There are currently 47 banking institutions in Cambodia and over 40 microfinance institutions (MFIs). Yet, despite the considerable number of institutions licenced to make loans, obtaining credit is not always straightforward in the Kingdom, a market known to lack alternative sources of equity for SMEs, such as venture capital funds, angel investor organisations or incubators. “Other countries, like Thailand, Malaysia or the Philippines, have specialized banks for SME, so that smaller corporations can have access to finance. In Cambodia these institutions are harder to come by,” says Dr. In Channy, president and group managing director of ACLEDA Bank, the nation’s biggest banking institution.
Matthew Tippetts, a managing partner at M Invest, an investment and advisory firm focused on the Greater Mekong region, explains some of the difficulties that SMEs face when looking for funding: “The main challenge has been to obtain attractive interest rates when land or property is put as collateral. Especially now, few banks want to increase their exposure to real estate developers, for example.”
Taking into consideration the sheer size of the condo supply now and in the foreseeable future, Tippetts is of the opinion that bank reticence might actually be healthy for the market. It is, however, a bleak scenario for some developers, who may face trouble securing finance despite having in their hands a quality product with little risk.
Security requirements vary from bank to bank, depending on the internal policies of each institution and their particular “risk appetite”. Most banks require some form of fixed asset security, such as land and buildings. However some may also take charges on moveable assets such as cars or machinery.
Floating debentures over the businesses are also possible, but have not yet been properly tested in the courts. “Enforceability over floating debentures is difficult because specific or direct charges rank higher in terms of priorities in a liquidation scenario,” says David Marshall, Head of Multinational Corporates at ANZ Royal.
According to Marshall, the borrower may have access to other more bespoke options depending on the bank, including taking assignments on key contracts such as an offtake, concession and franchise agreements.
According to Dr. Channy, the cost of borrowing in Cambodia is slightly higher than in surrounding countries. “For corporate loans, the interest rate ranges from 9 to 13 per cent per annum, “ he says, noting that interest rates in the Kingdom have stabilised in the last few years. Banks consider a number of criteria when determining the rate at which they will lend to a client. They look at the industry in which the borrower operates, the collateral and security provided, the amount of time until the repayment is due (also know as tenor), the borrower’s management experience, depth and character, its repayment capacity, and its governance and financial reporting. The bank will also take into account its own funding costs (from raising deposits or from borrowing), its own expenses and the hurdles to its internal return.
Interest rates are always susceptible to these factors, and may rise or fall following fluctuations in them. However, borrowing rates have historically been quite stable and do not jump significantly over short periods of time. In the event of sustained increases in the Federal Reserve’s base rate, however, USD-denominated loans in Cambodia are widely expected to rise.
Marshall qualifies interest rates in Cambodia as “very competitive”, a condition that, he explains, is brought about by the fact that the Kingdom enjoys a relatively free market system and high competition caused by the large number of banks operating in the country.
He goes on to explain that, as elsewhere, the interest rates set by banks in Cambodia are reflective of the old adage “risk vs. reward”. He advises to keep in mind that each bank may have a different view of both the risk and the reward in any given situation.
Credit Bureau of Cambodia
The Credit Bureau of Cambodia (CBC) is an NBC-regulated agency that gathers and shares credit information with lenders, creditors and consumers. The CBC provides financial information, analytical tools and credit reports to banks, microfinance institutions, leasing companies, credit operators and consumers.
For both the bank and the borrower, the CBC plays a critical role in facilitating the lending process. To the lending institution, the benefits derived from the work of the CBC are manifold. The credit reports put together by the CBC help banks manage risks and speed up their due diligence process, making it easy to determine the loan habits of the borrower and his/her creditworthiness.
“Financial institutions do rely on the credit information of our reports to make decisions. However, the CBC does not indicate in any of its reports whether or not a loan should be approved. We are one component in the entire decision-making process, but the final decision lies with the institution,” explains Pascal Ly, the CEO of the CBC.
To the consumer, the CBC is also a valuable tool: “The CBC can freely provide, once a year, their individual credit report. This allows consumers to check their credit information. The CBC is readily available to explain in detail the meaning of the information contained in the report,” explains Ly.
Dr. Channy, of ACLEDA Bank, is familiar with the work of the CBC. He explains that the bureau “plays an important role securing funding in Cambodia by sharing credit information with stakeholders and evaluating the creditworthiness of loan customers.” For Dr. Channy, the work of the CBC helps prevent over-indebtedness, speeds up the loan process, and facilitates customer access to financial resources.
“Through its Industry Performance Monitoring Report, the CBC helps banks analyze its own performance vis-à-vis other banks, MFIs, and the overall market. The bank can then set its own credit strategy. The information provided by the CBC allows banks access to new corporate loans. Finally, due to the work of the CBC, the operational costs and time spent for loan evaluation are significantly lower than before,” Dr. Channy concludes.