Experts hope that the national credit agency will protect the country from a future loan crisis and reduce the cost of lending to the public

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HENG CHIVOAN

Customers bank at a local ATMs. Cambodia may be set for its first credit bureau.

WITH the rapid expansion of public borrowing and the global credit crisis threatening banks around the world, regulators are planning Cambodia's first credit bureau to link the country into a national financial database.

Authorities hope the new system will bring the country's fast-growing borrowing into the regulatory fold and protect the market from runaway debt.

The system would record personal financial information and allow institutions to assess personal credit risk, said the International Finance Corp (IFC).

The IFC, a member of the World Bank group, and the National Bank of Cambodia hope to see the bureau launched in 18 months.

"With the banking sector growing, the country needs a credit system that is up to international standards," said Margarete Biallas, program manager for the Access to Finance IFC Advisory Services.

Biallas said a two-step program would see legislation passed in the next few months, followed by consultation with financial institutions and other stakeholders.

"The [credit] bureau is mostly for microfinance institutions. As they grow and expand, they are increasingly having problems with clients who don't tell them when they have a loan at other institutions," Biallas told the Post from Hanoi.

Borrowing has increased rapidly in Cambodia - a country where banks were almost unknown until the mid-1990s.

Most growth has been in microfinance, which targets small loans to the low-income segment. Cambodia has 17 registered microfinance institutions (MFIs), serving about 767,015 borrowers with outstanding loans of US$257 million, said Tal Nay Im, the director general of the National Bank of Cambodia. The sector has expanded at a robust 30 percent per year.

there is the potential for a collapse where people are paying loans off with other loans."

"We expect [the bureau] will be operational by the time the stock market launches in late 2009," said Tal Nay Im in a speech delivered last week.

She said the bureau "will give banks and MFIs comprehensive information on potential borrowers which they can easily access from a website".

A new method

The new credit bureau would replace a decentralised system that has flourished in Cambodia's microcredit market.

Acleda Bank, the country's leading MFI, said that assessing a borrower's eligibility has been as much about determining their standing in the community as valuing their tangible assets.

Without a credit bureau, risk assessments can involve sending field officers to villages to interview a candidate's neighbours and local commune authorities. Loans are often guaranteed through Group Loans where a number of people guarantee borrowing. The system, sometimes called Greelining, is suited for rural Cambodia where few reliable personal records exist.

But with the international credit crunch slowly spreading to the Kingdom, some experts warn that the existing system could be vulnerable and cost inefficient.

Loan overlap

Paul Luchtenburg, the CEO of Angkor Microfinance Kampuchea (AMK), said that while the current system is working to expand microcredit, the lack of a unified database leaves the credit system exposed.

He warned of the risk of loan overlap where clients dishonestly borrow from multiple institutions.

"We simply don't have enough data on loan overlap ... if [loan overlap] goes too far, there is the potential for a collapse where people are paying loans off with other loans," he said.  AMK's overlap rate is about 10 percent, defaults are minuscule at .08 percent, and 99 percent of loans are repaid on-time. But Luchtenburg said the situation could deteriorate  if lending increases and the global credit crisis worsens.

30%

annual microfinance growth

l With Cambodians becoming accustomed to the idea of banking, microfinance has expanded rapidly.

One financial analyst said that a credit bureau would also bring down the cost of lending in Cambodia. "The system right now works, but it costs a lot. You have to have credit officers to assess each case. It ultimately means higher borrowing costs," said Kang Chandararot, the head of the economics unit at the Cambodia Institute of Development Study.

"It's not whether the current system works; it has to do with cost and market efficiency."

Acleda Bank's John Brinsden said he supports a national credit bureau, but questions the logistics of setting it up.

"The [credit bureau] will be a tremendous help with transparency and it will encourage good discipline in customers and will make life easier for banks," he said, adding that Acleda already has an internal credit rating system.

But setting up a comprehensive credit database where none has existed before is a difficult task, said Brinsden.

"My concerns for microfinance are purely logistical. The system would be dealing with large numbers of people, some without paper identification and with different spellings of names. It will be hard to compile in a database.

"I am not sure that all banks are in favour of it," he said.

Brinsden also questioned whether loan costs would drop under the credit bureau.  

"There are certain costs associated with giving a loan that may stay the same, even with a credit bureau."