The call for lower interest rates this week by Cambodia’s SMEs points to an enduring concern within the Kingdom’s immature financial sector, but there are currently few opportunities for lower borrowing rates unless the government and financial sector motivate themselves to address the issue.
While the likes of Japan and the United States maintain base rates close to zero in a bid to stimulate economic activity, Cambodia has retained among the highest interest rates in the world with few mechanisms for lowering the cost of borrowing.
Given the highly dollarised economy, the National Bank of Cambodia has few options for lowering the base rate, which means the private sector will remain in charge of dictating interest rates for the foreseeable future. And, unfortunately, banks and microfinance institutions will see few incentives to reduce rates.
With more MFIs receiving deposit-taking licences, in theory, there would appear to be an opportunity for lower borrowing rates in Cambodia – given the likes of Amret and AMK can now draw on client savings rather than international lenders to finance loans.
But most have opted instead to offer extremely high savings rates in a bid to raise their competitiveness in attracting deposits rather than passing on these lower operating costs to borrowers.
AMK offers a staggering 12 percent per annum on 18-month fixed-rate deposits, which ranks as one of the most attractive savings products on the planet in an age of rates in the low single digits.
Cambodia remains a country where many people still consider deposit accounts as counter-intuitive. Many people in rural areas remain reluctant to hand over their life savings for what essentially amounts to a piece of paper with a number on it – a savings book – preferring instead to horde money under the mattress where it cannot be used to fuel borrowing and in turn the economy.
The absence of both a credit agency and land titles on many properties that could offer all-important collateral means borrowing remains as expensive as ever.
Cases such as Choice Taxi Company’s collateral-free US$300,000 loan from ABA Bank this year remain the exception rather than the rule. In this case, ABA Bank
considered the attractiveness and future growth of the metre-taxi market sufficient security – but this model is not realistic in the case of most lending packages. Cambodia remains a risky prospect for international lenders.
The onus is therefore on the government and financial sector to offer a solution. The government must improve regulation of the financial sector and improve transparency to then improve the country’s standing in the eyes of the global financial market. Addressing dollarisation and establishing a credit agency in the Kingdom would help assert greater control of monetary policy and offer lenders improved security.
But lenders themselves have to take the responsibility. More sensible rates would help pass on lower financing costs to borrowers and stop the current race within the banking sector that has seen deposit rates go through the roof. By encouraging people to save courtesy of high interest rates the sector is only hurting Cambodia’s recovery.