Cambodia’s growing Home Loan problem
Newbuild property in Cambodia |
Calls for more controls on developers also acting as loan
arrangers
Real estate industry insiders want the central bank and the
Ministry of Economy and Finance to set up policies and strengthen the law on
residential project developers who act as financial institutions to provide
housing loans to the customers without assessing their ability to repay them.
They say that because competition is tough in the real
estate market in the Kingdom and the market is limited, some developers allow
potential buyers to make installment payments on properties, especially houses,
directly with the developers without asking for a down payment.
They are also offering discounts to attract customers to
purchase their projects.
The fear is these strategies could hurt customers who lack
financial literacy and don’t understand the obligations of repayment or the
consequences of failing to meet them.
In some cases homes are repossessed and buyers lose a lot of
money.
Po Eav Kong, chief executive officer (CEO) of Advance Real
Estate, says that when people buy a house in a borey residential project by
paying in installment to the developers, the interest rate can be higher
compared with what banks and microfinance institutions offer.
He adds that the interest rate with Borey developers is from
10 percent to 20 percent per annum. However, if the customers get a home loan
from a bank, the interest rate can be between 6 to 8 percent or, in some
circumstances, 10 percent at most.
“If a customer buys a house and uses the home loan from the
borey, the borey developers will not know his or her financial position and
therefore cannot judge an ability to pay the loan back or not,” Po says. He
adds that buyers don’t always read the small print regarding borey repayments
and may not spot unreasonable terms and conditions.
Po adds that some countries set legally binding laws
preventing real estate agents, developers and lenders from operating in
consort. Cambodia does not. He wants more transparency regarding the process in
the Kingdom.
Real estate investor, finance and investment specialist
Ngeth Chou agrees all too often developers who also operate as lenders do not
investigate potential customers’ backgrounds or have the skills or manpower to
do so.
Ngeth, who is also a former senior consultant ant Emerging
Markets Consulting (EMC), is concerned about lack of financial literacy in a
country where around only 50 percent of the 16 million population has access to
at least one financial service: either a bank account or borrowing account, an
insurance account or an electronic wallet (e-wallet) account. For the past 20
years, the central bank, National Bank of Cambodia (NBC), has been leading the
effort in bringing the financial services to remote areas.
Experts estimate the formal financial inclusion rate in
Cambodia is 59 percent, with more than a third of the population using informal
services or services such as unregistered lenders or saving clubs. At least 29
percent use neither formal nor informal financial services and are thus
financially excluded. Within the formal financial sector, just 17 percent of
adults use banks, while 24 percent use the services of microfinance
institutions (MFIs).
“Because it is so easy to borrow, some customers can buy one
or two houses. Therefore there could be a housing bubble,” he said. “Some
customers expect that when they buy a house they can sell it on at a profit or
make money renting it out. But, if that expectation is not met, the customer
may suffer a problem with financial flow. He or she may then put the property
up for auction, which has an impact on the market as a whole,” he said. “The
best way is that customers should not use housing loans from developers because
they do not study the financial ability of their customers. However, the bank
will study financial incomings and outgoings, make a judgment on loan risk as
well as offering lower interest rates,” he says.
“If the banks approve the housing loan, it means that the
quality of the borey developers, the location, the legacy of the developers and
the nature of the borey development project is taken into consideration,” he
said. “Some developers are not financial institutions: They are builders, so
they have no authority to check on a customer’s financial health.
“The instalments with the developers present a very high
risk to economic stability because currently there is no proper check on the
transaction with the developers. If there is no check from an authority, risk
is increased. It is not a small issue because Borey developers build a lot of
houses, so if there is a crisis it will affect the entire economy.”
Kim Heang, founder of Khmer Real Estate Co, and regional
operating principal of KW Cambodia, agrees that customers should not take
housing loans from residential project developers.
“If I am a banker or financial regulator, I will not allow
real estate developers to accept installment payments or play the role of a
bank to provide a housing loan. Developers should not do that. Only banks should
set installments or decide on housing loans,” Kim adds.
“I do not support developers building houses and creating
their own installment services. They should work with banks. They have to ask
customers to hand over a down payment of 30 percent and then ask the customers
to work with a bank,” he says.
“Now, most borey projects run installment plans of their
own,” he says, adding it is wrong.
He said that the global economic crisis that started in 2007
in the US economy developed from this strategy – bad loans being sold on. The
risk is that if the customers have a 3 to 5 percent down payment, they will
accept it without studying the possibility of repayment. However, through the
bank, they will study the possibility of repayment.
The NBC says in its Macroeconomic and Banking sector update
2019 and outlook for 2020 that the credit growth in the banking sector has been
recovering after it saw a fall for the past three years. The rise is stemming
from the growth of people’s incomes, demand and the diversified financial
services among the financial institutions.
The NBC adds that the recovery of credit growth is supported
mainly by the growth in loans to real estate and construction, consumption and
commerce. “Credit growth in 2019 was mostly overwhelmingly based on mortgage
loans and to consumer product makers,” supporting economic growth.
The central bank, however, warned that if the consumers do
not spend the loan for the right purpose, the rise in credit could be
economically risky. The Credit Bureau Cambodia (CBC) says consumer loan balance
by type as of September 2019 totaled of $7.65billion and, of those, mortgages
absorbed 48.36 percent, credit cards 0.61 percent and personal finance just
over 51 percent.
CBC says non-performance loans (NPL) for 30 days as of
September 2019 on mortgages was only 0.57 percent, while personal or consumer
loans were 1.75 percent and credit cards were 2.65 percent.
Kim Heang - founder of Khmer Real Estate Co and regional operating principal of KW Cambodia |
Kim says, however, credit growth on housing loans with the
banking and finance sector would be good because they can record the
transactions, loan defaults and supply and demand across the real estate
sector.
“Therefore, for customers to use the bank for housing loans,
the borrower tends not to default. When they pay installments via borey
developers, the loan default is much higher because the developers do not study
the possibility of payback or other vital details. Their customers consequently
are high risk. I urge customers not to pay the loan directly with the
developers. Developers should recommend customers to work with a bank,” he
adds.
Koy Seyha, marketing manager for Borey TV Star, agrees that
customers should go with the banks or microfinance institutions to ask for
housing loans rather than going to borey developers. He adds that before the
bank approves a loan to a customer, the bank will study all the customer’s
assets, and collateral and the possibility of repayment. The banks have studied
minute details about the customers, so they know what the possibility of the customers’
ability to repay is viable or not. This means if the bank approves a loan, there
is only perhaps a 1 percent risk of non-repayment.
“Mostly, Borey TV Star is works with banks. We want the bank
to conduct an assessment of the customer’s property and assets. We do not want
the customers to work with us directly,” Koy adds.
He says the use of installment services with boreys involves
high interest rates and shorter terms than banks.
Because the bank specializes in loans, they can take a year
to decide whether to proceed. Borey developers need more immediate access to
working capital, so they need a short time to decide.
“Most of our customers are referred to a bank. Mostly, for a
housing loan, they have to pay a down payment of 30 percent and 70 percent is
loaned from a bank,” Koy says.
“Banks have a relationship with the NBC, so all customers’
histories are recorded.”
“Customers pay us up to 20 to 30 percent, but the rest is
dealt with by a bank. We encourage customers to work with a bank, not with the
developers. TV star has five projects with 500 units in Phnom Penh,” Koy adds.
Po says, however, he sees housing loans from financial
institutions are increasing year-on-year but buyers who work with borey
developers often have not thought about risk.
“Some customers have only a small amount of money and
speculate with a view to selling the property back at a profit within the next
three to four months,” he added. Po said that if the sales are sluggish and the
property price is stable, it will affect financial flows,” he adds.
He, among others, wants the National Bank of Cambodia and
the Ministry of Economy and Finance to set up a policy to manage the sector
more efficiently regarding sales and purchases of borey projects. In some
cases, the law is inadequate so it allows brokers in the real estate market to
exploit buyers. They want this to be legally discouraged or more draconian
measures implemented to safeguard the financially illiterate.
Cambodia’s growing Home Loan problem
Reviewed by Editor PH
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11:41 AM
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