In tight job markets, banks consider students high-risk borrowers
Ubiquitous in more developed countries, student loans remain rare and difficult to obtain in Cambodia, as banks and microfinance institutions continue to consider students high-risk borrowers with limited amounts of collateral.
In an uneasy job market, banks and microfinance institutions say that student borrowers may well wind up unemployed and default on their loans.
“The job market is very limited. We are afraid that students will be unable to pay back the loan,” said Kong Phean, brand developer for
Cambodia Mutual Savings and Credit, a microfinance credit union network.
But behind the scenes, financial institutions are devising ways to allow students to lay their hands on the cash needed for a higher education.
Mr Phean said that CMSC has developed partnerships with several higher education institutions, including the Institute of Technology in Phnom Penh, to provide loans with interest rates as low as 2.5 percent – the average interest rate on loans in the banking sector currently stands at 18 percent.
However, the attractively low rate does not mean student loans come without a lengthy list of stipulations.
“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 payments.
In some cases though, Mr Phean said risk associated with the parents has meant that students have had to use personal items like motorbikes as collateral in order to guarantee a loan.
Since the beginning of 2009 CMSC has provided just 16 students with loans, for which Mr Phean said he sees few applicants. According to Mr Phean, students aren’t confident in their ability to find a job post-graduation and are wary of being saddled with unshakable debt.
Nonetheless, other institutions are also starting to make college loans using students’ parents as collateral.
“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 tailors the specifics of its student loans to the cash flow of the borrower’s parents.
Still, education loans are uncommon at Amret and account for less than one percent of its total loan portfolio.
“You just can’t guarantee that there is going to be employment when you graduate,” said Margaret Ryan, a professor at the Royal University of Law and Economics.
However, she said if student loans were long-term and repaid in small, manageable increments, demand for them would surge.
“That would be sort of a dream,” she said. “There is nothing more important than education. But the question is, who’s going to pay for the education that the country needs?”
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 have yet to be established, though both banks do allow students to take out consumer 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, the bank’s president.
But having a part-time job is a tough stipulation for students. “Unfortunately, it is difficult for them to get access to the loan because we require a part-time job,” said Mr Channy.
At Canadia Bank, all borrowers must be able to offer up collateral – a house or land – in order to be eligible for a loan, said Dieter
Billmeier, Canadia’s vice president.
Without collateral, “how can you guarantee that the student will pay back the loan?” he asked, although he added that he is optimistic that student loans will be widely available in Cambodia in the long term.
“Cambodia is moving forward,” he said. “Everything is possible.”
Mr Billmeier noted that one of the reasons student loans are more widely
available in countries like the US is due to government involvement.
From 1965 to 2009, the US government secured the risk of most student loans made by commercial banks. While this arrangement ended in 2009, the government currently offers direct federal loans for students.
According to Mr Billmeier, Cambodian banks may be more comfortable offering student loans should the Cambodian government begin to guarantee the loans like the US government did.
Stephen Higgins, CEO of ANZ Royal Bank, which does not offer loans to college students, said that student loan programs would only appear in Cambodia once the level of educational services improves and the job market becomes more favorable.
“Before major banks start offering them [student loans], it will need to be a much higher income society,” said Mr Higgins.
He said that the cost of higher education in Cambodia, which tends to average about $1,600 over four years, is not yet high enough for banks to make a worthwhile profit from the transaction.
In student loan hotspots like the US, said Mr Higgins, the cost of a university education is high enough and the size of loans large enough that banks can justify the expense of processing them.
Students there can often run up debt of over $30,000 for a four-year degree program.
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 consumer 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.
He noted that demand for student loans is low, mainly due to the relatively affordable price of higher education.
Should demand someday increase, he added, he anticipates that microfinance institutions will respond to the market.