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Digital Finance for Financial Inclusion in Cambodia

ISSUE 2020
No 03
Release 22 February 2020
By Mr. Ngov Mengyu

Executive Summary

❖ Financial inclusion is the key mechanism to enhance further economic development in Cambodia. Improving accessibility to finance at an affordable rate allows SMEs and entrepreneurs to actively capture the opportunities that arise from a fast-growing economy in Cambodia. Moreover, financial inclusion will help to improve social welfare in Cambodia.

❖ However, the traditional banking system has limitations to further bridge the financial inclusion gap. Digital Finance will help excel financial inclusion.

❖ Improving financial inclusion might cause disruption to current financial stability. Policy makers need to implement the right policies to ensure that the digital finance ecosystem will thrive and grow sustainably.

❖ Making prudent regulations and frameworks to ensure it is being practiced ethically and safely. Improving financial literacy is critical to nurture the financial ecosystem and protect the consumer.


Financial inclusion is the foundation point of socio-economic development. The importance of financial inclusion policy will serve to unlock the Sustainable Development Goals (SDG) in Cambodia, particularly in regard to SDG: 1 Poverty Reduction and SDG: 9 Industry, Innovation and Infrastructure. Hence, financial inclusion may bring the sought-after process of inclusive growth into Cambodia.

The purpose of financial inclusion is to include every person who is unbanked into the formal financial system and to optimally serve the underbanked group of people. The goal of financial inclusion is thus to ensure that individuals have equal opportunity and greater access to formal credit, saving, payment and insurance, all at an affordable cost.

The improvement of financial inclusion will enable access to credit all whilst promoting developments of the social and financial infrastructure available to the public. Thus, individuals have the financial system to turn to during times of economic turbulence to smooth out their consumption. Furthermore, Small and Medium Enterprises (SMEs) from all sectors have equal opportunities to participate in the Cambodian growth. This shows the foremost fundamental of financial inclusion; its function is not only about access to finance and savings, as this mechanism will also help alleviate the country social exclusion existing in the economy.

The Royal Government of Cambodia (RGC) and National Bank of Cambodia (NBC) have been focused on improving financial inclusion through the introduction of microfinance institutions (MFI) and strengthening credit scoring mechanisms. Nevertheless, SMEs with limited assets for collateral purposes and financial history are excluded from the services.

In consideration of the challenges amongst Cambodia SMEs and low-income households, the rise of digitalisation may give way to the rise of Fintech and peer-to-peer (P2P) lending platforms as an indirect alternative to the traditional banking system. Fintech firms have the potential to connect with this cash-based society and transfer it into a digital-based society, where daily transactions can be completed digitally. Such a transformation will require each individual to be connected with any form of financing system. The purpose of this policy brief is to evaluate the current financial inclusion in Cambodia, illustrating how digital finance may enhance financial inclusion and change individual saving behaviour. It will help identify the key challenges of financial inclusion and provide recommendations.

Current Stage of Financial Inclusion and Opportunities in Cambodia

Individual well-being is positively linked with individual access to credit and banking systems. As entrepreneurs and SMEs have creative ideas, accessibility of finance and valuable institutional consultant may empower entrepreneurs and SMEs towards expansion and participating in the growing economy.

Providing equal access to financial systems will create a multiplier effect in the economy. One of the key elements that can boost economic growth effectively is the utilisation of credit to boost consumption and accelerate production capability. Figure 1 illustrates household debt as a percentage of GDP, by comparing Cambodia’s ratio to China and ASEAN nations. Cambodian Household debt ratio to GDP is estimated at around 15.78%. This ratio is relatively low compared to other countries, illustrating that the financial market in Cambodia is under- developed.

SMEs are the catalyst of innovations, since they lead to improving financial ability and piloting industrial progression. For Cambodia, SMEs alone account for at least 1.2 million of the Cambodian labour forces. 90% of 510,000 registered firms are categorised as SMEs 1 . Similarly, to all businesses, SMEs require additional capital in the form of credit for further expansion and operation. SMEs tend to have limited assets for collateral purposes, and the lack of banking, financial statements and credit records make them unpromising and risky candidates for the banks. Thereby, SMEs struggle to access credit from commercial banks. It is in this way that Fintech could be appropriately used to help excel SMEs in building up their financial statements and building their credit worthiness.

The RGC and NBC have been promoting Microfinance Institutions (MFI) to spread microcredit and improve financial inclusion amongst SMEs. MFI provides two large benefits; a relatively low-interest rate and longer loan repayment duration. The interest charge of MFIs is offered relatively lower compared to informal sources of financing. With a long duration of loan repayment, it will help free up the SMEs’ cash flow. As indicated by the World Bank report in 2016, households with access to loans will increase their probability of engaging in economic activities and become an entrepreneur enterprise by 4% compared to households without access to such loans.

Regardless of the wide extension of MFIs in rural areas and the microcredit as a driving force of entrepreneurial and commercialisation activities for households, SMEs growth continues to suffer from the credit gap. The mismatch of deposit and demand for credit have widened the credit gap.

The Rise of Digital Finance

Digital finance applications may be the solution toward the ineffectiveness of the conventional banking system. Digital finance is a platform to ease businesses and individuals’ daily transactions and payment purposes. In order to complete such transactions, individuals are forced to deposit cash in their account. Hence, digital finance has a potential effect in bridging the credit and saving gap in Cambodia’s financial market. The ADB (2019) predicts that the capitalisation of financial inclusion gap will see an improvement of 32% of GDP, with a potential growth of 1.7$ billion in electronic transaction flows between parties and, capable of mobilising an additional $500 million of saving.

Cambodia have been saving in various forms, as according to Figure 2, 16% of Cambodians have no saving behaviour and 72% of the population have been saving informally. Even if, the majority of Cambodians are participating in informal saving, this form of saving might not be sustainable and unable to promote saving behaviour amongst Cambodia. Informal savings could be saved in both liquid and illiquid assets. Saving in the illiquid assets are less flexible for the saver to convert those assets for their emergency needs5 . As for making informal loans, saver might get exposed to liquidity risk and credit risk The practices of informal saving occur from one of the possibilities of the lack of connectivity and access to commercial banks and MFI branches. Digital finance provides convenience, accessibility, affordability and safety, all of which mitigates both the distance and transaction costs.

Financial Inclusion and Financial Stability

Inclusive financing through digital financial services will help diversify the financial sector and promote transparency of the monetary transmission mechanisms. Financial inclusion might come with financial instability. Thus, these challenges must be equipped with innovative regulations designed to protect financial stability in Cambodia.

Digital finance and P2P lending platforms might expose the specific group of individuals to further financial risks. Greater inclusion is associated with extensive borrowing from the individuals, as these practices will be extremely risky during a systematic event as it may disrupt the financial system. In fact, the lack in financial understanding can be held responsible for the mismanagement of money and financial planning. Cambodia’s financial literacy rate is 11.8 out of the total possible score of 216 . This is well below the world average set at around 13.3. This is crucial toward maintaining financial stability, as there will be the higher probability that households will enter the vicious cycle called the debt trap7 . The trade-off between financial inclusion and financial stability may be resolved through a well designed policy to foster further economic propensity.

Policy Recommendations

In the promotion of digital finance in Cambodia, different levels of strategies, innovation and regulations are needed. Government bodies and financial intermediaries need a wide range of approaches to intensify the practice of e-banking. Even though internet banking in Cambodia has expanded extensively, the P2P lending platform is still in the beginning stages of the ecosystem. Karprak is the only P2P lending platform in Cambodia to date.

Beyond the innovation of delivering products and services in the technological base, Cambodia needs to take the advantages of the new value in the digitalised age which is “Data”. Modernising the individual ‘credit score’ through data monetarisation will allow traditional and modern banks to evaluate the creditworthiness of a larger pool of potential borrowers. The alternative method of credit scoring may be complementary to the conventional method of credit scoring.

Further, a stringent regulation framework needs to be prudent. Taking Indonesia as a case study for policy implications, where the state applied two frameworks being the ‘principles base’ and the ‘collaborative approach’ to regulate and facilitate the development of digital finance in Indonesia. With these two approaches, the policy aims to mitigate the proliferation of delinquent platforms in which they conduct business in an unethical style. Also, it aims to continuously keep control of the markets, assuring the ecosystem thrives. Although, the RGC and NBC have enacted E-commerce laws, consumer protection law and fintech regulations. The RGC and NBC need further framework in order to oversee the digital finance sector activities to thrive sustainably.

Beyond the points discussed above, financial education is crucial, in particular, Cambodia needs to buffer its financial literacy rate. Empirically , financial literacy is significant and positively correlated to improving financial inclusion. Financial education and general education teach individuals to be forward thinkers, and hence, it inspires saving behaviour amongst individuals. Educating the public with financial knowledge not only showcases the advantage of saving but educating the public on debt management and educating the public to invest smartly to prevent them from being indebtedness.

The opinions expressed are the author’s own and do not reflect the views of the Asian Vision Institute.