Cambodia plans crackdown on predatory and informal lending practices

Harrison White

Banking and Microfinance Associations in Cambodia are pushing for a decrease in the use of informal lenders and promoting the use of licensed financial services after an official announcement by the regulator and national police.

While the total value of informal lending is unknown according to an official joint statement on February 2, they are recklessly promoting and offering credit and other services through digital means like social media and mobile apps without proper authorization from NBC.

Read more: Cambodia’s microfinance association emphasizes sustainable growth as total lending portfolio hits $9.1B

These entities are known for imposing exorbitant interest rates and exploiting borrowers through fraudulent contracts, causing crippling debt and negative socio-economic effects with lending well above the 18% per annum cap, the joint statement said.

This behavior threatens the stability and fairness of the financial system, damaging public trust in the Cambodian banking sector. The NBC and National Police will enforce legal action against illegal lending and unauthorized advertising of financial services. The public is urged to only borrow from authorized lenders and report any suspicious activity to the authorities, it added.

While there is no exact definition between informal and illegal lending according to the industry systemic, organized, and usury lending without a license would constitute illegality and offenders will be dealt with on a case-by-case basis.

Importance of financial literacy to borrowers

In response, the Association of Banks in Cambodia (ABC) and Cambodia Microfinance Association (CMA) held a press conference on the current state of the banking and finance sector, and the proactive measures being taken to address the use of informal financial services.

Speaking at the ABC Headquarters in Phnom Penh Rath Sophoan, Vice Chair of ABC, emphasized the importance of financial literacy to address the issue adding that financial literacy is key in reducing the reliance on informal lenders,” he said.

“We have delivered financial literacy education to a wide range of individuals, including students, youth, small and medium-sized enterprises, women entrepreneurs, and local communities,” he added.

Rath Sophoan, Vice Chair of ABC.

Both associations have decided to offer courses on responsible credit lending and implement a common lending standard agreement for loans under $50,000. They have also discussed creating a complaint center to resolve issues related to credit loans.

“We want to focus on sustainable financing aimed at promoting social development, with a specific focus on environmentally friendly financing and new energy,” said Sophoan.

Read more: Interview with Sok Voeun on ensuring the prosperity and sustainability of Cambodia’s microfinance sector

Sok Voeun, Chair of the Cambodia Microfinance Association, stressed the importance of borrowers researching lending institutions before borrowing money. “It’s important to know about the licensing, operations, and legal agreements of lending institutions to avoid borrowing from illegal sources,” he said.

CMA also plans to establish a list of licensed lending institutions to help educate communities on which institutions are legitimate. “Whenever citizens are unsure about the legitimacy of an institution, they can check our list, which we plan to update daily,” he added.

Banks and Financial Institutions’ Code of Conduct

In January 2023, the ABC, CMA, and Cambodian Association of Finance and Technology (CAFT) officially put into full implementation their inaugural Banks and Financial Institutions’ Code of Conduct. Marking the end of a nearly one-year interim implementation period, during which the associations have worked to disseminate and strengthen the code among their members.

The code of conduct is a set of guidelines and principles aimed at promoting ethical and professional conduct among banks and financial institutions in Cambodia. It is intended to enhance integrity, trust and transparency in the financial sector, and to protect investors and consumers from harmful practices.

Read more: Cambodia’s financial sector fully implements flagship code of conduct for industry protection

The code was initiated and adopted in line with the National Financial Inclusion Strategy 2019-2025, which aims to promote sustainable development and resilience in the financial sector, as well as to enhance consumer and investor protection and professionalism.

Sok Voeun, Chair of the Cambodia Microfinance Association.

Cambodia aims to be taken off the gray list of the Financial Action Task Force (FATF) early in 2023 as Cambodia implements measures to prevent money laundering and combat terrorism financing such as implementing the Law on the Prevention of Money Laundering and Combating the Financing of Terrorism in June 2022.

As a result, the country is required to comply with additional regulations for international financial transactions, making it more challenging to invest in Cambodia compared to nations not on the list.

According to CMA’s, latest data loan portfolios grew to $9.135 billion (23.8% annual increase) with 2 million clients while deposit at the 5 MDI has grown to $4.686 billion (20.1% annual increase) with 2.66 million depositors.

These funds derive from five deposit-taking microfinance institutions, 52 non-deposit-taking microfinance institutions, 224 rural credit institutions, 16 financial leasing institutions, five third-party processors, and 34 repayment institutions.

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