As Cambodia’s Financial Sector Grows, So Do Its Challenges

The National Bank of Cambodia on Wednesday hosted its first annual macroeconomic conference, outlining the need to ensure Cambodia’s rapidly growing financial sector supports sustainable and inclusive economic growth while managing greater risks.

Cambodia’s banking and microfinance sectors have seen enormous growth in recent years with bank depositors increasing to 1.7 million in 2013 from 230,114 in 2008.

Borrowing in the microfinance sector has soared from about 800,000 customers in 2008 to 1.6 million in 2013. Loan disbursements in the first quarter rose by 14 percent to $200 million, while nonperforming loans remain low at less than 1 percent, according to the National Bank.

Though the increase in cash flow shows a stimulated economy, there are risks associated with it, said Heng Dyna, president of the Cambodian Economic Association.

“Bank funding from abroad is not subject to prudential limits and could stop with tapering in the U.S. and other external shocks, leading to volatile liquidity and credit conditions,” Mr. Dyna wrote in a document disseminated at the conference.

Measures proposed by Mr. Dyna included the introduction of micro prudential policies such as caps on loan-to-value ratios—a lending risk assessment before approving a mortgage—and on debt-to-income (DTI) ratios.

“[A cap on loan-to-deposit ratio] is just a sensible prudential measure to ensure banks can’t just keep extending more credit with abandon and no reference to deposit liquidity,” said ANZ Royal CEO Grant Knuckey, who attended the event.

Though there should be an emphasis placed on disbursing more loans in riel to reduce entrenching the country in a dollarized economy, this has its pitfalls, said Khou Vouthy, director of economic research and international cooperation at the National Bank of Cambodia.

“We have been facing risks in the microfinance sector because the institutions mostly rely on external sources of funds and loans. There are two main challenges: If the funds and loans were made for them in U.S. dollars, there would be an increase in dollarization; if they were made in riel, they would be exposed to currency mismatch,” he said.

Chan Sophal, an economist working with USAID to improve the livelihood of rural farmers, said more credit needs to trickle down to small businesses in provinces for ventures that will add value to agriculture production.

“More production in the rural sector calls for more credit to modernize farms and needed machineries…such as harvesters and water pumps…to replace labor and most rural SMEs are underserved by banks,” he said.

Mr. Knuckey said that though there has been progress toward “generally improving the soundness of the economy,” financial institutions need to feel more confident in the “bankability” of borrowers.

“One issue with bankability in Cambodia is the informality of business, especially the lack of sound financial reporting. This creates a barrier to finance with most prudent lenders,” Mr. Knuckey said.

“[I]f Cambodia could take just one step to increase access to finance for companies, it would be to enforce the law requiring companies to produce audited accounts,” he added. “If that was done, many companies would see access to finance improving, because they could evidence their cash flow and capacity to borrow.”

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