Pledge to Stamp Out Informal Money Lenders

Cambodia’s financial leaders have laid out measures to stamp out informal money lenders that often dupe customers to get into heavy debt
A money exchange shop in Phnom Penh. Kiripost/Siv Channa
A money exchange shop in Phnom Penh. Kiripost/Siv Channa

Leaders in Cambodia’s banking sector united this week to hold a discussion on taking measures against informal money lenders, who often trick consumers into taking out high-interest loans.

On Tuesday, the Association of Banks in Cambodia (ABC) and Cambodia Microfinance Association(CMA) organized a press conference on the topic: "The Situation of the Banking Sector and Proactive Measures against Informal Money Lenders." 

The session provided an update on the health of the banking and financial sector. It also disseminated the action plans that the two associations have been working on to improve the financial environment and financial literacy in 2023 and the next years ahead.

Financial environment related to financial literacy education is the initial point that ABC, CMA, and the National Bank of Cambodia (NBC) put a huge emphasis on to help eliminate and decrease the use of informal lenders. 

“Financial literacy, we have delivered it to many people, including raising awareness about financial literacy to students, youths, both in and out of schools, SMEs, also women entrepreneurs, especially to local communities,” said Rath Sophoan, Vice Chair of ABC. 

In addition, both associations decided to open​ courses on responsible credit lending​, credit policies and implement a common lending standard agreement for loans from $50,000 to $50,000​. In addition, they discussed creating a complaint center to resolve issues related to credit loans. 

“Both associations [ABC and CMA] will concentrate on sustainable financing aims spontaneously to social development in order to ensure lending from banks and microfinance. There is an environmentally-friendly agenda and financing for environmentally-friendly new energy,” he added. 

Informal lenders, especially through online platforms, affected Cambodia's economy and to prevent informal lenders there are three main steps to follow, he said.

“First, expand more legal financial service operations. Secondly, promote financial education in all images. Thirdly, improve the financial infrastructure, hence to help more citizens access the legal financial services on time with affordable price and protection by law,” Sophoan mentioned. 

Sok Voeun, Chair of Cambodia Microfinance Association, said getting to know more about lender institutions in advance, such as their license, operation service location and legal agreement, is important to avoid borrowing money from illegal lending institutions. 

“Asking about the license in order to ask more information from the officials that they are going to visit that institution, how the license looks like and how they do operations,” Voeun said. 

For the next stage, CMA plans to establish a list of legal institutions’ names so they can broadcast formal lending institutions to local communities. 

“We will arrange a list of names of institutions that got proper licenses from NBC, so we can start to share them with communities. Whenever they are wondering [is that institution legal or not], so whenever they cannot find the name of that institution on the list, it may have a problem [illegal institution]. We will try to update [the list] on a daily basis so citizens will gain more information,” the chair of CMA added. 

Solving illegal online lending is complicated as there is no specific data related to online borrowers as it is an informal practice and has not been recorded in the system. Almost 100 percent of the online lending institutions are not licensed by NBC and their operations are illegal, according to Sophoan. 

Online lending normally provides excessively high interest rates compared to other formal banks and microfinance institutes in the country. They often contact random people and introduce them to low interest rate promotions in a month or a week. This is a trap as consumers believe they are receiving low interest rates, without realizing the accumulative rate in a year. 

“Some people advertise there is only two to three percent interest rates. In contrast, banks normally show the interest rate in a year. For instance, the interest rate between eight to 10 percent per year. I noticed that the informal lending institutions rarely talk about interest rates per year. They will say two to three percent in a month and the total rate will be 28 to 36 percent in a year, which is an extreme rate,” he explained. 

Lack of study on the ability to repay and the purpose of the loan is commonly the reason why people fall into debt. 

The Cambodian banking system comprises 60 commercial banks, nine specialized banks, five deposit-taking microfinance institutions, 52 non-deposit-taking microfinance institutions, 224 rural credit institutions, 16 financial leasing institutions, five third party processors, 34 repayment institutions. Provides credit information sharing system services, one representative office of six foreign banks and 2,869 money exchange business.

The financial banking system provided loans to the economy with an increase of 21 percent to about $56 billion, while customer deposits increased by more than 11 percent or about $44 billion. The number of customer deposit accounts increased from 12.7 million to 14.3 million and the number of consumer credit accounts increased from 3.4 million to 3.7 million.

In the banking sector alone, loans to the economy increased by 19 percent to about $46 billion by the end of 2022, and consumer deposits increased by nearly 10 percent or about $38 billion.