in the 2000s increased investor entry and tripled the number of MFIs operating in the country.
- Seven MDIs in Cambodia are “SMART campaign certified.”
- Reports indicate unethical lending practices, instances of multiple borrowings, high interest rates charged, migration due to inability to repay, and foreclosure of live-in property.
- Before the cap, on average there were eight microfinance institutions operating in a village (estimate based on NBC Quarterly 2017).
- Estimates based on consumption data and household survey suggest household indebtedness increased, with the debt to consumption ratio increasing from 24 percent in 2010 to around 50-80 percent in 2016 depending on income levels.
- Cambodia experienced rapid credit growth of 46 percent per year during 2011-2014.
- Multi-borrowing prevalence (Credit Bureau Cambodia, 2016):
  - 36 percent had more than one loan.
  - 25 percent of borrowers had two loans.
  - Nine percent had three loans.
  - Two percent had more than three loans.
- Average interest rates before the interest rate cap were between 20-36 percent, while interest rates for high risk loans can be higher than 50% per year.
- Regulatory arbitrage between MFIs and pawnshops exists; pawnshops are licensed by the ministry of Economy and Finance and are not subject to the interest rate ceiling set by the NBC.
- Minimum capital requirement for pawnshops is much lower than that for microfinance institutions.
- Increasing concern over unregistered or unlicensed entities engaging in microcredit activities with no reporting requirements.

Deepening but not inclusive enough: access, loan sizes, and fintech:
- Only about 1/3 of adult population in Cambodia has access to formal loans and saving accounts (World Bank Survey, 2017).
- Finscope survey 2016 using a broader definition suggests a higher level of financial inclusion at 59%.
- Loan size distribution in 2016:
  - About half of borrowers have loans smaller than 500 USD.
  - Another 20 percent have loans between 500 and 1000 USD.
- In 2018, after the cap, loans below 500 USD declined to about 30 percent of total loans.

Policy tensions and the interest rate cap:
- The interest rate ceiling of 18 percent was enforced on new or restructured loans of any maturity offered by microfinance institutions, rural credit institutions, and leasing companies from April 2017. The cap does not apply to loans contracted before April 2017.

### Interest Rate Cap in Cambodia (2017) — design, responses, and quantitative impacts
Design and Scope of the Cap:
- Scope:
  - Applies to new loans offered by microfinance institutions, rural credit institutions, and leasing companies.
  - Not applied to loans provided by commercial banks and other lenders such as pawnshops regulated by the Ministry of Finance.
- Definition:
  - The 18 percent interest rate cap refers to nominal interest rate and does not include other loan-related fees (microfinance institutions may charge non-interest fees such as commission fees or credit insurance fees).
- Binding level:
  - Cap set at 18 percent per annum.
  - When introduced, commercial banks charged between 10-13 percent while microfinance charged 20-36 percent per year depending on loan risk and type of microfinance institutions.
  - The 18 percent cap is applied equally to all loan sizes.

Typical provider responses to the cap (theory):
- Financial institutions usually have three options when a cap is imposed:
  - (i) Comply with the cap by reducing operation costs, searching for lower funding costs, and/or compromising profit margin.
  - (ii) Increase loan-related fees (commissions, credit insurance) when not included in cap calculation.
  - (iii) Convert to other types of institutions to avoid the scope of the cap, potentially creating informal lenders or institutions outside supervision.

Observed industry responses in Cambodia:
- All three options observed:
  - Interest income declined, reflecting compliance with the nominal interest rate cap for new loans.
  - Increase in number of MDIs and MFIs seeking cheaper funding via foreign shareholders; in 2017 and 2018, 4 MFIs were acquired by foreign banks or financial institutions.
  - Emergence and growth of pawnshops and informal/online lenders: pawnshops increasing from 328 in 2016 to more than 500 in mid-2018 and loans provided by pawnshops increasing from 38 million USD to 158 million USD by end 2020.
  - Reports of some MFIs setting up pawnshops to book credit operations outside the cap.

Quantitative impacts — key statistics and trends:
- Microfinance sector interest rate (percent of total outstanding loans): declined from about 20.8 percent in 2016 to 17 percent in 2017.
- Interest income (% of loans): 2016 = 20.8; 2017 = 16.9; 2018 = 15.0; 2019 = 14.2. Changes: 2017-2016 = -3.9; 2018-2016 = -5.8; 2019-2016 = -6.6.
- Borrowers (thousands): 2016 = 1,825; 2017 = 1,775; 2018 = 1,873; 2019 = 2,109. Changes: 2017-2016 = -51; 2018-2016 = 48; 2019-2016 = 284.
- Average Loan Size (USD): 2016 = 1,718; 2017 = 2,406; 2018 = 2,899; 2019 = 3,416. Changes: 2017-2016 = 687; 2018-2016 = 1,180; 2019-2016 = 1,697.
- Small loans (<500 USD) declined substantially; among MDIs, loans below 500 USD declined by 49 percent in 2017 and another 31 percent in March 2018.
- Loans 500-1000 USD increased by 100 percent in 2017 among MDIs.
- Among MFIs, loans below 500 USD decreased by 25 percent in 2017; loans 500-1000, 1000-3000 and 3000-5000 USD increased by about 31, 46, and 38 percent respectively.
- Total credit provided by microfinance institutions increased by 40 percent in 2017 compared to 23 percent in 2016.
- Credit provided by MDIs increased by 37 percent in 2017 compared to 22 percent in 2016.
- Credit provided by MFIs increased by 61 percent in 2017 compared to 33 percent yoy in 2016.
- Fees (% of loans): 2016 = 0.5; 2017 = 1.0; 2018 = 1.8; 2019 = 1.7. Changes: 2017-2016 = 0.5; 2018-2016 = 1.3; 2019-2016 = 1.2.
- Commission fees charged by MDIs doubled and by MFIs tripled after the cap end-2017.
- Total interest and non-interest income (as percent of outstanding loans) declined about 2 percentage point in total.
- Operation Expense (% of loans): 2016 = 7.8; 2017 = 6.3; 2018 = 5.9; 2019 = 5.4. Changes: 2017-2016 = -1.6; 2018-2016 = -1.9; 2019-2016 = -2.5.
- Return on Asset (%): 2016 = 3.5; 2017 = 2.7; 2018 = 2.7; 2019 = 2.8. Changes: 2017-2016 = -0.8; 2018-2016 = -0.8; 2019-2016 = -0.7.
- Non-performing loans (%): 2016 = 1.4; 2017 = 1.6; 2018 = 1.3; 2019 = 0.8. Changes: 2017-2016 = 0.1; 2018-2016 = -0.2; 2019-2016 = -0.6.
- In 2018 total number of MFIs = 80 (four new MFIs entered market).
- Rural credit institutions increased from 170 to 310.
- Number of banks: 2016 = 51; 2017 = 54; 2018 = 56 (one major microfinance institution converted to commercial bank).
- Pawnshops loans: 2016 = 38 million USD; end-2020 = 158 million USD.

### Empirical assessment — regression and difference-in-difference results
- Simple regression (monthly data) summary:
  - After cap: interest rate declined; fees increased; loan size and total loans increased. Changes in number of borrowers and profitability ambiguous.
- Difference-in-difference setup:
  - Treated group: microfinance institutions (MFIs and MDIs). Control group: commercial banks (excluding specialized banks and institutions with fewer than 500 clients).
  - Specification: y = β0 + β1 cap + β2 mfi + β3 cap*mfi + ε, with funding costs and operation expenses included.
  - Pre-cap: supervisory data at end-2016. Post-cap: average data of 2017 and 2018.
- Key interaction coefficients (cap*mfi) and significance (Table 3 highlights):
  - Non-Interest Fees: Interaction (cap*mfi) = 13.27*** (standard error 4.01)
  - Number of Borrower: Interaction (cap*mfi) = -0.07 (0.67) — not significant
  - Total Loans: Interaction (cap*mfi) = 0.30 (0.52) — not significant
  - Average Loan Size: Interaction (cap*mfi) = 0.39 (0.42) — not significant
  - Profitability: Interaction (cap*mfi) = -1.08 (4.58) — not significant
  - Funding costs: coefficient on Non-Interest Fees = 0.05* (0.03); on Loans = -0.02*** (0.00); on Loan Size = -0.01*** (0.00); on Profitability = -0.86*** (0.03).
  - Operation expense: significant positive association with Number of Borrower and Total Loans; negative with Average Loan Size.
  - Observations = 168 for each regression; R-squared vary across outcomes (0.29 to 0.84).
  - Significance notation: *** p<0.01, ** p<0.05, * p<0.1.

Interpretation of estimates:
- Significant positive interaction on fees confirms widespread increase in commission fees by microfinance institutions to offset interest income loss.
- Effects on number of borrowers not statistically significant overall; impacts heterogeneous across institutions.
- Cannot conclusively link increases in total loan and average loan size causally to the cap; MFIs and MDIs responded differently (MDIs tended to increase loan size; MFIs generally did not).

Conclusions:
- Short- and medium-term effects:
  - Nominal interest rates declined as intended.
  - Circumvention via enlarged non-interest fees (commission fees increased threefold across institutions).
  - Short-term negative impact on small borrowers; small loans declined while larger loans increased (credit rationing from small to large borrowers or higher debt per borrower).
  - Medium-term: number of borrowers and total loans recovered and exceeded pre-cap levels by end-2019; MFIs/MDIs adjusted operations and costs and continued lending while charging higher fees.
- Distributional and market effects:
  - Impact on financial inclusion varied across institutions depending on operation costs, funding costs, client base, and ability to raise commission fees.
  - Emergence of alternative/unregulated lenders (pawnshops, online and informal lenders) and regulatory arbitrage observed.

### Policy implications and recommendations
- If maintaining the cap to protect consumers:
  - Consider a non-binding cap coupled with stronger consumer protection safeguards.
  - Clearly define scope of implementation with regard to loan characteristics (including size and availability and type of collaterals) and calculation of related fees and charges to minimize unintended consequences.
  - Avoid enforcing caps inconsistent with market conditions to prevent reversing financial inclusion and incentivizing unregulated entities.
- Policy options to protect borrowers and limit negative impacts:
  - Enhance consumer protection framework and enforcement to prevent abusive and irresponsible lending practices.
  - Strengthen lender discipline and financial literacy among borrowers; bolster consumer protection law enforcement; create a solid regulatory framework to avoid regulatory arbitrage among MFIs, pawnshops, and informal lenders.
  - Expand consumer education initiatives (examples cited: “Let’s Talk Money” campaign, inclusion of financial literacy in general education); prohibit deceptive marketing techniques; require ethical lending training by Banking and Financial Institute.
  - Foster healthy competition and efficiency in microfinance industry:
    - Encourage orderly consolidation of MFIs via higher capital requirements for small institutions.
    - Improve operational efficiency through lower costs of doing business and harnessing fintech (capitalize mobile money transfer networks, introduce tiered E-KYC, adopt alternative credit scoring and information sharing).
    - Reduce credit risk premia via more efficient loan foreclosure procedures and lower debt collection costs.
    - Manage fintech-related risks (cybercrime, transparency, consumer protection).
  - Strengthen collaboration among NBC, CMA, CBC, and Association of Banks in Cambodia (ABC); enhance enforcement tools and potential NBC intervention where needed.
- Overall guidance:
  - Combine consumer protection, enhanced transparency, competition and efficiency measures, and proportionate regulation to protect borrowers without driving credit activity outside the regulatory perimeter.

### Appendices — empirical tables and prudential comparison highlights
- MDIs' response (Table A1 summary):
  - Post April 2017 coefficients: Borrower = -0.06; Loans = 0.41***; Loan Size = 0.46***; Fees = 1.95***; Fees/Interest Income = 0.08***; ROA = 0.01***.
  - Observations: 288 (varies by column); Institutions: 8.
- MFIs' response (Table A2 summary):
  - Post April 2017 coefficients: Borrower = 0.24*; Loans = 0.38***; Loan Size = 0.15; Fees = 1.18***; Fees/Interest Income = 0.11***; ROA = -0.02.
  - Observations: up to 2,089; Institutions: 69–70.
- Prudential regulation comparison (Appendix 3) highlights:
  - Capital requirement (in USD): Banks = 12.2M if influential shareholder is BFI with a rating of “Investment grade”; Otherwise, 36.6M. MDIs (MFIs): 2.44M (for other non-deposit taking MFIs: 61K).
  - Reserve requirements: Banks = 8% in KHR on deposits and borrowings and 12% for foreign currencies deposits and foreign currencies borrowings. MDIs (MFIs): 8% of deposits for both KHR and foreign currencies (non-deposit taking MFIs: NA).
  - Provisioning and asset classification and other regulatory details differ materially between Banks and MDIs/MFIs (see appendix tables).

*Source: Appendix 1–3, "Cross-country experience: Interest rate caps and financial inclusion" (from wpiea2021107-print-pdf).*

### Appendix 1: Cross-country experience: Interest rate caps and financial inclusion ........ 28

### Appendix 1: Cross-country experience: Interest rate caps and financial inclusion

### I. Introduction
- Cambodia’s microfinance sector increased tenfold from 7 in 2004 to 82 in 2019.
- Number of borrowers doubled to 2.1 million between 2010 and 2019.
- Main sector challenges: significant reliance on foreign financing, high costs of funding, concerns of over-indebtedness, and low financial literacy among borrowers.
- In March 2017, the National Bank of Cambodia (NBC) introduced an 18 percent cap on annual interest rate of microfinance loans (both local currency and US dollars).
- Objectives of the cap: alleviate borrowers’ repayment burden and improve efficiency of the microfinance sector.
- Study design: difference-in-difference approach on banks and non-bank microfinance supervisory data, using institution-level and aggregate data from end-2016 to end-2019 to capture short- and medium-term dynamics prior to the Covid-19 pandemic.

Key empirical findings:
- Microfinance institutions increased non-interest fees to offset interest income loss; loan-related commission fees have tripled on average across all microfinance institutions.
- Number of borrowers declined immediately after the cap, while total microfinance loans continued to grow.
- Some microfinance institutions shifted away from small borrowers toward larger ones.
- Impact on number of borrowers varied across institutions depending on operation costs, funding costs, and client segments.
- Microfinance institutions providing larger loans to urban areas tended to be less affected.
- Microfinance institutions adopted a mobile payment network, securing lower funding costs and reducing operation costs.
- Policy caution: enforcing a cap inconsistent with market conditions risks reversing financial inclusion gains and incentivizing unregulated entities to emerge.

Policy alternatives suggested:
- Adjust the cap to reflect market conditions if upheld.
- Enhance borrower protection framework.
- Foster healthy competition.
- Promote efficiency of the microfinance industry.
- Encourage orderly consolidation to reduce overhead and operation expenses.

### II. Banking sector overview (at cap introduction, March 2017 context)
- Financial system composition when cap was introduced: 39 commercial banks, 15 specialized banks, 76 microfinance institutions, and 313 rural credit operators.
- Of 76 microfinance institutions: 69 are non-deposit microfinance institutions (MFIs) and 7 are deposit-taking microfinance institutions (MDIs).
- The microfinance sector is dominated by seven MDIs which account for 84 percent of total assets.
- Overall sector share: microfinance industry accounts for 26 percent of total loans portfolio of the banking industry and captures 68 percent of total borrowers (rural credit operators excluded).
- Historical growth of microfinance:
  - 1992: total loans of 3 million USD (0.12 percent of GDP) and 50,000 borrowers.
  - 2012: about 1 billion USD and 1.2 million borrowers.
  - 2017: 3 billion USD (15 percent of GDP) and 1.9 million borrowers.
- Domestic credit growth driven by microfinance: about 30 percent every year in past decades.
- Total credit to GDP provided by banks and microfinance increased from 24 percent in 2009 to around 105 percent in 2017.
- Regulatory milestones:
  - 2000: Law on Banking and Financial Institutions promulgated.
  - 2009: NBC regulation allowed qualified microfinance institutions to collect deposits (MDIs), subject to stricter regulation.
  - 2010: Economist Intelligence Unit Global Microscope ranked Cambodia number one for regulatory framework for microfinance industry (EIU 2013).

Microfinance institutional tiers and roles:
- MDIs play an important role in access to finance and reducing reliance on foreign funding.
- Microfinance institutions are tiered depending on risks posed to financial stability (Appendix 3 referenced).

### III. Microfinance institution groupings and characteristics
- Group I:
  - Mostly MDIs and few MFIs.
  - Serve SME and provide relatively larger loans, mainly in USD.
  - Average loan per client usually above 2000 USD.
  - Relatively lower operation costs; clients come to office for disbursement and collection.
- Group II:
  - Mostly MFIs providing small loans and group lending.
  - Average loan size normally less than 500 USD.
  - Higher operation costs due to village-level disbursement and collection.
  - Accept soft title deeds and other forms of personal guarantees as collateral.
- Group III:
  - Provide both small loans and larger loans to SMEs.

Contextual note:
- Cambodia’s GDP per capita is about 1300 USD in 2018.

### IV. Interest rates and costing structure (pre-cap, end-2016)
- Top ten microfinance institutions (about 90 percent of market) charged an average rate of 28 percent.
- Banks’ average lending rate: 12 percent in USD and 21 percent in KHR.
- Microfinance loan interest rates ranged between 15 and 36 percent depending on currency, loan size, and credit risk.
- Interest income as a percentage of total loans among microfinance institutions is well above that of commercial banks.
- Informal lenders can charge over 100 percent per year and use predatory terms.
- NPL rate among MFIs is 3 times higher than that of commercial banks on average.
- Cost composition drivers for microfinance:
  - Higher funding costs (often foreign funding).
  - Higher operation (administrative/overhead) costs.
  - Higher credit risk from small loans and group lending.

Specific cost metrics and comparisons:
- Microfinance operation costs account for 43 percent of total expense.
- Operation cost is about 3 times higher for MDIs compared to commercial banks.
- Operation cost is about 6.5 times higher for MFIs compared to commercial banks.
- Disbursing a 500 USD loan in rural areas costs about 15 percent of total loans (including staff time, transportation, and communication).
- Overhead cost alone accounts for about 8 percent of loan costs.
- Microfinance branches account for 62 percent of total financial institutions’ branches in the country.
- Rental expenses constitute about 11 percent of overall operation expenses.

Figures referenced (descriptive):
- Figure 9: Interest Rates By Institutions (percent) — Banks, MDI, MFI.
- Figure 10: Loan Cost Before the Cap (Percent) — breakdown: Interest expense, Admin. expense, Provision, Net profit.
- Figure 11: MDI: Cost of Loans (percent of gross portfolio) — Funding Cost, Operating Cost, Loan Loss Provision; includes multiple MDI1..MDI7 with 18% marker.
- Figure 12: MFI: Cost of Loans (percent of gross portfolio) — Funding Cost, Operating Cost, Loan Loss Provision; includes 18% marker.
- Figure 13: Operating Expense/Loans (percent) — Banks, MDI, MFI.

### V. Observed effects after the March 2017 18 percent cap (short- and medium-term, end-2016 to end-2019)
- Fee and pricing behavior:
  - Loan-related commission fees have tripled on average across all microfinance institutions (to offset interest income loss).
- Client outreach and loan volumes:
  - Immediate decline in number of borrowers after the cap was introduced.
  - Total microfinance loans continued to grow despite borrower decline.
  - Some institutions shifted focus away from small borrowers toward larger borrowers, especially urban and larger-loan providers.
- Heterogeneous impacts:
  - Institutions’ responses varied depending on operation costs, funding costs, and client segments served.
  - Microfinance institutions offering larger loans to urban clients were less affected.
- Cost adjustments and technology:
  - Adoption of mobile payment networks helped some microfinance institutions reduce funding costs and operation costs.

### VI. Policy implications and alternatives
- If the cap is retained, it needs adjustment to reflect market conditions; enforcing a cap inconsistent with market conditions risks:
  - Reversing financial inclusion efforts.
  - Creating incentives for unregulated entities to emerge and grow, transferring problems outside regulator oversight.
- Suggested policy alternatives to protect borrowers while limiting negative impacts:
  - Enhance borrower protection framework.
  - Foster healthy competition in the microfinance market.
  - Promote efficiency within the microfinance industry.
  - Encourage orderly consolidation to reduce overhead and operation expenses.

### VII. Research contribution and limitations
- This paper is the first known application of a difference-in-difference approach on supervisory data to examine interest rate cap impacts on financial inclusion in Cambodia.
- The Cambodian context is suitable because the cap applied to microfinance institutions only, not to banks, allowing comparison.
- Timeframe excludes Covid-19 period to focus on short- and medium-term dynamics after the cap.

*Appendix 1: Cross-country experience: Interest rate caps and financial inclusion — IMF working paper excerpt*

### 2. Funding costs

### 2. Funding costs

### Funding structure and funding costs
- Seven MDIs can take deposits; 69 MFIs cannot take deposits and thus rely more on foreign and domestic borrowings.
- For MDIs, despite domestic deposit taking, 84% of funding are from foreign investors and 16% from local funding.
- Deposit rates are usually higher in MDIs than in banks, contributing to higher interest expense by MDIs.
- Fixed-term deposit rate at MDIs is 7.5 percent, compared to 4.4 percent at commercial banks.
- The one-year fixed term deposit at MFI in 2017 is about 7 percent.
- The interest rate for foreign borrowing by microfinance institutions ranges between 2.5 and 5 percent, depending on currencies and borrowers.
- For non-deposit-taking MFIs, funding costs vary significantly because some MFI financing is partly subsidized by donors, charities and/or social-oriented investors at lower market rates.

### Concerns on microfinance: mission drift and over-indebtedness
- Rapid sector growth in the 2000s increased investor entry and tripled the number of MFIs operating in the country.
- Seven MDIs in Cambodia are “SMART campaign certified,” complying with consumer protection principles set by the global microfinance industry.
- Reports indicate unethical lending practices, instances of multiple borrowings, high interest rates charged, migration due to inability to repay, and foreclosure of live-in property.
- Before the cap, on average there were eight microfinance institutions operating in a village (estimate based on NBC Quarterly 2017).
- Estimates based on consumption data and household survey suggest household indebtedness increased, with the debt to consumption ratio increasing from 24 percent in 2010 to around 50-80 percent in 2016 depending on income levels.
- Cambodia is among the most saturated credit markets in the world given rapid credit growth of 46 percent per year during 2011-2014.
- Multi-borrowing prevalence (Credit Bureau Cambodia, 2016):
  - 36 percent had more than one loan.
  - 25 percent of borrowers had two loans.
  - Nine percent had three loans.
  - Two percent had more than three loans.
- Clients borrowing from one institution to pay off debt at another has become common practice, and the waiting period to refinance old debt has shortened.
- Average interest rates before the interest rate cap were between 20-36 percent, while interest rates for high risk loans can be higher than 50% per year.
- Regulatory concerns:
  - Regulatory arbitrage between MFIs and pawnshops exists; pawnshops are licensed by the ministry of Economy and Finance and are not subject to the interest rate ceiling set by the NBC.
  - Minimum capital requirement for pawnshops is much lower than that for microfinance institutions.
  - Increasing concern over unregistered or unlicensed entities engaging in microcredit activities with no reporting requirements.

### Deepening but not inclusive enough: access, loan sizes, and fintech
- Only about 1/3 of adult population in Cambodia has access to formal loans and saving accounts (World Bank Survey, 2017).
- Finscope survey 2016 using a broader definition suggests a higher level of financial inclusion at 59%.
- Financial inclusion remains low compared to countries of similar income.
- Poor customer information, weak contract enforcement, and issues of multi ID documents result in high transaction costs and risk premiums, especially for small loans.
- Fintech usage (e.g., mobile phone services) has been widespread but mostly limited to remittance services.
- Loan size distribution in 2016:
  - About half of borrowers have loans smaller than 500 USD.
  - Another 20 percent have loans between 500 and 1000 USD.
  - Most loans are for social loans, business loans, and personal finance.
  - Social loans account for half of loans below 500 USD and 20 percent of loans between 500-1000 USD.
- In 2018, after the cap, loans below 500 USD declined to about 30 percent of total loans.

### Policy tensions and the interest rate cap
- Policy trade-off: promote financial inclusion and outreach (including savings mobilization and credit for sectors such as agriculture) versus reducing over-indebtedness, preventing predatory lending, and restoring lending discipline.
- The interest rate ceiling of 18 percent was enforced on new or restructured loans of any maturity offered by microfinance institutions, rural credit institutions, and leasing companies from April 2017. The cap does not apply to loans contracted before April 2017.

*Source: IMF staff compilation from the chapter "2. Funding costs" of the provided PDF content.*

### 2017. As stipulated in the regulation (Prakas in Appendix 4), the cap aims to protect

### Interest Rate Cap in Cambodia (2017)

### Design and Scope of the Cap
- Scope:
  - Applies to new loans offered by microfinance institutions, rural credit institutions, and leasing companies.
  - Not applied to loans provided by commercial banks and other lenders such as pawnshops regulated by the Ministry of Finance.
  - Figure referenced: parts of financial system in which new or restructured loans are subject to the interest rate cap.
- Definition:
  - The 18 percent interest rate cap refers to nominal interest rate and does not include other loan-related fees (microfinance institutions may charge non-interest fees such as commission fees or credit insurance fees).
- Binding level:
  - Cap set at 18 percent per annum.
  - When introduced, commercial banks charged between 10-13 percent while microfinance charged 20-36 percent per year depending on loan risk and type of microfinance institutions.
  - The 18 percent cap is applied equally to all loan sizes.

### Typical Provider Responses to the Cap (theory)
- Financial institutions usually have three options when a cap is imposed:
  - (i) Comply with the cap by reducing operation costs, searching for lower funding costs, and/or compromising profit margin.
  - (ii) Increase loan-related fees (commissions, credit insurance) when not included in cap calculation.
  - (iii) Convert to other types of institutions to avoid the scope of the cap, potentially creating informal lenders or institutions outside supervision.

### Observed Industry Responses in Cambodia
- All three options observed:
  - Interest income declined, reflecting compliance with the nominal interest rate cap for new loans.
  - Increase in number of MDIs and MFIs seeking cheaper funding via foreign shareholders; in 2017 and 2018, 4 MFIs were acquired by foreign banks or financial institutions.
  - Emergence and growth of pawnshops and informal/online lenders (option 3), with pawnshops increasing from 328 in 2016 to more than 500 in mid-2018 and loans provided by pawnshops increasing from 38 million USD to 158 million USD by end 2020.
  - Reports of some MFIs setting up pawnshops to book credit operations outside the cap.

### Quantitative Impacts — Key Statistics and Trends
- Industry rates and income:
  - Microfinance sector interest rate (percent of total outstanding loans): declined from about 20.8 percent in 2016 to 17 percent in 2017.
  - Interest income (% of loans): 2016 = 20.8; 2017 = 16.9; 2018 = 15.0; 2019 = 14.2. Changes: 2017-2016 = -3.9; 2018-2016 = -5.8; 2019-2016 = -6.6.
- Borrowers and loan size:
  - Borrowers (thousands): 2016 = 1,825; 2017 = 1,775; 2018 = 1,873; 2019 = 2,109. Changes: 2017-2016 = -51; 2018-2016 = 48; 2019-2016 = 284.
  - Average Loan Size (USD): 2016 = 1,718; 2017 = 2,406; 2018 = 2,899; 2019 = 3,416. Changes: 2017-2016 = 687; 2018-2016 = 1,180; 2019-2016 = 1,697.
  - Small loans (<500 USD) declined substantially; among MDIs, loans below 500 USD declined by 49 percent in 2017 and another 31 percent in March 2018.
  - Loans 500-1000 USD increased by 100 percent in 2017 among MDIs.
  - Among MFIs, loans below 500 USD decreased by 25 percent in 2017; loans 500-1000, 1000-3000 and 3000-5000 USD increased by about 31, 46, and 38 percent respectively.
- Loan supply:
  - Total credit provided by microfinance institutions increased by 40 percent in 2017 compared to 23 percent in 2016.
  - Credit provided by MDIs increased by 37 percent in 2017 compared to 22 percent in 2016.
  - Credit provided by MFIs increased by 61 percent in 2017 compared to 33 percent yoy in 2016.
- Non-interest income and fees:
  - Fees (% of loans): 2016 = 0.5; 2017 = 1.0; 2018 = 1.8; 2019 = 1.7. Changes: 2017-2016 = 0.5; 2018-2016 = 1.3; 2019-2016 = 1.2.
  - Commission fees charged by MDIs doubled and by MFIs tripled after the cap end-2017.
  - Total interest and non-interest income (as percent of outstanding loans) declined about 2 percentage point in total.
- Operational metrics:
  - Operation Expense (% of loans): 2016 = 7.8; 2017 = 6.3; 2018 = 5.9; 2019 = 5.4. Changes: 2017-2016 = -1.6; 2018-2016 = -1.9; 2019-2016 = -2.5.
  - Return on Asset (%): 2016 = 3.5; 2017 = 2.7; 2018 = 2.7; 2019 = 2.8. Changes: 2017-2016 = -0.8; 2018-2016 = -0.8; 2019-2016 = -0.7.
  - Non-performing loans (%): 2016 = 1.4; 2017 = 1.6; 2018 = 1.3; 2019 = 0.8. Changes: 2017-2016 = 0.1; 2018-2016 = -0.2; 2019-2016 = -0.6.
- Institutional counts:
  - In 2018 total number of MFIs = 80 (four new MFIs entered market).
  - Rural credit institutions increased from 170 to 310.
  - Number of banks: 2016 = 51; 2017 = 54; 2018 = 56 (one major microfinance institution converted to commercial bank).
  - Pawnshops loans: 2016 = 38 million USD; end-2020 = 158 million USD.

### Empirical Assessment (regression and difference-in-difference results)
- Simple regression (monthly data) summary (Table 2 summary):
  - After cap: interest rate declined; fees increased; loan size and total loans increased. Changes in number of borrowers and profitability ambiguous.
- Difference-in-difference setup:
  - Treated group: microfinance institutions (MFIs and MDIs). Control group: commercial banks (excluding specialized banks and institutions with fewer than 500 clients).
  - Specification: y = β0 + β1 cap + β2 mfi + β3 cap*mfi + ε, with funding costs and operation expenses included.
  - Pre-cap: supervisory data at end-2016. Post-cap: average data of 2017 and 2018.
- Key regression table (Table 3) — interaction (cap*mfi) coefficients and significance:
  - Non-Interest Fees: Interaction (cap*mfi) = 13.27*** (standard error 4.01)
  - Number of Borrower: Interaction (cap*mfi) = -0.07 (0.67) — not significant
  - Total Loans: Interaction (cap*mfi) = 0.30 (0.52) — not significant
  - Average Loan Size: Interaction (cap*mfi) = 0.39 (0.42) — not significant
  - Profitability: Interaction (cap*mfi) = -1.08 (4.58) — not significant
  - Funding costs: effects include funding costs coefficient on Non-Interest Fees = 0.05* (0.03); on Loans = -0.02*** (0.00); on Loan Size = -0.01*** (0.00); on Profitability = -0.86*** (0.03).
  - Operation expense: significant positive association with Number of Borrower and Total Loans; negative with Average Loan Size.
  - Observations = 168 for each regression; R-squared vary across outcomes (0.29 to 0.84).
  - Significance notation: *** p<0.01, ** p<0.05, * p<0.1.
- Interpretation of estimates:
  - Significant positive interaction on fees confirms widespread increase in commission fees by microfinance institutions to offset interest income loss.
  - Effects on number of borrowers not statistically significant overall; impacts heterogeneous across institutions.
  - Cannot conclusively link increases in total loan and average loan size causally to the cap; MFIs and MDIs responded differently (MDIs tended to increase loan size; MFIs generally did not).

### Conclusions
- Short- and medium-term effects:
  - Nominal interest rates declined as intended.
  - Circumvention via enlarged non-interest fees (commission fees increased threefold across institutions).
  - Short-term negative impact on small borrowers; small loans declined while larger loans increased (credit rationing from small to large borrowers or higher debt per borrower).
  - Medium-term: number of borrowers and total loans recovered and exceeded pre-cap levels by end-2019; MFIs/MDIs adjusted operations and costs and continued lending while charging higher fees.
- Distributional and market effects:
  - Impact on financial inclusion varied across institutions depending on operation costs, funding costs, client base, and ability to raise commission fees.
  - Emergence of alternative/unregulated lenders (pawnshops, online and informal lenders) and regulatory arbitrage observed.

### Policy Implications and Recommendations
- If maintaining the cap to protect consumers:
  - Consider a non-binding cap coupled with stronger consumer protection safeguards.
  - Clearly define scope of implementation with regard to loan characteristics (including size and availability and type of collaterals) and calculation of related fees and charges to minimize unintended consequences.
  - Avoid enforcing caps inconsistent with market conditions to prevent reversing financial inclusion and incentivizing unregulated entities.
- Policy options to protect borrowers and limit negative impacts:
  - Enhance consumer protection framework and enforcement to prevent abusive and irresponsible lending practices (lending without prudent regard for repayment capacity, deceptive terms, unethical repossession).
  - Strengthen lender discipline and financial literacy among borrowers; bolster consumer protection law enforcement; create a solid regulatory framework to avoid regulatory arbitrage among MFIs, pawnshops, and informal lenders.
  - Consumer education initiatives (existing examples: “Let’s Talk Money” campaign, inclusion of financial literacy in general education) should be expanded; prohibit deceptive marketing techniques that hide true costs; consider transparent/responsible incentive schemes for credit officers; require ethical lending training by Banking and Financial Institute.
  - Foster healthy competition and efficiency in microfinance industry:
    - Encourage orderly consolidation of MFIs via higher capital requirements for small institutions.
    - Improve operational efficiency through lower costs of doing business and harnessing fintech (capitalize mobile money transfer networks, introduce tiered E-KYC, adopt alternative credit scoring and information sharing).
    - Reduce credit risk premia via more efficient loan foreclosure procedures and lower debt collection costs.
    - Manage fintech-related risks (cybercrime, transparency, consumer protection).
  - Strengthen collaboration among NBC, CMA, CBC, and Association of Banks in Cambodia (ABC); enhance enforcement tools and potential NBC intervention where needed.
- Overall guidance:
  - Combine consumer protection, enhanced transparency, competition and efficiency measures, and proportionate regulation to protect borrowers without driving credit activity outside the regulatory perimeter.

*Source: IMF chapter on the impact of the 18 percent nominal interest rate cap on microfinance in Cambodia (2017–2019) as presented in the supplied content.*

### Appendix 1: Cross-country experience: Interest rate caps and financial inclusion

### Appendix 1: Cross-country experience: Interest rate caps and financial inclusion

### Cross-country evidence and theoretical channels
- Cross-country evidence on the effectiveness of interest rate caps is mixed (Maimbo and Gallegos 2014).
- In theory, interest rate caps can help reduce the cost of borrowing for consumers and are often used by governments and tends to be a politically popular tool to protect unsophisticated borrowers from predatory lending.
- The real economic impact depends on three factors:
  - (i) how banks adjust supply and composition of loans in reaction to the cap;
  - (ii) how consumers adjust their demand for credit; and
  - (iii) whether and how much the cap is set below the current market interest rate.
- Although more than 70 countries worldwide have enacted interest rate caps to some degree, they vary in scope and forms (Ferrari, Masetti, and Ren, 2018).
- Interest rate caps vary substantially regarding what they cover, how they work, and how interest rates are defined.
  - If the primary rationale of the cap is to protect consumers, caps are usually set at levels that only limit extreme pricing but leave the core market with minimal implications.
  - If the objective is to achieve certain socio‐economic goals, such as lower overall cost of credit, ceilings are set at “binding levels” intended to influence the market outcome. (Footnote 23 describes absolute and relative caps.)

### Types of caps (footnote summary)
- Absolute cap: fixed nominal rate that may not be exceeded; may include multiple different caps based on size or type of loans, socio‐economic characteristics of borrowers, or industry.
- Relative cap: maximum allowed interest rate depends on the level of a benchmark rate (e.g., policy rate or average market rate); defined as a spread over the benchmark; relative caps vary over time with the benchmark.

### Empirical patterns and predominant international experience
- Despite good intentions, international experience predominantly points to negative impacts, including:
  - reduction of credit availability;
  - increase in costs for low-income borrowers;
  - withdrawal of financial services from the poor;
  - loss of transparency of financial products.
- Specific observed behaviors and outcomes:
  - Caps set above the market rate do not seem to affect the market and can help limit predatory practice. Caps set above market rates affect only extreme pricing with little impact on the overall market. If interest rate caps include regulations on non-interest fees, caps can potentially help remove predatory lenders.
  - Caps are often circumvented by the use of non-interest fees and commissions. When interest rate is not clearly defined, the cap tends to be circumvented with financial institutions charging non-interest fees such as commission fees for loans.
  - Caps set well below market rate can discourage financial institutions to lend. The impact on the credit supply reduction depends on the scope of the cap. Blanket caps can lead a large decline of unsecured and small loans, as well as in credit to SMEs and riskier sectors. Moreover, loan size tends to increase, suggesting a credit rationing from small to large borrowers and potentially concentration risks.

### Country examples and outcomes
- Japan: introduction of interest rate cap in 2006 led to reduction of credit supply, drop in acceptance of loan applications and emergence of illegal lending (FRB San Francisco, 2007).
- India: interest rate caps in 2011 led to a slowdown in borrowing and lowered formal financial access (ADB, 2016).
- Kenya: interest rate caps led to a significant decline in aggregate lending, an increase in nonperforming loans, and a lending shift away from small and medium enterprise toward safer corporate clients (Mehnaz and Bilal, 2018).
- Nicaragua: application of an interest ceiling caused microfinance institutions to reduce lending and withdraw from rural areas due to high operation costs and risks; institutions added fees and other charges to cover costs since these were not capped (CGAP, 2004).
- South Africa: several financial institutions circumvented caps by charging credit life insurance and other service fees, reducing transparency of total loan costs (Mehnaz and Bilal 2018).
- Armenia: lack of clarity on how to calculate the interest rate led banks and microfinance institutions to impose fees and commissions, reducing transparency but still imposing payment burden on borrowers.

### Summary of cross-country lessons
- Caps may create incentives for unregulated entities to emerge and grow, transferring problems outside the regulator’s domain.
- Caps are often difficult to enforce and can lead to evasion through alternative products or charges.
- Caps can stifle credit product innovation and finer market segmentation by confining the acceptable range of rates and products.

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### Appendix 2: Structural break of key variables among MDIs and MFIs

### Empirical specification
- Baseline panel specification with robust standard error:
  - y_it = α_i + β1 Post_April2017 + ε_it
  - y_it is the outcome of interest in the sector at month t.
  - α_i is the dummy for institutions (fixed effect for banks, MDIs, and MFIs).
  - β1 is coefficient on a dummy equal to 0 for all months prior to April 2017 and equal to 1 for April 2017 and thereafter.
  - Interest is in significance levels of β1 representing average change in outcome y in the post-April 2017 period.

### MDIs' response to interest rate cap (Table A1)
- Summary findings:
  - Effects on number of borrowers: statistically insignificant though coefficient has negative sign.
  - Effect on average loan size: positive and statistically significant, suggesting MDIs increased loan size to meet cap requirement.
  - Effect on commission fees: positive and statistically significant, confirming MDIs increased commission fees.
  - Coefficient for profitability (ROA): positive and statistically significant, suggesting MDIs’ profits increased despite the cap.
- Table A1 coefficients and statistics (as presented):
  - Variables in table columns: Borrower, Loans, Loan Size, Fees, Fees/Interest Income, ROA
  - Post April 2017: -0.06, 0.41***, 0.46***, 1.95***, 0.08***, 0.01***
    - Robust standard errors in parentheses: (0.08)(0.03)(0.06)(0.34)(0.02)(0.00)
  - Constant: 12.20***, 3.23***, -6.67***, 7.11***, 0.01**, 0.02***
    - Robust standard errors in parentheses: (0.02)(0.01)(0.02)(0.11)(0.01)(0.00)
  - Observations: 288, 288, 288, 250, 288, 288
  - R-squared: 0.057, 0.585, 0.649, 0.466, 0.452, 0.140
  - Institutions: 8, 8, 8, 8, 8, 8
  - Significance notation: *** p<0.01, ** p<0.05, * p<0.1

### MFIs' response to interest rate cap (Table A2)
- Summary findings:
  - Effects on number of borrowers among MFIs: positive and significant at 10% (number of borrowers increased despite the cap).
  - Effect on average loan size: statistically significant; MFIs largely do not increase loan size to meet the cap requirement (contrast with MDIs).
  - Effect on commission fees: positive and stronger than in MDIs, confirming MFIs increased commission fees.
  - Coefficient for profitability (ROA): not statistically significant, suggesting MFIs’ profits largely unchanged despite the cap.
  - Interpretation: MFIs continue to lend to new borrowers but charge higher commission fees and largely do not increase loan size; explained by MFIs serving riskier clients and difficulty increasing loan size.
- Table A2 coefficients and statistics (as presented):
  - Variables in table columns: Borrower, Loans, Loan Size, Fees, Fees/Interest Income, ROA
  - Post April 2017: 0.24*, 0.38***, 0.15, 1.18***, 0.11***, -0.02
    - Robust standard errors in parentheses: (0.13)(0.13)(0.09)(0.19)(0.03)(0.02)
  - Constant: 6.71***, -1.30***, -5.71***, 3.62***, 0.06***, -0.02***
    - Robust standard errors in parentheses: (0.05)(0.05)(0.04)(0.08)(0.01)(0.01)
  - Observations: 2,083, 2,085, 2,083, 1,754, 2,089, 2,104
  - R-squared: 0.009, 0.030, 0.007, 0.136, 0.031, 0.017
  - Institutions: 70, 70, 70, 70, 69, 69
  - Significance notation: Robust standard errors in parentheses: *** p<0.01, ** p<0.05, * p<0.1

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### Appendix 3: Prudential regulation comparison between CBs and MDIs (MFIs)

### Licensing and registration
- Banks: Licensing
- MDIs (MFIs): Registration Obligated for Licensing Registration regardless (MFIs: Obliged if
  - portfolio >$244K or borrowers >1000
  - saving >$24K or depositors >100
  - (Otherwise, will be classified as MFOs))

### Capital and guarantees
- Capital requirement (in USD):
  - Banks: 12.2M if influential shareholder is BFI with a rating of “Investment grade”; Otherwise, 36.6M
  - MDIs (MFIs): 2.44M (for other non-deposit taking MFIs: 61K)
- Capital guarantee at NBC:
  - Banks: 10% of minimum capital (=capital requirement)
  - MDIs (MFIs): 10% of registered capital (non-deposit taking MFIs: 5% of registered capital)

### Net worth and solvency
- Net Worth (NW):
  - Banks: NW = Tier1 + Tier2 and Tier2 < Tier1 (or Tier2 < 50% NW)
  - MDIs (MFIs): NW = Tier 1 + Subordinated debt : capped at 100% Tier1
- Solvency ratio:
  - Banks: 15% (monthly reporting)
  - MDIs (MFIs): (not specified in table cell)

### Asset classification and provisioning
- Banks:
  - past due > 90 days => substandard
  - past due > 180 days => doubtful
  - past due > 360 days => at loss
  - Provisions for restructured loans
  - past due > 180 days is doubtful: 60 days if loan <1 year
  - past due >360 days is at loss: 90 days if loan <1 year
- MDIs (MFIs):
  - NO provision for restructured loans

### Reserve and liquidity requirements
- Reserve requirements:
  - Banks: 8% in KHR, on deposits and borrowings and 12% for foreign currencies deposits and foreign currencies borrowings
    - Eligible assets at NBC averaged over maintenance period
    - Daily maintenance > 80% of minimum requirement
    - in KHR, balance held at NBC for clearing purposes included in eligible balance
  - MDIs (MFIs): 8% of deposits for both KHR and foreign currencies (non-deposit taking MFIs: NA)
- Liquidity Coverage Ratio (legislated Jan. 2016):
  - Banks: >60% (as from Sept. 2016)
  - MDIs (MFIs): (non-deposit taking MFIs: NA)

### Large exposures and limits
- Reporting big exposures:
  - Banks: 50 biggest exposures (quarterly reporting)
  - MDIs (MFIs): No regulation
- Large exposures (>10% of Net Worth):
  - Banks:
    - Must be <20% of NW (or <35% on accepted request)
    - Σ large exposures <300% NW
    - -1 client -> Must be <2% of NW
    - - group of related clients -> <3% NW
    - - Deposit from 1 client <3% NW
  - MDIs (non-deposit taking MFIs): Must be <10% of NW

### Other prudential items
- Fixed assets: Banks: < 30% of NW; MDIs: No regulation
- Prompt corrective action (PCA): based on solvency ratio
  - Obligatory Capital restoration plan if Solvency ratio < 15%
  - special measures by NBC if Solvency ratio < 5%
- Net open position in foreign currencies: Monthly reporting to NBC; limit of total open position < 20 % NW
- Internal control: Regulation exists (MFIs: Same but not enforced)
- Governance in banks and FIs: Regulation exists

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*Source: Appendix 1–3, "Cross-country experience: Interest rate caps and financial inclusion" (from wpiea2021107-print-pdf).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021107-print-pdf.pdf_