Cambodia should be proud of the proliferation of the financial services landscape. By all major financial and non-financial metrics, the Cambodian banking and finance sector over the past 15 years has been a marvel of success and a model of transformation.
It has attracted hundreds of millions of dollars in foreign direct investment, it employs a couple hundred thousand workers, and its product capabilities have expanded, offering a competitive landscape that is certainly consumer and investment friendly. Most importantly, it has delivered finances to the farthest reaches of Cambodian’s borders and folded millions of the un-banked into the formal financial sector.
One of the key drivers of this success has been the openness of Cambodia’s liberal, but well-regulated, market-oriented financial sector. This has been Cambodia’s ethos and one of its greatest assets. Financial services’ investors have rewarded Cambodia by developing and expanding markets, broadening target clients and products and services. But the recent interest rate cap on lending may change that or could push financial institutions to new service delivery channels to make them more efficient.
As the drama unfolds on the 18 percent interest rate cap issue, with arguments being tabled for and against, it is easy to get caught up in the hyperbole. Meanwhile, microfinance institutions (MFIs) are busily reworking to their business plans to accommodate a new reality, while shareholders are considering their strategies. MFIs are likely to adapt and adjust their business formulas and revenue structures so that they can retain their profitability and solvency while still servicing their target clients.
There is too much at stake not to.
There are always unintended consequences in policy-making no matter how utilitarian the intentions are. One example that has not been widely discussed is the ability of Cambodia to attract future foreign direct investment (FDI) in the financial sector or other industries. This is simply because investors need some certainty on the investment climate so they can make decisions based on a set of economic and business parameters. Sudden changes in the investment climate make investing in any industry uncertain. While not clear at this point whether this will affect FDI, certainly it may cast reservations on some investors’ plans.
In the past few years we have seen some consolidation in the sector. Consolidation has the potential to offer additional efficiencies and change industry structures for the benefit of consumers and shareholders. Of course, it can also have negligible or negative effects as well. For example, larger financial institutions typically raise funds at a lower cost than a smaller institution, and if a large bank were to merge with a smaller financial institution, margins may be enhanced across a merged entity. This is usually at the determent, though, of one of the merged entities. The recent changes may push consolidation to accommodate new business realities.
On a positive note, competitive factors have pushed a number of banks and MFIs into client segments they would normally not have focused on. Although interest rates have already been on the decline for more than a decade it has still provided attractive returns for investors. For example, traditional MFI lenders are increasingly doing small and medium-sized enterprises (SME) loans and more banks are pushing into the SME space. This has benefited customers the most, offering a higher range of product and service choices while providing access to finance at a cheaper cost.
Overall, the future of the financial sector in Cambodia still looks strong and is going to be increasingly technology based. This means that many financial services will be done on electronic platforms saving both the client and the financial institution time and money. And while these changes would have likely to take much more time to evolve than a developed economy, perhaps these recent developments will push it faster. These advances will facilitate new operating structures in financial institutions that will make them leaner and better for consumers.
David Sok Dara Marshall is a Canadian Cambodian who has been working in the banking sector for more than 19 years. Prior to joining Mekong Strategic Partners as a partner in 2016, Marshall was the head of multi-national corporates and financial institutions group with ANZ Royal Bank.