National Bank of Cambodia (NBC) director general Chea Serey discusses the growth of the country’s financial sector against the backdrop of regional integration. She also explains the central bank’s monitoring systems, efforts to upgrade them, and its strategy for gradually shifting from a dollarized to a riel economy. Ms. Serey also addresses talk about a bubble in the property sector, the potential of Cambodian microfinance institutes to expand regionally, and unethical lending practices.
KT: Can you provide an overview of the financial sector. Is it healthy?
Ms. Serey: We have a very attractive financial sector. For evidence of this look at the presence of many foreign-owned banks here and the interest of many more to operate in Cambodia. At the same time, we also notice an increase in the number of consumers using the financial sector, especially those who had not has access to formal financial service before. This also proves the public is confident about the sector.
If you look at microfinance institutions (MFI), that sector is regarded as one of the most successful microfinance sectors in the world. We receive representatives from other countries in the region and as far away as Africa coming to conduct study visits about our regulatory framework. They want to study how our microfinance sector became so successful.
So, the sector success is recognized worldwide. Many foreign investors are also interested to enter it, both social-oriented development funds and profit-driven investment funds. Many shareholders or/and investors in Cambodia’s biggest MDIs [microfinance deposit institutions] are mostly from France, the Netherland, Switzerland, Norway, Australia, America, Japan and Singapore.
Because of the popularity of the services and its attractiveness to foreign investors, many NGOs are also trying to replicate the business model hoping to get access to those investors. Most of them are genuinely set up to help low-income people in rural areas, but there are also some who are taking advantage of the situation charging high interest rates and using unethical practices to foreclose properties.
It is difficult to regulate the small operators and they tend to be scattered everywhere in the country. But, obviously we can’t deny the fact that their unethical practices are affecting the reputation and confidence in the financial system. That’s why earlier this year, we announced that they had to register.
KT: Recently, the NBC suspended receiving registration forms from rural MFI operators. Why?
Ms. Serey: Since the announcement we saw a lot of microfinance operators applied to register, thanks to good cooperation with local authorities. Within a short time, we received registration applications from more than 300 operators. This was too much for us to handle. So, we had to suspend accepting applications temporarily while we check business profiles, structures, and sources of funds so that we can gauge their quality. If they do not qualify we will shut them down.
KT: Credit growth remains strong, around 30 per cent per annum, with rising demand from the construction sector. Do you see a bubble in this sector?
Ms. Serey: When you look at credit growth it has been going fast, but the pace of growth has moderated. When credit growth is fast, we have to be concerned about the reasons for it. First, does it grow in a particular sector where it can fuel a price bubble or overheating? Second, what is the quality of the credit portfolio, especially new lending? Is it due to the fact that banks are competing with each other to get a client base so they give loans to whoever wants one – that’s why you see credit growth is fast. Are the macro-fundamentals, i.e. economic growth and prospects, justified for such rapid growth?
In this regard, the NBC is looking very carefully into credit growth. We are looking at the sectors absorbing the most of it and whether it is diversified to all sectors in the economy or going straight into one.
If we look at credit quality, presently the nonperforming loans (NPLs) account for about 2 per cent [of total lending]. And, lending has been spreading out across all sectors. Of course, loans for real-estate and construction are growing very fast. However, if we compare this to the total loan portfolio, it is still relatively small.
But, within the sector, what we want to check is whether the credit had been given to developers or buyers. And, we have observed that there a lot condos are being built everywhere. What we need to establish is whether they are financed here or with money from abroad.
If they received loans abroad, even if the projects are unsuccessfully the risk is low as it is external [to the Cambodian banking system], although as a secondary effect it may affect investment confidence.
If they take loans domestically and a project fails, there will be a problem. But, presently, we don’t have enough data to ascertain that. That’s why, we recently joined with the National Institute of Statistics to conduct a survey on FDI [foreign direct investment] and we expect the results in 2016.
As the central bank, the NBC is also compiling the balance of payments, i.e. recording trade [of goods and services] and investment between Cambodia and the rest of the world. We monitor these trends very closely to understand their implication on the economy. However, some data is very difficult to get. That’s why the NBC recently began conducting many surveys purely for statistical purposes to strengthen the quality of our data. Unfortunately, surveys can only produce estimated data and are not 100 per cent accurate.
With quality data, the NBC can better monitor the situation and make informed policy decision. Until we have the full picture before our eyes, I think the NBC will refrain from making impromptu decisions, such as credit caps or ceilings on construction of real estate.
KT: There is quite a bit talk about conflicts between property developers and commercial banks over loans for housing. What is the NBC doing about this?
Ms. Serey: Actually, we are working with some developers. Some of them are also asking for licenses because providing credit falls under the Law on Bank and Financial Institutions, so it is an issue of NBC oversight.
At the same time, we also have some developers who are not applying for licenses from us so I want to alert to buyers to be careful with them. Those [unlicensed] developers are asking buyers to buy plots of land or houses by taking loans with interest rates around 15 to 16 percent, while commercial banks charge around 8.5 to 9 percent. But, what the developers set as a condition is that once the buyers take a loan, they will not issue a land title [till the loan is repaid].
Buyers should be careful. Now, the NBC is preparing a consumers’ capability development campaign aiming to let customers understand about their rights and understand about their obligations about financial service.
Once the customers receive loans and use it in the right way, that’s ok, but once they use it in the wrong way, there will be a problem.
KT: The NBC has been promoting using our domestic currency for a long time, but business transactions are still being made in US dollars. What can be done about this?
Ms. Serey: Promoting the use of the riel is a long-term joint effort between the government and the NBC. The position of both the government and the NBC is that we won’t use administrative measures to promote use of the riel. If we did that, we don’t know what we the result will be. It is not as simple as 1 plus 1 is 2.
So, with this in mind, we are talking about change at the level of sentiment. Now, other countries have found it easy to de-dollarize once the exchange rate or inflation situation is stable. When this happens their people resume using the local currency. However, our country is not like that because we have all the right macro fundamental indicators, such as a stable exchange rate and inflation, and economic growth is high, but people still prefer using US dollars.
So, the question is why don’t our people use local currency? They are accustomed to the notional value of the US dollar but not the riel. Changing people’s mindset requires time. If we rush and, say, announce tomorrow that all the foreign currency has to change to riel, [US dollars] will flow out of the country.
So what we are doing is more awareness campaigns to promote our local currency by issuing leaflets, media campaigns, etc. to inform people. And, we are also making the local currency more attractive and the notes are of higher quality. For business purposes, we are working with young entrepreneurs… to sell their products in riel. I think this is a turning point for us.
KT: How will our financial sector develop with regional integration on the way?
Ms. Serey: Essentially, we are a free market, which means that capital can flow in and out freely. We have the freest [capital flows] in Asean, after Singapore. This means that for our financial sector is very attractive. But, it is important to realize that our market is still small and our financial products very basic. At the same time, our capital market is also small compared to our neighbors. With the materialization of Asean Economic Community, I think, our micro finance sector is the one that we can expand regionally.