Away from the eyes of the authorities, the unregulated consumer loan market is thriving, triggering unease in the banking sector as the risk of credit growth increases
In the bowels of the Cambodian banking sector hides a shadow operation that has blocked the financial authorities for several years.
No doubt these activities, which involve direct mortgages by real estate developers and unofficial pawn shops and pawn shops, have surreptitiously fueled the economy, the scale of shadow banking, or recently identified as non-bank financial institutions. , remains unclear in Cambodia.
Globally, however, the Financial Stability Board endorsed by the G20, a body that oversees financial systems around the world, noted that based on a narrow measure from shadow banking, the sector has grown. 1.7% to reach $ 50.9 trillion in 2018. This market now accounts for 13.6% of total global financial assets.
The shadow banking system has been characterized, among other things, as lacking disclosure and information on the value of their assets, and having little regulatory or prudential oversight of the type associated with traditional banks.
Laura Ellen Kodres, division chief for the Global Financial Stability Division of the International Monetary Fund (IMF), claimed in a 2013 article, adding that shadow banking mimics traditional banking.
Unfortunately, it is neither subject to international regulations such as the Basel III framework which mitigates risks in the banking sector nor to anti-money laundering laws.
As such, they operate in absolute isolation from the regulated financial institutions sector without oversight or data sharing, in this case with the National Bank of Cambodia (NBC) and Credit Bureau Cambodia (CBC).
In its financial stability review last year, NBC lamented that shadow banking had actively grown as real estate developers were involved in providing credit or selling on credit to homebuyers.
“Given the important role of developers in this sector while data availability is still limited, closer coordination of relevant authorities is needed to ensure sustainable and inclusive growth of the construction and real estate sector in Cambodia.” , wrote the central bank.
This inadvertently means that there is no way to know the extent of an individual’s debt exposure, said Oeur Sothearoath, CEO of CBC, a credit bureau established under of a 2016 prakas.
“Real estate developers come under the regulations of the Ministry of the Economy and Finance (MEF). However, mortgage loans are not regulated by them. So, I’m not sure the MEF has this data.
“We do not capture this data [too] and risk information is not shared with the banking industry. There should be cross discussions on this issue, ”he added.
To make matters worse, the opaque operation is not suitable for a dubious source of funds, particularly with the European Commission identification of Cambodia as a high-risk nation with efforts to combat money laundering and the deficient terrorist financing.
This is in addition to the Financial Action Task Force’s re-registration of the intergovernmental watchdog body on money laundering last year.
“From a business perspective, the effects would be devastating for the economy as the blacklist makes it difficult for countries to do business with Cambodia, especially when it comes to transactions,” said David Van, senior partner of Platform Impact, public-private partnership consultant.
The concern is justified, especially as the non-bank financial sector is expected to accelerate as the struggling economy disrupts people’s livelihoods.
The removal of prerequisite criteria, such as good credit scores, payslips, down payments and guarantors, makes it desirable to use an alternative source of funding.
Debt has increased
Four years ago, the ministry recognized NBC’s challenge to minimize the risks inherent in rapid credit growth and that the Cambodian financial system was evolving rapidly while becoming more interconnected.
He said microfinance institutions almost resemble the typical shadow banking system, as they provide an alternative source of finance for small and microenterprises.
“These emerging developments create new challenges. At this stage of the country’s financial development, a strong financial sector supervision and supervision framework is a prerequisite to ensure the resilience of the system to unexpected shocks, ”said the ministry in the mid-year 2016 assessment of the Monitor. macroeconomic.
That was then, but now an anomaly in the regulatory measures seems to have arisen, as real estate developers are allowed to participate in the loan market, without banking regulations and without sharing data with NBC.
Ministry spokesman Meas Soksensan disagrees, saying financial flows within the sector are regulated in accordance with government policy.
“It is coordinated by the Economic and Financial Committee, an interministerial consultation body chaired by the Minister, [where we] take into account the potential risks and avoid dominance of one or a few sectors, ”he told The Post.
Soksensan explained that “technically registered” or “official” real estate developers operating under the current mechanism should not be seen as shadow banking services.
“The current practice allows all Cambodians to own housing. Another example of a model that the government is trying to apply is the so-called affordable housing loan, ”he said.
Obviously, the issue is sensitive, given that several industry players who were approached refused to develop, including NBC and the Cambodia Association of Property Developers.
Acting with caution, In Channy, chairman of the Cambodia Association of Banks, said it was up to the government to deal with this, as there are two regulators.
“Pawn shops are regulated by the MEF [while] real estate and real estate developments are regulated by the MEF and the Ministry of Land Use Planning, Town Planning and Construction, ”noted Channy, who is also chairman and managing director of Acleda Bank Plc group.
In the absence of data from the non-banking sector, information from the regulated financial sector could shed light on the credit sector.
For example, the World Bank has stated that as of December 31, 2019, the share of outstanding bank loans to the construction, real estate and mortgage sectors, excluding microfinance and parallel bank loans, is of the banking sector was 31.3% to $ 7.7 billion, compared to $ 5.6 billion or 27.9% in 2018.
The share, which was equivalent to 28.6 percent of gross domestic product last year, rose to over 22.8 percent when the construction boom collapsed after being triggered by the 2008 global financial crisis- 2009.
The World Bank said that a potential effect on the microfinance sector is due to the loss of household income as the number of workers made redundant in the tourism, clothing and construction sectors increases. To date, more than 150,000 workers at all levels have been made redundant or faced with pay cuts.
This is expected to increase the level of rural household debt beyond 40%, as previously reported in the Cambodia Socioeconomic Survey 2017.
The National Institute of Statistics survey also revealed that outstanding loans and credits from the microfinance sector (and credit operations) accounted for 52.3% of rural household debt.
Borey loans no rule
An economic analyst, who spoke on condition of anonymity, argued that the MEF and NBC should be the sole regulators of home loans granted by banks, while developers should be prohibited from offering finance. real estate.
“Developers shouldn’t be allowed to provide loans because it’s messy and they charge higher interest rates than banks. The credibility of loan applicants is also not properly verified, ”said the analyst.
Home loans from developers (who build borey or gated communities) may seem appealing to homeowners because the approval criteria are less stringent, which helps new homeowners with little or no savings acquire loans. covering the full cost of the house.
“I didn’t have to post a deposit for the house and was offered a full loan. If I had been to the bank, they would have done various credit checks, which takes time, ”said Try Sopheak, a retail store manager, who owns a house in a borey near Sen Sok, Phnom Penh. .
The 35-year-old father of two took out a loan of $ 90,000 with an interest rate of 12% in 2014. Last year, he remortgage his two-bedroom house when he had difficulty repaying his monthly debt.
While the initial terms are somewhat compassionate, the repercussions of defaults and late payments are rather drastic.
“If you delay a payment for five days, the penalty is $ 24, and if you don’t pay off the loan for two or three months, they immediately foreclose the house and sell it at auction,” he said.
The lack of regulation in this real estate finance sector poses a risk to clients who are not protected by law and could face complications in their legal remedies.
For May Tola, this was the only option she had after being turned down by two commercial banks because she couldn’t pay the 30% deposit for her house.
“My original plan was to seek bank financing but I couldn’t meet the criteria. It was easier with borey funding because all I needed to produce were my husband’s ID cards and my fingerprints.
“The approval was immediate, but we are paying the price of a high interest rate of 10% per annum compared to the banks’ average interest rate of 7%. We also end up paying more for interest than principal, ”said the 26-year-old clerk.
Tola is among thousands of people who have taken out loans from their developers and more are expected as affordable units, around 30% of the 28,000 units, will hit the market this year.
So what happens next? Is the government concerned about the growth of credit risk?
“We [will] oversee the growth of each sector and try to balance [the expansion]”Soksensan said, reiterating that all decisions will go through the economic and financial policy committee.
But, that does not answer the question.