The refusal of Cambodia’s banks to grant long-term loans to small and mid-sized businesses is handicapping the country’s development plans and may ultimately turn against the banks themselves, a development agency report has found.
The report, sponsored by the Mekong Project Development Facility and put together by international banking consultant Stephen Harner, found that less than 1 percent of loans made by Cambodia’s biggest banks to small and mid-size businesses were longer than two years. That, the MPDF argues, is a troubling figure, because the government’s poverty-reduction and development plans rely on creating trade.
The lack of support for small and mid-size businesses “is surely one of the key constraints in Cambodia,” MPDF Regional Manager Adam Sack said, speaking at a workshop of government and banking officials called to discuss the report’s findings.
The lack of lending not only hurts the small and mid-size businesses—it could also harm the nation’s banks, Harner said, speaking at the workshop. On average, only 33 percent of the major banks’ assets are made up of loans, Harner said.
“From a bank perspective, this means that only 33 percent of the assets are earning money for the bank. This is a serious problem for the banks. This distorts the economics in Cambodia,” he said.
By way of comparison, assets in China’s banks are 70 percent loans—and might be higher if the government didn’t put a cap there, Harner said.
The banks’ stinginess comes in spite of a huge buildup in their assets, due in part to a national law requiring banks to keep at least $13 million in capital.
That law helped the big banks raise upward of $128 million in capital in two years. The country’s banks have $385 million on deposit; in total, Cambodia’s banks are sitting on $575 million in assets, Harner said.
Some government officials remained puzzled on how to resolve the matter.
Cambodia’s unstable environment makes banks reluctant to take risks on smaller businesses, said Va Huoth, head of the Economic, Social and Cultural Observation Unit, which operates under the Council of Ministers.
Much will depend on how well Cambodia can pull its financial system together, said Hean Sahib, director of the Ministry of Finance’s financial institute.
Many development experts see small and mid-sized businesses as the key to building a solid economy.
Sar Kim Lomouth, Canadia Bank’s loan committee chief, said his bank already backs small and mid-sized businesses, charging only 1.5 percent interest. Fewer than 10 percent of the loans fail, he said.
The authors offered eight policy changes they say will help turn the problem around. The report recommends a commercial court; as well as allowing private banks to hand out credit ratings, setting up a national asset registry, the development of local consultants, creating asset-based financial groups, like leasing companies, and waiving or revoking the 15 percent tax on interest payments for funding between financial groups.
