final rating a cambodia, final... · final rating a third rating validity: 1 year if no relevant...

November 2008

CONTACTS

MicroFinanza Rating srl Corso Sempione, 65 20149 Milan – Italy Tel: +39-02-3656.5019 [email protected] www.microfinanzarating.com

AMRET #35BA, Street Tchecoslovaquie (169) Sangkat Veal Vong, Khan 7 Makara,

Phnom Penh - Cambodia Tel: (855)23 880 942 Fax: (855) 23 881342

[email protected] www.amret.com.kh

AMRET – Cambodia

Final rating A

Third rating Validity: 1 year if no relevant changes in operations or within the operation context will happen.

Previous rating: A October 2007

Amret was transformed from a former GRET experimental project in 2000 and received its MFI license from the National Bank of Cambodia in 2001. Amret aims at providing financial services to low income people as well as micro and small enterprises, while achieving high levels of financial performance. Lending operations are conducted under group and, increasingly, individual methodology. Amret relies on a strong governance and ownership structure, having between its shareholders international actors such as Advans, FMO, OikoCredit and others. In the last year Amret accessed massively to commercial liabilities which fostered the satisfactory growth rates of portfolio. In 2009 however the institution expects to receive the license on savings and then to focus on the development of savings products.

Legal Form Limited Liability Company

Inception year 1991, licensed MFI in 2001

Area of intervention Rural – Semi-rural

Credit methodology Individual and Solidarity Credit

MicroFinanza Rating 2

Strengths Opportunities

Leading marketing position

Excellent portfolio quality

Wide national network

Access to funding (both equity and liabilities)

Strong governance and ownership structure

Access to saving mobilization

Transformation into a bank

Product diversification

Strengths Opportunities

Leading marketing position

Excellent portfolio quality

Wide national network

Access to funding (both equity and liabilities)

Strong governance and ownership structure

Access to saving mobilization

Transformation into a bank

Product diversification


Relevant changes compared the previous rating

AREA Relevant changes and comments Trend

External Environment

The microfinance sector presents an increasing level of competition, especially in urban areas, while exchange of information remains limited and mostly informal. Recently, all MFIs within CMA signed a Memorandum of Understanding about fair competition that pushes MFIs to avoid stealing clients from competitors in order to reduce the risks of clients‟ over indebtedness. While this represents an important step for the sector, other issues remain to be addressed such as the fact that land titles, which are utilized by many MFIs in guarantee requirements, are not fully available. In December 2007 the National Bank issued a new Prakas regulating savings mobilization from MFIs complying with certain requirements, which will allow them to collect deposit from the public. Many MFIs have already applied and the first licences are expected to be granted during 2009. Though the macroeconomic situation of Cambodia appears quite stable, in the last year consumer price inflation continues to accelerate, largely owing to the general upward trend in food prices (in December 2007 food prices were up by 19.8% year on year). The Economist Intelligence Unit forecasts that inflation will soar to an annual average rate of 21% in 2008, driven by rising food and fuel prices, before easing downwards in 2009. On the other side even if clear impact of the international financial crisis is not visible yet most probably there will be limited availability of funds for coming years at more expensive rates.

Slightly negative

Governance, management

and operations

Amrets‟s ownership structure resulted strengthened after the entrance of 3 new shareholders and the contribution to BoD meetings of the representatives from OikoCredit, FMO and PROPARCO. The new BoD nowadays relies on internationals and on the GM, who contributes to maintain a good communication with the management. Even if the local presence is still limited to the GM the overall functioning of the BoD is satisfactory and improved compared to last year thanks to the increased number of physical meetings held every year. An overall strengthening of the structure has been pursued with the creation of Units within the different departments and the creation of some new position (such as the Social and Environmental Officer, the Economic Analyst, etc). The HR management has been strengthened through the separation and the promotion to managerial level of the Training and Development Unit. New performance staff appraisal has been developed to better respond to the need of a fast growing institution, as well as internal and external trainings to have a satisfactory capacity building for all staff. Moreover they developed a High Potential Staff Policy aimed at the personal development of staff with managerial capacities. The Internal Audit department is strengthening its activity from year to year, nowadays delegating internal control activities for each department within Amret and completing the implementation of such policies. The MIS still presents some constrains linked to the offline nature of the system, the impossibility to manage multiple currency and Khmer language. Nevertheless, the institution has already planned the study for a new banking MIS which should better respond to the need of the bank.

Slightly Positive

Financial products and asset quality

The diminishing trend of solidarity credit over total portfolio continued in the last year, reaching 52.5% as of September 2008. Nevertheless SC remains the core product as per number of borrowers (80% of total active clients). This is also reflected in the gradual increase of the average disbursed amount. However analyzing average disbursed loan per product it results clearly that Amret keeps a strong outreach in depth in SC (average disbursed of US$ 150). The pricing policy introduced last year appears to be very accurate and effective, allowing Amret to keep its market positioning and to get advantageous prices for its products. Continuous improvements and amendments to the Credit policy are adopted in order to satisfy the needs of an increasing demanding clientele. As of September 2008, Amret maintains an excellent portfolio quality, with a consolidated PAR 30 equal to 0.11% and a PAR > 1 day worth of 0.46%.

Stable


The calculation of drop out is still ineffective and the information distorted by including clients switching from one product to another, due to the mono product approach of the loan tracking system. Nevertheless, based on perceptions client desertion is relevant and attention should be paid to this phenomenon. Although advanced repayments are considered one competitive advantage for Amret, the non tracking of prepayments in the MIS complicates the liquidity management and may affect the smooth running of the cash flow exercise.

Financial structure and

ALM

In the last year Amret increased its paid-in capital thanks to the injections of new shares from 3 new shareholders: OikoCredit, FMO and PROPARCO. Thus the financial structure resulted strengthened and this allowed keeping financial leverage below the threshold of 4 and capital adequacy at satisfactory levels. Even though the risk management framework is still improvable within Amret (ALCO not yet functioning), as far as the management of financial risks is concerned Amret reduced its exposure to interest rate risk and currency risk and results faintly exposed to maturity mismatch risk. Savings do not yet cover a relevant role in the financial structure of the institution but their weight will increase gradually from 2009 onward. As of today Amret is suffering from limited delays in receiving the funds due to the international financial crisis. It is not clear what will be the impact of the worldwide crisis in the coming periods. Most probably the first effect will be an increase in the cost of funds and a limited availability of resources which Amret plans to overcome with the development of savings.

Positive

Financial and operational

results

Amret confirms its excellent financial performances, even if in an inflationary environment. In fact the high level of inflation of 2008 reduced the adjusted results. While ROE and ROA registered for the period October 2007 – September 2008 32% and 6.7% AROE and AROA decreased to 12.2% and 2.8%. Financial expenses have constantly increased their weight in Amret‟s cost structure over the period of analysis, together with the increase of leverage. Portfolio yield continues its decreasing trend, even if more slowly than in the previous period thanks to the very accurate pricing policy adopted by the institution. Further decreases of the yield are expected in the coming period along with the increasing competition. Efficiency levels in terms of operating expenses ratio have improved over the period October 2007 – September 2008 down to 16.5%, from 22.3% for 2006.

Positive

Strategic objectives and

future evolutions

In the last year Amret developed a multiple scenario analysis and a sensitivity analysis on interest rate thus completing its strategic planning activity. Amret‟s equity is going to be fuelled by an inflow of new capital investment worth of US$ 5 million, covered by existing shareholders. This increase will be crucial to foster growth, while complying with the capital requirements of the NBC. The transformation into a bank is foreseen for year 2011.

Slightly positive

Final opinion

Amret maintains its leading position within the Cambodian microfinance sector with a portfolio of almost US$ 50 millions and an important outreach of more than 200,000 clients. In the last year the institution has achieved a more solid structure thanks to the entrance of 3 new shareholders and the reshaping of the BoD. Financial performances have further consolidated in 2008 regardless of the inflationary environment that has characterized Cambodia. Undoubtedly the worldwide financial crisis will impact on the planned institutional evolution, most probably with credit crunch and an increase of passive interest rates. Nevertheless Amret has demonstrated a good capacity to attract investors (also in terms of equity investments) and presents wide operational margin that allows to cover an eventual increase of interest rates. Amret so far has been able to satisfactory manage financial risks even if the ALCO is not yet functioning and risks management policies are not formalized. The main challenge will be linked to the capacity to face an unfavorable macroeconomic situation and the consequences of the international financial crisis. At the same time Amret’s main objective for 2009 is the achievement of the license for savings mobilization. Capitalization is adequate as well as the level of indebtedness for the institution – which leaves room for further expansion – all in compliance with the requirements of the National Bank of Cambodia.


Amret headquarters in Phnom Penh and offices in Kandal province Amret province offices (operating in 12 provinces) Kampot, Kampong Speu, Kampong Cham, Prey Veng, Takeo and Siem Reap


Benchmarking

All figures of peer groups are referred to the MicroBanking Bulletin (MBB) database updated as of December 2007 Amret ratios indicated here do not fully correspond to the ratios presented in the report as they are calculated according to the MBB methodology

1.

Being one of the leader MFIs in Cambodia with one of the biggest portfolio Amret presents outstanding performances. Its profitability is well over the average of Cambodian MFIs and the peer groups, also thanks to the higher portfolio yield. The excellent levels of profitability and sustainability are guaranteed by a satisfactory operating expenses ratio, in line with the one of Cambodian MFIs even if higher than the Asian peer. Financial leverage stands at a satisfactory 3.3, higher than the average of Cambodian MFIs but in line with other peer groups of similar institutions. Productivity reaches outstanding levels, both per loan officers and per staff thanks to the mix of solidarity and individual methodology. In fact as shown by the average loan balance per borrower Amret is slightly above the average of Cambodian MFIs and Asian peer group but has a better outreach than NBFI and MFIs having the mixed methodology.

1 The MBB adjusts the financial data to produce a common treatment for the effect of: a) inflation, b)subsidies, and c)loan

loss provisioning and write-off (see MBB , Appendix I: Notes to Adjustments and Statistical Issues).


Table of contents 1. External Environment and AMRET positioning .......................................................... 8

Institutional background .............................................................................................................. 8 Political and economic context .................................................................................................... 8 Microfinance industry .................................................................................................................. 9 Regulation and supervision in microfinance .............................................................................. 10 Competition and Amret‟s market positioning ............................................................................. 10

2. Governance and operational structure ...................................................................... 12 Ownership and Governance ...................................................................................................... 12 Organisation and structure ........................................................................................................ 13 Human Resources .................................................................................................................... 14 Internal control and operational risk management ..................................................................... 15 Accounting and external audit ................................................................................................... 15 Management Information System .............................................................................................. 15

3. Lending and saving operations .................................................................................. 17 Lending products ...................................................................................................................... 17 Lending procedures .................................................................................................................. 18 Collaterals and accessibility ...................................................................................................... 19 Savings and other banking services .......................................................................................... 19

4. Assets structure and quality ....................................................................................... 21 Assets structure ........................................................................................................................ 21 Portfolio structure ...................................................................................................................... 21

5. Financial structure and ALM ....................................................................................... 24 Liabilities and equity structure ................................................................................................... 24 Assets and Liabilities Management ........................................................................................... 25

6. Financial and operational results ............................................................................... 27 7. Strategic objectives and financial needs ................................................................... 29

Financial needs ......................................................................................................................... 30

8. Details of the risk factors ............................................................................................ 31 Annex 1 - Financial statements ...................................................................................... 33 Annex 2 - Financial statements adjustments ................................................................ 35 Annex 3 - Financial ratios ............................................................................................... 36 Annex 4 - Definitions ....................................................................................................... 37 Annex 5 - Guidelines of reporting and accounting ....................................................... 38 Annex 6 - Rating Scale .................................................................................................... 41

Amret – Cambodia – November 2008 Chapter 1


1. External Environment and AMRET positioning Institutional background Amret started its operations in 1991 as an experimental GRET2 project delivering microcredit through Solidarity Group methodology (Individual Credit was launched in 1996). Subsequently, in 2000 it was incorporated as a private limited company with a share capital of KHR 330 million (US$ 84,500) from GRET (81%) and SIDI (19%). The following year, under the name of Ennatien Moulethan Tchonnebat (EMT), the institution received its MFI license from the National Bank of Cambodia. Amret aims at providing financial services to low income people as well as micro and small enterprises, while achieving high levels of financial and social performance. Lending operations are conducted under group and, increasingly, individual methodology. In 2008 Amret applied for the license for savings mobilization and expects to develop a set of savings product during 2009. New shareholders have been incorporated in mid 2008: Proparco, OikoCredit and FMO thus guaranteeing a further strengthening of the capital structure of Amret.

Political and economic context Cambodia‟s macro-economic performance has been relatively good since 1999, the year in which political stability - after 20 years of civil unrest - was restored. Recent general elections held in July 2008 saw the ruling Cambodian People‟s Party (CPP) retain its leading role in both local and central government in 2008-09 by obtaining over 58%. The biggest opposition party, Sam Rainsy Party, made some gains in rural areas but lost to CPP in Phnom Penh and ended up with around 21% of the vote overall. The new government will not face any major threat to its hold on power.

Private sector activities have continued to develop in recent years, in particular thanks to easier access for Cambodian textile products to American3 and European markets and the development of the tourism sector. After achieving a high growth rate of 13.5 % in 2005, economic activities stabilized in 2006, when

real GDP grew by 10.8%, due to the increase in agricultural production, the sustained growth of tourism, the continued growth in garment exports and the expansion of construction activities. Economic growth is dipped slightly to 10.3% in 2007. The economy will lose momentum in 2008-09, with real GDP growth slowing to around 6-7% a year, bringing to an end a period of four successive years of double-digit growth. Inflation has been kept at a manageable rate in recent years, with annual averages of 4.9% and 5.6% for 2006 and 2007, respectively. Nonetheless, consumer price inflation continues to accelerate, largely owing to the general upward trend in food prices (in December 2007 food prices were up by 19.8% year on year). The Economist Intelligence Unit forecasts that inflation will soar to an annual average rate of 21% in 2008, driven by rising food and fuel prices, before easing downwards in 2009.

2 Groupe de Recherche et D‟Echanges Technologiques, a French NGO.

3 The US and Cambodia signed a Bilateral Textile Agreement, which gave Cambodia a guaranteed quota of US textile

imports.



Although the riel will appreciate on an annual average basis in 2008, we forecast that the currency will continue to follow a depreciating trend in the second half of 2008 and into 2009, as inflation is set to stay in double digits and the current account will remain in deficit. While the country has registered impressive growth over the past few years, the actual impact on poverty reduction has been poor. Indeed, the inequality between the urban area of Phnom Penh and the rest of the country has tended to swell. With a GDP per capita of US$ 723, Cambodia is one of the poorest countries in the region: 35% of population lives below the national poverty line, and 20% of households are headed by a female. Social indicators are still out of touch with the Cambodian Millennium Development Goals. In particular, access to water represents a major concern, with only 41% of population having access to an improved source of water supply. Microfinance industry Microfinance in Cambodia began in the early 1990s as the country came out from a long period of civil conflict. NGOs first provided microcredit to fill the gaps left by the banking sector with the first microfinance experiments credit-oriented, to provide a kick-start to new business activities. After the international recognition of a new Cambodian government in 1993, aid started to flow to the country and within the decade the initial experiments were transformed into a sector led by profitable, regulated financial institutions. As of December 2007 there were 17 MFIs operating under licenses form the NBC and 26 registered as rural operators with operations in all 24 provinces of Cambodia. Overall, the Cambodian MF sector in Cambodia reached almost 800,000 borrowers and 355,000 savers by the end of 2007, although the vast majority of savings accounts were held at the only microfinance provider with a bank charter – ACLEDA Bank. The total loan portfolio reached almost US$ 470 mil while savings mobilized totalled US$ 350 mil. Growth in outreach from 2003 – 2007 has been consistently around 20 percent per year. By December 2007, three institutions (AMRET, AMK and ACLEDA) had reached the 100,000 borrower mark, with AMRET overtaking ACLEDA as the largest institution in terms of number of borrowers. ACLEDA Bank Plc. has nearly US$ 160 mil in loans and 12 percent of the entire Cambodian banking systems‟ assets. Focusing on rural areas and small businesses, ACLEDA Bank has over fifty percent of the domestic microfinance market. The sector is rapidly growing, as the loan portfolio increased by 88.6% and the number of borrowers by 29.7%, over the year 2007. The microfinance sector in Cambodia appears to be splitting into two groups – those maintaining a focus on small-balance loans and outreach, and others working with a mixed product offering of micro- and SME-loans. This growth has mainly been fuelled by loans from foreign commercial sources, despite the presence of local banks and financial institutions such as the Rural Development Bank (state-owned) and Canadian Bank, which mainly channelled funds provided by international financial institutions such as ADB and KfW. Within Cambodia, the Rural Development Bank and the NBC have extended funds to some MFIs, but beyond those institutions, local financing has been much harder to come by. Foreign microfinance investment funds (with varying degrees of „commercial‟ approach) have filled this gap, providing approximately two-thirds of all funding from outside Cambodia, or US$ 54 mil. The remaining resources are made up of subsidized funds from international NGOs and development financial institutions (DFIs; e.g. IFC, ADB). No formal mechanism exists for MFIs to exchange information on borrowers, while banks have created their own credit bureau (even if it only collects negative information). In order to meet their specific needs, licensed MFIs established 2004 the Cambodian Microfinance Association (CMA), which aims at supporting the sector by providing training opportunities, policy advocacy, and enhancing relationships between the different operators. CMA plays an important role in fostering local and international networks, promoting coordination and facilitating conflict resolution between institutions. Recently, all MFIs within CMA signed a Memorandum of Understanding about fair competition that pushing MFIs not to deal with clients of competitors in order to avoid clients‟ over indebtedness. While this represents an important step for the sector, other issues

http://www.acledabank.com.kh/



remain to be addressed such as the fact that land titles, which are utilized by many MFIs in guarantee requirements, are not fully available.

Regulation and supervision in microfinance In November 1999 the National Bank of Cambodia (NBC) issued a new law on banking and financial institutions, followed in 2000 by a decree ('Prakas') regulating the microfinance industry by licensing and registering major microfinance providers. NGOs and microfinance projects were given the opportunity to transform into formal financial institutions (limited liability company or cooperative), or simply to be registered if they do not qualify for licensing criteria. The new prakas (2000 and 2002) marked a shift toward the commercialization of microfinance and its integration into the formal financial system of Cambodia. On 18th December 2007 the National Bank issued a new Prakas regulating savings mobilization. Amongst the main requirements introduced by the decree it is worth mentioning the need to have a minimum capital of US$ 2.5 mil and a liquidity ratio of 100%4. Registered and licensed MFIs are submitted to a set of regulatory and supervisory provisions, out of which the main are the following:

Licensing requirements: a microfinance institution is required to be incorporated as a limited liability company or a cooperative.

Supervision: registered MFIs need to submit quarterly reports including: financial statements, breakdown of loans/deposits by sector and currency; loan classification and delinquency ratio and network of branches and offices. No on site supervision is required for registered MFIs. Supervision activities are concentrated on licensed MFIs, which need to present monthly and annual reports including: audited financial statements, BOD annual report, statistics of staff and salaries; updated organization chart. Suspicious transactions should also be reported. Off-site supervision focuses on capital adequacy and loan performance. Yearly on-site supervision is planned for licensed MFIs.

The NBC has proven to be flexible and supportive toward a growing microfinance sector, softening the capital adequacy (from 20% to 15% of total risk weighted assets) and accepting to some extent the currency risk (all MFIs but also many commercial banks present relevant net position in US$ and the NBC is pushing local banks to lend to MFIs in order to cross benefit for the open position). In April 2008 the NBC implemented new Charts of Accounts, more similar to the ones of the banking sector. Many MFIs are currently concluding the implementation of the new COA as a requirement to obtain the license for savings mobilization (expected in late 2008/early 2009).

Competition and Amret‟s market positioning Amret still maintains its leading position in the Cambodian microfinance sector, being the first MFI in the country in terms of active clients. Certainly in the last year the institution has been broadening its target, maintaining a focus on rural population but serving more and more urban microentrepreneurs. As of September 2008, Amret is ranked 3rd in terms of outstanding portfolio and 5th in terms of volume of deposits attracted – even if it resulted concentrated into few savers. Its long experience in microfinance together with a rooted presence in the territory confers Amret a good reputation among clients and local authorities. Over last year, Amret has slightly diminished its market share, serving approximately 21.3% of total microfinance borrowers, with an outstanding portfolio accounting for 17.8% of the total portfolio, not including ACLEDA (and 11.3% including it). Working within 14 provinces and 83 districts across Cambodia, Amret registers a good breadth of outreach on the national territory, considering the average operational areas of 9 provinces and 54 districts among the 17 MFIs tracked by the CMA.5

4 Calculated as liquid assets (cash in hand + deposit with NBC + deposit with banks + loans maturing in the next 30

days) over adjusted amount of deposits (25% of voluntary savings). 5 CMA Microfinance Operator Information as of September 2008.



In recent years, competition on the microfinance market has increased, due to the rising number of practitioners and the inflow of available resources. This results in an increasing overlap of geographic coverage, with previously specialized MFIs starting to offer a better variety of credit products (both individual and group loans) in order to diversify their portfolios. The main competitors for Amret are AMK, VFC and TPC – all institutions with a strong focus on group loans. Certainly Amret is also competing with HKL and SATHAPANA as far as individual lending is concerned. The competition is particularly evident in urban Phnom Penh where there is high saturation with many MFIs operating on the market. All the same, Amret continued expansion strategy to new provinces and within the current provincial operations help to ensure its access to new and unsaturated markets.

Amret monitors demand and competition in the market through the CMA publications as well as conducting regular survey on clients‟ satisfaction. In the last year the institution further increased its flexibility in the definition of interest rates having nowadays differentiated interest rates per each area of operation. Moreover it started to lend to clients who have already a loan from other MFIs. The combination of high competition and the absence of an effective information exchange bring about a risk of client over-indebtedness, with a potential negative impact on the portfolio quality of MFIs. As previously mentioned, the CMA is working to develop a Code of Ethic for all the MFIs and recently produced a MoU on fair competition in order to combat the issue. At the same time, the CMA is starting to collect blacklists of clients from all members – even thus facing the problem of multiple tracking of clients, as per the use of IDs, passports, family books, driving licenses and so on for identification purposes by the MFIs. The main competitive advantages of Amret can be considered the following: more flexible products especially due to the fact that Amret accepts prepayments without

charging any penalty; higher amounts available for group members (up to US$ 250 each) absence of compulsory savings high accessibility (door-to-door service and no requirement for physical collateral in case of

Solidarity Credit); friendly approach and good customer service.

In contrast, the competitive disadvantages of Amret include higher interest rate compared to competitors, although the distance has been partly reduced thanks to the introduction of flexible interest rates. Certainly over the last year Amret has been working hard on further improving its offer, becoming more flexible in terms of requirements. Nevertheless, the institution does not offer better conditions for repeated clients. The big challenge for Amret comes now from the expected savings mobilization, which will require a change in the approach and mentality and a strengthening of operations. Amret is now expected to more directly face competition from banks and mainstream financial institution.



2. Governance and operational structure Ownership and Governance In 2000, Amret was transformed from project into a private limited company with a share registered capital of KHR 330 million (US$ 84,507) which has been subscribed by two shareholders, namely the Groupe de Recherche et d‟Echanges Technologiques (GRET) and Société d‟Investissement et de Développement International (SIDI). Along with the growth of the institution new shareholders joined the capital structure and in 2008 three new investors massively entered into the capital of Amret: Proparco, FMO and OikoCredit. As a result of this widened ownership Advans gained the leadership and remained as the solely influent shareholder while GRET which before was the influent shareholder is now on the second position with 20% of the shares. The three new members also entered with important shares (roughly 15% each). LFP significantly reduced its shares, Botta, Amret‟s staff investment company kept its 2% share while SIDI and I&P exit from the capital. Continuous increase of the paid-in capital is expected for the coming years: in 2009 equity will rise by US$ 5ml, in 2010 by other US$ 5 ml and more significant increase is due in 2011 aiming at satisfying the minimum capital requirement for bank transformation (US$ 37 ml). The entrance of new shareholders and the step out of SIDI and I&P brought significant changes also on the composition of the BoD. Nowadays the BoD is composed of 7 members, most of whom are international and with solely the General Manager local. Regardless of the limited local presence within the Board, the composition itself of the main governing body guarantees an adequate understanding of the context and of the needs of the institution. The Board presents a good variety of expertise with GRET keeping a strong focus on the social objectives and ADVANS and others bringing strong banking and financial expertise. All members have a long experience on microfinance and most of them have been working directly in South East Asia. On the other side the presence of the GM, even if with voting right, allows keeping a strong and effective linkage and communication with the management and brings key information on the evolution of the Cambodian microfinance market. Whereas at the time of the last rating the Board was meeting quite rarely (twice a year), nowadays the BoD meets on a quarterly basis and continuous communication is kept via emails and telephone. It is worth mentioning that the overall functioning of the Board results to be very effective and attentive to the needs of the institution. Communication with the management is excellent, also thanks to the support given by one staff from Advans visiting Amret before BoD‟s meetings in order to prepare the meeting. The Board has two standing committees. The Risk Management Committee consists of the Management team led by the GM and is aimed at producing an action plan identifying the main risk areas to be submitted to the BoD. The composition of the Audit Committee has been changed in the last year, including three members of the BoD and the Internal Audit Manager and having the GM sitting in it only as an observer. The frequency of the meetings also increased along with the increased frequency of BoD meetings. Moreover monthly reports are sent to the AC in order to maintain a strict and effective control over operations.



Organisation and structure Over the last year, two new district branches have been opened in Siem Reap and Phnom Penh, thus further consolidating its large network which now covers 14 provinces. The biggest change in terms of organizational structure refers to the separation of each department into different units with the aim of increasing effectiveness and streamlining efficiency of each person within the unit. Undoubtedly departments have been strengthened with the recruitment and training of new staff. As a result of this Amret relies on a complete and solid structure which allows it to growth and at the same time to control the sound evolution of the overall branch structure. Top Management is composed by the General Direction, Internal Audit, Finance, Marketing & Communication, IT, HR, Operations Department and Training and Staff Development Secretariat. A few positions have been introduced, namely the Economic Analyst in charge of producing some macroeconomic analysis amongst other duties (for example about inflation rate, etc), the



Compliance and Anti-Money Laundering officer and the Social and Environmental Officer. The last one is indeed in charge of studying existing policies on social and environmental issues within Cambodian MFIs and banks. An important investment has been done by Amret on this as the S&E officer will first receive some training offered by FMO and then will be responsible for the development of adequate policies and procedures on social responsibility.

Human Resources As of September 2008, Amret counts on 707 employees, out of which 362 are loan officers, thus maintaining a satisfactory staff allocation ratio of 51.2%. Regardless of the continuous recruitment Amret relies on young and competent staff. At HQ the institution relies on a motivated and experienced Top Management. As the rest of Cambodian MFIs, Amret suffers relevant levels of staff turnover. In 2007 turnover was at 7.5% while it for the period October 2007 – September 2008 it registered the peak of 9.2%, levels which confirms the existence of a very dynamic labor market. Even if written career paths do not exist within Amret, internal promotion is highly encouraged. The institution is planning to introduce a High Potential Staff Program, which would allow to identify and train staff with a strong leadership that have good potentiality to become manager in the future. Moreover the positive working environment and the good relationships with all staff at all levels further influence the retention of staff. In the last year in order to strengthen and improve the training function, the Training and Development Unit has been separated from HR and upgraded to Top Management level. As a result of this more attention is paid to the preparation of trainings, internally and externally provided but especially to the identification of training needs performed at the end of each year. Trainings are well organized and developed. External ones come mainly from CMA and Cambodian Institution of Banking while internally there is a technical team of 6 people in charge of field trainings and general courses. Moreover it is important to stress that for the coming three years Amret has signed an agreement with FMO for technical assistance and capacity buildings worth EUR 700,000.



Salaries appears to be still slightly below the market, even if the overall level of salary for field and management staff has been increased in the last year following the market study performed in 2007. At the same time the incentive scheme is quite structured and differentiated according to the products and the results achieved. The two main parameters used are the amount of interest collected and the repayment rate. Even if the level of transparency of such incentive scheme is quite limited the results brought by it appears to be satisfactory. To increase the motivation of staff Amret also relies on a further bonus paid at the end of each year and from 2009 will introduce also a profit sharing mechanism per branch and per province. Management team also receives a bonus defined as 2.5% of the net profit multiplied per the return on equity and divided by 20. Moreover a set of additional benefits exists within Amret, such as medical care, maternity leave, etc. Nevertheless it is important to note that – being salaries paid in Riels – the current level of inflation may call for a further revision in order to include the loss of purchasing power of the currency. Internal control and operational risk management The Internal Audit Department is continuously improving its operations. In the last year two units were created within the department: the financial / accounting and the operational risks unit for a total number of 17 staff. The separation of control functions and the implementation of control procedures in each department has been completed and the overall control environment strengthened. Nevertheless the IA Manager is currently developing new control procedures and will work on them during the year to implement them. The IA Manager relies on an Internal Audit Plan which requires to visit branches at least twice a year with a team of 4 people for 5 to 10 days. Monthly reports are then produced and sent to the Audit Committee for discussion and copied to the Management. With respect to the previous rating the composition of the Audit Committee has been changed; nowadays there are 3 BoD members in the AC while the GM is participating as an observer. The AC meets on a quarterly basis but receive monthly update of the audit work. Concerns remain while still discovering cases of frauds (especially from LOs taking the money from clients when they prepay in advance) and a limited use of the cash flow analysis for individual loans. Cash handling of loan officers on the field can still be problematic and in general cash management presents some weaknesses (for example lack of insurance for cash kept at the branches and in transit).

Accounting and external audit In 2007 Amret changed the external auditor and appointed KPMG – after having used for 5 years the services of PriceWaterhouseCoopers (Cambodia) Limited. The auditors have expressed an unqualified opinion on Amret‟s financial statements. KPMG audit was conducted in accordance with Cambodian Standards on Auditing and International Standards on Auditing. FS are prepared in accordance with the Cambodian Accounting Standards and guidelines issued by the National Bank. The Company transacts its business and maintains its accounting records in two currencies, Khmer Riels (“KHR”) and United States Dollars (“US$”). The Company maintains its accounting records in Riels. Amret‟s accounting policies and reporting are in accordance with the IAS and International Financial Reporting Standards (IFRS) and fully comply with the Disclosure Guidelines for Financial Reporting by the Microfinance Institutions.

Management Information System The biggest change to be reported in the MIS in comparison to the previous report refers to the adoption of the new Chart of Accounts, as per NBC requirements. This represents one of the pre-requisite for savings mobilization and involved the implementation of banking model chart of accounts. Moreover in the last year the IT Manager worked on the continuous improvement of the integrated system, MBWin.



In September 2008 a new method for the calculation of penalties and interest for back office loans has been implemented, thus allowing to have continuous and precise calculation of due amounts. The system has been further customized to account for the new products introduced. As far as reporting is concerned the IT department developed a consolidation tool to be used for the rapid consolidation of few basic information on the evolution of portfolio and other major items. Nevertheless, standard reports are still produced on a monthly basis, with the complete consolidation of the full database at Amret level. In contrast to the previous rating reporting has been customized and implemented within MBWin. All provincial offices are on-line with the HQ while the rest of branch and sub branch offices still do not have online connectivity available. This is however in the plans and full connectivity for all Amret branches is expected to be completed in 2009. This is particularly important in view of savings mobilization but is also needed for a sound development of the internal remittance product. As the majority of Cambodian MFIs, to meet the requirement from the NBC, Amret changed its Chart of Accounts, adopting the banking formats. Security in terms of backups is satisfactory. Backups are made daily in the branches; weekly backups are sent to the HQ and monthly backups are sent to Provincial office. At the HQ backups are made in two copies (one copy kept outside the building). Passwords to access to the system have to be changed every 40 days and every 90 days for MBWin, while for supervisors they need to be changed manually. An informal contingency plan exists. Amret has already started to look for a new MIS, which should be able to support the future development of Amret in terms of clients served and volume of operations but which should also be more flexible and adequate for the increasing need of the future banking institution.



3. Lending and saving operations Lending products Amret provides Solidarity and Individual Credits to low-middle income people as well as micro, small and medium enterprises for different purposes (business, consumption, home improvement and education) according to their needs and with the aim of improving their living standards. The conditions of loan products are presented in the table below:



Even if Solidarity Credit still represents the core product in terms of number of clients (80%), for the year 2007 and the period October 2007 - September 2008 the share of group loans over total portfolio diminished to 59.6% and 52.5%. This responds to the increasing demand of individual loans. The major changes in the credit policies and procedures have been applied to the group loans with the aim of increasing the flexibility and attractiveness of this kind of loans. The maximum loan amount for SC has been raised twice during 2008 till reaching US$ 250 per each member. Amret‟s group lending methodology combines low risk with good quality of service due to high attention paid in establishing a strong and possibly permanent customer relationship. To this purpose, Amret benefits from cooperation with Village Association Committees6 and local authorities, as information intermediaries and guarantors of the client‟s character. Moreover, even if potentially in contrast with the pure solidarity group methodology, group loans presents very flexible characteristics: in terms of number of clients accepted, the use of balloon repayment and the fact that member of the group can have at the same time an individual loan. As far as individual lending is concerned, the last year saw the rapid growth of IC Back Office which is directed to rural clients mainly coming from group lending and has been diversified into 4 sub-products according to the loan purpose (business, education, home improvement and consumption), and is offered on the field. On the other hand, a Front-office Individual product targets urban clients (living in district and provincial towns) borrowing at district offices. Interest rates are reviewed on a monthly basis under the flexible interest rate approach. This means that in each province and branch the Branch Manager defines the applicable interest rate according to the market conditions and the pressure from competitors. Although as a result of this pricing of product results very accurate and competitive in the market, as no interest rate tables exist in the branches it may turn to be difficult for the LO and for the client himself to clearly remember and understand the changes in pricing. Amret is currently developing some new products: IC Back Office in US$ as well as inter-branch transfer. On the other side 2009 will be dedicated to the development of savings products. Lending procedures The assessment of client capacity of repayment and the monitoring of clients appear to be adequate and effective. As far as the Solidarity Credit is concerned, loan processing is strongly supported by Credit Committees established at village association level and by local authorities. For individual loans, the evaluation of the client‟s ability to repay is fair. Nevertheless LOs faintly use the cash flow tool for the assessment of loans (even if this is required only for loans bigger than US$ 750). Undoubtedly LOs developed a specific experience as there are specialized LOs for individual loans Front Office and LOs for group and individual loans in the field. The high level of flexibility in the forms of repayments accepted represents a strong competitive advantage but implies a more complicate and less transparent procedure towards clients (for example in case of early prepayments the new repayment schedule is not provided to the client). Both before and after the disbursement of the loan, the monitoring of the client is systematic and satisfactory, carried out by credit agents through monthly visits and in case of Solidarity Credit also by the Credit Committee of the village association. According to internal policies branch managers are not required to carry out on-site visits to clients, but in practice they often spend a significant part of their time on the field. Regardless of the absence of a written loan default policy, the follow up of delinquent clients results satisfactory. The institution is aware of the risk of having non standard procedures for the follow up of delinquent clients and is currently drafting a written policy to be implemented by the end of year.

6 Which screen applications, prepare contracts and follow up the use of the credit and loan repayment.



Time for disbursement is in line with respect to competitors. Loan processing takes on average 3 days for individual credit and 7 days for Solidarity Credit. Processing is generally shorter for repeated clients and can take only one day. A risk related to cash handling and transportation still exists, as a proximity service for clients living in scattered and remote areas is guaranteed. Loan approval limits are still the same: the district manager can approve up to US$ 2,000, loans up to US$ 5,000 can be authorized at provincial level. For credits higher than US$ 5,000, the approval of the Operations Manager and the General Manager is required, while in the past disbursements decisions were fully delegated to branches. The maximum loan ceiling is US$ 10,000. Collaterals and accessibility In order to access Solidarity Credit, members must voluntarily form into joint liability groups operating within a Village Credit Association. Group formation is flexible as the minimum number of members required to form a group is 3 and the maximum number of member is 6. Collateral policy for individual loans has not changed. A physical collateral worth twice as much as the loan amount is required, out of which major real properties (including land) must be worth at least 150%. The evaluation of the collateral value is carried out internally and mainly based on credit agents‟ experience, rather than on the assessment of a specialized expert. Moreover, the borrower must find one witness, while for loan amount over Khm Riels 5,000,000 (around US$ 1,200) they must additionally provide a personal guarantor. Amret, as well as its main competitors, requires land titles and building certificates. For this, it is worth to note that in Cambodia, the use of land titles as collateral is still ineffective due to the scarcity of land title issued by the government (only half of the land has an ownership record) and the high cost of registration. As a consequence, MFIs usually rely on the copy of the land certificate issued by chief of commune (not issued by official government land title department), which however can be used by clients for backing parallel loans from different institutions. Savings and other banking services Savings product offer has not been developed since the last rating and still consists of 4 main products. Savers have the possibility to save in different currencies, the US$ and the Khmer Riel. Amret‟s savings products appear to be quite appealing in terms of interest rate offered. Nevertheless, Amret’s capacity to mobilize savings is still limited. Difficulties to attract deposits for MFIs are



linked to a general lack of trust from the public and specific constraints of this institutional form (in terms of public image). However, Amret applied in 2008 for the license for public savings mobilization and it is currently waiting the positive response from the NBC before launching a massive marketing campaign on savings. At the same time it is worth noting that Amret characterizes itself in respect to other MFIs for the fact that, even if not mobilizing an important amount of savers, it is ranked 5th in the volume of savings attracted. Indeed, as of September 2008, the average balance of savings is worth US$ 800, and the majority of deposits (88%) are certificate deposits. In addition to savings and credit, Amret is currently completing the development of inter-branch transfers.



4. Assets structure and quality

Assets structure Amret maintains over years a stable assets structure with a good concentration of assets into the core business. During the last year average net portfolio accounted for 78.3%. As of September 2008 cash and banks stands at a quite low level, being only 1.6% of total assets. Nevertheless it is important to note that a good cushion is given by the financial investments which include also the 6 month NBC deposit used for the back to back and which account for 13.8% of total assets. During the period October 2007 – September 2008 average liquidity represented 17.5% of total assets which is a considerable level. Net fixed assets and accrued interests represent the residual 2% of total assets.

Portfolio structure As of September 2008 Amret‟s outstanding portfolio is worth US$ 46.6 millions, almost equally divided in the two products: solidarity and individual loans. In the last year Amret confirmed its sound growth and registered a +72.8% for year 2007 and +64% for the period October 2007 – September 2008. Whereas portfolio by volume appears to be almost equally distributed in the two products, 80% of the total number of loans is disbursed to group members. There is indeed a clear tendency and a gradual shift toward individual lending, in terms of volume of portfolio, but the strategy aims at keeping the solidarity credits as the core product in terms of clientele served. As a result of the new portfolio structure the average disbursed loan amount increased sensibly, passing from US$ 130 of 2006 to 182 of 2007 to 262 of the period October 2007 – September 2008. A more specific analysis allows us to identify the movements in the depth of outreach per kind of products.

Assets structure - September 2008

81.6%

1.6%1.1%

1.1%

0.9%

13.8%

Cash and Banks Net PortfolioNet Fixed Assets Financial InvestmentsAccrued interest Other Assets



Amret maintains an important depth of outreach thanks to group loans, which are raising at minor rates and reached for the period October 2007 – September 2008 US$ 151 with the average disbursed loan size per single borrower for the Solidarity Credit which is worth of US$ 307. On the other side the institution serves a new market segment which does not necessarily corresponds to clients upgrading from groups; the average disbursed loan size for individual loans is from year to year increasing and more than doubled in less than 2 years from US$ 334 in 2006 to US$ 756 in the period October 2007 – September 2008. Overall, Amret maintains a good outreach, measured both as breath and depth and keeps a stable percentage of women clients8. (83.7% for the period October 2007 – September 2008). The average disbursed loan on per capita GDP is also quite stable at around 30-35%. Given the tight and increasing competition on the microfinance market Amret continuously pays attention to customer‟s satisfaction and retention of clients and performs twice a year a client’s satisfaction survey. Moreover the Marketing and Communication Department is also responsible of conducting once a year a market study which includes information on satisfaction of roughly 400 clients half of which are Amret‟s clients and half are clients who left and of competitors. A very precise analysis of drop-out is also systematically performed. Nevertheless the institution didn‟t fixed yet the bugs in tracking dropped out clients in the MIS and the results are still distorted. Drop out is calculated on 3, 6 and 12 months period and a more in depth analysis is requested when its level goes over 30%. Nevertheless, the information is distorted by the fact that clients switching from one product to another are considered dropped out. According to the last study available dated September 2008 the 12 months drop out (calculated as number of clients who left / total number of clients who repaid during the period) stands at 34%, slightly lower than the level registered last year (36.45%). The most problematic product is the IC as it presents a desertion of 40%, compared to the 33.4% of SC and with a higher share of clients leaving for competitors. At the same time from the analysis of IC drop out it emerged that almost 30% of them simply switch back to the group loan. Analyzing the desertion per branches it results that Siem Reap, a highly competitive market, is the branch with the highest concentration of dropping out clients (43.1%) while the best performing branch in terms of clients’ retention is Kandal. The breakdown of the outstanding portfolio by provincial branch shows a good distribution among the different operational areas, concentrated in the southern and central regions of the country. All branches with the exception of Takeo have grown with respect to the previous rating; in particular Siem Reap and Kampot registered the highest growth rate. The growth has been sound for all the branches as the levels of delinquencies are kept very low. The analysis of the portfolio by sector does not point out major changes, with the majority of the portfolio (57.6%) financing agricultural activities.

7 This figure has been calculated assuming an average group size of 5 members.

8 It has to be noted that some distortions in the data arise from the fact that no multi-product approach is used by the

loan tracking system, the loan - and not the single borrower - being the base unit in the MIS. The distortions are related both to the fact that the exact number of group members is not tracked and to the presence of clients with more than one loan.



The concentration in agriculture, triggering a higher risk for the intrinsic nature of this typology of business is kept under control by the fact that agricultural portfolio is mostly represented by

solidarity credits characterized by a certain intra-group diversification of activities and sources of income, although this is not regulated by a specific internal policy. Trade and services represent also a significant share of loan portfolio, accounting for 20.9%, as of September 2008 while the residual part of portfolio is dedicated to construction, household expenses and transportation.

Loan portfolio quality Over the last year Amret maintained its excellent portfolio quality with PAR 30 ranging between 0.07% and 0.11%. As of September 2008 PAR 30 stands at 0.11% while PAR 1 registered an increase and stands at 0.46% (compared to the 0.23% of the same period of 2007). It is worth noting that regardless of the rapid growth of individual lending in the portfolio composition, Amret has been able to maintain an outstanding portfolio quality. This is as a consequence of the strict institutional policies on the management and monitoring of portfolio and also the result of the good credit culture of Cambodian people. As far as restructuring of loans is concerned Amret applies a strict policy which allows to restructure in case of problems once in a cycle and up to a 4 months of the repayment schedule. However, in order to receive approval for the restructuring the client must fully pay the previous installments and must have a good credit history in the past. Moreover the client has to inform Amret Credit Agent one month in advance. All these conditions certainly mitigate the

riskiness of such kind of loans. In the last year the IT

Department developed a module for the monitoring of restructured loans and is now

systematically tracking them.

Write-off is applied to all loans overdue more than 360 days and for the period

October 2007– September 2008 amounts to 0.04% of the average outstanding portfolio for the period. Amret keeps a full coverage of its delinquencies as shown by the level of the risk coverage ratio, well over 100% (283% for the period October 2007– September 2008).

Amret - Cambodia - November 2008 Chapter 5


5. Financial structure and ALM In the last years Amret has strenghetned its capacity to attract foreign investments and this is shown in the increasing share covered by commercial liabilities on its financial structure. Undoubtedly the institution has also been able to maintain the financial leverage under control, keeping it at aorund 3 (2.88 in 2006, 3.62 in 2007 and 3.34 as of September 2008). Undoubtedly when considering that a part of the financial resources are raised on a back-to-back scheme the financial leverage results lower and equals to 2.7 (calculated net of the backed loans from the NBC). At the same time it is worth noting that continuous efforts are spent for the sound capitalization of the institution. In 2008 three new shareholders joined Amret’s capital structure and as a result of this during the period October 2007 – September 2008 equity grew by 76.9%. This allowed keeping capital adequacy (on risk weighted assets) over the limit of 15% required by the NBC. Given the important growth rates planned by the institution for the coming periods, even if ROE stands at quite high levels, the institution should continue to capitalize its structure to guarantee a sound and positive evolution. Liabilities and equity structure As of September 2008 Amret total liabilities amounts to US$ 43.8 ml, registering a growth rate for the period October 2007 – September 2008 of 70%. Over the last year the share of long term liabilities has diminished and nowadays represents 64% of total funds. Over the years the institution has developed strong and longstanding relationships with a diversified bunch of international investors such as Oikocredit, FMO, Blue Orchard, Symbiotics, Deutsche Bank (see Annex 5 for details) and since 2008 has also accessed the national resources through Foreign Trade Bank. Amret also relies on a stable relationship with the National Bank using its back to back scheme.

Indeed Amret continued to access to a relatively high amount of funds from the NBC – typically short term facilities. As of September 2008 20.5% of the borrowings are taken under a back-to-back scheme with the NBC, which is relatively costly but still cheaper than alternative market mechanisms for hedging the currency risk and comply with the open position ceiling established by the NBC (see next paragraph). The back-to-back facility is still renewable every 6 month, by requiring the actual repayment of the loan upon each renewal, which could imply

major hardship for liquidity management. This difficulty and the need to look for alternative hedging (or liquidity) facilities on the market could push upward the cost of funding. However for the moment this is the only acceptable option which allows the institution to maintain currency exposure under the limits. As of September 2008, 61.3% of total liabilities is disbursed in local currency, a value quite stable compared to the previous year with an increasing share of NBC funding (representing 20% of total funds). Indeed, it is worth noting that since last year international investors demonstrated their willingness to lend in local currency thus reducing the exposure to exchange rate risk.



Although nowadays deposits still represent a minor component of total liabilities (2% as of September 2008) they should strategically play a crucial role in the future development of the institution. Equity posted a growth of 77% in the last year (October 2007 – September 2008) thanks to the injections of new shares brought in by three new shareholders: PROPARCO, OikoCredit and FMO who entered the capital of Amret in July 2008. As a result of this capital increase paid in

nowadays accounts for 29% of total equity, increasing quite sensibly its share with respect to the previous year. Quasi-capital which is constituted by funds received by AFD (through the Government) and is non-repayable as long as Amret pursues its microfinance activities represents 7% as of September 2008. The good and consolidated profitability of the institution is demonstrated by the share of retained earnings over total equity (58% as of September 2008). Moreover the institution pays dividends to its shareholders in the measure of 15% of net income.

Capitalization strategy for the coming periods is based on the further subscription of US$ 5 millions from the existing shareholders during 2009 and on continuous generation of profits.

Assets and Liabilities Management Amret drafted policies and procedures for the establishment of an ALCO Committee9 but its concrete implementation has been delayed and not completed yet. As a consequence its financial management still results limited given the absence of policies and procedures for the management of financial risks. In fact the financial analysis is mostly driven by the request of the National Bank of Cambodia. At the moment a set of reports on liquidity risk, solvency and foreign currency position are regularly produced and ratios are monitored, in compliance with the NBC regulation. Nevertheless, given the important growth realized by the institution in the last years and its planned evolution, Amret will need to strengthen and complete tools and reporting for financial management (especially in regards to financial mismatch). As of September 2008 Amret fully complies with the NBC regulation on currency risk; indeed its open position in US$ remains well below the threshold of 20% over total equity registering a value of 7%. It is worth noting that nowadays loans in US$ represents 38.7% of total portfolio and will probably cover an increasing share with the development of individual lending. Nevertheless almost all the debts disbursed in US$ are entirely or partially covered by the back to back scheme. With an average residual maturity of liabilities of 32.5 months and an average residual maturity of portfolio of 14 months Amret results to be faintly exposed to maturity risk. As shown in the table below for all brackets below 365 days the institution does not suffer from any

9 The ALCO is composed by the GM, Internal Audit Manager and Finance Manager.



negative gap. The Treasury Unit under the Financial Department is responsible for the daily consolidation of cash balance in all branches and for the preparation of quarterly and monthly cash flow projections.

Undoubtedly a more accurate analysis should be performed once massive savings mobilization will start in order to guarantee an adequate coverage of the liquidity need of the institution. Although Amret is for the moment complying with the liquidity ratio required by the NBC the present liquidity management system still presents some weaknesses, that may be considered significant once the savings mobilization will be in place. Indeed, whereas the fact of accepting prepayments of portfolio without charging any penalty represents a strong competitive advantage for the institution, at the same time it complicates the continuous and efficient monitoring of cash flows. Over years liquidity has been maintained at satisfactory level with cash and bank representing roughly 6.6% of total assets in December 2007 and 2.5% in September 2008. Nevertheless including short term financial investments and the accounts held with the NBC average liquidity for the period October 2007 – September 2008 stands at 17.5%. It is worth noting that at the time of the visit (beginning of October) Amret was suffering from a shortage of funds caused by the delay in the disbursement of funds along with the international financial crisis. A potential shortage of funds could then undermine the projected growth of the institution.

Amret’s exposure to interest rate risk is limited as the institution mainly accessed loans with fixed rates. As of September 2008, 77.5% of liabilities bears fixed rate. The institutional strategy aims at obtaining funds at fixed rate in order not to incur in the interest rate risk. Undoubtedly this could mean a higher interest charged by investors and even if interest rates are expected to decrease – due to increasing competition - given the wide margin between active and passive interest rate there is no relevant risk.



6. Financial and operational results Although maintaining over the years sound levels of profitability and sustainability, in the last year Amret suffered the impact of an inflationary environment. Indeed, profitability slowed down a bit in 2008 with ROE and ROA registering for the period October 2007 – September 2008 32% and 6.7% (compared to the 35% and 7.8% of 2007). Certainly profitability levels jumped from the results achieved in the previous years (in 2006 ROE and ROA was 25.6% and 7.3%) demonstrating the capacity of the institution to achieve positive results in a very competitive environment. Operational self-sufficiency confirms the positive results achieved over the last years, stabilizing for 2007 and October 2007 – September 2008 at 145% and 139.5%. Adjusted results accounts mainly for the effect of inflation - particularly tight in 2008 – but remains satisfactory. For the period October 2007 – September 2008 AROE and AROA registered respectively 12.2% and 2.8% while FSS10 slowed down to 117.8% (from 137.2% of 2007). Confirming once again the commercial nature of the institution, financial expenses follows a continuous upward trend and further increased their weigh in Amret’s cost structure. Funding expenses ratio stands at 10.1% for the period October 2007 – September 2008 (increasing from the 8.9% of 2007). This is the consequence of a slight increase in the average cost of funds, from 9.4% in 2006 to 10.4% in 2007 and 11% for the period October 2007 – September 2008, combined with an increase by 70% of the funding liabilities over the last 12 months. It is worth mentioning that the financial crisis that is affecting the worldwide financial market will most probably reflect in a rising cost of funds for the Cambodian microfinance sector in the coming periods. Nowadays interests paid on savings still represents a minor component of financial expenses as savings account for 2% of total liabilities. For 2009 and more aggressively in 2010 savings should massively increase reducing the use of external resources versus the use of internal ones. Thanks to a consolidated structure and to the achieved economies of scale Amret presents decreasing levels of operating expenses. In 2006 operating expense ratio over portfolio stood at 22.3% then decreasing to a stable value of 16.5% for 2007 and for the period October 2007 – September 2008. This, regardless of the decreased staff allocation ratio which passed from 65% as of September 2007 to 59.2% as of 2007 and 51.2% for the period October 2007 – September 2008. Indeed productivity levels increased sensibly, both in terms of number of clients and volume

10 Operational and financial self-sufficiency (OSS and FSS) do not include taxes unlike ROA and ROE. This is because

we consider the first two ratios as a comparable measure of the sustainability of the MFI without taking into consideration external factors like taxes



of portfolio managed. LOs productivity as number of borrowers reached 560 clients for the period October 2007 – September 2008 rising from the 518 of December 2007 but obviously diminishing with respect to 2006 when group lending was the only methodology used. Loan officer productivity by amount increased period by period and nowadays a LO can manage more than US$ 120,000. The same for staff and branch productivity. In particular it is worth mentioning that staff productivity achieved a considerable level of 300 borrowers per staff over the last 12 months. Surely productivity resulted from the rising share of individual lending over the total portfolio, pushed by the specific design of the incentive scheme. In the medium term, operating expenses may be pushed upwards by costs related to saving collection.

A stable and very low level is registered also for provision expenses which account for 0.2% for 2007 and for the period October 2007 – September 2008. As shown in the graph Amret maintains positive and wide margins thanks to a rather high portfolio yield, that – even if slightly decreasing from year to year – still satisfactory covers operating, financial and provision expenses. For the period October 2007 – September 2008 portfolio yield stands at 36.2% faintly decreasing from 2007 but registering a sensible drop from the value of 2006 (when it was 41.2%). Undoubtedly the institution relies on a very accurate pricing policy which aims at keeping interest rates at high level but in the market to face competition. As a result of this operational margin is for the last twelve months of 9.5 percentage points, however dropping to a small 4.6% when including the adjusted provision for inflation. Amret demonstrated an adequate capacity to face increasing competition and the important effect of inflation. Certainly for 2009 Amret will have to face with the effects of the worldwide financial crisis that will most probably immediately reflect in an increase in the cost of funds and in a probable cut down of funding sources. Its capacity to mobilize savings will be the main challenge for 2009 along with continuous streamline of operations.



7. Strategic objectives and financial needs The main features of the projected institutional, operational and financial development of Amret are included in the Business Plan 2008-2011 and were internally developed through a bottom-up approach involving all the departments. The Business Plan is complete and comprehensive, including a SWOT analysis, a market study of competitors and a detailed operational plan with actions and related timeframe. Financial projections are updated once a year by the Planning Unit Manager in cooperation with the Operations Department. Two different scenarios are produced: a conservative one and a moderate one and sensitivity analysis on interest rate is also performed. The backbone of the strategy for 2009 is the access to savings mobilization and the further consolidation of operations in view of the bank transformation planned for 2011. So far Amret greatly over-achieved planned results and performances set in its strategic document, especially in terms of growth of financial and portfolio indicators. According to the projections 2008-2011, Amret plans to increase its loan portfolio at acceptable rates ranging from 70% in 2008 to 50% of 2011. Certainly the worldwide financial crisis may affect the growth rate of the coming year and may eventually slow down the growth. Nevertheless, it is worth mentioning that Amret is one of the leading MFIs in Cambodia and that it relies on a strong ownership structure (with Advans itself having a strong equity base) and this will certainly guarantee a continuous inflow of funds. As shown in the Business Plan document outstanding portfolio should reach almost US$ 90 millions by 2009 and overpass US$ 200 millions by 2011.

Customer deposits are expected to grow slowly in 2008 and to jump in 2009 up to US$ 8 millions. Subsequent growth rates are considerable. In order to keep the financial leverage under control Amret‟s equity is planned to growth steadily for 2008 and 2009 and to register growth rates over 100% in 2010 and 2011 with the coming bank transformation. At least for 2009 the growth of equity will be guaranteed by the existing shareholders, which already committed themselves to contribute further US$ 5 millions. The productivity in terms of number of clients served shows that the share of individual loans over total portfolio will gradually increase in the coming years, even if in terms of number of clients group loans will be the core product. The main Strategic Objectives for 2009 are the followings:

- Introduce new financial products such as Inter-Branch Money Transfer and improve the quality of existing products.

- Strengthen the equity structure: maintaining retained earning and raising more paid up capital.

- Expand into new areas (Battambang province and other districts). - Achieve outreach of 273,633 customers (including 74,326 Individual Credit customers),



- achieve a loan outstanding portfolio of almost US$ 90 millions registering a growth rate of 70%,

- Diversify funding sources by securing new loans from both local and international banks and other financial institutions, and by developing the collection of savings,

- Improve staff performance and productivity, - Decentralize operational and financial management to the provincial level to accelerate

decision making, - Select and Implement new Core Banking System (CBS), - Establish the new corporate identity and product image in order to strengthen Amret image in

view of the future massive savings mobilization. Each year, Amret should maintain annual ROE not less than 20% and will distribute 15% to 20% of net profit for dividend while remaining profit is for equity building. Financial needs The financial needs necessary to sustain the planned growth for 2009 are worth almost US$ 40 ml, out of which US$ 5ml will come from equity and the bulk US$ 31ml from lenders. As far as equity increase is concerned it is worth noting that the US$ 5 ml will be covered entirely by existing shareholders while a further opening of the capital will most probably occur in 2010. On the other hand, in regards to its financing the above mentioned funds will be raised from the exiting lenders, Dexia, Symbiotic, Triodos, Oikocredit and from new lenders, Development World Market (DWM), KFW, Spanish Microfinance, Micro-Credit Enterprise. Amret already relies on advanced negotiation with DWM, Triodos, Micro Credit Enterprise and FMO and has a further set of preliminary contacts with many other investors. For 2009 as the bulk of assets will be held in KHR Amret will prefer to borrow in local currency, whereas the share of funds in US$ will increase in 2010 with the planned expansion of the portfolio in US$. At the same time the institution prefers to negotiate fixed rate in order to better manage interest rate risk. Even if a certain degree of uncertainties is linked to the future evolution of the financial market and expectations are still unclear on the consequences of the worldwide financial crisis, Amret demonstrated so far its capacity to reach positive performances and to meet timely obligations with its lenders. For 2009 savings are not yet considered a relevant source of financing as the licence is expected to be issued not before mid-end of 2009. By 2009 savings should represent 9% of total portfolio, gradually rising to 15% in 2010 and 20% of portfolio in 2011. Certainly in the future savings will represent an alternative for cheaper and quicker financing of portfolio. Continuous efforts for capitalization are spent on the one side to guarantee an adequate capital adequacy ratio and on the other hand in view of future bank transformation. Indeed, the new regulation on banks increased the minimum capital requirement for banks from US$ 13 ml to US$ 37 ml.



8. Details of the risk factors According to our analysis, the main risk factors of Amret are the following:

Amret – Cambodia – November 2008 Annex 1


Annex 1 - Financial statements



Annex 2 - Financial statements adjustments The financial statements in Annex 1 are the result of standard reclassification. They are based on audited financial statements according to international standards, except for the infra-annual FS in the period October 2006 – September 2008, which were not audited. Financial statements have been then adjusted in order to make them comparable to financial reporting and performances of institutions using different accounting standards and operating in different environment and to evaluate the level of sustainability of the institution with market conditions. The main adjustments include:

adjustment for the accrued interest on delinquent loans > 90 days

elimination of subsidies (donations in kind11 and soft loans12)

provisions are calculated with a standard formula13

adjustments for inflation

adjustments for write-offs

For the period October 2007 – September 2008 the only adjustment applied is the one due for inflation, which however significantly impact on the results. For the previous periods a further adjustment is applied to cover subsidized cost of funds.

The cumulative effect of all these adjustments reduces the net income in all the periods.

11

Donations in kind are valorized and added to operational expenses. 12

In the income statement it is registered the value of the difference between financial costs of the institutions and financial cost evaluated at the market rate. In particular, in the case of loans in local currency, it is considered 75% of the average lending rate in the national market (IFS Line 60P). In the case of loans denominated in foreign currencies (US$ and Euro), it is considered the average value of LIBOR 1 year plus 3%. 13

Provisions are calculated according to the following formula: Portfolio: 1-30 days 10% Restructured loans 0-30 days 50% 31-60 days 30% > 30 day s 100% 61-90 days 50% >90 days 100%



Annex 3 - Financial ratios



Annex 4 - Definitions

Description of the ratio Formula

Profitability

Return on equity (ROE) Net income before donations / Average equity

Adjusted return on equity (AROE) Adjusted net income before donations / Average equity

Return on assets (ROA) Net income before donations / Average assets

Adjusted return on assets (AROA) Adjusted net income before donations / Average assets

Operational self-sufficiency (OSS) (Financial revenue + Other operating revenue) / (Financial expenses + Loan loss provision expenses + Operating expenses).

Financial self-sufficiency (FSS) (Adjusted financial revenue + Other operating revenue) / (Adjusted financial expenses + Adjusted loan loss provision expenses + Adjusted operating expenses)

Profit margin Net operating income / operating revenue

Portfolio quality

Portfolio at Risk (PAR30) Portfolio at Risk > 30/ Gross outstanding portfolio

Provision expense ratio Loan loss provision expenses / Average gross portfolio

Loan loss reserve ratio Accumulated reserve / Gross portfolio

Risk coverage ratio (>30 days) Accumulated reserve / Portfolio at risk >30 days

Write-off ratio Write-off of loans / Average gross portfolio

Efficiency and productivity

Staff allocation ratio Loan officers / Total staff

Loan officer productivity – Borrowers Number of active borrowers / Number of loan officer

Loan officer productivity – Amount Gross portfolio / Number of loan officer

Staff productivity – Borrowers Number of active borrowers/ Number of staff

Staff productivity – Amount Gross portfolio / Number of staff

Operating expenses ratio Operating expenses / Average gross portfolio

Cost per borrower Operating expenses / Average number of borrowers

Administrative expenses ratio Administrative expenses / Average gross portfolio

Personnel expenses ratio Personnel expenses / Average gross portfolio

Financial management

Portfolio yield Interest income from portfolio / Average gross or net portfolio

Funding expense ratio Interests and fee expenses on funding liability / Average gross portfolio

Cost of funds ratio Interest expenses on funding liability / Period average funding liability

Current ratio Short term assets / Short term liability

Debt/Equity ratio Total liability / Equity

Capital adequacy ratio Total equity / Total assets

Outreach Average disbursed loan size Amount issued in the period / Number of issued loans

Average disbursed loan size on per-capita GDP Average disbursed loan size / Per-capita GDP

Other definitions:

Funding liability: Liability that finance the loan portfolio and the cash investments necessary to manage the loan portfolio

Operating expenses: Personnel expenses + Administrative expenses Recovery from write-off ratio: Income from write-off (payments received from loan already written-off) / Average gross portfolio Restructuring of delinquent loans: includes rescheduling loans (extending the term of the loan or relaxing the schedule of required payments) and refinancing loans (paying off a problem loan by issuing a new loan). Drop-out ratio: calculated as follows: (number of active clients at the beginning of the period + number of new (first time) clients entering during the period – clients written off during the period – number of active clients at the end of the period) / (number of active clients at the beginning of the period).



Annex 5 - Guidelines of reporting and accounting Financial statements Amret‟s financial statements are audited by the Cambodian affiliate of KPMG. KPMG audit was conducted in accordance with Cambodian Standards on Auditing and International Standards on Auditing. FS are prepared in accordance with the Cambodian Accounting Standards and guidelines issued by the National Bank. The Company transacts its business and maintains its accounting records in three currencies, Khmer Riels (“KHR”), United States Dollars (“US$”) and Thai Baht (“THB”). The Company maintains its accounting records in Riles.

Loan loss provision and write-offs Amret is following the standard classification of loans according to NBC regulation, which includes 4 classes of risk. Standard and sub-standard loans refer to portfolio overdue of respectively 30 and 60 days; doubtful loans and loan losses also take into consideration the duration of the loan. Short term loans fall in the category of doubtful loans if they are more than 60 days past due, while long term loans are included in the same category if they are more than 180 days past due. Loans are classified as losses, when short term loans are overdue more than 90 days past due and long term loans more than 360 days. Write-offs are implemented 360 days after the due date.

Restructured loans A loan can be restructured under the following conditions:

Loan can be restructured just once in a cycle and for a delay of maximum 4 months; Previous instalments (both interest and principal) need to be paid back; Good credit history of the client so far; The customers must inform Amret (Credit Agent/District Teller) one month in advance.

The approval for restructuring is to be given by the Branch Manager at the District level with the participation and verification of the responsible Credit Agents.

Insider loans Amret provides two types of loans to staff: buying motorbike and medical treatment. Buying motorbike: Amret allow staff at all levels after having completed probation period to borrow at a maximum of 2,800,000 Riels to buy a motorbike for the ease of working. All credit agents and district managers can borrow without limitation to the number of borrowers per year. For other staff, only 4 persons can borrow per year. This loan is non-interest bearing and is paid back by a reduction in salary in the period of 12 months. Medical treatment:This type of loan is provided to staff at all levels to pay for a cure in case that it is not covered under the insurance policy or the amount of expense exceeds the schedule of benefits covered by the insurance policy. The maximum amount can be 500 US dollars (if the sum of their monthly salary for 3 months equals to or more than 500 US dollars) or the sum of their monthly salary for 3 months (if the sum of their monthly salary for 3 months is less than 500 US dollars). This loan charges no interest, and needs to be paid back by a reduction in salary in the period of 12 months. Furthermore, Amret also provides loan for a cure of employee‟s dependents. This loan charges 1.5% interest rate, and needs to be paid back by a reduction in salary in the period of 12 months.

Donations Amret did not received donations in the last three years.



Details of funding liability As of September 2008, Amret has the following borrowings from different sources:



Annex 6 - Rating Scale

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