Advanced Bank of Asia has publicly announced its first ever loan agreement that did not require any fixed assets as collateral, a benchmark agreement in a country where such financing is particularly rare.
The loan, worth $300,000, was given to Choice Taxi Company, a South Korean venture that started operations in Phnom Penh in October and, with help from the loan, bought 20 metered cabs made by Kia Motors Corp.
“In Cambodian financial culture, [banks] often ask for land rights or some property as collateral,” said Choi Dae-yong, general director for Choice Taxi Company, adding that the loan agreement had been made on the back of ABA Bank’s optimistic outlook for the Cambodian taxi market.
“ABA is more active than other banks,” he said. “They wanted to consider the project and invest in it.”
Mr Choi declined to reveal the interest rate charged on the loan.
The decision by ABA to finance Choice Taxi Company without collateral is a rare one. Availability and access to loans remain limited, in no small part because of a lack of confidence in the legal system and business environment.
Prior to the deal, Mr Choi said his company had tried to acquire a loan from three other banks in Cambodia—one Korean bank and two local banks—all of which had asked for some form of collateral.
The ABA loan funded around 70 percent of Choice Taxi Company’s investment, with the remaining 30 percent coming from Trans-Choice Cambodia, which wholly owns the operation.
“Vision and commitment are essential for any new business to succeed, but not always enough to convince banks to consider these qualities as tangible assets,” the bank said in a statement released last week.
“In today’s difficult economic climate, securing finance generally requires hard assets as security that new ventures may find difficult to provide.”
“When seeking support, Mr Choi contacted many financial institutions including Korean banks. However, as there was no historical data on the taxi industry, the banks were conservative, feared risk and required hard assets as security,” the statement continued.
John Brinsden, vice-chairman of Acleda Bank, said whether or not ABA’s uncollateralized loan agreement was a sign of looser credit conditions in the banking sector was uncertain.
Narrow access to financing is still common in Cambodia, unlike neighboring countries like Thailand and Vietnam, where lending by banks is nearly equal to the country’s entire GDP, he said.
“We’re not under any pressure to start uncollateralized lending,” said Mr Brinsden, adding that the loan portfolio at Acleda Bank was continuously growing, even as tight credit conditions remain.
However, Mr Brinsden said the decision by ABA to lend money in this fashion did appear to represent a new strategy.
Steven Higgins, CEO of ANZ Royal Bank, said that the provision of sound collateral as a security to a loan was commonplace worldwide and is considered as standard banking practice when averting risk.
Still, assessing the solidity of a company’s business plan “should take absolute priority” when lending money, he said.
“That is what the [National Bank of Cambodia] is pushing the banks to do. You want customers where the cash flow will repay the loan rather than their security,” he added.
Choice Taxi Company is the second operation of its kind to operate in the capital.
Mr Choi said the taxi market was steadily growing, with many clients realizing that the price for a short taxi ride can compete with the fare for a tuk-tuk. Choice Taxi Company currently charges customers $0.10 for each 150 meters, with a minimum $1 fare.
