Cambodia is a complicated country. The problem of corruption remains rife, with the country scoring 20 on the Transparency International Corruption Perceptions Index (CPI). That’s 6 points above the notoriously corrupt North Korea. The government’s notoriety was cemented recently when Prime Minister Hun Sen extended his 33-year rule – winning 125 seats in the last election after the opposing party conveniently dissolved.
Still, the economy grew at an estimated rate of 7.1% in 2018, driven primarily by an expansion in both domestic consumption and exports. But this growth belies the fact that many of the country’s citizens are mired in debt, with household debt reaching $4.2 billion in February this year. This represents 15.9% of the country’s GDP, compared with 12.3% the previous year.
Could digitising Cambodia’s economic future be the answer? Or, with consistently low digital literacy and continuing corruption issues, are there simply too many barriers to making this a reality?
Retail banking in Cambodia today
The banking system in Cambodia is not in a particularly strong place right now. The World Bank estimates that only 22% of the population have access to a bank account, whilst only 3% use bank cards and just 0.6% make purchases or pay bills online.
However, it is at least heading in the right direction. Whilst Cambodia was listed as the 7th most risky country in the world by the Basel Anti-Money Laundering Index last year, it was recently moved from the blacklist into the grey list after the National Bank of Cambodia drew up new anti-money laundering and anti-terrorism laws for its new national strategy.
Speaking of that national strategy, its main point was to underline the country’s firm commitment to digital transformation. As with many countries in Southeast Asia, Cambodia is currently undergoing a necessary digitisation process. Indeed, they wish to create a predominantly digital economy by 2023.
Perhaps the bank that best reflects this commitment is the newly established Chip Mong Bank (CMCB). A subsidiary of the local Chip Mong Group conglomerate, CMCB launched at the beginning of 2019, teaming up with Compass Plus’ TranzWare system to offer cardless cash transactions, ATM withdrawals and plenty more besides via a cash-by-code system that promotes convenience and user-friendliness.
Of course, whilst services such as CMCB have helped to make great strides towards making Cambodia’s great digitisation project a reality, there are some severe challenges to face. The ICT sector that is expected to drive this future economy, for example, is going to require a major groundswell in skilled workers to meet the increased market demand.
We often think of disruption as a sudden change and digital transformation has been an increasingly disruptive influence in the banking sector for years now. For banks in Cambodia, change is happening at an increasing speed. But those that want to remain relevant will need to up their digital disruption game sooner, rather than later, at least if they want to be able to compete with the agility of the fintech upstarts and the might of the global behemoths.
Many incumbent banks in the region are making the necessary difficult choices to position themselves for the digital age, but those that have yet to join them will need to push through the barriers and adopt a digital mindset if they want to compete beyond 2019.
If Cambodia is to become (as the government intends) an “intelligent and comfortable nation with intelligent people, intelligent society and intelligent government” within the next 4 years, then there will need to be a considerable investment made in skilled workers operating in everything from cybersecurity, e-commerce and the cloud, to artificial intelligence and e-payment systems.
Whilst Cambodia has grand ambitions regarding its digital expansion, it also lags behind its ASEAN neighbours on several digital fronts. the country’s year-on-year internet penetration growth rate was relatively low at 12% – compared to 28%, 29% and 33% in Vietnam, Myanmar and Laos, respectively.
There has been modest progress regarding digital investment in recent years. Over the past decade, Cambodia’s entrepreneurs have stepped up their game to create a small but enthusiastic tech startup market. However, before Cambodia’s banks can benefit from digital progress, the barriers to progress need to be removed. This means that a comprehensive digital economy strategy should be developed to incentivise investment in digital infrastructure, improve digital literacy, promote entrepreneurship and innovation, and build trust in the use of online services. Only then can retail banks in the region catch up to their close and not-so-close neighbours.
Debt collections in Cambodia today
Debt collections strategies in Southeast Asia are falling well behind their Western counterparts due to irresponsible lending and overall short-term views when it comes to debt. This has led to the region becoming notoriously complicated. Cambodia might not be quite as complicated as other countries in the region such as Indonesia and Thailand, but when it comes to small loans, it has a very big problem indeed.
Cambodia’s economy is heavily agricultural and it’s the country’s farmers who have borne the brunt of the debt. This is debt that has to be juggled whilst the debtors are held at the whims of loan sharks who continue to jockey for business among millions of poor Cambodians. According to the World Bank, the average small loan size in Cambodia is among the world’s highest, currently sitting at over $1,000 - a growth from $200 just a decade earlier, which is twice the pace of per-capita income.
This is not helped by the fact that whilst only 4% of the population have formal savings, 28% have taken out formal loans; figures that simply don’t add up. This has led to a situation where the average loan size in the country is among the highest in the world, with 2 million borrowers in the country owing a record $2.8 billion.
This situation arose in the wake of the Khmer Rouge genocide and a protracted civil war that left banking infrastructure almost non-existent and left microfinance lending as one of the only realistic ways to help alleviate poverty.
According to the Mimosa consultancy group, the average size of MFI (microfinance) loans focusing on the poorest clients in Cambodia sits at around 70% of median annual income, which puts the country among the leaders in developing nations in terms of the number of people borrowing money from a financial institution.
However, even though incomes have risen in recent years, many Cambodian borrowers (as many as 10%) are unable to pay their debts and outstanding MFI loans amount to a rather daunting 12% of GDP. To combat this, banks need to use the data available to them to be more selective about what loans they approve. They also need to invest more into the collections lifecycle to prevent the accounts they do approve from collapsing into delinquency.
Indebtedness is not just a national issue; it’s a national epidemic and, to make matters worse, the government has made a point of distancing itself from these problems, stating officially that “All MFIs are private, not owned by the state.” Cambodia’s national bank is also taking a strong stance by revoking licenses from rural microfinance firms and issuing a public warning against borrowing from lenders who promise zero (or close to zero) interest on loans.
For those who are approved, however, the country’s increasingly speedy march into the digital age could prove a major benefit. Japanese company Showcase Digital recently saw the potential in Cambodia’s mobile microfinancing sector and invested $300,000 into digital micro-financing company Digicro, which will help boost its micro-loan service in the country through its subsidiary Spean Luy.
The Digicro app allows Cambodians to apply for small loans up to $1,000 in just 10 minutes with no paperwork and will benefit from an evaluation process that uses machine learning to build an infallible credit scoring system that evaluates each user’s ability to repay on an automatic case-by-case basis. Over half of Cambodians have access to the internet, but many of them are unable to apply for a loan either due to a lack of official documentation or because they live in a remote area. Digicro is just one of many systems that hope to democratise loans in Cambodia and help the country find its feet in this new age of digital banking.
Given the extent of government corruption, it’s incredibly naive to trust the ‘official’ NPL rate among small loans of 1.6%. The International Monetary Fund agrees. It also states that the vast majority of loans in the country appear to be made by those struggling to make ends meet and are made to purchase items those of us in the Western world take for granted (mobile phones, transportation).
However, with so many unable to pay back those loans, the cycle of debt keeps on refreshing itself as more and more names are added to the over 70 registered MFIs offering their services to Cambodia’s population of 15 million. The only way to halt that cycle is for retail banks to adopt stricter lending guidelines and ensure adequate monitoring, which will be that much simpler if the country can achieve the digital transformation it desires and deserves.