Phnom Penh: Commercial banks in the capital have capitalized on the real estate boom with real estate and construction loans accounting for over a third of their portfolios, according to the National Bank of Cambodia (NBC).
The percentage of real estate related loans is a sharp increase from the previous year and coincides with massive inflows of foreign direct investments mostly from China.
“The real estate sector has been supported by foreign direct investment (FDI) inflows to construction and real estate activities which accounted for 20 percent of total FDI in 2018 and grew at 27.5 percent,” stated the NBC in its Financial Stability Review report. “At the same time, bank loans to construction and real estate activities which constituted around 17.1 percent of total bank loans expanded at 35.4 percent in 2018.”
The banks have also rapidly expanded credit to the real estate sector and mortgage-related financial products from 16.5 percent share of total credit in 2012 to 27.6 percent in 2018.
Moody’s Investors Service Inc. noted in its annual country credit report that the Cambodian economy is on pace for steady growth mainly because of foreign direct investment from China into the real estate sector.
But the report also warned that the banking sector’s reliance on the property sector may put the financial industry in peril if foreign investments into the kingdom dry up due to global economic volatility, specifically the US-China trade war and investor fears of an imminent global recession.
Banks are starting to dial back on the percentage of real estate loans in their portfolios, heeding warnings from the Central Bank that too much credit is being extended to individuals or entities without proper financial reporting records.
“Cambodia is like Malaysia many years ago,” said Maybank Cambodia CEO Mohd Hanif Suadi. “Credit is about validity. What you tell me I will validate? You tell me you want $100,000 loan. How do we validate? We either vailiate by looking at properties or assets and see how those assets can be translated to cash flow. That determines whether or not you can pay. But those are unrecorded. “
“So how do we create a sense of discipline to begin to keep a financial record?” asked Suadi.