US Fed Rate Hikes Pinch Cambodian Pockets

Three foreign banks have so far raised their interest rates on loans, with more likely to follow as foreign and domestic cost of funds become expensive, leaving a mass of discontent borrowers seeking answers. Though out of its hands, NBC deputy governor Chea Serey has stepped in to explain the situation and offer advice
Apartments and condominiums in Phnom Penh, December 25, 2022. Kiripost/Siv Channa
Apartments and condominiums in Phnom Penh, December 25, 2022. Kiripost/Siv Channa

The impact of the US Federal Reserve persistent interest rate hikes has finally hit home with Cambodians experiencing higher loan interest rates of around 0.5 percent this month, owing to the jump in funding costs on the back of higher exchange rates.

While the rise in funding costs is inevitable, National Bank of Cambodia (NBC) deputy governor Chea Serey expressed regret that given the high level of dollarisation in the country, the central bank has no control over the negative effects of a stronger US dollar on Cambodia.

“The exchange rate is unmanageable as Cambodia still uses dollars as a currency, so it is out of our control. We cannot do anything,” she said during a recent programme on the promotion of riel usage and the Bakong system in Sihanoukville.

However, she said, “actually, the inflation in Cambodia is not really high” compared to neighbouring countries, but the high usage of “another country’s currency” means that interest rates have to rise in tandem.

“Since we bought the money from them at a high price… when our citizens borrow money from us it is also costly,” Serey said, urging Cambodians to widely use the riel, so that the NBC will have increased capacity to maintain the interest rate in the market.

‘Not an island’

In the first quarter of this year, the cost of funds, an amount that is spent by financial institutions to acquire funds, is estimated to have risen between 1.5 and 2.5 percent, said Kaing Tongngy, spokesman for Cambodia Microfinance Association (CMA).

The higher the cost, the more is passed on to consumers to secure loans, though In Channy, president and group managing director of ACLEDA Bank Plc, reminded that domestic cost has also gone up correspondingly.

“I think increasing the cost of funds is not a new thing, it gradually happened since last year. It is a known issue that banks and their stakeholders should have been well aware and prepared. In terms of long-term funding, we are not an island,” he said.

Looking at the general components of funding, Channy shared that 15 percent of it consists of shareholders’ equity, 70 percent is funded by the domestic market (savings and deposits), with the remaining 15 percent originating from the international market.

“The 15 percent of funds is not just impacted by the rise in international cost of funds. Domestic costs of funds have also risen, as they are also the entrepreneurs,” he said, referencing domestic funders.

Unfair, unacceptable

Cathay United Bank (Cambodia). Kiripost/Siv Channa
Cathay United Bank (Cambodia). Kiripost/Siv Channa

For consumers, the impact is profound amid inflation which is anticipated at three percent this year and four percent in 2024, Asian Development Bank estimated.

Based on the information gathered by Kiripost, about three banks have started raising their base rates on loans and outstanding loan interest rates by about 0.5 percent. They are SBI Ly Hour Bank, Cathay United Bank (Cambodia) Corp Ltd and Union Commercial Bank Plc (UCB).

These banks are among nearly two-thirds of foreign-owned banks in Cambodia.

A Cathay United customer, who declined to be named, said he received a text message last Monday from his bank informing him that rising funding costs will result in an interest rate hike of 0.5 percent per annum, effective from April 12.

“I was a bit surprised when I got the SMS and was wondering if the bank would raise the interest rate for my outstanding loan,” said the public relations firm employee, who took out a $14,000 loan with an annual 10 percent interest rate four years ago.

He felt that using the rise in cost of funds as a reason to raise interest rates on outstanding loans is “unfair” because the loan agreement was approved before the pandemic and the war between Russia and Ukraine. “It is okay if the interest rate is increased for new loans, which are reflective of the current economic situation.”

That said, the borrower mentioned that he will not object to the new interest rate as his loan size was “small” and it is expected to mature at the end of October this year.

Another Cathay United customer, who spoke on the condition of anonymity, shared that he is currently servicing his $40,000 loan, which he took out five months ago, and that informing borrowers of a rate hike just a week before the new rate application is “unacceptable”.

“I think any increase in loan interest rate should only be applicable to new loans. My loan states that in the first year, the interest rate is 6.88 percent per annum and in the second year it goes up to 7.50 percent.

“But after the additional hike of 0.5 percent, the rate comes up to 7.38 percent for the first year and eight percent for the second year,” he told Kiripost.

Cathay United, a wholly-owned subsidiary of Taiwanese Cathay United Bank Co Ltd, did not respond to a request for comment, while UCB, wholly owned by Taipei-based E.Sun Commercial Bank Ltd, could not be reached for comment.

Meanwhile, SBI Ly Hour CEO Phalarin Chea acknowledged that the increased lending rate of 0.5 percent per annum will apply to “most of the bank’s customer segments” effective of April 3.

“It is to cover part of our costs of funds, which is not fully compensated,” Phalarin said, adding that the lending rate is “lower” than the rate of the increase on its cost of funds. “[Because] we always take care of the effect on our customers, who are also [operating] in a difficult business environment.”

The base rate increase on loan interest rates is applicable to existing loans where agreements have stipulated adjustments based on floating rate, Phalarin said.

“For the new loans, we follow our policy which we would discuss on new competitive loan conditions including pricing,” he added.

He also mentioned that the management would review the lending rate when the source of funds reduces.

Serey explains

Discontentment was evident as many Cambodians took to social media to vent their frustrations, citing the Law on Consumer Protection and Prakas on Unfair Contract Clause in the Banking and Financial Sector to strengthen their case.

This caught NBC’s Serey’s attention, who offered an explanation via Facebook. She said banks that borrow from abroad have to pay higher interest rates, just as banks that use local capital pay higher interest rates on depositors.

She said looking at deposit rates, “almost every bank” has raised them. Depositors want high interest rates, while borrowers want low interest rates. As a result, some banks have decided to raise interest rates on their consumer loans.

“The question is, is this wrong, or right? I also do not know how each contract is written,” Serey said, adding that it depends on the agreement between the two parties.

“Some contracts are based on international floating interest rates. So, if international interest rates rise, credit interest rates also rise, and if international interest rates fall, credit interest rates also fall,” she wrote.

But there are also some loan agreements, she pointed out, where the interest rate is predetermined for the total term of the loan. In this case, the bank has to renegotiate with the customer if the terms change.

“Therefore, please check your contract carefully before signing. And, understand your rights and obligations clearly to avoid conflicts in the future. However, according to the regulations in force, financial institutions are obliged to clarify all customer questions and present all conditions honestly and transparently,” Serey said.

No hikes so far

The US central bank has been raising the interest rates since March last year. To date, a total of nine hikes, bringing the interest rate to five percent, have been implemented to quell rising inflation in the US.

What this means to Cambodia is its high exposure to rising exchange rates. In 2021, 65.5 percent of commercial banks’ source of funds comprised customer deposits, which represented 142.9 trillion riels. Short and long-term borrowings made up 13.3 percent while capital was above 21 percent, NBC data shows.

Thanks to the large customer deposit base supporting the banks’ source of funds, NBC said the overall funding base appeared “stable”.

But unlike microfinance deposit-taking institutions, where 55 percent of its total funds comprise deposits, microfinance institutions rely on multilateral and bilateral donors, banks, foreign and domestic financial institutions and investors.

But the gradual hikes in the Fed’s interest rates have not effected a change in the sector yet.

CMA’s Kaing Tongngy asserted that association members “have not raised” the interest on loans as they are “willing to absorb” the increased costs to help clients recover from Covid-19 and other economic challenges. “The members will not increase interest rates on existing loans,” he added.

Don’t overreact

Sharing his views, Association of Banks in Cambodia chairman, Raymond Sia, said the rises continue to impact most countries globally from an angle of supply, such as banks and financial institutions (BFIs), and demand (customers or end consumers).

“The days of quantitative easing when interest rates were low or at zero are behind us,” he reminisced, while projecting interest rates to remain at “this elevated level” for the next 12 months before some tapering is seen.

He said member BFI customers can expect higher interest rates for their deposits, just as how global banks felt an immediate impact on overall cost of funding when the Fed started raising them.

“BFIs have their respective shareholders and stakeholders to be accountable to and with their own individual asset and liability management framework, they would need to strike a balance and adjust their lending rates accordingly to ensure that it commensurates with the higher cost of funding (which increases the cost of operations),” Sia told Kiripost.

Weighing in, Stephen Higgins, co-founder and managing partner of Mekong Strategic Partners, said like most countries in the region, Cambodia is seeing much tighter liquidity which is flowing through to higher interest rates on both deposits and loans.

Citing Vietnam as an example, where tight liquidity has had a major impact on the property market, Higgins viewed that something similar can be expected in Cambodia.

But, while these interest rate increases will be “painful for some borrowers”, the level of increase is “well below” what borrowers have seen in places like the US and Australia. “So, we shouldn’t over-react,” said the banker.