If you are from America or Europe, you expect that having a steady job with a good income means that you can borrow money from a bank.
Not so in Cambodia.
In a survey of six local banks, all said that a land title is a requirement for getting a loan.
Banks refer to a land title as “collateral” – and this collateral cannot be a movable object, like a car, a boat, or a motorcycle.
“Our bank needs a land title, if you don’t have it, we cannot provide a loan for you,” said Sanrith Puthya, a senior loan officer at Canadia Bank. “I think all the banks (in Cambodia) are the same.”
It comes down to the fear that if the borrower does not pay, the bank won’t get its money back because Cambodia’s laws are weak, explains Lun Bouna, a credit officer at Cambodian Public Bank that also requires a land title for loans.
“Because in America, the government can control their people, but in Cambodia, if you don’t pay, you (can) run and we cannot find you,” he said.
The same policy is also enforced at Acleda Bank, the Foreign Trade Bank, Cathay United Bank and Mekong Bank.
Yet for small business owners or entrepreneurs with new business ideas – this leaves little choice for obtaining loans.
“There are very few banks (in Cambodia) that are willing to lend to start-up companies that don’t have at least a three year track record of being in business for profit,” says Anthony Galliano, an American banker who now has an investment management company in Cambodia.
Part of the problem, he added, is that businesses in Cambodia have poor accounting practices and are not audited – so banks can’t rely on their financial records while making loans.
Microfinance Loans Too Small
Microfinance institutions in Cambodia provide some loans without requiring the borrower to have a land title – only an ID card is needed – but these loans are generally very small and interest rates outrageously high.
The loans also need to be paid back in a very short period of time, such as one year.
For example, Amret Microfinance only makes small loans – a maximum amount of $500 per person, and some people cannot even get the $500, said the company’s deputy chief of credit Rom Ratha. Interest rates range from 1.9 to 2.2 percent per month and the loan needs to be paid back within a year at the longest.
Aeon Microfinance lends between $100 and $3,000, depending on the customer’s income, and has an interest rate of 2.9 percent per month, said Puth Leakena, a call center employee at Aeon Microfinance. In most cases, a borrower can get a loan that is about two times their monthly salary, Ms. Leakena said. (The average income in the country is about $100 per month.) Foreigners cannot borrow from Aeon Microfinance at all.
These interest rates are outrageously high, compared to rates in other countries, agrees Mr. Galliano.
“Twenty-four percent per year, that’s crazy,” he said. “The rates in the U.S. are pretty low – three to six percent per year.”
Inflation in Cambodia was 2.9 percent last year according to the World Bank.
Only Short-Term Loans
Even for customers who have land titles, Cambodian banks are unwilling to lend money for long periods of time. Most business bank loans in Cambodia are made for less than five years, Mr. Galliano said – compared to the United States, where banks make mortgage loans that span decades.
For example, Acleda Bank, one of the largest banks in Cambodia, makes loans for a two year period maximum – at an interest rate of 1.7 percent per month, said credit officer Bun Thoeun. A land title is required to obtain the loan.
The unwillingness to lend for long periods of time affects long-term projects, such as construction, Mr. Galliano said.
Because of this, businessmen here often turn to equity rather than debt for financing. Equity means that people try to get business partners to invest into the project with them.
“In other economies, you see debt financing, but here there is a much larger component of equity because it’s harder to get a longer term debt,” Mr. Galliano said.
But even equity funding is not easy to obtain, especially for small or medium-size businesses, he admitted.
Improvements in the banking sector
On the positive side, the banking sector in Cambodia has been making some positive steps forward.
The country’s first credit bureau was established about two years ago, according to Galliano. This means that Cambodian banks can now report lenders for not paying back their debt and can avoid making loans to borrowers who had previously defaulted on payments.
“If you default on a loan, you’re going to get reported,” he said. “You can also go after someone in court if they don’t pay.”
However, Cambodian banks rely more on the local people’s fear of “losing face,” or having their reputation destroyed, Mr. Galliano said.
“It’s a big face issue if you don’t pay,” he said.
SIDEBAR: Exceptions – How to borrow without a land title
There are a few special cases in which it might be possible for a borrower to get money from a Cambodian bank without a land title.
Here are some cases:
At Canadia Bank, which has a construction company partner, a borrower can get a loan without a land title only if he or she purchases a condominium or an apartment through the company’s own housing project, said housing loan officer Chhean Chankhyra.
Cambodian Public Bank has in the past loaned money using the assets of a company – such as machinery at a rice mill – as collateral, said credit officer Lun Bouna.
Foreign Trade Bank can make a loan using the borrower’s fixed deposit as collateral. If the customer has a savings account in the bank but does not wish to withdraw money and lose the interest, the bank can make a loan, as long as the amount loaned is less than what the customer already has in his or her savings account, said loan officer Meng Sengkry.
Anthony Galliano, an American banker who works in Cambodia, said a taxi company once obtained a loan from ABA Bank using its taxi cabs as collateral.
Aeon Microfinance has a group loan program, where a group of as many as six borrowers can obtain a larger loan together. An individual borrower’s loan cannot exceed $500.