ANZ Royal's chief executive officer, Stephen Higgins, says the mortgage sector is in its infancy, but still critical to the bank's future success

Photo by: HENG CHIVOAN

ANZ Royal CEO Stephen Higgins is building his loan book for the future.

TAKING out a mortgage to buy a home was unheard of in Cambodia only half a decade ago. Even today, although mortgages have been available since 2004, most housing transactions are still handled in cash. Prime Location caught up with ANZ Royal CEO Stephen Higgins last week to discuss how the mortgage sector has changed in the year and a half his bank has been in the game. He took us through the ins and outs of assessing home loan applicants and underscored how the sector  will one day be an important component of the retail banking business.

ANZ Royal launched a new home loan marketing campaign in Prime Location last week. What potential do you see in the sector?

It's still very early days in the home loan sector in Cambodia. In other markets around the world, mortgage lending is a very big part of what banks do, but here it's tiny. We've got 550 mortgage customers, not because we don't want to do it, but because the demand isn't quite there yet. But it's something that will grow over time.

What is the total value of those mortgages?

You are probably looking at US$10 million to $25 million. It's not big.

How big do you think the market could grow over the medium term?

It's simply not the main game here. At the moment, the profits we generate are primarily from the corporate side. I have one corporate customer who is bigger than my entire mortgage book. But we are building the retail side for the future. You are looking at five years plus.

The other thing that is important here is that on the consumer side one of the really powerful things is credit scoring, where when a customer applies you can put some data through a computer and it spits out yes or no so you can give an answer right away. To do that, you need a history of data.

For us, undertaking these loans now, putting them in place, understanding how customer behaviour works will in a few years' time provide us with that data to allow us to do that. It's a competitive advantage. It's what banks do all around the world, and we will do it here once we have sufficient data.

What terms do you offer, and how do these differ from more developed markets?

It tends to be up to 15 years and it amortises over that period. The rates are variable - you can't get fixed rates in this market because there is no swaps market here. We traditionally lend up to 50 percent against property here, which is lower than most other markets,  but prices are more volatile here so we do need to take more precautions. We look at people's ability to service the debt, proof of income and we look for hard title. We don't accept soft title.

Incomes are relatively low here, so do you accept other forms of collateral for loans?

We've got 550 mortgage customers ... it's something that will grow over time.

We don't lend to someone unless they can afford to repay. We assume that we don't need the collateral, so either they can afford to repay us or they can't. If they can't afford to repay us through their income, we don't give them a loan. It's not like America where they had ninja loans - no incomes no jobs or assets. We insist on incomes.

The security - the property - is only there as a backstop in case something goes wrong and they can't repay us. Generally it's the house, so if we are only lending 50 percent or less against the value of the house, that is normally sufficient security.

A new generation is coming through that has gone to university and are now in jobs paying around $300 a month. If they don't come from money, are they able to pick up a mortgage and enter the property market?

The reality is it wouldn't be fair on them to do so because they couldn't afford it; you'd have locked them into a lifetime of debt.

So, what is the minimum monthly income for a mortgage?

 It depends on the value of the loan, but typically you'd be looking at repayments of maybe 30 percent of someone's income. You can

backward engineer that to work out what kind of a loan you could provide for that level of income.

For someone on $300 a month, maybe they could afford $15,000 to $20,000 but that is not going to buy you much in the way of a property.

Given our processing costs, registering things with the titles office, you simply cannot do those loans and make money.

If a borrower defaults, what are the legal channels for collecting? Are these channels adequate?

It's an interesting one. In three years of operating we have never had a credit loss here. The secured transactions law in Cambodia is actually very good; the uncertainty is enforcement, and for us that's untested.

The other thing that is very noticeable here is that there is a very strong willingness to repay on the part of the customer. For us, when customers have got into trouble, we have been able to work with them to resolve it rather than pushing it through the court system.

There is a very big face issue involved; for a lot of people, borrowing money in the first place can be a challenging thing to do. To then default on it is terrible, so people will do what it takes to repay. One of the things we have seen quite a lot is that often parents or relatives will bail people out. There is no legal obligation for that to happen but there is a very strong moral obligation.

Is there adequate housing insurance in Cambodia?

We insist on house insurance because the reality is that if your house gets burned down, all you are left with is a piece of land, whereas we have lent against the house and land. So we insist on insurance and often it is provided by our sister company Infinity.

What about insurance to protect against defaulters?

In developed markets you can get income insurance that says if you get sick for whatever reason and can't repay your mortgage then this insurance will step in and meet your repayments. It's insurance to make sure that if something happens to you, your family is not left with the burden of having to meet the repayments or have the house sold.

I am not aware of it being available here, and I would be surprised if there's a market for it. The market for mortgages is still too small.