MICROFINANCE INDUSTRY REPORT Thailand - Banking with the ...

MICROFINANCE INDUSTRY REPORTThailand2010Produced by the Banking with the Poor Network in collaboration withthe Foundation for Development Cooperation.Funded by the Citi Foundation as an activity of the Citi Network Strengthening Program.

MICROFINANCE INDUSTRY REPORTThailand2010Produced by the Banking with the Poor Network in collaboration withthe Foundation for Development Cooperation.Funded by the Citi Foundation as an activity of the Citi Network Strengthening Program.

i. Contentsii. Foreword 3iii. Acknowledgements 4iv. Acronyms 51. Country Profile - Thailand 62. Characteristics and Experiences of Microfinance 83. Challenges and Opportunities 184. References 21Other Publications 24Figures and TablesTable 1: Population and Demographic Data, Thailand 6Figure 1: Thailand Poverty Situation 7Figure 2: Household Financial and Credit Access Structure 7Figure 3: Thailand’s Microfinance System 8Box 1: Thaksinomics: How Populism Trumped Financial Inclusion in Thailand 9Box 2: Microcredit and Environmental Conservation Program 15Box 3: Baan Muang Kham’s Village Bank 15Box 4: Impact on Women 17Box 5: Trad Province Savings Groups 172 microfinance industry report - THAILAND

ii. ForewordThis assessment was completed as a Banking With the Poor Network (BWTP Network) activity of the CitiNetwork Strengthening Program, in collaboration with the Foundation for Development Cooperation, SEEPNetwork and funded by the Citi Foundation.The Citi Network Strengthening Program supports the development of Industry Assessments for national andregional level networks. The purpose of the BWTP Network Industry Assessments is to provide an overview ofthe microfinance sectors in which the BWTP Network operates. These assessments aim to extend beyond theperformance of individual institutions, and focus on the development of the microfinance market as a wholeby being both descriptive and analytical in nature. The aim of these assessments is to provide an outlookon each industry that is a valuable resource to the BWTP Network, its members and the wider microfinancecommunity.The ‘Microfinance Industry Report: Thailand’ is a review of the microfinance sector in Thailand, and constitutesa new contribution to the BWTP Network’s Asia Resource Centre for Microfinance (ARCM).The ARCM is based on dialogue and information exchange at national and regional levels in South andSoutheast Asia, and aims to constitute a one-stop learning and information hub for BWTP members and othermicrofinance actors in Asia.The ARCM promotes increased outreach and efficiency of financial services for the poor in South andSoutheast Asia, services that are essential in the fight against poverty in the region, improving the lives ofmillions through asset building and increased income.The ARCM has two main objectives:>> First, the ARCM aims to encourage partnerships and cooperation in Asia, among microfinance providers andsupporters, and between providers and financiers, in order to increase financial support for microfinanceschemes and to increase peer learning.>> Second, the ARCM aims to build a knowledge management platform accessible to all microfinance actors inthe Asia region, in order to increase institutional capacity, to increase the dissemination of innovations, andto develop regional and sub-regional standards in microfinance.The Microfinance Industry Report: Thailand describes a sector that is heavily dominated by governmentprograms and intervention that has limited the growth of a viable commercial sector. As this reportgoes to press (April 2010) the Government of Thailand is introducing further regulation that maydeepen government involvement in subsidised village banking on a national scale. All efforts have beenmade to ensure that information is as up-to-date and accurate as possible taking into considerationthe most recent period of uncertainty. For updates, visit the Microfinance Thailand website atwww.microfinancethailand.com .Banking With The Poor Network 3

iii. AcknowledgementsThe Microfinance Industry Report: Thailand was produced by the Ms. Tatsanee Setboonsarng under the directionof Jamie Bedson, BWTP Network Program Manager and Asia Regional Representative at The Foundation forDevelopment Cooperation (FDC).A note of great appreciation goes to the Common Interest Foundation, especially Ryan Young and his team,for complying data of NGO MFIs in Thailand and sharing their field experiences as case studies in this report.Special appreciation also goes to Robert Boxwell for his valuable comments and helpful assistance in editingthe final draft.Thank you also to Julio A Sanjines Cerruto, FDC Singapore intern, for some valuable editing of the finaldocument, and Dr John Conroy for his guidance on the discussion of ‘Thaksinomics’.4 microfinance industry report - THAILAND

iv. Acronyms> > SEEPSmall Enterprise Education and Promotion Network> > ARCMAsia Resource Centre for Microfinance> > BAACBank of Agriculture and Agricultural Cooperative> > BOTBank of Thailand> > The BWTP Network Banking with The Poor Network – BWTP> > BBLBangkok Bank> > CGAPConsultative Group to Assist the Poorest> > CDDCommunity Development Department> > CADCooperatives Auditing Department> > CICooperative Institutions> > CPDCooperatives Promotion Department> > GSBGovernment savings bank> > GDPGross Domestic Product> > GNPGross National Product> > HIV/AIDSHuman Immunodeficiency Virus / Acquired Immunodeficiency Syndrome> > KBankKasikorn Bank> > KTBKrung Thai Bank> > MOFMinistry of Finance> > NSONational Statistical Office> > NBFINon-bank Financial Institutions> > NGONon-Government Organisation> > NPLNon-performing loans> > NESDBOffice of the National Economic and Social Development Board> > OTOPOne Tambol One Product> > PDAPopulation and Community Development Association> > ROAReturn on Assets> > ROEReturn on Equity> > SGSavings-for-production Groups> > SCBSiam Commercial Bank> > SMESmall and Medium sized enterprises> > SEDSmall Enterprise Development Co. Ltd.> > SME BankSME Development Bank of Thailand> > SFISpecialized Financial Institutions> > TDRIThailand Development Research Institute> > FDCThe Foundation for Development Cooperation> > VRFVillage and Urban Revolving FundBanking With The Poor Network 5

1. Country Profile - Thailand1.1 Country and MicrofinanceIndustry OverviewTable 1: Population and DemographicData, ThailandTotal population67,000,000(Sep. 2009 est., NSO)Estimated number of people 19,000,000below the poverty line plus 20percentEstimated number of households 5,200,000below the poverty line plus 20percentEstimated number of households 6,200,000needing access to credit – marketpotential (A)Number of active borrowers (B) 4,500,000percent of people currently having 72.6 percentaccess to credit as percentage ofmarket potential (B/A)Market gap in numbers (C = A-B) 1,700,000Market gap in percentage (C/A) 27.4 percentSources: NSO, NESDB, and BOT.Thailand has a long history of development in themicrofinance industry, which corresponds withits large dynamic rural sector. National StatisticalOffice 1 (NSO) statistics show that in 2007, 63percent of the population (41 million) lived in ruralareas. About 92 percent of these were farmers.While these farmers generate approximately11 percent of the country’s GDP, their output isthe raw material base for Thailand’s large agroprocessingsector, which contributes to about25 percent of the country’s total export value. 2The remaining 8 percent of the rural populationare employed in a variety of areas, primarily as lowskilled workers in the, manufacturing, construction,and transport sectors.In the case of small and medium sized enterprises(SMEs), according to the SME DevelopmentBank of Thailand (SME Bank), the total numberof business enterprises throughout Thailand wasestimated at 1.87 million in 2006; 99 percentof these are SMEs. They account for nearly 80percent of non-farm employment, 42 percent ofGDP and 38 percent of manufactured exports. 3There were roughly 10,000 SMEs registered duringthe first quarter of 2009, while about 5,000 closeddown, mainly due to lack of access to credit. 4The Kasikorn Bank (KBank) has estimated that if thesestatistics included micro enterprises resulting fromthe government’s One Tambol One Product (OTOP)program and new self-employed entrepreneursconsisting of educated, unemployed office workers,the number of SMEs would increase to over 2.4million (as of early 2009) but only one third haveaccess to credit from the formal financial sector. 5According to the Office of the National Economicand Social Development Board (NESDB), thoseliving below the poverty line (using the UNbenchmark of USD 1.25 per day) earn less thanTHB 1,443 per month 6 . This is 14 percent of thecountry’s GNP per capita of THB 10,043 per month.NSO statistics show that 8.5 percent (5.5 million) ofThailand’s population lived below the poverty linein 2007, a rapid improvement from the 21 percent(12.6 million) in 2000. However, it is estimated that13 percent of the rural population (5.3 million) areconsidered “poor” people or “rural poor”; two thirdsare concentrated in the north-east of the country. Itis also estimated that 18 percent of the population(12 million) are “urban poor”. There are also severalhundred thousand more poor people among theminority hill tribes in the Northern part of thecountry, as well as refugees along the border whodo not have Thai nationality, and so are not includedin the country census. These people are also in needof financial services.Thailand remains a bank-based economy wheremost business sectors and citizens obtain funds(working capital) and financial services fromcommercial banks. A survey in 2007 by the Bank ofThailand (BOT) and the NSO found that 9.61 percent1 National Statistical Office, 2008a and 2008b.2 Bank of Thailand, 2009b.3 Nattapon Dejvitak. 2006.4 Marketeer, 2009.5 Op. cit.6 Office of the National Economic and Social DevelopmentBoard, 2007a.6 microfinance industry report - THAILAND

of both the country’s households and SMEs did nothave access to financial services. Amongst thosewith access to financial services, 16.35 percent wereserviced by the semi-formal and informal sectors.While the number of households without accessto any financial services is relatively modest, thesurvey found that a much larger proportion of thepopulation (33.93 percent of households) did nothave access to credit. The majority of householdsin these groups are served by specialized financialinstitutions (SFIs), 6.41 percent from the first and5.73 percent from the second income quintile.Households in the third, fourth and fifth (highest)income groups using the services of SFIs are at 4.12percent, 2.68 percent and 0.98 percent respectively.In summary, lower-income households rely mainly ongovernment SFIs and informal financial intermediariessuch as the Government Savings Bank (GSB) and Bankof Agriculture and Agricultural Cooperatives (BAAC)or self-help savings groups. Although a relatively highproportion of households have access to financialservices, they do not use these services to secure loansor other credit products. The financial services availableto these groups include savings deposits, debit card,money transfers, cashier and gift checks, cash paymentand on-line deduction, money exchange and foreignbill collection.The weak nature of Thailand’s financial servicessector was one of the causes of the 1997 AsianFinancial Crisis. The Ministry of Finance (MOF)and BOT subsequently tightened and increasedthe scope of regulations for the sector under thenational Financial Sector Master Plan in 2000.This restructuring also led to the formationand development of Thailand’s first ‘NationalMicrofinance Master Plan’. The first five- year phaseof the Microfinance Master Plan (2009-2013)(the ‘Plan’) is part of the second phase financialsystem restructuring and was scheduled 100 to be9.6implemented in the fourth quarter 0.8 of 2009.3.43.3 The80BOT is encouraging the use of microfinance so19.9as toincrease the access10060to financial 9.6 services by unserved0.8 3.4and underserved groups. The aim 3.38040 of the Plan 33.9 is to19.962.9link the formal banking system to existing financial60209services for low income people, such as cooperative14institutions (CIs), funds, 400village banks, as well assavings groups. This linkage would encouragethe banks, which have sufficient capital butinsufficient customer credit information, to engagein microfinance business by utilising the customercredit information of CIs and savings groups.Currently, the MOF is considering three approaches toproviding microfinance services to low-income people:i.ii.iii.Give permission to experienced foreigninvestors to start microfinance activities;Allow commercial banks to partner with thirdparty microfinance experts and foreign investors;Allow commercial banks to operatemicrofinance programs through separateentities, such microfinance subsidiaries.Figure 1: Thailand Poverty Poverty Situation Situation5040302010042.263333.7692percent of totalpopulation28.4790Poverty Line1,4431,3861,190 1,2421,130 1,135953838211914.817.514.911.39.68.51988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2007Source: National Statistical Office Office and Office and of Office the National of the Economic National and Economic Socialand Development Social Development Board, Office of Board the Prime of Minister. the Prime Minister.Figure 2: 2: Households Financial Financial and Credit and Access Credit Structure AccessStructure100402033.90.860Figure 2: Households Financial and Credit Access StructureFigure 2: Households Financial and Credit Access Structure20062.9Financial access809.63.43.319.962.933.9Informal sectorBanks & SFIs09Financial access Semi-formal sector Credit access14No accessOther formal sectorSources: 12 NSO-BOT, Households socio-economic survey, Q4 2006Informal sectorSFIs31Semi-formal sectorCommercial banksBanks & SFIsOther formal sectorFinancial access 12Sources: Credit access NSO-BOT, Households socio-economic survey, Q4 2006SFIsSources: NSO-BOT, Households 31 socio-economic survey, Q4 2006Commercial banksBanks & SFIsCredit accessSources: NSO-BOT, Households socio-economic survey, Q4 2006No access200015001000Banking With The Poor Network 79141231Bt/M5000No accessInformal sectorSemi-formal secOther formal secSFIsCommercial ban

2. Characteristics and Experiencesof Microfinance2.1 General CharacteristicsThailand has a relatively thin and segmentedfinance market that has nonetheless been fairlyefficient at mobilising savings and channellingfunds to the rural population and commercialagriculture. From a conventional perspective, thesize of the microfinance industry in Thailand is small,as the government has been the main provider.There has been a lack of concerted effort in creatinga legal environment friendly to private and/or NGOsmicrofinance operations in Thailand (see Box 1).Most of the private and/or NGOs microfinanceprograms are small and target specific groups ofpeople such as those living in urban slums, factoryworkers, people living with HIV/AIDs, minority hilltribes,or non-resident refugees along the borderwith neighbouring countries. These programs aregenerally independent and rarely collaborate witheach other.The MOF has divided the current microfinancesystem in Thailand into three main categories: 7i.i.Formal and large MFIs are those formal financialinstitutions (bank and non-bank) operatingunder prudential regulations 8 includingcommercial retail financial institutions and thegovernment’s Special Financial Institutions(SFIs), i.e., Government Savings Bank (GSB),Bank for Agriculture and AgriculturalCooperatives (BAAC), SME DevelopmentBank, Islamic Bank, et al. Although there isno specific data on the total amount of fundsoperating under microfinance services of theseorganisations, the MOF has estimated thatcredit supplied by formal financial institutionsis about THB 7.73 trillion (approx. USD $235 B)or about 89.7 percent of total credit in 2007.Semi-formal MFIs are legal, member-based MFIsoperating under non-prudential regulationsto promote savings and investment withincommunities, including agricultural, savings,and credit union cooperatives, registeredsavings-for-production groups, and Villageand Urban Revolving Fund (VRF). The amountof funds provided by this category of MFIswas around THB 860 billions (≈USD 24.5 B) orabout 10 percent of the total credit in 2007.i. Informal Independent and Self-help savingsand credit groups are informal, communitymember-based organisations promotingsavings and providing lending services tocommunity members. These groups areusually established with support from externalorganisers, including NGOs, local governmentagencies, and monks. Most of them followeither the village bank or solidarity groupoperating models. The amount of fundsprovided by MFIs in this group is estimatedat over THB 30 billion (approx. USD $910 M)or only 0.3 percent of the total credit in 2007.The Microfinance Master Plan in development aimsto regulate MFIs in the second and third categoriesunder appropriate prudential regulations andintegrate them as part of the country’s formalfinancial sector.Figure 3: Thailand’s Microfinance SystemFormalCommercial banks, FinancialCompanies, Credit Fonciers,BAAC, GSB, GHB, EXIM Bank,Islamic Bank, SME Bank,Insurance companies, andNon-bank financial institutionsSemi-formalVillage and UrbanCommunities Revolving Fund,Agriculture / Savings / CreditUnion Cooperatives, RegisteredSavings for Production GroupsSelf-helpSaja Savings Groups, VillageBank, NGOs MFIs, otherfinancial intermediaryorganizationsCredit Coverage*THB 7.730 Trillion**USD 234 BillionTHB 860 BillionUSD 26 BillionTHB 30 Bil.USD 909 Mil.* Estimated by Ministry of Finance, there is no official data to date.** The figure represents credit of the entire formal financial system;number for only MFIs portion is not available.Source: Fiscal Policy Office, Ministry of Finance, as at December 20077 Fiscal Policy Office, 2005c.8 See list of formal financial institutions offering microfinanceservices in Thailand and related regulator and laws at http://www.bot.or.th/English/FinancialInstitutions/FIStructure/FI_System/Regulator8 microfinance industry report - THAILAND

Box 1: Thaksinomics: How Populism Trumped Financial Inclusion in ThailandThai politics is a game played out in the arena of an uneasy constitutional democracy, interrupted bymilitary interventions. Most recently, the struggle between the ‘red-shirts’ (supporters of exiled ex-Prime Minister Thaksin Shinawatra) and the ‘yellow-shirts’ (mainly the anti-Thaksin People’s Alliance forDemocracy), has gained much international media attention. One constant in Thai politics since theelection of Thaksin has been an increased level of government involvement in the provision of financialservices to the poor, as well as to other politically-favoured groups.The government of Thaksin Shinawatra was elected early in 2001 on a populist platform promising toreduce poverty levels and to accelerate recovery from the Asian economic crisis. The new governmentwas pledged to implement a one million baht (about $24,000) revolving credit fund for each ofThailand’s 77,000 villages, to create a ‘People’s Bank’ for grassroots lending and to declare a three-yeardebt moratorium for farmers. As well, it was about to commence the broader program of pump-primingand consumption-led growth stimulated by cheap credit which has come to be known as ‘Thaksinomics’(a set of economic principles espoused by Prime Minister Thaksin).As chair of the Asia-Pacific Economic Cooperation process (APEC) in 2003, Thailand placed a study of‘specialised financial institutions’ (SFIs) on APEC’s agenda. Many considered the Thai proposal asdesigned primarily to validate and promote Thaksinomic policies of subsidised credit and state-directed‘policy lending’. Its underlying assumption appeared to be that private sector financial institutionswould be unable to provide services, especially credit, under circumstances such as those of the Asianfinancial crisis and the subsequent economic recovery. Since market forces could not be relied upon, itwas presumed necessary for the state to create and/or underwrite SFIs in order to achieve the necessary‘linkage’ between the banking and social sectors.The resultant Thai study of SFIs published by APEC endorsed SFIs providing subsidized credit, as wellas other elements of an economic nationalist policy agenda at odds with APEC’s own foundationalprinciples. In hindsight, Thaksinomic policies of ‘easy money’ may have damaged Thai government banksand eroded the rural credit culture. With this precedent established, no subsequent Thai governmenthas been able to avoid engaging in a political ‘auction’ characterized by cheap credit schemes and otherpopulist programs. For APEC, its efforts to identify and promote policies for financial inclusion andsustainable microfinance suffered a setback that lasted until 2008, when the APEC Business AdvisoryCouncil resumed discussion of how APEC Finance Ministers might be persuaded to endorse and adoptpolicies for financial inclusion.Adapted from ‘APEC and Specialized Financial Institutions: The Influence of Thaksinomics’, Dr John Conroy,The Foundation for Development Cooperation, 2004.Banking With The Poor Network 9

2.2 Key PlayersThe key players in each of the three main categoriesare described below.2.2.1 Formal MFIsi. Bank for Agriculture and AgriculturalCooperativesThe Bank for Agriculture and AgriculturalCooperatives (BAAC) was established under theBAAC Act in 1966 as a vehicle to deliver low-costcredit to Thai farmers. In the past four decades,the BAAC has evolved to meet the diversifieddemands of a market-driven and growing ruraleconomy, and has become the predominant rurallender in Thailand. It is now providing financialservices both directly to farmers and throughagriculture cooperative institutions (CIs) andfarmers’ associations at below-market interest ratesfor agriculture and agriculturally-related activities.The most notable features of BAAC’s success are itsdepth of outreach to Thailand’s rural poor and itsvast savings mobilisation.In 2007, the BAAC had extended its reach toapproximately 98 percent of all farm families inThailand through its 75 provincial offices, whichsupervise 945 branches throughout the country,along with 946 field units scattered around localareas nationwide. The BAAC has been modernisingits service-delivery systems and has very lowadministrative costs as a result (about 2 percent oftotal assets). This is partly accomplished through amodest but fluctuating dependence on subsidies.Of the 5.91 million farm families that had accessto credit services from BAAC for the fiscal year2007 (April 2007 to March 2008), 4.34 million wereindividual farmers that received credit directly fromBAAC, 1.57 million were members of agriculturalcooperatives and 1,200 farmer families weremembers of farmers’ associations.Although the BAAC’s aggressive expansion of itslending portfolio has incorporated a vast newclientele into the formal financial sector, legallimitations on certain practices have led to adecline in the bank’s overall loan repayment rates.Timely loan repayment rates averaged 88 percentwith much of the arrears balance repaid belatedly,leading to very small eventual loan losses (0.03percent in FY2007), despite an exclusive focus onagriculture and agriculture-related enterprises,which are vulnerable to the vagaries of nature andvolatile fluctuations in input-output prices.The BAAC has funded its substantial loan outreachprimarily through vigorous efforts to mobilise ruralsavings over the last two decades. At the end ofFY 2007, BAAC had a total deposit outstanding ofTHB 514.67 billion (approx. USD $15 B), an increaseof THB 18.05 billion (approx. USD $0.5 B), or 3.63percent, from the preceding year. Outstandingcredit stood at THB 449.18 billion (approx. USD$12.8 B). This gives a loan/deposit ratio of 87percent, a marked increase from 31 percent in 1986and 78 percent in 1996. This is much higher thanany commercial bank.ii. Government Savings Bank (GSB)In 1913, the GSB was introduced to Thailand andwas the first government owned bank to focuson “micro” savings. By the end of 2007, the GSBoffered 21 savings products and 16 loan products,7 of which are in line with government policy tosupport grassroots development and 9 productsto support SMEs and general businesses, as well asother financial services. These include, for example,special services for the Muslim community, boat andmotor cycle banking, community and school banks,finance education, and career and professionaldevelopment training. The GSB also offers loansas small as THB 2,000 (USD $57). The GSB deliversthese services through its 597 branches nationwide,of which 18 are community bank outlets, 2 subbranches,343 Islamic bank outlets, 18 serviceoutlets, 187 service outlets at district offices, 2mobile service boats, 20 mobile service buses,1,005 ATMs, and 214 school bank outlets. The Bankhas also expanded its GSB Express Service by usingmotorcycles to serve large and corporate customersin the Bangkok metro area.As of end-2007, the GSB’s administrative costsamounted to only 1.5 percent of total assets, whileloan losses were at 0.02 percent. With a total of THB644 billion (approx. USD $18.4 B) in savings deposits10 microfinance industry report - THAILAND

and a total loan portfolio of THB 470 billion (approx.USD $13.4 B), the GSB has a deposit-to-loan-ratio of73 percent (an increase from 52 percent in 2003).Of the several products and services of the GSB,there are two successful MFI programs worthnoting.A. People’s Bank ProgramThe People’s Bank program is one of the mostpopular MFI products of the GSB and was pilotedin 2000, with product design support from theConsultative Group to Assist the Poorest (CGAP).The People’s Bank program was fully implementedin 2001 to focus on providing low interest rate credit(less than 1 percent per month) for investmentactivities and/or businesses, with a THB 72 million(approx. USD $2 M) supporting budget from thegovernment.As of 2007, the People’s Bank program had over 1.68million clients with a total loan value of THB 42.4billion (approx. USD $1.2 B) or 9 percent of the GSB’stotal loan portfolio.B. Community Bank ProgramA Community Bank receives direct communityinvolvement in its operation and managementthrough an Advisory Committee, together with theGSB and local government sector. “Involvement” inthis case means that members of the communityhave a say in the type of financial services provided.At the same time, the community is expected tomaintain and improve the performance of the bankin order to sustain it for the optimum benefit of thecommunity. As a result, each Community Bank is setup according to the needs of the local communityand owned by everyone in the community. It isa progressive step for village banks or self-helpsavings groups or Cis, coupled with guidance fromprofessional bankers. The first Community Bank wasestablished at Amphur Omkoi, Chiang Mai provincein 1999. Since then, other government banks, suchas Krung Thai Bank (KTB) and the BAAC, have alsoapplied this concept to their operations. Currently,the GSB has 18 Community Banks serving thecountry.iii. Commercial Retail BanksRetail banks aim to offer financial services for SMEsand low-income customers, subject to customerlending limits. Since 1990, the structure of the Thaifinancial system has undergone a remarkable shift.In addition to the customary practice of receivingdeposits and extending loans, the BOT now allowscommercial banks to provide more businessfinancial services, such as insurance or preparingfeasibility studies for projects or investment.Following the implementation of the FinancialSector Master Plan in 2004, banking servicesstarted to reach out to the lower income segments,especially SMEs. Additional requirements forcommercial banks seeking retail banking licensesto improve financial services to SMEs and retailcustomers increased the accessibility of financialservices to smaller businesses, especially in therural areas. In the initial phase of this Master Plan,only currently operating and qualified financialcompanies and credit financiers were able to applyfor retail banking licenses. Tier-1 retail banks arerequired to have a minimum capital of THB 250million (approx. USD $7 M) and are allowed to openbranches, with no limits placed on the number orlocation.However, the 1997 country’s financial crisis severelyaffected all commercial banks in Thailand. Highlevels of non-performing loans (NPLs) madecommercial banks more cautious in approving loansto potential high risk customers, which are mostlysmall businesses. Almost all existing commercialbanks also have retail banking operations andhave started to introduce several new products forSMEs and personal banking services. For example,Siam Commercial Bank (SCB) introduced ‘SpeedyCash’ and ‘Speedy Loan’ for personal banking andthe ‘Chao Sua Noi Project’ or ‘Little Tycoon Loan’ forSMEs; Kasikorn Bank (KBank) launched its ‘K-ExpressCash’ for ‘K-Personal Credit’ and the ‘K-SME’ program,offering loans that are customised to fit each client’spurpose and providing professional training fornew entrepreneurs through its K-SME Care centre;Bangkok Bank (BBL) offers 6 types of housing loansand started its Bualuang SMEs Innovation Project,providing special loans and innovative businessBanking With The Poor Network 11

models and ideas, as well as conducting researchand developing innovations support as a businesspartner.In the second phase of the National FinancialSector Master Plan implemented since late-2009,the government’s strategies to strengthen thecountry’s microfinance industry include allowingexisting commercial banks to downscale, or set upa microfinance window as a separate subsidiary.As such, the BOT has been offering seminars andtraining to educate staff of commercial banks aboutthe unique characteristics of microfinance practices,to prepare them for the actual implementation ofthe new law.C. Non-Bank Financial InstitutionsNon-bank financial institutions (NBFIs) still havea small role in comparison to commercial banksin Thailand’s economy. At the end of 2005, thetotal credit of traditional NBFI’s was approximatelyTHB 714 Billion (approx. USD $20.4 B) or about 9.5percent of the total value of the whole credit in thefinancial system.The implementation of the Financial Sector MasterPlan following the economic crisis has given NBFIsan opportunity to expand their role as sources offunding for businesses and the general public.Commercial banks have been very cautious since1997, which has resulted in decreased release ofcredit, and reduced credit lines. Credit from NBFIshas helped to alleviate these problems of NPL’s dueto this ‘credit crunch’. One of the key advantagesof obtaining credit from NBFIs is that these creditschemes do not require collateral. NBFIs tend todeal in liquid rather than collateral-based lending,quite different from banks.A few NGOs have taken the form of NBFIs toimplement their microfinance activities in Thailand.However, the main limitation for NGOs on this pathis that the minimum capital requirement for a nonbankcompany in Thailand is THB 50 million (approx.USD $1.4 M), which is beyond the capacity of themajority of NGOs.The limited role of NBFIs can be partly attributed tothe following;>> The related laws, and the implementation ofrelated laws, rules and regulations and theirsupervision are unclear.>> The level of regulation between different typesof enterprise varies or is sometimes completelylacking, meaning that each operates underdifferent regulatory standards. This may alsotranslate to unfair advantages or disadvantages toentrepreneurs with the same type of business.>> There are no specific laws relating to non-bankbusinesses. Financial institutions must depend onother related laws, and there are possible conflictsbetween these laws.>> Data regarding NBFIs is randomly distributedamong several organisations such as the Non-Bank Entrepreneur Association, the Ministry ofCommerce, the Bank of Thailand, and several otherresearch centres. There is no central database.This hampers the public sector when trying toplan suitable and effective developmental andregulatory policies.These problems particularly affect developing nonbankfinancial institutions.2.2.2 Semi-formal MFIsi. Cooperatives Institutions (CIs) and Savings-for-Production Groups (SGs)Cooperative Institutions (CIs) and Savings-for-Production Groups (SGs) are member-basedorganisations and make up the second largestgroup of microfinance service providers in Thailand.The main businesses of these groups are providingsavings and credit services, as well as productsdistribution services through member shops.CIs are regulated under the Cooperatives Act of1968 and overseen by the Cooperatives PromotionDepartment (CPD), Cooperative AuditingDepartment (CAD), Ministry of Agriculture andCooperatives. However, the regulations arecomplicated and interpreting them and complyingwith them is onerous for the management of CIsand Credit Unions.12 microfinance industry report - THAILAND

SGs, on the other hand, have chosen not toregister as ‘cooperatives’ to avoid the complexityand limitations of being a registered cooperative.This exemption was granted by the MOF and theBOT in 1974, but there is a requirement that theyregister and operate under guidance developed bythe Community Development Department (CDD),Minister of Interior; and to also agree to deposittheir savings with the government-owned KrungThai Bank. Since then, the growth of SGs has beenquite rapid, having better success in matchingcustomers’ needs and achieving sustainability thanexisting registered CIs. In 2004, the governmentissued the Agriculture Groups Act of 2004 whichrequired these SGs to register under CPD andbe supervised by CAD, but with more relaxedregulations than CIs.According to the CAD reports, as of September2009, there were 13,453 registered CIs and SGsin Thailand; an increase from 10,487 in 2007. Thiscan be divided into 7,682 CIs (included agricultureand non-agriculture as well as credit unioncooperatives) and 5,771 SGs. These groups haveover 10 million members (9.5 M and 0.6 M for CIsand SGs, respectively) or 16 percent of the totalpopulation. The Rural Thai Villages Report 2007,produced by CDD, indicates that 13.79 percent ofthe total 7.9 million rural households borrowedfrom cooperatives, and 28.73 percent borrowedfrom savings groups. However, the report did notindicate whether these savings groups are onlyregistered SGs or also included also unregisteredself-help and Sajja savings groups. 9As of the end of the fiscal year 2009 (August 2008– July 2009), the total savings stood at THB 316.1billion (approx. USD $9 B), an increase from THB237.5 billion (approx. USD $6.8 B) in 2007, most ofthem (99.9 percent) belong to CIs. The loan portfoliototalled THB 787 billion (approx. USD $22.5 B - anincrease from THB 561.5 billion in 2007), with almostall (99.9 percent) belong to CIs. The total operatingfund stood at THB 1.1 trillion (approx. USD $31 B), anincrease from THB 809 billion (approx. USD $23 B) in2007, which was equal to approximately 12 percentof the country’s GDP. Capital is thus sufficientenough to cover external debt by 3 times. NPLs’ratio also was quite low and stood at 0.1 percent ofloans outstanding for Cis, and 1.8 percent for SGs in2008.Despite these positive numbers, these groups havelimited types of services, inadequate liquidity andminimal business scale, as well as a lack of effectiveand efficient management systems. Although themajority of these groups have been profitable, totalexpenditure has been rather high at 80 percent ofincome since 2005 (80 percent for CIs, 99 percent forSGs). This has resulted in gross margins of around18 percent during the past 5 years. Return on Equity(ROE) and Return on Assets (ROA) ratios were alsoquite low, ranging between 7-12 percent for ROEand only 3.6-3.8 percent for ROA during the past 5years.The evaluations done by CAD indicate that in 2008a total of 40.5 percent of CIs did not meet theoperation standard, an improvement from 43.6percent in 2006. Better performers were savingscooperatives (only 7.9 percent did not meetstandard) and credit union cooperatives (27.9percent) though both of these deteriorated in 2006(from 0.80 percent and 25.1 percent, respectively).The worst performing were agriculturalcooperatives, with 49.2 percent below standard in2008, improving nevertheless from 54.7 percent in2006. The main reason (71.1 percent) for the lowstandard of performance was a lack of accountingstaff, which then led to lack of appropriatemanagement information. Combined frequentlywith high management turnover, the result is often9 The Sajja (Truth) Savings Group is very much like a pledge savings group, but incorporated the Buddhist principle of Truthfulness, Sajja. Itwas initiated in 1985 by a Buddhist monk who observed the luxurious spending habits of young people in the village who still depended ontheir poor parents for money. He persuaded these youths to take a vow or Sajja to save part of their money for a revolving fund. The eldersin the village also joined the Sajja Group. Since then, the Concept was adopted by villages throughout the country, with support from theCommunity Development Department (CDD). Today, Sajja savings groups have became a common basic model of self-help savings groupsamong small villages around Thailand.Banking With The Poor Network 13

an accumulated weakness that has a negativeimpact on these institutions’ financial status andfuture operations. Nonetheless, several successfulCIs and SGs, especially savings cooperatives, havebecome best practice cases as well. 10ii. Village and Urban Revolving Fund (VRF)In 2001, the government launched the Village andUrban Revolving Fund (VRF) program, which aimedto provide THB 1 million (approx. USD $22,500) toevery village and urban community in Thailandas working capital for locally-run rotating creditassociations. The money was quickly disbursed tolocally-run committees in almost all of Thailand’s74,000 villages and over 4,500 urban (includingmilitary) communities. The Fund was designed andintended to help boost household-level non-farmenterprise. The total initial injection of capital intothe economy amounted to THB 78 billion (approx.USD 1.75 B) or 1.5 percent of GDP, making it themost ambitious microfinance program initiative inthe world to date. By May 2005, the VRF committeeshad lent a total of about THB 259 billion (approx.USD $8.3 B), with an average loan of THB 15,000(approx. USD 466). The money has been channelledto the VRF clients through the BAAC and GSB, thekey microfinance arms of the government.The government rates VRFs on a variety of efficiencyand “social” criteria. Those that are rated AAA in anygiven year are provided with a bonus of a furtherTHB 100,000 to add to their working capital. VRFscan also borrow up to an additional THB 1 million(USD $22,500) from the BAAC or GSB. The size ofthe additional loan is determined by the BAAC orGSB, using their respective criteria. Some of themore dynamic VRFs are attempting to become ruralbanks, which would potentially lead to an efficiencygain in that it would allow money to move acrossvillages.The borrowers of VRFs were disproportionatelypoor and agricultural. Fund borrowing in 2004was associated with, on average, 1.9 percent moreincome, 3.3 percent more expenditure, and about5 percent more ownership of durable goods. Theseresults are broadly consistent with the resultsfrom instrumental variables models (where theidentifying instrument was the inverse of villagesize), which however show a smaller (marginal)effect. Households that borrowed both from therevolving fund and the BAAC gained substantiallymore in terms of higher income than those whoborrowed from either one or from neither.Several research studies 11 indicate that VRFs havehad a moderate impact on household spendingand income. It increased total short-term credit,consumption, and income growth, but decreasedasset growth. Most of the impact from VRFborrowing is concentrated in the poorest quintileof the population as measured by expenditureper capita, or borrowers which are more typicalcustomers of informal financial institutions. Thefindings also reflect that VRFs reduced creditconstraints and increased spending by 5.2 percent,making the program markedly pro-poor. Theeffect of the VRF appears to increase agriculturalinvestment. Business income increased, especiallyin female-headed households, as did labourincome. However, overall this micro-credit programincreased consumption among villagers ratherthan being used primarily for income-generatingactivities.2.2.3 Informal Independent andSelf-help Savings Groupsi. NGO MFIsIt is quite difficult to get a full picture of, andinformation on, NGO MFIs in Thailand. This isbecause most NGOs in Thailand are operatingeither as foundations or associations, with existinglaws that are quite restrictive when applied to theprovision of financial services. Therefore, most ofthese organizations might not admit publicly thatthey have microfinance projects, or they might onlyprovide backup support both in term of finance(seed funding grants) and know-how (operation andmanagement) for villagers in establishing their ownsavings groups or village banks, without expecting10 See Walaitat Worakul, 2006.11 See Kaboski, Joseph P. and Robert M. Townsend, 2009; Menkhoff, Lukas and Ornsiri Rungruxsirivorn, 2009; Wannapa Phetde. 2008;Bawornphan Achakul and Warawan Chanduaiwit, 2007; Jirawan Boonperm, Jonathan Haughton, and Shahidur R. Khandker, 2007.14 microfinance industry report - THAILAND

Box 2: Microcredit and Environmental Conservation ProgramPopulation and Community Development Association (PDA), the largest Thai NGO in the country, launchedits most innovative microfinance program focusing on environmental conservation activities by usingreforestation as a means of capital formation through Village Banks. Each community generates moneyfor a Village Bank by planting trees. For each tree planted, a small amount of money is put into a centralrevolving fund until there is enough for the Bank to begin business. Each Village Bank is managed by acommittee, comprised of half male half female members. To borrow from the bank, villagers must buya minimum number of shares, as well as open a savings account at the bank. A savings account pays 6percent interest, which is much higher than any other major banks.The bank gives loans to individuals or groups, at a low interest rate, to start up business ventures. Thetrees are inspected every year and a financial bonus is put into the revolving fund for every tree that ishealthy and a deduction is made for each tree that is dead. Half of all profits in the Village Bank go towardscommunity development activities. These projects promote villager participation in forest conservationand replenishment of public lands and degraded areas. They also convert open land into forests foreconomic use without depleting existing ones. The Village Bank projects have proven to be extremelypopular; they see high rates of repayment and high rates of investment.Source: Population and Community Development Association (PDA)’s website: www.pda.or.th/eng/micro_credit.aspBox 3: Baan Muang Kham’s Village BankBaan Muang Kham is a small farming village in the Mae Taeng district in Chiangmai province in the northof Thailand. Most people in this area farm rice, bean or potatoes for a living. In June of 2008, a group of44 women joined together and formed a Village Bank. Each month, members would meet together andcollect a minimum of 50 baht in savings from each member. After several months, the Village Bank startedto use the group’s savings to provide income-generating loans to it members. Interest rates were set at 3percent per month, which was significantly lower than the moneylender in the village who charged 10-20percent per month.Within a year, the Village Bank had increased in size to over 55 members and Village Bank has becomeconfident enough to start borrowing additional funds to re-lend to its members in order to cover moreloan demands. By June 2009, the Village Bank was lending nearly 300,000 baht to its members every sixmonths and was making sizeable returns on their money. During the first year of existence, memberswere received huge returns on their savings. The average member had saved 650 baht in the first year andreceived approximately 460 baht in interest on their funds.The goal of this Village Bank is to collect enough savings so that they do not need to continue borrowingfrom outsiders to cover their village’s loan demands. The group currently completes its own bookkeepingand accounting without outside assistance. It is expected that within 5 years, Baan Muang Kham will notneed to rely on any government, NGO or outside assistance with regards to its financial services.Source: Common Interest Foundation, Thailand, 2009.Banking With The Poor Network 15

any return on the funding. A few also work throughexisting cooperatives and savings groups; theseoperations can continue due to lack of requiredsupervision and enforcement of authorities.Currently, there are only a handful (less than 30)known NGOs that have microfinance relatedprograms. Most of these programs are projects ofmissionary organisations or international NGOs;only a few are local. A few NGOs with a more seriousfocus on microfinance activities have registeredor are undergoing the process of registeringthemselves as a company, i.e., Small EnterpriseDevelopment (SED) Co. Ltd., and Common InterestFoundation.Normally, NGO microfinance programs are relativelysmall and have strong development objectives.Their aim is to provide microfinance services toimprove the household economic position of lowincomeminority groups who reside in remoterural areas and do not have access to finance. Forexample, SED is based in the Northern provinceof Surin and works with the poor in that region.Common Interest is based in Chiangmai in theNorth and focuses on women and minority hilltribegroups in Chiangmai and nearby provinces.The Population and Community DevelopmentAssociation (PDA) has projects around the country,but targets poorer communities. These NGO MFIsusually also have more innovative models andmethods than other institutions which often resultin higher development impacts than formal andsemi-formal MFIs (See Box 1). They are mostly smalland location specific.To have a better picture of these NGOs, currentdata gathered 12 from ten NGOs willing to shareinformation on their microfinance programs showthat they have around 52,000 member customerswith a total of THB 62.4 million (USD $1.8 M) insavings and THB 243 million (USD $6.9 M) in theirconbined outstanding loan portfolio. The majorityof this was contributed by the World VisionFoundation, who alone has around 31,000 creditcustomers with THB 190 million (USD $5.4 M) inoutstanding loan portfolios (although no savingsservices are offered).ii. Self-help Savings GroupsThe self-help grass-root savings groups in Thailandstarted in 1965 as a joint effort of members andcommunity leaders, a result of the lack of access tothe formal financial services sector. Most of theseself-help savings groups are usually small, locallybased, offer only savings and credit services, andare monitored by their own members. A study 13shows that at the beginning of 2005 there were over48,770 self-help financial service groups around thecountry (an increase from 39,003 groups in 2002),with close to 10 million members (an increase from4.6 million in 2002), and over THB 13 billion (USD $375 M) in savings (an increase from THB 10 billion(USD $291 M) in 2002). According to the Reporton Quality of Life of Rural Thai based on the BasicNeeds Information Year 2007 by CDD, 7,926,620households around the country are membersof at least one of these groups, and 2.3 millionhouseholds or 28.7 percent borrowed from one ofthese groups.Most of these self-help savings groups applyvillage banking or solidarity group methodologies,which have been proven to be the most successfulmodels for Thailand, with varying strategies inraising and mobilising funds. Many of these groupswere started as community development projectswith assistances and supports from NGOs or localgovernment development agencies or monks (SeeBoxes 3 and 4).95 percent of Thailand’s population are Buddhistcommunities, especially in rural areas, and aretypically structured around Buddhist temples (wat).Therefore, there are many successful and uniqueself-help self-reliance savings and credit groupsinitiated by monks around Thailand. Many of thesesavings groups have become best practice casesin microfinance within the country, due to theirinnovative strategies to mobilise resources for thebest benefit of the community (Box 4).12 The data collection was undertaken by staff of the CommonInterest Foundation for the purposes of this paper.13 Paiboon Wattanasiritham, 2003.16 microfinance industry report - THAILAND

Box 4: Impact on WomenNor Ae, as a Karen hill-tribeswoman, has had difficulties accessing financial services from the formal sectorneither banks, government programs nor moneylenders would offer her a loan. Because of her limitedeconomic opportunities, Nor Ae gained employment as a day labourer in the fields of Thai farmers. Savingsof THB50 (USD1.50) per month after she joined the Village Bank in her community in February 2009qualified her for a loan which she used to purchase a small cow. She hopes to sell it for a profit once shefattens it up.Uchin, a rice and longan farmer, also started to save THB50 per month in April 2008 with the Village Bankin her community. Uchin usually buy seeds and fertilizer from the local store on a 10 percent interest permonth credit. She would also have to sell her rice and longan harvest to this same store. When she qualifiedfor a loan, she used it to buy seeds and fertilizer. She not only made significant savings on interest chargesbut also made 36 percent on her savings during her first year. She plans to continue saving to qualify forlarger loans in the future.Matsee sells used items in her local market. Normally, she would borrow funds from the moneylender tobuy large quantities of supplies in a larger market. The local moneylender charges 20 percent per monthin interest. In April 2009, Matsee decided to join her community’s Village Bank and start saving THB30(USD0.86) per month and now qualifies to borrow up to 5,000 baht at interest rates of 2 percent per month.The savings on interest charges will significantly improve her profit margins.Source: Common Interest Foundation.Box 5: Trad Province Savings GroupsThe Trad Province Savings Groups started off in 1990, by a development monk, with 2 Sajja savings groups.Over a decade later at the end of 2002, it had grown to become 157 groups or, generally, one savings groupfor one village in the entire Trad Province. As of 2002, the groups have 47,197 members and a combinedsavings of THB 145 million (USD 4.2 M) as well as THB 29 million (USD 0.8 M) combined welfare funds.Apart from communities’ welfare funds, the Groups also have extended their activities to various otherservices including:>> supporting the conservation and protection of one of the largest mangrove forests in Thailand togetherwith the various marine resources,>> promoting the use of bio-fertilizers to reduce costs in agriculture as well as for better health protectionand improved agricultural production,>> collective bargaining and cooperative arrangements for the purchase and sale of various goods andservices such as rich, molasses (for production of bio-fertilizers), cooking gas, lubricating oil, motor vehicleinsurance service, etc.,>> livelihood training and development programs,>> spiritual enhancement through specific teaching program as well as through the regular monthlycommunal gatherings for the savings and credit transactions.Source: Paiboon Wattanasiritham, 2003.Banking With The Poor Network 17

Apart from providing savings and credit services,these groups also use their surplus profit to setup multi-purpose welfare funds covering health,education, occupation, and support for children,youth, women, elderly, orphans, the disabled,and also folk artists. Some of the Medical ExpenseWelfare Funds of these groups can easily cover thefull medical cost of an artery by-pass operationfor a member. Earlier this decade, many of thesegrassroots savings groups banded together toform networks for various purposes, including thecreation and operation of welfare facilities. Thishas added more avenues for internally-generatedresource mobilisation. A few of the stronger oneshad transformed into community banks under thesupport of GSB or other banks.Often, the key factor behind the success of most ofthese strong groups is the outstanding leadershipand unique charisma of their individual leaders.As such, the groups are vulnerable without anadept leader. Capable successors are also difficultto find in most cases. This is a matter of concernand unresolved for many of these active groups.It is hoped that dependency on one figure can bereduced by a standardized systematic operatingand management system.D. Informal private financial servicesThere are many forms of informal microfinanceresources around the country including savingsgroups similar to the ROSCA groups or locallycalled ‘Share Groups’ 14 which exist in almost everysocial group throughout the country and includevendors’ credit at almost every gold vendor andlocal coffee shop operating like private pawnshops,as well as private money lenders. Some of the illegallending operations provide ‘shark loans’ of interestrates as high as 2 percent per day and some of thebig operations can have circulation flow of fundsreaching THB 200 million (USD $5.7 M).However, the extension of financial services byformal and semi-formal financial institutions hasreplaced a certain level of dependency on localmoney lenders as the main source of funds inrural areas. A survey by the Thailand DevelopmentResearch Institute (TDRI) indicates that the shareof informal sector lending has declined from56 percent in 1985 to 40 percent in 1995 in theNortheastern region. Several research studies inthe early 2000s also confirmed the decrease independency on private money lenders since theimplementation of the government’s VRF programin 2001. In 2006, a survey by the BOT and NSOfound that their share of informal sector lendinghad dropped to 9 percent of total credit market.However, a recent survey by CAD and the Universityof the Thai Chamber of Commerce indicated thatinformal lending has increased to 20 percent inearly 2009. This study also found an increasing trendof informal sector debt among low-income peopleleading into 2010.14 See features of Thailand’s share game at http://www.gdrc.org/icm/sher.html18 microfinance industry report - THAILAND

3. Challenges and OpportunitiesCurrently, there are still a few constraints forMFIs in Thailand. However, it is hoped that theimplementation of new Microfinance Master Planshould ease many of these constraints and openup more opportunities for the new players. The keyconstraints are as follows:i. Subsidised creditsThe above discussion reveals that access tosubsidised low interest rate credits for the poorremains a problem in Thailand, but is different frommany other countries. The problem is chiefly theproliferation of too much subsidised credit frommultiple sources. Such credit is often used for nonincomegenerating items and activities, which leadsto an inability to pay existing debts. Therefore overindebtednessoften results from poor clients seekingnew and more loans, and most of the time, withhigher interest rate from private money lenders, torepay their earlier debts. Thus, this leads to deeperindebtedness as the cycle would continue.To make things worse, apart from injecting moresubsidised lower interest loans for the poor, theThai government helped to lift these overwhelmeddebt problems of the poor by introduced debtrestructuring, a debt moratorium, and debtforgiving programs. These are very sensitive anddelicate tools to apply in microfinance, becausethey send the wrong signal to poor borrowersthat deferring payments on their loans or evendefaulting are acceptable practices.From the microfinance perspective, the practices ofthe Thai government are considered to be unfair toother MFIs and are unconducive to promoting anattractive environment for others players to enterinto this market. Such practices are also hinderingthe growth of the microfinance sector in Thailand.The Thai government should therefore reconsiderthe broad impact of such policies, which canhamper both poor borrowers themselves and themicrofinance industry as a whole.ii. Sustainable interest ratesInterest rates charged by most semi-formal MFIs inThailand span a wide range; from 10 percent to 24percent per annum. Although the BOT had lifted allinterest rate ceilings for formal financial institutionsin 1992, it still stipulates a 15 percent per annuminterest rate on personal loans from NBFIs andprivate individuals, capped at 28 percent per annuminclusive of all related fees. For credit card services,banks usually charge additional penalty interest onlate payment, which increases the total interest rateto the maximum level of personal loans. As such,Thailand is likely to be one of the very few countries,if not the only country, where interest rates chargedby MFIs are lower than banks.Because of high competition from subsidised lowinterest rate credits provided by the government,it is difficult for non-government MFIs to increasetheir credit interest to a sustainable rate. It is hopedthat soon-to-be implemented regulations will openup the microfinance market and the governmentwill assume a more regulatory role and level theplaying field in order to attract more investors andplayers into the country’s microfinance industry.iii. Reliable informationInformation asymmetry has been one of the keyconstraints in microfinance industry around theworld. It is common practice for borrowers toseek loans from multiple sources. But the lack ofappropriate market and customer credit informationin the microfinance business makes it difficult foran MFI to determine whether a loan applicantalready has a loan outstanding with other financialprovider(s), or whether he/she is blacklisted for badrepayment records or defaulted on prior loans.There is, however, some hope in this regard.The BOT is considering, as part of the upcomingMicrofinance Master Plan, to set up a separatemicrofinance credit bureau in conjunction tothe current existing credit bureau office. Even ifthis occurs, it is expected several years would berequired for any microfinance credit bureau tobecome fully functional.Banking With The Poor Network 19

iv. FraudThough fraud is a common concern among MFIsand cannot be eliminated entirely, it can certainly bemitigated. It is not uncommon among semi-formaland independent MFIs in Thailand for managers todisappear with a large sum of their operating funds.Several more focused development impact studiesalso found that most of the clients being reached byformal and semi-formal MFIs were wealthier peoplein the communities. It is also not unusual to findmany of these wealthier groups were in leadershippositions of the community or committees offinancial services projects. It is possible thereforefor these wealthy groups to secure large loans atbetter interest rates, and then to lend that sum outto poorer people at higher rates, especially thosewho are in need of money and/or having difficultiesaccessing loans or getting timely loans from othersources.Standardised and proper management systemscan help prevent and reduce fraud incidents inthe microfinance industry as it did for all formalfinancial institutions.v. Lack of appropriate legal entity for MFIsThe microfinance business is different fromthe traditional financial business transactionsundertaken by commercial financial institutions(both bank and non-bank) that provide variousfinancial services or the BAAC or cooperatives, not tomention foundations and associations or businessoperations. Therefore, there is no appropriate legalentity that is suitable for microfinance operationsunder current laws in Thailand 15 . The best supportformat currently is the non-bank lending company.However, it requires a minimum registered and paidup capital of THB 50 million (≈USD 1.4 M) underexisting law and is quite high for many existing MFIs.From the CIs’ point of view, the currentcomplicated top-down regulations are burdeningmanagement rather than supporting the growthof CIs. As in the case of saving-for-productiongroups mentioned earlier, operating without acooperativetitle gives them much more flexibilityto better serve their members at lower costs andreduce unnecessary work.The MOF and the BOT has planned, under thecountry first Microfinance Master Plan, to relax severalfinancial regulations, along with new regulationsfor microfinance players. It has to consider whetherany conditions or factors in the plan will supportand allow MFIs in carry out their full potential. TheMOF and BOT also need to consider how the newregulations will affect the whole financial system.Nonetheless, microfinance must still exist to meet theneeds of those who do not have access to financialservices and must rely on informal debt, which resultsin higher interest rate.vi. Institutional capabilityThe high turnover of management amongcooperatives and dependency on individualleaders among savings groups have been mattersof concern for the future performance of manyMFIs. Dealing with these challenges as well as withthe design and implementation of microfinanceproducts and services raises many questions aboutthe technical mechanisms and the institutionalcapabilities required, including but not limited to,qualified staff and ability to design products withclient participation. Closure of MFIs for any of thesereasons can create negative impact on poor clientsin the communities they aimed to serve.The BOT plans to promote technical assistanceunder the first Microfinance Master Plan so as toincrease the institutional capability of existing semiformaland self-help MFIs.15 See institutional options for microfinance activities in Thailand at www.microfinancethailand.com/docs/institutional_options.pdf.20 microfinance industry report - THAILAND

vii. Fund management and investmentopportunitiesMFIs have faced many challenges in fundmanagement, even with capable professionalmanagement personnel. While some MFIs use theextra income for additional lending activities, otherssee themselves trapped by the limited investmentopportunities they face under the governing laws aswell as a lack of the required knowledge and skills.Foundations and associations, which are the legalform of most NGO MFIs, are subject to a 15 percenttax on interest received from savings; furthermore,foundations are not permitted to do business.The current Cooperative law also preventscooperatives from offering loans to non-membersand limits investment opportunities on excess fundsin hands. Hence, many cooperatives and savingsgroups have substantial amount of unused funds,while others lack funds to respond to unmet creditdemands among their members.Future Prospects of the MicrofinanceMaster PlanThe Microfinance Master Plan will relax somefinancial regulations to attract commercial banks andnew players into the industry. Is is hoped that theseproposed changes will not only increase financialaccess to low income families, but contribute to anarrowing of the national income gap.However, it is normal to have mixed opinions fromthe perspective of current MFIs. While commercialbanks are more open to the prospect, developmentfocused MFIs are concerned that the profitorientation of commercial banks might overtakethe focus on social responsibility and communitydevelopment aspect of MFIs.. International NGOMFIs are looking forward to the relaxation ofregulations but CIs and SGs are concerned aboutlosing the flexibility they currently have if they areforced to operate under the new law. Many are alsoconcerned about ceding control to the professionalcommercial banks or foreign expert MFIs they mighthave to link up with in order to survive.The liberalisation of financial institutions can bea double-edged sword, resulting in both gainsand losses, depending on how prudently theseinstitutions exercise their new-found freedom inhandling portfolios. MFIs must bear in mind atall times that greater liberty carries with it morerisks which, if not well-managed, may backfire tooutstrip any initial gains. Nevertheless, increasedcompetition with respect to interest rates andcredit availability pushes financial intermediaries toimprove and professionalise their services.Banking With The Poor Network 21

4. References>> Bank of Agriculture and Agricultural Cooperatives.2003 to 2008. Annual Report, www.baac.or.th.> > Bank of Thailand. 2009a. Credit Conditions ofFinancial Institutions. Economic Intelligence Team,Domestic Economic Department, Monetary PolicyGroup. August 2009.> > ____________. 2009b. Ray Ngarn Naew NomeTurakit (Business Report). Economic/BusinessInformation Exchange Programme Betweenthe Bank of Thailand and the Business Sector,Domestic Economic Group. June 2009.> > ____________. 2009c. Thailand’s Economic andMonetary Conditions in 2008. Monetary PolicyGroup, March 2009.>> Bawornphan Achakul and Warawan Chanduaiwit.2007. “Karn Pramern Phol Kratob Khong KongthunMoo Baan Tor Kwaam Yak Joon” (Evaluation onimpact of the Village Funds on Poverty). Paper byGroup 1 - Credit to Alleviate Economic Problemof the Poor, presented at the Seminar on How toSolve Poverty Problems: Competition, Distribution orWelfare, organized by the Chai Pattaya Foundationand Thailand Development Research InstituteFoundation, 10-11 November 2007.>> Chaiyasidh Anuchiwarawong. 2007. “Okad Tee JaKao Tuung Laank Sinchuae Kab Karn Lod PanhaKhawm Yak Joon” (Credit Access Opportunitiesand Poverty Reduction). Presentation by Group1 - Credit to Alleviate Economic Problem of thePoor, presented at the Seminar on How to SolvePoverty Problems: Competition, Distribution orWelfare, organized by the Chai Pattaya Foundationand Thailand Development Research InstituteFoundation, 10-11 November 2007.>> Chodechai Suwanaporn. 2006. “Trends ofNon-Bank Financial Businesses: Developmentand Regulation.” Worasan Karn Ngern KarnKlang (Money and Finance Magazine). FiscalPolicy Office, Ministry of Finance of Thailand.19(59/2549). pp. 76-83.>> Coleman, Brett E. 2006. “Microfinance in NortheastThailand: Who Benefits and How Much?” WorldDevelopment. 34(9), pp. 1612-1638. http://qed.econ.queensu.ca/pub/faculty/lloyd-ellis/econ435/readings/coleman2006.pdf.>> Conroy, Dr. John, 2004. “APEC and SpecializedFinancial Institutions: The Influence ofThaksinomics”, The Foundation for DevelopmentCooperation, Australia.>> Committee on Quality of Life Development.2007a. Raay Ngarn Moo Baan Chonnabot Thai Pee2550 (Rural Thai Villages Report 2007), CommunityDevelopment Department, Ministry of Interior ofThailand.> > ____________. 2007b. Raay Ngarn KhunnapapCheewit Khoon Chonnabot Thai Jak Kor Moon KaumJampen Puentan (Jo Por Tor) Pee 2550 (Report onQuality of Life of Rural Thai based on the Basic NeedsInformation Year 2007), Community DevelopmentDepartment, Ministry of Interior of Thailand.>> Cooperative Auditing Department. 2006 to 2009.Financial Condition Report, www.cad.go.th.> > _____________. 2009a. Financial Conditionof Cooperative Institutions and Farmers Groupin Thailand 2008, Ministry of Agriculture andCooperatives of Thailand.>> _____________. 2009b. “Moong Phan Sahakorn:Sathanakarn Nee Kraow Ruaen Nai Raduab ThanRak (Looking through Cooperative Institutions:Debt Situation of Low-income Households).”by Center for Economic and Business Forecast,University of the Thai Chamber of Commerce.http://203.154.183.18/ewt/cadweb_org/ewt_news.php?nid=5815&filename=sk.>> Fiscal Policy Office. 2005a. “Rak Than Tee YangYuean Khong Karn Ngern Than Rak” (TheSustainable Foundation of Microfinance). FPOWeekly Review, No. 49/49, 27 December 2005issue.>> ____________. 2005b. “Paan Mae Boat KarnNgern Radub Tan Rak” (Microfinance MasterPlan), Ministry of Finance, www.fpo.go.th/pdf/financepercent20basispercent20model.pdf>> ____________. 2005c. “Paan Mae Boat KarnNgern Radub Tan Rak” (Microfinance Master Plan).Presentation, Seminar on Microfinance MasterPlan. Ministry of Finance. 14 July 2005.22 microfinance industry report - THAILAND

Global Development Research Center. Undated.Thailand’s Sher Game. http://www.gdrc.org/icm/sher.html.>> Jirawan Boonperm, Jonathan Haughton, andShahidur R. Khandker. 2007. “Does the VillageFund Matter in Thailand?” Policy Research WorkingPaper No. 5011, The World Bank, DevelopmentResearch Group, Sustainable Rural and UrbanDevelopment Team.>> Kaboski, Joseph P. and Robert M. Townsend. 2009.“The Impacts of Credit on Village Economies.”Working Paper No. 09-13, Massachusetts Instituteof Technology, Department of Economics, USA.>> Marketeer. 2009. ”Kasikornthai Kao Jub Talad SincheurKlum SME Mai” (Kasikronthai eyeing creditfor new SMEs market). Marketeer Online. 11 June2009. www.marketeer.co.th/marketeertoday_detail.php?marketeertoday_id=1171.>> Menkhoff, Lukas and Ornsiri Rungruxsirivorn.2009. “Village Funds in the Rural Credit Marketof Thailand.” Department of Economics, LeibnizUniversitaet Hannover, Germany.>> National Statistical Office. 2007. “The 2007Household Socio-Economic Survey’” www.nso.go.th.>> ____________. 2008. “Core Social Indicators ofThailand 2008.” www.nso.go.th.>> Nattapon Dejvitak. 2006. “The Role of SME Bank inThailand.” Presentation. SME Development Bankof Thailand, 16 February 2006>> Office of the National Economic and SocialDevelopment Board. 2007a. “Thailand’s OfficialPoverty Lines.” Office of the Prime Minister,Thailand.>> ____________. 2007b. “Households Income,Expenditure, and Debt Report.” Office of the PrimeMinister, Thailand.>> Paiboon Wattanasiritham. 2003. “A People-Centered Approach to Resource Mobilization inThailand.” Paper presented at the 4th InternationalWorkshop on Resource Mobilisation, 5-8 May2003, Bangkok.>> Payaow Kimpatom. 2009. “Pawa Settakit SahakornLeea Klum Kasettakorn: Chung Kraung ReakPee 2552” (Economic situation of cooperativeinstitutions and farmers group: First half-year2009). Cooperative Auditing Department,http://203.154.183.18/ewt/cadweb_org/ewt_news.php?nid=6704>> ____________.“Pawa Settakit Sahakorn Leea KlumKasettakorn Pee 2550” (2007 Economic situationof cooperative institutions and farmers group).Undated. Cooperative Auditing Department,http://203.154.183.18/ewt/cadweb_org/ewt_news.php?nid=3376>> Plearnpit Satsangwan. 2006. “Sathaban KarnNgern Chapoaw Kit: Kreang Muue Khong NayobaiRat Nai Karn Khao Toung Poo Tee Mai Dai RubBorikarn Jak Thanakarn Panich” (SpecializedFinancial Institutions: A Polity Tool to Fill the GapLeft by Commercial Banks?). paper presentedat the annual seminar organized by The ChaiPattana Foundation, the Bank of Thailand,Rural Community Organizations DevelopmentInstitution, The National Economic and SocialAdvisory Council, Office of the National Economicand Social Development Board, and The ThailandDevelopment and Research Institute Foundation,Thailand. 9-10 December 2006.>> ____________ and Sukanda Lewis. 2008.Thailand’s Financial and Banking Systems. Facultyof Economics, Thammasat University. Bangkok.>> Somboon Jitpentom. 2009. “Paan Pattana RaboobSataban Karn Ngern Chabub Tee 2” (The 2ndFinancial Sector Master Plan). Thansettakit, 17-19September 2009 issue.>> Tientip Subhanij. 2009. “Household sector andmonetary policy implications: Thailand’s recentexperience.” Bank of Thailand Discussion Paper,DP/06/2009..> > Walaitat Worakul. 2006. Thailand Best Practices andLessons Learned Community-based Microfinance: AnEmpowering Approach Towards Poverty Alleviationand Community Self-Reliance, UNDP Thailand andMinistry of Foreign Affairs of Thailand.Banking With The Poor Network 23

EDITED BY JAMIE BEDSONTHE FOUNDATION FOR DEVELOPMENT COOPERATION & CITI FOUNDATIONEDITED BY STUART MATHISONTHE FOUNDATION FOR DEVELOPMENT COOPERATION & CITIGROUP FOUNDATION2008Produced by The Banking with the Poor Network in collaboration with the SEEP NetworkFunded by the Citi Foundation as an activity of the Citi Network Strengthening Program2009Produced by The Banking with the Poor Network in collaboration with the SEEP NetworkFunded by the Citi Foundation as an activity of the Citi Network Strengthening Program2010Produced by the Banking with the Poor Network in collaboration withthe Foundation for Development Cooperation.Funded by the Citi Foundation as an activity of the Citi Network Strengthening Program.้่อคนยากจน้Indonesiaป ร ะ เ ท ศ ไ ท ย20102009Produced by The Banking with the Poor Network in collaboration with the SEEP NetworkFunded by the Citi Foundation as an activity of the Citi Network Strengthening Program2009Produced by The Banking with the Poor Network in collaboration with the SEEP NetworkFunded by the Citi Foundation as an activity of the Citi Network Strengthening Program2010Produced by the Banking with the Poor Network in collaboration withthe Foundation for Development Cooperation.Funded by the Citi Foundation as an activity of the Citi Network Strengthening Program.Produced by The Banking with the Poor Network in collaboration with the SEEP NetworkFunded by the Citi Foundation as an activity of the Citi Network Strengthening ProgramPla ning2009Ministry ofFinance andPlanningSri Lankan – German Development CooperationPublished by ACTED and the Banking with the Poor Network in collaborationwith the Foundation for Development Cooperation.Produced by GTZ ProMiS in collaboration with The Banking With The Poor Network2010Funded by the Citi Foundation as an activity of the Citi Network Strengthening Project and ACTEDPla ningOther PublicationsMicrofinance Industry Reports in this seriesMICROFINANCE INDUSTRY REPORTVietnamBáo cáo đánh giá về ngành tài chính vi môViệt NamTháNg 7/2008MICROFINANCE INDUSTRY REPORTNepalMicrofinance Industry Reports(Vietnam, Nepal, Indonesia,Bangladesh, Sri Lanka, Thailand,Lao People’s Democratic Republic,Myanmar and translations), 2008-2009.Available on CD ROM and online.Do mạng lưới ngân hàng phục vụ người nghèo xuất bản vớisự hợp tác của SEEP networkđược tài trợ bởi citi Foundation như một hoạt động củachương trình tăng cường mạng lưới của citiProduced by The Banking with the Poor Network in co laboration with the SEEP NetworkFunded by the Citi Foundation as an activity of the Citi Network Strengthening ProgramAvailable from the BWTP Network websitewww.bwtp.orgMICROFINANCE INDUSTRY REPORTIndonesiaMICROFINANCE INDUSTRY REPORTBangladeshLaporan IndustrI Keuangan MIKroditerbitkan oleh Banking with the poor networkBekerjasama dengan seep networkpendanaan oleh Citi Foundation sebagai bagiankegiatan dari Citi network strengthening programIndonesia_Cover_Translation.in d 1 15/05/2 09 8:35:15 AM2009Produced by The Banking with the Poor Network in co laboration with the SEEP NetworkFunded by the Citi Foundation as an activity of the Citi Network Strengthening ProgramBangladesh_Cover_Translation.in d 1 18/05/2009 7:17: 2 PMProduced by GTZ ProMiS in collaboration with The Banking With The Poor NetworkMinistry ofFinance andSri Lankan – German Development CooperationMicrofinance Industry ReportSRI LANKASri_Lanka_Sinhala.in d 1 13/05/2009 2:47:15 PMProduced by GTZ ProMiS in collaboration with The Banking With The Poor NetworkMinistry ofFinance andSri Lankan – German Development CooperationSri_Lanka_Tamil.in d 1 18/05/2 09 6:05:24 PMMICROFINANCE INDUSTRY REPORTThailandMICROFINANCE INDUSTRY REPORTLao People’sDemocratic RepublicMICROFINANCE INDUSTRY REPORTMyanmarรายงานสภาวการณ์ภาคการเง ิ นระด ับฐานรากจัดทำโดย เครือข่ายสถาบันการเงินเพืร่วมมือกับ มูลนิธิเพืภายใต้โครงการสร้างความเข้มแข็งให้เครือข่ายของซิตี่อความร่วมมือด้านการพัฒนาสนับสนุนโดย มูลนิธิซิตีOther BWTP Network / FDC PublicationsCapacity Building for Partnerships in Microfinance Trainer’s ManualCapacity Building forPartnerships in MicrofinanceTrainer’s ManualCapacity Building for Partnerships inMicrofinance Trainer’s ManualJamie Bedson (Ed.), 2008ISBN: 978-0-9804698-1-3Available online and for purchase on CD ROM.ISBN: 978-0-9804698-2-0MICROFINANCE IN ASIATrends, Challenges and OpportunitiesMicrofinance in Asia: Trends,Challenges and OpportunitiesJamie Bedson (Ed.), 2009.Available on CD ROM and online.Microfinance and Disaster Management Volume 2 - Participant’s Manual 2006Microfinance and Disaster ManagementVolume 2 - Participant’s Manual2006Microfinance and Disaster ManagementTrainer’s ManualStuart Mathison (Ed.), 2006Available for purchase and online.ISBN: 0-9586728-9-XGetting the Framework RightPaul B. McGuire, John D. Conroy,Ganesh B. Thapa (Eds.), 1998Available for purchase throughthe Foundation for DevelopmentCooperation website.ISBN: 0-9586728-3-0Available from the BWTP Network websitewww.bwtp.org24 microfinance industry report - THAILAND

Banking With The Poor Network 25

The Banking With the Poor Network SecretariatThe Foundation for Development Cooperation (Singapore) Ltd81 Anson RoadSuite 8.03 & Suite 8.05Singapore 079908Tel: + 65 6438 4112 Email: info@bwtp.org Web: www.bwtp.orgTo achieve greater financial inclusion in Asia