Access to credit would increase dramatically if Cambodian borrowers could put up movable assets as collateral, but lenders say much more needs to be done to remove the risks associated with these assets, including the establishment of a legal framework that would restrict changes in ownership and allow creditors to repossess collateral.
Hout Ieng Tong, president and CEO of Hattha Kaksekar Ltd, one of the Kingdom’s largest microfinance institutions (MFIs), said financial institutions in Cambodia rely almost entirely on real estate property as collateral for the loans they issue. He said lenders deem movable assets, such as cars, motorbikes, agricultural machinery and crops, too risky to accept as collateral given their liquidity.
He said while lenders typically hold the title of properties used as collateral until the debt is repaid, the absence of a secure ownership registration system for movable assets makes their use as a security guarantee problematic.
“We still view that [using movable assets as collateral] is extremely risky because we lack a trustworthy platform to manage these assets,” he said. “Movable assets are easily bought and sold in the market.”
Ieng Tong said borrowers can already use movable assets as collateral to obtain same-day loans at pawnshops, though pawnbrokers physically hold the asset on their premises and charge a much higher interest rate than banks and MFIs.
However, it will take time before the government and the concerned institutions can develop a comprehensive framework that will mitigate risk and allow movable assets to be used as collateral on bank and MFI loans.
Total outstanding loans by banks in Cambodia exceeded $14 billion last year, with the total MFI loan portfolio surpassing $3.1 billion, according to National Bank of Cambodia data.
While financial experts have acknowledged that the acceptance of movable assets as collateral would increase access to finance, they cite the need for a system to ensure that once these assets are placed as a security the lender will have the right to repossess the collateral if the borrower attempts to sell it or defaults on payments.
Oeur Sothearoath, interim CEO of Credit Bureau Cambodia (CBC), the Kingdom’s only credit agency, said before banks and MFIs will accept movable assets as collateral there must be a system in place that allows creditors to repossess the assets should a problem arise.
“Currently, if a bank client uses a car as collateral to obtain a loan and then sells the car or takes it to a pawnshop the bank has no right to confiscate the vehicle,” he said. “If movable assets are ever to be accepted as collateral we would first need a legal framework that authorises creditors to collect the asset [if the borrower sells the asset or fails to make payments].”
Sothearoath said as a start, financial institutions should begin accepting movable assets from long-time customers with a good credit history or used in conjunction with fixed assets such as hard-titled real estate. This would limit the creditor’s exposure.
Bun Mony, adviser to the Cambodian Microfinance Association, said he supports initiatives to use movable assets as collateral, which he said would give small and medium-sized enterprises (SMEs) quick access to much-needed capital. He would also like to see agricultural companies, such as rice millers, able to use stock in their warehouses as collateral.
However, he said in order for these initiatives to succeed borrowers would need to demonstrate their integrity.
“SME owners need to prove their transparency by showing a clean financial report to lenders,” he said. “Borrowers also need to be honest and make sure that the properties are not used to obtain loans from many different institutions.
This is one area where the CBC can help. The credit agency, whose database contains over 4 million credit histories, can help identify when borrowers attempt to take out loans from multiple lenders.
According to Sothearoath, 17 percent of the 3 million bank and MFI customers with outstanding loans have borrowed from more than one institution simultaneously.
While the credit bureau can share this information with lenders, he confirmed that it does not keep track of what has been used as collateral.
“Until now, we have never recorded the title of a house or land [put up as collateral by] loan-takers,” Sothearoath said. “However, this could be something we should consider in the future.”