Industry Report 2020: Banking and Microfinance Sector in Cambodia

Cambodian market may appear to come near the point of saturation since credit-to-GDP ratio has exceeded 100%. However, this is not really the case. While total credit offered by banks and microfinance institutions reached 121% of the GDP in 2019, the market still has plenty of room for growth. According to the World Bank data, the world’s average domestic credit to private sector to GDP ratio stood at 134%, while the East Asia & Pacific (excluding high income countries) region’s average ratio reached 153% in 2019. In addition to this, it is also important to note that unlike many countries with a well-developed capital market that serves as alternative financing sources, Cambodia has relied primarily on the banking and microfinance sector to finance business growth as the Kingdom’s capital market still remains at its infancy and may not meaningfully serve as alternative financing sources to bank or MFI loans. This implies that the level of credit-to-GDP ratio that can be deemed as a saturation point in Cambodia should be higher than that in countries where various funding options alternative to bank or microfinance loans are available.

Furthermore, it is also worth noticed that strong credit growth in Cambodia has been propelled not only by increasing level of financial inclusion (as measured by credit-to-GDP ratio), but also by the country’s strong economic growth rate. Over the past decade, Cambodia had achieved an average real GDP growth rate of about 7%. Taking into account the inflation rate, this can be translated into an average nominal GDP growth of around 9 ~ 10%. Prior to the coronavirus outbreak, Cambodia’s nominal GDP growth rate was projected to slow to around 8 ~ 9% for a number of years to come. This could be the minimum growth rate of bank and MFI credit in Cambodia should the level of credit-to-GDP ratio remain unchanged. Although the impact of COVID-19 on the economy and the banking and microfinance sector is expected to be considerable, it is likely to be short-term, and the post-COVID-19 economic recovery would likely be accompanied by a more sustainable and healthier banking/microfinance sector growth. On the positive side, the COVID-19 helps put a brake on the rapid growth of credit to real-estate sector, the root of future financial and economic crisis.

In addition to the overall sector growth potential, a number of specific areas of promising growth can also be identified from the analysis in this report.

§  First, there could be potential growth in provincial areas given that the current level of banking/microfinance outreach still remains low in the rural area (the number of bank/MDI branches per 100,000 people in provincial areas is less than half of that in the capital city).

§  Second, there is untapped potential that could be exploited to diversify revenue through the introduction of innovative financial products and services, which may help offset further decline in lending rates. In Cambodia, banking and microfinance sector’s non-interest income accounted for merely 12.4% of total revenue in 2019. In Thailand, commercial banks’ net fee and service income could represent more than 15% of total revenue, while non-interest income (including gain/loss from various investments) could account for as high as more than 25% of total revenue.

§  Third, the agriculture is also a segment that may subsume a robust growth potential ironically due to its under-performance in recent years. Of the total credit by banks and microfinance operators, credit to agriculture accounted for slightly below 10% in 2019, down from 15.3% in 2015. Growth of credit to agriculture slowed down drastically during 2015-2019 period as the agricultural sector was affected by unfavorable weather condition. The sector recovery in the post-COVID-19 era would mean more financing demand into the sector.

§  Specifically, for MDIs and former MDIs, it may be possible to further lower their overall cost of funding by continuing to increase the proportion of customer deposits in their financing structure (MDIs’ average customer-deposit-to-total-fund ratio stood at only 50%, compared to commercial banks’ average of 61% as of 2019).

§  The other growth area would be the credit card loan. The number of credit cards issued by banks, despite a notable growth of 29.4% during 2015-2019, was less than 112,000 as of 2019, compared to the number of debit cards of more than 2.6 million. This suggests plenty of room for growth for the credit card business.

US and European DFIs and funds were early investors in the Cambodian banking and microfinance sector. However, most of them have already exited their investment as the market has reached the point where they consider their mission complete. New investors that have emerged tend to be a large major foreign commercial bank or financial group with strong financial capability and abundant experience. They brought about low funding cost, new products and services, as well as new technology, taking the Cambodian market competition to a new level.

On top of the emergence of new market players that have intensified the market competition, the competitive landscape in the banking and microfinance sector is also characterized by the continued predomination of large financial institutions. Of the total 60 banks, the top 20 (resp. top 30) largest banks accounted 85.7% (resp. 95.0%) of market share in gross loans, 91.8% (resp. 98.2%) of market share in deposits, and 93.1% (100.2%) of market share in net profit in 2019. Of the total of 82 microfinance operators, the top 10 largest ones accounted for 90.3% of market share in gross loans and interest income, and 95.0% market share in net profit last year.

§  Therefore, in order to compete and survive in this intensified market environment, financial institutions may wish to either find strategic shareholders that have a strong financial capability and abundant experience to increase competitiveness, or merge with other financial institutions in order to achieve the economy of scale and improve operational efficiency and profitability.

§  For investors who are foreign banks and wish to establish presence in Cambodia, it may be possible to do so by (1) setting up a branch office; (2) establishing a new locally-incorporated entity; or (3) acquiring the existing entity. Given the market domination of large institutions and the great number of small and passive institutions, there seems to be too many financial institutions for the current size of Cambodian market. For this reason, setting up a branch office or establishing a new entity would not be the best option since it may be difficult now to obtain a license from the central bank, while starting everything from scratch may requires years for the new business to meaningfully take hold in the Kingdom, and would give up more time to be left behind by the current market leaders. On the other hand, acquiring an existing entity would provide a better option that allows investors to jump start and immediately build up their presence and brand image in Cambodia. However, for this option, investors may want to make a swift move since the number of good existing entities that are available for purchase now has reduced significantly as the result of recent M&A transactions in the industry.