Last year’s credit crunch in the banking sector prompted many financial institutions (FIs) to cut their interest rates in 2024 to stimulate macroeconomic activities amidst persistently strong loan demand.

According to the National Bank of Cambodia (NBC), as of December 2023 the country had 58 commercial banks, nine specialised banks and 87 microfinance institutions (MFIs).

Credit growth reached $57.6 billion in 2023, marking an increase of only 4.8% from the previous year.

Loan distribution across sectors showed varied growth: The hotel and restaurant sector saw a marginal increase of 0.6%, wholesale sector loans grew by 4.8%, home purchase loans increased by 6.4%, real estate loans surged by 16.9% and construction lending rose by 13.9%. 

The central bank also noted that the non-performing loan (NPL) rate in the banking and microfinance sectors was 5.4% and 6.7%, respectively. Outstanding deposits witnessed a 13.1% increase to $47.9 billion last year, with assets in the banking system escalating to $84.3 billion, representing a year-on-year growth of 8.6%.

Some FIs reducing interest rates

Toch Chaochek, CEO of Cambodia Post Bank Plc (CPBank), reported a significant growth in his bank’s performance, with outstanding loans increasing by more than 8% and deposits growing by 15% last year. 

He noted that many FIs had reduced their interest rates by approximately 0.5 percentage points, a strategy aimed at enhancing loan disbursement in the market, especially as many institutions did not grant many loans last year.

“I see that some [FIs] started to cut interest rates because they did not perform well last year due to the global economic downturn and the rise of inflation. At the same time, the increase in interest rates by the US Federal Reserve [Fed] last year also influenced some [FIs] to raise their interest rates, which contributed to their very low growth,” he explained.

Chaochek said that projections of the Kingdom’s economic growth by international FIs, such as the World Bank and the International Monetary Fund (IMF), as well as the Cambodian government, indicate an increase of more than 6% this year. 

He also referenced the Fed’s plans to cut interest rates to stimulate the economy, suggesting this as a key factor in the decision to cut rates domestically.

“We will see more loan disbursement this year compared to last, as many [FIs] continue to reduce interest rates and approve more loans to improve their performance,” he added.

Chaochek highlighted that retail trade accounted for around 38% of loans, housing 24%, transportation 11%, personal use 8%, construction and real estate 5% and agriculture 5% as well.

Say Sony, CMO of First Finance Plc, stated that his institution performed well last year, maintaining a manageable NPL rate. 

He emphasised that the slower growth in the financial industry’s loan sector last year was not solely due to some FIs increasing interest rates, but also due to the macroeconomic slowdown impacting business activities.

“We are the first FI specialising in affordable housing finance in Cambodia. We work with individual homeowners and small families, not heavily involved with big project developers,” he explained. 

“This means both individual clients and families can still access First Finance loans for home improvements or building new housing. We aim to lower our interest rates as much as possible,” he added.

The IMF projects the country’s economic growth at 6.1% in 2024, with inflation at 3%, while the NBC forecasts a slightly higher growth of 6.4%, with a lower inflation rate of 2.5%, both supported by the recovery in the tourism and manufacturing sectors.

Expert’s view

Anthony Galliano, group CEO of Cambodian Investment Management Holding, told The Post that consumers are undoubtedly curtailing their spending due to higher inflation and consequent higher interest rates. 

“This is evident in the decrease in spending on large, long-term purchases such as properties, cars and major durable goods. Business investment was also on the downtrend due to tighter and more costly credit,” he stated.

He noted that in 2023, the real estate market experienced an unprecedented decline, with prices dropping by 20-30% or more. He said the downturn was accompanied by a significant reduction in new car imports and a contraction in retail sales.

“Lower interest rates will decrease borrowing costs, which will be a relief to stressed borrowers and help alleviate NPLs. Credit policy at [FIs] should soften, spurring investment and spending,” Galliano explained.

“The current NPL issue is under control and the NBC and the banking sector are managing this well through the peak of the US interest rate hike cycle. This prudent management will pay off as interest rate reductions are anticipated for mid-year, barring any geopolitical crises. 

“This is an election year in the US, and although over the last 17 election years, rates fell less than 30% of the time [5 out of 17], it is expected that they will fall this time around,” he added.