Phnom Penh, Cambodia, May 27, 2003 — A just-released discussion paper explains some of the reasons why Cambodia’s small and medium enterprises (SMEs) find it difficult to borrow the money they need to invest in long term assets. Not only do banks require SMEs to secure loans with land and buildings, and pay loans back in less than a year, they charge high interest rates (an average of 17%). According to the paper, Financing SMEs in Cambodia: Why do Banks Find it so Difficult, such borrowing terms make it nearly impossible for SMEs to finance the investments in buildings and equipment that would allow them to expand their businesses.
The discussion paper, which summarizes a study commissioned by the Mekong Private Sector Development Facility (MPDF), gives a number of reasons why banks are reluctant to lend to SMEs. A few of these include bankers’ lack of expertise in assessing the viability of borrowers’ businesses; borrowers’ lack of expertise in convincing banks to lend them money; and the fact that banks have no way of checking would-be borrowers’ credit history because Cambodian law protects their privacy.
Limitations of the law and legal system are another constraint. Banks consider laws inadequate to protect their interests, and if a borrower defaults on a loan it can take months for a case to be heard in the backlogged courts. If the borrower appeals a judgment and the case is then tried in the Appeals Court and then the Supreme Court, official and unofficial fees can cost the bank a large percentage of the value of the loan. If the borrower goes bankrupt, the bank may find that other creditors are allowed to claim the assets, even when these were financed by the bank.
To help resolve these and other problems that bar SMEs from securing adequate financing, MPDF’s discussion paper offers a number of recommendations. These include: setting up a commercial court to adjudicate business conflicts; amending or repealing the existing law that protects borrower’s privacy so that banks can share information on borrowers’ credit history; providing training to banks that will increase their skills in risk assessment and the setting of appropriate interest rates; promoting the development of local consulting services that can help SMEs prepare effective business plans; and developing specialized financial institutions such as leasing companies that would give lenders clear rights to any assets they finance should borrowers default.
According to Adam Sack, Regional Manager for MPDF in Cambodia and Lao PDR, if these and other recommendations in the discussion paper are followed, they could contribute to increasing the availability of longer-term and more affordable loans. “Securing such financing is crucial for SMEs. Future economic growth in Cambodia and the creation of sustainable jobs depend to a large extent on the successful development of SMEs.”
MPDF’s study findings are being widely disseminated to the banking industry, government, donors and entrepreneurs. MPDF is currently pursuing a number of the recommendations with its partners, including the provision of training to loans officers and owners of SMEs.
For further information and a copy of the discussion paper, contact Mr. Hor Soneath, MPDF Business Development Officer for Research and Policy Dialogue. Telephone: (855)-023-210 922. Email: shor@ifc.org.
