In Tight Job market, Students Seen as High-Risk
Ubiquitous in more developed countries, student loans remain elusive in Cambodia, as banks and microfinance institutions continue to consider students high-risk borrowers with limited amounts of collateral.
An uneasy job market, banks and microfinance institutions say, means that student borrowers are likely to wind up unemployed and defaulting on their loans.
“The job market is very limited. We are afraid that student will be unable to pay back the loan,” said Kong Phean, brand developer for Cambodia Mutual Savings and Credit, a microfinance credit union network.
According to the Education Ministry, 28,233 students completed an undergraduate degree last year, though the number of graduates who successfully find employment each year—a prospect that is key to their creditworthiness—is unknown.
Experts say that demand for student loans is also low because the price of Cambodian education—about $1,600 for four years—is within reach for most students.
But behind the scenes, financial institutions are devising ways that allow students to lay their hands on the necessary cash needed for a higher education.
Mr Phean said CMSC had developed partnerships with several bodies including the Institute of Technology of Cambodia to provide loans with interest rates as low as 2.5 percent.
Despite the attractively low interest rate, banks do have a lengthy list of caveats.
“We only give loans to students in their third year and up because third-year students are sure about their skills and their major,” said Mr Phean, adding that in most cases parents are asked to guarantee the loans in case students fail to make their repayments.
Though in some cases, Mr Phean said the risks associated with the parents had meant that students have had to use personal items like motorbike licenses as collateral in order to guarantee a loan.
Since 2009, CMSC has provided just 16 students with loans, for which Mr Phean said CMSC sees few applicants. Demand for student loans, experts say, is in part low because students themselves, not confident they will find employment after graduation in a job market that is unable to accommodate the flood of new graduates each year and wary of being saddled with unshakable debt, hesitate to take out a loan.
“You just can’t guarantee that there is going to be employment when you graduate,” said Margaret Ryan, professor at the Royal University of Law and Economics. She added, however, that if student loans were long term and repaid in small, manageable increments, she expects that students would feel more comfortable and demand for the loans would surge.
“That would be sort of a dream,” she said.
According to Mak Nang, deputy director of the Phnom Penh education department, tuitions remain low enough that families are still able finance their children’s educations independently.
“Most students are able to pay the tuition fee—mostly with their parents and relatives’ support,” Ms Nang said, adding that the Education Ministry was not in contact with lending institutions and did not know the number of students who could be helped by loans or who have secured them from lending institutions.
According to Ms Nang, the ministry of education also provides between 3,000 and 4,000 scholarships to students pursuing high-education degrees each year.
But for students from low-income backgrounds who are not receiving scholarships, a loan can make all the difference, and the risks associated with borrowing money may be worth taking.
Peng Phall, 23, a student receiving a loan from one of CMSC’s partner institutions in Siem Reap, said he was confident that he can pay back his loan at $17 a month with the salary from his part-time restaurant job.
“Microfinance helped me have the opportunity to study at a standard school the same as a rich student,” he said. “I wish that we had a lot of programs like this, because it would help poor students like me to continue studying.”
Like CMSC, other institutions are also trying to minimize the risk of lending to potentially jobless students by involving students’ parents in the lending arrangement.
“We lend this money to the parents to finance their children’s education,” said Thalarin Chea, general manager of the microfinance institution Amret, adding that his institution set interest rates and repayment schedules based on the cash flow of the borrower’s parents.
Still, educational loans are uncommon at Amret and account for less than 1 percent of its loan portfolio. For some of the country’s larger institutions like Acleda Bank and Canadia Bank, the low demand for student loans and the risk associated with student borrowers has meant that student loan programs are yet to be established, though both banks do allow students to take out retail loans to pay for education.
In order to be eligible for Acleda’s consumer loan—paid back in monthly installments—the borrower must have a part-time job, said In Channy, president of Acleda.
“Unfortunately, it is difficult for them to get access to the loan because we require a part-time job,” said Mr Channy.
But banks and microfinance institutions say that the ubiquity of student loans is still many years away.
Stephen Higgins, CEO of ANZ bank, which does not offer loans to college students, said the level of educational services and the job market must improve before student loan programs will appear in the country.
“Before major banks start offering them [student loans], it will need to be a much higher-income society,” said Mr Higgins.
He said the low cost of higher education in Cambodia is not yet big enough for banks to make enough profit from the transaction.
In student loan hotspots like the US, where private four-year institutions of higher learning charge an average of $26,000 in tuition, not including room and board, students can become heavily indebted after graduating and require long periods to service their debt.
According to Mr Higgins, the size of these loans is large enough that banks can justify the expense of processing them.
Another issue confronting the disbursal of student loans in Cambodia is a lack of legal structure permitting financial institutions and students to draw up specific contracts for student loans.
“The market for microfinance is very new in Cambodia,” said Bun Mony, chief executive officer at Sathapana Ltd, a microfinance institution where parents and students can apply for loans to finance college education.
As microfinance has only been operating in Cambodia for 10 years, he said, sound legal structure on student loans is as of yet undeveloped and will be necessary if banks are to feel confident lending to such unpredictable borrowers.