Chapter 1 CAMBODIAN SMALL AND MEDIUM SIZED ... - ERIA

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1. a lack of collateral2. an in-adequate legal framework and poor contract enforcement3. a limited number of financial products on offer4. an inability of SMEs to prepare basic financial statements.5.2.1 Collateral and land titlingBanks are typically reluctant to extend credit unless the borrower can provide propertyas collateral for the loan. The weak legal system and a lack of traceability make banksunwilling to accept anything other than un-movable property as collateral. Unless theland has legal title transaction costs are increased by the banks efforts to verifyownership. These costs are passed onto the borrower in the form of higher interest rates.The Ministry of Land Management Urban Planning and Construction, withhelp from international donors, are systematically issuing formal title on all land inCambodia. Once SMEs have formal titles recognised by the courts the transaction costsassociated with using land as collateral should decrease. However, as of 2005 less thanten percent of property had been issued with a title. 66 An optimistic estimate of the timeneeded to register formal title to all plots of land in Cambodia is ten years. Businesseswithout land are often constrained to expensive short term loans from informal sources.5.2.2 Improving collateralThe need for land as collateral can be reduced by strengthening the legal system asdiscussed above in 0. With more specialised courts, contracts will become cheaper,speedier and easier to enforce. Lenders will have more confidence in forms of collateralother than land. The ability and willingness of SMEs to access formal long term creditshould increase as the risks and costs of lending decrease.Improving the judicial system to deal with commercial cases is a long termproject, unlikely to benefit SMEs in the foreseeable future. In the short term, SMEability to access productive capital can be improved by providing other forms offinancial services, such as leasing.23
5.2.3 LeasingThere are very few financial services other than credit available to Cambodia SMEs.Leasing is common in many developing countries but has yet to become popular inCambodia. This is probably, as with many of the problems facing SMEs, due to thedifficulties enforcing contracts. Although banks have the authority to lease assets itseems the lack of legal protection discourages them from doing so. 67In 2000 the International Finance Corporation assessed the options for leasingin Cambodia. Their findings identified four main restrictions preventing leasingarrangements. One, the banking law restricted leasing to banks only. Two, the taxsystem discriminated against leasing arrangements. Three, the lack of traceability inCambodia meant that banks were dependent on personal relationships with customersfor securing repayments. And four, if there were payment defaults repossessing a leasedasset was difficult. 685.2.4 Improving access to leasingTo overcome these barriers the SME Sub-Committee recommend three major policychanges. One, enacting a leasing law enabling non-bank financial institutions to financeand operate leases; Two, amending tax legislation to encourage both banks and otherfinancial institutions to provide leasing services; three, strengthening the legalframework to effectively address issues of payment defaults. 695.2.5 Limit information on borrowersOne of the barriers to an effective financial sector in Cambodia is financial institutions’lack of traceability and knowledge about borrowers. Banks are often unwilling to extendcredit unless they are aware of the potential borrower’s credit history. With so fewSMEs borrowing from the formal sector almost none have a credit history. Additionally,with such weak institutions it is easy for those with poor credit histories to hide thisinformation.24
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Page 7: Table 2: SME definitionEmployee num
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Page 14 and 15: Table 3 Rectangular Strategy: 13 st
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Page 18 and 19: Lowering barriers to company regist
Page 20 and 21: The ADB recommend any citations sho
Page 22 and 23: would not only reduce the costs of
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Page 28 and 29: positions for approaching financial
Page 30 and 31: 1. more trade fairs2. areas for SME
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Page 36 and 37: 63World Bank, 2004.64World Bank, 20

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