Although financial institutions have flourished in recent years, informal credit systems at the village level remain popular for many Cambodians, a practice that could eventually hurt the economy and add risk to both lenders and borrowers, economists say.
Phlong Pisith, who recently completed research for Northern Illinois University, in the US, found that when money is badly needed, many still turn to rich neighbors or local leaders, a system that relies on relationships and confidence between borrows and lenders and is devoid of contracts.
Focusing on Kandal province’s Koh Thom district, where informal credit remains very popular, Phlong Pisith found that informal lending did not even require collateral.
“The traditional credit system is still active in Cambodia nowadays,” he told VOA Khmer recently. “Because when people need money urgently, they can’t go straight to the bank or micro-finance institutions. So they first go to borrow, at interest, from those they know.”
These informal systems have historic roots and are used by fishermen, farmers and business owners alike, as a way to create more jobs or improve livelihoods.
“It is very hard to borrow money from banks,” said Chum Kimsuv, a farmer in Battambang province. “There are many documents needed, such as signatures from the commune, as well as photographs. It’s too complicated. If we borrow from [local] capitalists, we already know each other well.”
Doung Chamreoun, a fisherman from Kandal, said he was a bank customer, true, but he also couldn’t abandon informal systems, which remain important to his daily living.
That may be, but economists warn these systems will eventually hurt the economy, as some lenders quickly get into trouble with high interest rates. In informal systems, these can reach from 5 percent to 10 percent a month, while credit in the formal sector is around 2.5 percent or 3 percent.
Creditors, meanwhile, risk losing money because they have no guarantees, said Lim Sovannara, an economist for UNDP. People continue to use the systems because they have limited education and limited trust of financial institutions, he added.
Phlong Pisith also found, though, that informal lending can support formal lending, helping borrowers make payments on time instead of risking their collateral.
Still, said Chan Sophal, president of the Economists Association of Cambodia, only formal credit systems will better the economy over time.
Numbers of borrowers, lenders or loan amounts in this informal section are unknown to the National Bank, its general-director, Tal Nay Im, said. But she claimed the number is falling, as more people turn to financial institutions.
Cambodia has more than 50 banks and micro-finance lenders, though only the latter provide money to the rural poor. Up to 2008, the National Bank estimates that some 850,000 people have taken advantage of such loans, a number that has jumped from a reported 44,000 borrowers in 1994.
Still, a large amount of informal lending takes place, said Ros Seilava, deputy secretary-general of the Ministry of Economy and Finance. The government is now strengthening its policies to encourage more interest rate reduction among micro-finance lenders, while encouraging people to use formal services.