Outlawing Flat Interest in Cambodia
This case study highlights National Bank of Cambodia's (NBCS) decision to outlaw the flat interest rate calculation method. It discusses the impact of this approach on pricing transparency in the Cambodian microfinance market. NBC has historically focused on client protection in the microfinance industry. It has used several approaches to lower interest rates on microloans with the goal of improving financial services for the poor.
The NBC decided that an effective way to facilitate competition was through pricing transparency, specifically by standardizing the method of calculating prices. It issued Prakas (regulation) on the Calculation of Interest Rate on Microfinance Loans, as a result of which all Cambodian MFIs charge interest on the declining balance of the loan amount. The policy helped NBC to improve the environment for competition among MFIs in Cambodia. It also led to improved consumer protection. The policy has enabled microfinance clients to act as informed consumers and to benefit from the decline in prices. It has been effective for several reasons. They include:
- It is simple and enforceable;
- It supports both service providers and clients;
- It is a concrete step toward additional measures.