Getting a loan in Cambodia has historically been easier said than done. And even as the economy makes further inroads into international markets, availability and access to loans remain very limited, in no small part because of a lack of confidence in the legal system, experts say.
According to 2008 figures from the International Monetary Fund, banks in Cambodia lent the equivalent of 24 percent of the country’s gross domestic product, a remarkably low figure when compared to other developing countries. Last year in neighboring Vietnam and Thailand, for example, lending by banks equaled 91 and 94 percent of GDP respectively.
“Access to credit has been a perennial problem in Cambodia, from the earliest days until now,” said Bretton Sciaroni, a partner at Sciaroni & Associates, a law firm that advises businesses considering doing business in Cambodia. “In talking to businessmen, they frequently mention the lack of credit as a constraint on expanding business operations.”
Mr Sciaroni said that a significant reason for such low lending activity is that most deposits are short-term deposits, and banks are understandably reluctant to make long-term loans on the basis of those deposits.
Mr Sciaroni, along with other experts, said that by far the most worrisome factor regarding access to credit is confidence in Cambodia’s judicial system.
“The problem occurs when there is a default on the loan, and the bank is required to get a court judgment and then enforce it. Most banks are reluctant to subject their loans to the vagaries of litigation,” Mr Sciaroni said.
Nonetheless, as banks across the world try and re-establish confidence in the millions of customers who have lost so much from the global economic crisis, Cambodia’s banking sector is looking relatively robust. All four of the countries top commercial banks remain profitable.
In Channy, CEO of Cambodia’s largest commercial bank, Acleda, says there is so much room for growth inside the economy that lending activities could increase threefold.
Acleda provides nearly a quarter of all loans in the banking sector, second only to Cambodia Public Bank, which begs the question of why in a country with more than 30 commercial and specialized banks there is not considerably more loan activity?
Lending activity is “very low when compared to other developing countries like Vietnam and India,” Mr Channy said in a recent interview at Acleda’s headquarters in Phnom Penh. He added that, ideally, he would expect banks to be lending up to 80 percent of GDP.
Phan Ying Thong, country head of Cambodia Public Bank, the country’s largest lender with a 26 percent share of the market’s outstanding loans, agreed that the main reason for the reduced levels of lending in Cambodia is related to weaknesses in the legal system.
“It takes a long time for us to recover our loan if it is a bad loan. In the case of more developed countries like Malaysia, the process of recovery is quite structured,” he said. “The main problem is linked to the law.”
“Banks usually ask for fully secure loans so that problems can be mitigated,” he said, adding that they also need a substantial amount of collateral.
“Not many people here are in that situation,” he noted.
Cambodia Public Bank, unlike Acleda, targets much larger businesses, particularly in the import-export, wholesales and retail industry. The bank’s average loan size is $750,000.
Mr Ying Thong believes that banks should loan more, but admits this can only happen if Cambodia’s legal system generates enough confidence.
Tal Nay Im, deputy governor of the National Bank of Cambodia, said that the national bank could not do anything to encourage private banks to provide more loans to people.
“It is their right to do what they want, to loan or not. We can not do anything on that matter,” she said.
According to John Nelmes, Cambodia resident representative of the IMF, “The level of financial intermediation in Cambodia is much lower than in neighboring countries, however, keep in mind that the pace at which lending rises has implications for macroeconomic stability and banking sector soundness. Too fast and risks of overheating and inflation arise, as we saw in 2007 and early 2008 in Cambodia, and risks that loans will be extended to borrowers who can not pay back.”
Julia Brickell, resident representative at the International Finance Corporation, the World Bank’s private investment arm, said that there are a number of issues that may constrain access to finance, including legal investor protection and availability of credit information.
A review carried out in 2006 by the World Bank Group showed that credit access can rise after improvements in both creditor rights and in information sharing.
“Where legal systems exist to allow fair, timely and cost-effective methods of enforcing creditor rights, lenders are more comfortable with extending credit. The other very important issue is creditor information,” said Mrs Brickell. “When lenders know more about borrowers, their credit history, or other lenders to the firm, they are often more comfortable with lending.”
Next week the IFC will sign a memorandum of understanding with the Ministry of Commerce to support establishment of the National Arbitration Center and will support the setting up and the operation of the center for the first three years.
In addition, the IFC are working with the NBC on the development of a private credit bureau program, which will help the industry establish a comprehensive information-sharing and credit-reporting system.
Even so, this won’t automatically boost lending. Top lending banks like Acleda and Cambodia Public Bank have been players in the system for many years now, while many of the country’s banks have only entered the scene just recently.
Additionally, Acleda in particular focus largely on smaller loans, with nearly 50 percent of all their loans go to either micro- or small-size businesses and 15 percent go directly to the agricultural sector, according to Mr Channy. Figures also show that Acleda’s average loan size was calculated at $1,923, an extremely small amount when considering the average commercial bank loan is $300,000.
“We are very careful from the beginning in working with the customer,” Mr Channy said. “We don’t want them to fail. They fail. We fail. We grow together.”
But for newer banks—often with the intention of providing larger loans—that are still feeling their way around the economic landscape here, caution is of utmost importance.
Kim Yeng, a credit assessment officer at Sacombank in Phnom Penh, whose bank opened its doors in the capital in June, said the Vietnamese bank’s first inroads would consist of a risk assessment period lasting until early 2010.
“Now we are learning from local banks,” he said, adding that the rule of law was nowhere near strict enough for banks to have confidence in the protection surrounding their assets.
Sacombank has a policy to loan up to 70 percent of the client’s collateral. “But business plans are of highest importance,” said Mr Yeng of potential loan applicants. “We must see that business have a clear and open vision.”
John Vong, deputy CEO of Sacombank, said: “Sacombank’s lending policy is not about speed. Its about managing credit risk effectively.”