45425 GREAT EXPECTATIONS BUT DISAPPOINTING RESULTS WHAT WENT WRONG WITH THE CAMBODIA INSTITUTE OF BANKING ? MARGARETE O. BIALLAS There were great expectations of success in January 2004 when IFC's multidonor advisory initiative, the Mekong Private Sector Development Facility (IFC MPDF) launched the Cambodia Institute of Banking (CIB), Cambodia's first training center for the finance industry. There was obvious need, the Association of Banks in Cambodia was backing CIB with members' own money, and IFC advisory staff were well qualified to help launch and advise CIB after three years of advising a similar, successful institution in Vietnam. So, with many good reasons for success, why was CIB a disappointment, and what lessons can be learned from this? Background There were good reasons for thinking the Cambodia Institute of Banking would succeed. First, Cambodia's fledgling commercial finance industry was growing fast. But after decades of war and isolation that only ended in the 1990s, banks and microfinance institutions (MFIs) were held back by a lack of qualified staff. Only 40 percent of Cambodians were served by Second, CIB would have no real competition. the finance industry, and services were limited to Periodically, one donor or another ran a short individual loans secured by property of much course on some aspect of banking, but there were greater value, group loans, deposits, and transfers. few of these courses, they reached only a fraction As a result, small and medium enterprises (SMEs), of potential trainees, and with high-priced foreign which make up more than 95 percent of consultants giving the courses, and donors Cambodia's private sector, lacked the financing subsidizing these costs, the approach was not and financial services they needed to improve and sustainable. By using international experts to expand their businesses and make a greater develop curricula in partnership with local trainers contribution to job creation and economic who would then give the courses, CIB expected to development. offer international-standard training at a price that local banks and MFIs could afford. With surveys of SMEs listing access to finance as their chief constraint, IFC MPDF made increasing Third, CIB had strong government and industry access to finance a priority. Along with improving support. The National Bank of Cambodia and the governance and managerial systems in leading Ministry of Finance both saw the need for a institutions, and helping to attract longer-term permanent institution with capacity to train all levels international financing, advisory staff also provided of banking staff. In addition, seven prominent on-the-job training for loan officers. members of the Association of Banks in Cambodia (ABC) each pledged $10,000 to launch CIB, and SmartLessons, November 2007 1 ABC itself gave the new institution free office space CIB had three core functions: in its building. · Product development: developing or Fourth, IFC MPDF had prior bank training localizing international-standard but locally experience. In 2001, in collaboration with a affordable training materials, software consortium of nine Vietnamese commercial banks, applications, and certification programs. IFC MPDF helped launch--and continued to · Trainer development: identifying capable, advise--the Bank Training Center (BTC) in Ho Chi locally based trainers and developing their Minh City. After three years of operations, there capacity. was strong and growing demand for BTC courses, and it was progressing well toward spin-off (July · Market development: promoting CIB's brand 2006). BTC not only showed the way for CIB, but through industry events and media relations. also had curricula that potentially could be adapted for Cambodia at a very reasonable cost. The With so many promising reasons for success, experience with BTC versus the ongoing work with why didn't CIB succeed? individual institutions in Cambodia also showed that "wholesaling" through a bank training Board members must be chosen with care, institution was far more cost-efficient and understand their responsibilities well, and commit sustainable than developing capacity in a few to fulfilling them. institutions. Initially, members of CIB's board were very committed to participation. But they were all busy The final reason for optimism was the CEOs of large banks and had little time to devote availability of a capable adviser who had to CIB. They were also unwilling to contribute more experience with banking, curriculum design, and money in order to pay the salary required to recruit training delivery. His role was to help CIB recruit a competent general manager. Instead, board staff and consultants, set up office procedures, members continued to manage the institute as best install an accounting system, and oversee needs they could. With no strong direction from the top, assessment, curriculum development, training of CIB lacked a strategic plan, a business plan, or trainers, and marketing and delivery of courses. secure financing, and little was done to promote CIB to the banking community. Lesson learned: The role and time requirements of board members must be made very clear upfront. Lack of qualified staff was a challenge for CIB. Finding a qualified local manager and trainers turned out to be much more difficult than expected. Although a capable local manager was finally identified after several rounds of recruiting, the salary offered was too low and the recruitment fell through. CIB also found it difficult to recruit capable trainers. The Bank Training Center in Vietnam had CIB was set up with two objectives: 1) to introduce much better success in recruiting both a manager international-standard bank training that would be and associate trainers, because the overall level of locally affordable and subsidize the development of education in Vietnam is much higher and the the curriculum and local trainers; and 2) to build a finance sector is much larger and better developed. sustainable institution that would become self- sufficient after a few years of advisory services. Lesson learned: Although CIB's board preferred to have the institute managed by IFC MPDF's adviser, in retrospect, to achieve sustainability, CIB should have been managed by a Cambodian from SmartLessons, November 2007 2 the start, with coaching from the adviser. Also, the three years, and this finally led IFC MPDF to salary needed to recruit a capable manager should withdraw its support. CIB is still operating under the have been in place from the beginning, and ABC Association of Bankers in Cambodia, and if donors should have played a greater role in finding a are willing to provide the funding, training materials, manager. In addition, CIB should have more and staff resources, CIB will organize courses on actively drawn on its shareholders to develop a an ad hoc basis. local network of associate trainers and invested more in training the trainers. Replication of a good model is no guarantee of success, if demand assumptions are wrong. CIB appeared to have very good prospects for success. The IFC-MPDF-supported Bank Training Center was showing success in Vietnam, a bank- training needs assessment conducted in Cambodia in July 2003 showed great need, and the banking industry appeared to be committed to sending their staff. For these reasons, IFC MPDF concluded that there would be sufficient demand, even in a relatively small market. This conclusion turned out Lesson learned: Be realistic about demand and to be wrong. In 2003, banks and MFIs in Cambodia the willingness of target beneficiaries--in this case, employed a total of 2,300 people, with top and banks--to pay market prices and other associated middle managers accounting for only about 8 costs. This is particularly important in a market percent of all employees. Although the number of flush with donor funding that will subsidize the employees was growing, it turned out not to be costs of training. realistic to project that all banks would send 65 percent of their employees to at least one three- CIB's pricing policies were not realistic. day training program, or send a smaller percentage It was a mistake for CIB to apply the same $30 fee of employees to a number of programs. per training day for all courses regardless of the type of employee being trained. Banks were much less likely to spend $120 for a four-day course for tellers or clerks who earned only $960 per year. On the other hand, $120 was too low for training a senior loan officer whose annual salary was over $4,000. Unfortunately, although a tiered pricing structure was planned as the project evolved, it was implemented too late. Lesson learned: CIB should have introduced a tiered pricing structure from the beginning and charged much higher prices for senior staff, because these prices would still be far below the cost of sending senior staff abroad for training. Although some banks patronized CIB and sent staff Tiered pricing would have taken into account the to all 27 courses offered, not all banks were willing high costs of overseas training as well as the local to do so. Some sent staff only a few times, and salary structure. other banks never participated at all--particularly rural banks, whose costs for participation were CIB's projections for reaching the break-even point significantly higher. In addition to course fees, rural were overly ambitious. banks had to pay trainees' travel and The business plan projected that CIB would break accommodation costs. With enrollments well below even in its fourth year, based on the assumption expectations, CIB was far from breaking even after SmartLessons, November 2007 3 that CIB would offer 60 three-day courses for a money, because many more enterprises can be total of 1,500 training participants, each paying $30 served. But the approach is based on several per training day. This target was not reached for important assumptions that should not be two reasons. First, with its pricing, the organization underestimated. The market must be large enough; was not covering the variable (direct) costs of financing must be sufficient; and the sponsor must training, let alone its fixed costs. Increasing be committed and provide enough funding. Also, throughput would only increase the deficit. The Board members must have the right skills and plan envisaged slowly increasing prices over time; enough time, and be willing to serve for several however, this was blocked by CIB's Board. They years. And in a frontier, postconflict country like felt that their banks had already contributed Cambodia, where qualified staff are in short supply, enough by capitalizing CIB. A second problem, as the time frame for spin-off must be much longer. already stated, was the limited size of the market. In retrospect, given the Cambodian situation, IFC Lesson learned: Given the much smaller market MPDF would have been better advised to focus on in Cambodia, the deadline for achieving financial its first objective for CIB--that of developing the self-sufficiency should have been much longer for demand for international-standard finance industry CIB than it was for the Bank Training Center in training at locally affordable prices. Rather than Vietnam. Even BTC did not reach the break-even spend time establishing an institution, IFC MPDF point on a cash-flow basis until a full six years after should have focused on bringing demand-driven its establishment. Also, CIB should have tried professional training to Cambodia by effectively harder to lower its costs early on by developing the promoting the need for training to the finance capacity of local trainers, rather than relying so industry as a crucial investment. Finally, industry much on costly international trainers. commitment should have been achieved from the start through an appropriate cost-sharing Conclusion arrangement, while institutional sustainability should only have been considered once the market Establishing business development service was well established. providers such as CIB is a good use of donor ---------------------------------------------------------------- Relevant Resources: Go to www.mpdf.org to download the fact sheet and the financial sector diagnostic for Cambodia. Additional information is also available from Transaction Leader Pak Sereivathana (PSereivathana@ifc.org). About the Author Margarete O. Biallas, the manager of IFC MPDF's Access to Finance Program, is based in Hanoi, Vietnam, and is responsible for financial markets advisory services in Vietnam, Cambodia, and Lao PDR. Prior to joining IFC, Margarete worked for 10 years with KfW. Margarete has previously worked with IFC's SME Department and the financial markets group for Eastern Europe. For further questions, contact mbiallas@ifc.org. Ann Bishop, Communications Advisor, IFC MPDF, edited this note. Approving Manager: Trang Nguyen, Acting General Manager, IFC MPDF. DISCLAIMER IFC SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/smartlessons or contact the program at smartlessons@ifc.org. SmartLessons, November 2007 4