Surely, that’s been the question at the very top of global leaders’ minds over the last few years. Cambodia, too, has its own banking problems, but it’s not that they are “too big to fail,” but that they are not big enough. The Phnom Penh Post is reporting on a World Bank report that shows Cambodians utilized banks less than any other Asia-Pacific country last year. (Story here).
About a quarter of Vietnamese and Laotians have accounts at a financial institution, while only 4% of Cambodians do. Banks here aren’t just sitting on money – 82% of deposits were lent out – so there must be something else causing this phenomenon. Is there a trust issue with banks? Are Cambodians weary of the formalized documentation process that a bank requires? Whatever the reason, the result is more informal lending, which means more lending requiring collateral.
A loan that involves collateral is technically called a “secured transaction.” This means that if the borrower doesn’t make his payments, then the lender gets the property the borrower staked for the loan. This sort of lending has been going on since ancient times. The assurance of property gives the lender enough comfort to lend out cash. A secured transaction in Cambodia requires a loan contract as well as a security agreement. The security agreement is only about the property that is standing as the foundation of the loan (the collateral). There are rules for what property may stand as collateral, for more detail see our recent report. Finally, the security agreement should be filed with the Ministry of Commerce, which is conveniently done online through the Secured Transaction Registry.
These sort of laws make good sense, because it is very important for governments, borrowers and lenders to have reliable, clear information about financial markets. Earlier this month the brand new Credit Bureau of Cambodia began operations. Its timing couldn’t have been better: It aims to facilitate lending in the country by centralizing information from banks and microfinance lenders. According to the World Bank’s report, microfinance seems to be popular in Cambodia where collateral is often necessary.
Given that Cambodians are wary of banks, perhaps something can be done to bring make the informal lending market more transparent. More transparency could mean lower interest rates, increased availability of capital, and a more efficient capital market.