Cambodia Investment Review
A recent report from Visa Consulting & Analytics is signaling substantial potential for digital transformation in Cambodia’s burgeoning credit landscape. By delving into the trends, opportunities, and challenges in the country’s evolving financial sector, the report suggests that Cambodia stands poised for the introduction of modern forms of credit, such as credit cards and digital loans.
Economic growth and financial inclusion have been significant goals for Cambodia. Over the past two decades, the country has experienced exponential economic growth, averaging an impressive 7.7% annual rate from 1998 to 2019. This robust growth trajectory positions it among the fastest-growing economies worldwide. Cambodia now aims to transition from its current lower middle-income status to an upper middle-income status by 2030.
Amid this rapid growth, the need for credit has become democratized across Cambodia’s population. Approximately 58% of the populace, regardless of gender, age, education, or income, requires credit. The report states, “Cambodia’s borrowing landscape showcases an unprecedented spread across its demographic divisions, providing a unique opportunity for financial inclusion”. The figures were drawn from the Global Findex Database 2021, shedding light on the widespread credit need among Cambodians.
Further democratization of financial services in Cambodia
This equalizing phenomenon in the financial market underscores the enormous potential for further democratization of financial services in Cambodia. With the right strategy and technology, the report suggests that this need could be met through modern credit services, boosting financial inclusion.
Government initiatives have played an instrumental role in paving the way for a safer and more effective credit industry. The National Bank of Cambodia (NBC) has implemented robust measures such as an 18% interest rate cap on micro-loans and enhanced credit reporting systems. To foster financial literacy, they have promoted education, aiming to curb predatory lending practices and protect borrowers.
The report underscores the transformative potential of digital finance for Cambodia’s economy, particularly for sectors like agriculture. It states, “The role of digital finance in stimulating Cambodia’s economic growth, particularly in the agriculture sector, is transformative”. Online payment instruments empower farmers to shift from cash to digital transactions, fostering greater access to credit and stronger cash flow, which is integral to the sector’s financial stability.
Role of credit cards in fostering financial inclusion
Modern forms of credit, such as credit cards, virtual credit cards, mobile payments, and wearables, offer promising avenues for financial inclusion. The report highlights how these credit forms offer flexibility, enable positive credit history, and promote digital transparency.
“Credit cards serve as a powerful instrument for financial inclusion, allowing consumers to responsibly access credit, maintain a positive credit history, and develop financial literacy,” the report reiterates, emphasizing the role of credit cards in fostering financial inclusion.
One innovative credit solution is the bank-issued ‘Buy Now Pay Later’ (BNPL) schemes. As the report notes, these short-term financing options could support customers’ needs, allowing for a smoother transition to other forms of credit.
Responsible lending and prudent risk management
However, the report underscores the importance of responsible lending and prudent risk management practices in the credit business. It points to the role of Credit Bureau Cambodia in collating credit information, which has helped reduce the number of “credit invisible” Cambodians, thus promoting a more inclusive financial landscape.
“The key to success lies in prudent risk management and responsible lending practices, combined with innovative credit decisioning models using both traditional and alternative data,” the report concludes.
The report suggests strategies for banks to minimize risk while promoting credit usage. It states, “Having 43% penetration of personal finance loans in the consumer loans market is an opportunity for lenders to consider revolving credit conversion.”
For new-to-bank customers with little or no credit history, the report suggests that lenders might offer secured credit cards. This not only provides protection for the lender but also enables customers to build credit, fostering a more inclusive financial ecosystem.
The Visa report concludes with optimism about Cambodia’s financial future. “Unlocking modern forms of credit in the evolving digital credit landscape lowers the barrier to entry for financial services and brings more Cambodians into the formal financial sector, encouraging safe and responsible payment transactions,” it suggests.