Structural Integrity: Anthony Galliano
THE purchase of a home is usually the most expensive acquisition a person will make in their lifetime, and given the financial outlay is normally a multiple of their annual income, a housing loan or mortgage is commonly used to finance the purchase.
In most jurisdictions, mortgages are typically used to finance home purchases as few individuals have sufficient savings or liquid funds to enable them to purchase the property outright. The majority of home purchases in Cambodia however are substantially outright cash purchases and the use of mortgages or housing loans, while gaining acceptance, are only used in a small percentage of home acquisitions.
The roots of housing loans in Cambodia, or a form of them, can be traced back as far as 1997 when microfinance institutions or NGOs, such as ACLEDA Bank, offered forms of housing finance. Although not housing loans as they are known today, a product was available. In 2004 Canadia Bank, followed by other banks, introduced housing loans.
With the growing use and development of banking products in the market such as deposit accounts, ATM cards, and credit cards, one may ask why there is only a moderate use of housing loans for property acquisition. The answer may very well be twofold, cultural adversity to borrowing and product awareness.
Cambodia is still substantially a cash economy. Borrowing can be viewed as a weakness, or certainly a negative. It is not unusual for the family to gift cash, land or housing when members acquire a residence. In some cases, prospective suitors for marriage may be rejected if they require financing to buy a home.
Financing through debt, in general, is viewed as a burden. Outright payment of cash, or gifted property, is the primary means of home acquisition in Cambodia. The use of and trust in banks has, however, increased substantially with many Cambodians now depositing their cash in banks rather than housing savings in a safe or other secure places in the home.
Banks have made great strides in educating the population on the merits of their products. The banking industry, recognising the low penetration rate of the housing loan product and potential growth, is making significant efforts to increase product awareness through advertising and educational efforts.
By most accounts it is not hard to get a housing loan in Cambodia provided one has sufficient income, a down-payment, clean credit record, proof of identity and an employment history.
A mortgage is a loan secured by real property, usually the property to be purchased, often for acquiring a residence. The borrower will make a down-payment, and the lender will provide a loan for the remaining acquisition cost. Loans are usually long-term, 5-30 years, and repayment can be principal and interest or interest only and a bullet payment.
The acquired property is typically pledged as security or collateral, meaning the lender has a legal charge over the property, and the lender may impose limits on its use or disposal. The lender is usually a financial institution such as a bank and will charge interest and normally a one-time arrangement or origination fee.
Upon completion of repayment of the loan the borrower will own the property outright, however, should the borrower default on the loan, the bank may foreclose and dispose of the property.
Housing loans are available to Cambodians for purchases of houses, condominiums, and flats. Some banks will only lend on a property in which the borrower will reside, in other words the bank will not finance property speculation.
Generally a 30% down-payment is required and the term of the loan is usually 5 to 10 years. Some banks offer shorter-term financing such as bridge loans of six months and longer-term financing of more than 10 years if the transaction warrants. Interest rates generally vary from 10-14%, the recent trend being a decline.
Some banks will charge a one-time arrangement fee and generally expect a hard titled property as security.Property insurance is mandatory.
The borrower will need to demonstrate proof of income with repayments usually based on 20-40% of monthly income. A Credit Bureau comprised of the banks is expected to be in operation in 2011. Banks will share non-performing loan history and this is expected to expedite the approval process in the coming years.
There are high expectations from the banks that the present and coming generations will embrace the housing loan product.
Housing loans comprise 3-10% of the total loan portfolio of the larger banks and non-performing loans are generally quite low for this product. The general strategy is to grow this business substantially. The idea is to cross-sell deposit accounts with credit cards, vehicle and housing loans.
Given that only a modest minority of the population use the product, the anticipated expansion of real estate development in Cambodia, and the growing awareness of the merits of consumer bank financing, the prospects for the housing loan product look very promising.
Anthony Galliano is Chief Executive
Officer at Cambodian Investment Management.