The Credit Guarantee Corporation of Cambodia (CGCC) provided credit guarantees of $105 million as of February to businesses as their working capital for expansion.
In a factsheet issued on March 10, CGCC said that as of the end of February it has supported 1,155 businesses by providing credit guarantees for their loan applications, amounting to $104.9 million.
Large portions of the loan guarantee were used as working capital and other purposes of investment or business expansion, and capital expenditure, the report mentioned. As of January 2023, the outstanding guaranteed loan was $81.6 million while the outstanding guaranteed amount was $58.8 million.
Various credit guarantee schemes have played a crucial role in strengthening entrepreneurship and enhancing financial inclusion in Cambodia, especially during the Covid-19 pandemic, through the smooth disbursal of loans, CGCC said.
The CGCC has come up with three guarantee schemes so far — the Business Recovery Guarantee Scheme (BRGS) launched in March 2022, the Co-Financing Guarantee Scheme (CFGS) unveiled in September 2021 and the Women Entrepreneurs Guarantee Scheme launched in April 2022, besides the extension of the CFGS to tourism. The CGCC of the Ministry of Economy and Finance has extended the BRGS from January 1, 2023, until the $200-million scheme is fully utilised.
Updating some scheme features, including the scheme period, the definition of the micro, small and medium enterprises (MSMEs) and large firms, and the maximum loan amount for each guarantee are on the extension of BRGS.
BRGS aims to support businesses, including MSMEs and firms, to enhance their access to formal loans from Participating Financial Institutions for working capital, investment, and business expansion.
Credit Guarantee Corporation of Cambodia Plc (CGCC) reportedly issued a total of 1,155 Letters of Guarantee (LG) for loans worth $104.9 million equivalent as of February 28 – up 13 per cent year-to-date – as part of its mission to improve financial inclusion among small- and medium-sized enterprises (SME) and promote the sustainability and expansion of businesses worst hit by Covid-19.
As of January 31, the outstanding guaranteed amount was $58.9 million out of the $81.6 million worth of loans covered by the LGs, as noted by the state-owned enterprise in a new report, remaining in the 70-80 per cent target range at just over 72 per cent.
The CGCC was established by Sub-Decree No 140/ANKR/BK on September 1, 2020, and its $200 million Business Recovery Guarantee Scheme (BRGS) was launched on March 29, 2021 in a bid to widen access to formal loans from participating financial institutions (PFI) for working capital, investment and business expansions.
Cambodia Microfinance Association (CMA) chairman Sok Voeun lauded the CGCC’s credit guarantee arrangements as important tools for SMEs to access formal unsecured loans to keep their businesses afloat and expand in light of Covid-19 bruises.
He told The Post on March 13 that commercial banks accounted for 80 per cent of loans covered by the 1,155 LGs, while microfinance institutions (MFI) “partnering with the PFI” constituted the rest.
On the other hand, banking institutions accounted for about 95 per cent of the $104.9 million loan value, he said.
“We’ve provided credit to most of the priority sectors, including services, agriculture and manufacturing,” he affirmed.
“We are happy to join the CGCC because risks are guaranteed. We’ve noted that since the beginning of the project, the rate of bad loans has been minimal because the businesses have the potential to stimulate economic activity, although they may not have collateral.
“Hence the credit guarantee scheme has been a big help for them to expand their businesses,” he said.
The finance ministry has authorised the extension of the BRGS beyond December 31, 2022, until all funds have been utilised, an early-January CGCC statement confirmed, which noted that the terms of the scheme had also been updated, including the maximum guarantee amounts for differing categories of businesses.
The statement disclosed that loans, mostly unsecured, totalling about $89 million were guaranteed by the CGCC as of December 31 under the BRGS.
Cambodia Post Bank Plc, one of the PFIs, accounted for roughly $1 million of that, all of which went to SMEs, confirmed its CEO Toch Chaochek, telling The Post on March 13 that the plan is to increase that to $5-10 million in 2023.
To this end, the bank aims to shift its focus, from large SMEs with adequate collateral that are seeking to expand, to smaller ones without the assets needed for the secured loans to do the same, he revealed.
“The CGCC project is great for SMEs that do not have the collateral to obtain the loans – they have a shot at rehabilitating and expanding their businesses,” Chaochek said.
The 11th Give a Day has featured the Credit Guarantee Corporation of Cambodia as its keynote as well as enabled Cambodia’s entrepreneurial ecosystem to connect at the new Khmer Enterprise Headquarters for the first time in 2023.
Khmer Enterprise CEO Dr. Chhieng Vanmunin delivered the welcoming remarks highlighting the ongoing progression of the initiative which was first piloted in 2021 before receiving its full funding for monthly and quarterly meetings in 2022 and has now been renewed for 2023.
“The Give a Day monthly meetings and quarterly ecosystem builder events have been greatly welcomed by Cambodia’s entrepreneurial community – and have provided both learnings and networking opportunities between various sectors,” he told over 50 attendees from the ecosystem at KE headquarters.
“We also wanted to welcome everyone to our new headquarters at the Business Development Center in Chroy Changvar, Phnom Penh, and advise that our open working space is available to everyone in the ecosystem as well as both our meetings’ rooms and event space,” he added.
Rajiv Pradhan Country Director at Swisscontact in Cambodia and Sabine Joukes Pact Cambodia Country Director and WE Act Chief of Party echoed this statement adding it was fantastic to reconnect the ecosystem for the first time in 2023.
Increase credit guarantee issuance by 50% in 2023
Delivering the keynote CGCC CEO, Wong Keet Loong commented the scheme was looking to increase the number of transactions it underwrites by 50% in 2023 as the organization looks to increase its outreach to the country’s micro and small and medium businesses, (MSMEs).
CGCC received its sub-decree on September 2020 and was fully incorporated in November 2020 its guarantees are intended to expand the availability of credit to smaller enterprises that may not have the collateral which banks typically require to advance working capital loans.
Initially launched as a tool to close the credit gap that emerged between small businesses during the pandemic, the CGCC issued its first guarantee in April 2021 and has since given a total of 985 Letters of Guarantee (LG) for loans worth $92.7. Mr Loong said that the CGCC had even more ambitious targets for 2023.
“My biggest goal for this year is to increase the outreach of our guarantees. The CGCC wants to provide guarantees to 1500 SMEs this year. We want to guarantee $100 million of loans in 2023. I know that is optimistic but I believe it can be done,” he said in response to a question from Cambodia Investment Review.
Rising interest rates may impact growth
Mr Loong said that the main barrier to reaching this target was the global macro picture, particularly the impact of rising US interest rates.
“The main issue right now is that external factors are affecting the cost of funding, which is going up as US interest rates rise and this is affecting a number of financial institutions (FIs). They see that fixed deposit rates are going crazy which is good for depositors, but not FIs and this impacts their lending,” he added.
Global factors may act as a drag on the CGCC’s work in the near term, but fellow speaker H.E. Dr. Chhieng Vanmunin, CEO of Khmer Enterprise, said that if credit guarantees become more widely used in Cambodia it would make it much easier for firms to do business internationally.
“In their current state, a lot of Cambodian companies are unable to demonstrate a track record of success, however, if they run through the credit guarantee program with CGCC it provides a history of how well they managed issues such as shipping and cash flow.
So this is one of the things that we support them to expand their market internationally,” he said.
40% of its guarantees go to female-owned businesses
The CGCC currently offers four different guarantee products and in April last year, it launched it’s third the Women Entrepreneurs Guarantee Scheme (WEGS), a $50m capped fund that is aimed at supporting women and female-owned businesses.
According to the CGCC’s data up to 40% of its guarantees go to female-owned businesses, whereas Mr Loong said that up to 65% of Cambodian MSMEs were run by women. An audience member, who didn’t identify herself, suggested that this gap was partly due to issues over lack of financial knowledge.
“One reason is that we know most women entrepreneur’s businesses are not registered and one way to improve that is via financial literacy, and this will have many benefits. If financial literacy is growing then entrepreneurs are more confident, more informed, and able to negotiate good loans,” she said.
Mr Loong responded that the CGCC did support unregistered businesses, for the first year at least and that expanding awareness of credit guarantees should in turn increase the number of registrations by female business owners.
“However, we tell customers that you need to be registered after a year, because when the anniversary comes, if you’re not registered, then we charge you an additional 0.5%. So, in a way, it incentivizes businesses to be registered. But when they come on board, they can be unregistered,” he said.
The Give a Day program returns in 2023
Give a Day is an initiative within the Entrepreneurship Ecosystem Building Project (EEB) which is jointly funded by Khmer Enterprise, USAID’s WE Act Project through Pact Cambodia and Swisscontact.
In addition, to monthly meetings, the initiative also included a quarterly Ecosystem Builders Network (EBN) event that focused on mapping the six pillars of Isenberg’s Model of the Entrepreneurial Ecosystem.
The quarterly meetings created a space through which ecosystem builders and government agencies can share information, foster best practices, identify market gaps and opportunities, and explore collaboration or complementarity to strengthen the ecosystem.
Cambodia’s ESO ecosystem, broadly defined as groups that support, train, and fund entrepreneurs is still in the nascent stage with many new organizations launched to help nature and develop the sector.
On 10 February 2023, Mr. Wong Keet Loong, CEO of CGCC, provided a Keynote Presentation on “Credit Guarantee Schemes of CGCC and its Role in Enterprise Development” at “Give a Day” event, co-organized by Swisscontact, Khmer Enterprise, and Pact Cambodia, and presided over by H.E. Dr. Chhieng Vanmunin, Mr. Rajiv Pradhan, Country Director of Swisscontact, Ms. Sabine Joukes, Chief of Party, WE Act/Pact Cambodia, and participated by almost representatives from Entrepreneur Support Organizations (ESOs), investors and business associations.
“Give a Day” is a forum gathering the entrepreneurial ecosystem community in Cambodia that are mutually supporting each other with the willingness to bring any open discussion related to entrepreneurship for effective solutions. Today’s “Give a Day” event theme is credit guarantee schemes that are a gateway for SMEs to access formal loans, therefore it is crucial that SMEs and ESOs understand the schemes.
Mr. KL Wong introduced credit guarantee schemes’ journey in Cambodian Financial Ecosystem and its role in supporting potential MSMEs to be able to obtain an easier and larger amount of loans under CGCC’s credit guarantee through CGCC’s participating financial institutions. Participants were pleased to learn about the benefits of credit guarantees and how this financial instrument could address the challenges in access to finance that their members and network are currently facing.
As one of the first banks who become CGCC’s PFIs, what motivates Canadia Bank to utilize the credit guarantee schemes with the existing loan products of Canadia?
One of the main reasons that motivates us to use credit guarantee schemes is that we believe that the CGCC credit guarantee scheme can help potential business owners who need loans to for their businesses but do not have enough collaterals to access more capitals to meet the financial needs of their businesses, especially to recover and expand the businesses after the COVID crisis has been eased.
After adopting CGCC’s credit guarantee schemes for more than a year, how do those schemes benefit the bank and your customers?
We have provided loans under the CGCC credit guarantee schemes to more than 200 clients with a total loan size of nearly $ 20 million over the past year. Through these guaranteed loans, clients are able to expand their business in various sectors that generate more employment and contributed significantly to the country’s economic recovery.
How does Canadia Bank structure loans with credit guarantee?
We have CGCC’s guaranteed loan programs for potential clients with good credit histories and clear business plans. It can be provided to both existing customers and new customers.
Recently, both Canadia Bank and CGCC have each launched products supporting women entrepreneurs. How will the “Smart Lady Loan” and CGCC’s “Women Entrepreneurs Guarantee Scheme” (WEGS) impact women-owned SMEs in greater access to finance regarding unsecured loans?
“Smart Lady” of Canadia Bank and “Women Entrepreneur Guarantee Scheme (WEGS)” of CGCC are making a significant contribution to support women entrepreneurs to access to the finance for their business needs, avoiding high-risk and risky loans. Through these two projects, women entrepreneurs have not only been able to access their loans more easily and conveniently but have significantly reduced their financial costs, especially in the first year, which included lower interest rates and guarantee fees. In addition, women entrepreneurs will receive many other benefits through the Smart Women Lady loan program from Canadia Bank.
Canadia Bank is currently the top performer of using CGCC’s scheme, what is Canadia Bank’s strategy of further expanding the usage of credit guarantees, especially to the rural area SMEs?
We continue to reach out to our target customers, especially those who have potential businesses but do not have sufficient collateral to secure a loan. We will also continue to link credit guarantee schemes with our new loan products to provide a wider range of options for our customers.
As the credit guarantee topic is a new topic in Cambodia, how should Canadia Bank and CGCC do to raise awareness of credit guarantee to the borrowers?
In order to raise awareness about credit guarantee, we should continue to promote it more comprehensively, especially reach out to more business owners through social media, workshops, business associations, etc.
Credit guarantee aims to support businesses, especially SMEs, access to formal loans. Under CGCC’s current schemes, CGCC provides credit guarantees on loans disbursed by banks and microfinance institutions that are the participating financial institutions (PFIs) to the borrowers. To reap the benefits of credit guarantees, the borrowers must be ready to apply for loans from the PFIs in the first place. Understanding how the PFIs assess the borrower’s creditworthiness helps the borrower better prepare to get the guaranteed loans.
Before approving a loan, the bank must be convinced about the loan purpose and the appropriate loan amount for such purpose. How can the borrowers convince the bank? A reliable business plan and financial statement are good testimony to justify the loan purpose and amount. A proper business plan and financial records not only make it easier to borrow but also allow borrowers to critically examine the current business condition and plan better for success. Precisely, they help gauge the appropriate loan amount and repayment capacity. Indeed, borrowing the right amount matters. A surplus borrowing costs unnecessary accumulated interest, fees, and prepayment penalties, while inadequate borrowing may hinder potential business growth. This is called “condition,” one of the 5 Cs that banks use to evaluate borrowers’ creditworthiness.
Given that the condition is satisfied, banks also require “collateral” to protect themselves against loan default. The banks typically provide loans worth about 70% of the borrower’s collateral value. The collateral requirement is one of the main challenges for borrowers’ access to loans from banks. According to IFC, of all small and medium enterprises that approached banks for loans, 66% were rejected because of lacking collateral requirements. This is why CGCC comes in. CGCC provides credit guarantees to banks to act as collateral on behalf of the borrowers. CGCC’s PFIs can assess the borrower’s creditworthiness by treating the credit guarantee as the borrower’s collateral. This reduces the collateral burden for the borrowers when applying for loans.
The ability to repay the loan is the fundamental requirement for the bank to approve a loan. Regardless of satisfactory conditions and collateral or CGCC’s guarantees, the banks would not lend, and CGCC cannot guarantee if the borrowers cannot prove that they can repay the loans. So how can the borrower justify the “capacity” to repay? Again, this is when a reliable business plan and financial record can come into play. A proper financial statement tells the borrower’s assets, liabilities, equity, income, and cash flow which are reliable sources to evaluate the repayment capacity. Plus, the business plan describes the future business trajectory in which future income can also be used to justify the repayment capacity.
If banks provide business loans, they want to know how much own “capital” the borrower put into the business. This matters because it shows the borrower’s commitment to the company where the loan proceeds will be used. It shows “skin in the game.” How can the borrower master this? The proper financial record should show the owner’s equity in the business. Official supporting documents such as partnership agreement and company registration are valid evidence of the borrower’s investment in the company. Usually, banks find it more challenging to assess informal or unregistered businesses because they lack reliable sources of the document to validate their creditworthiness. That is why businesses are encouraged to register to improve their access to finance.
Another criterion to prove the repayment capacity is the “Character” of the borrower. Notably, banks investigate the borrower’s credit records, including loan repayment history, number of loans, and current loan outstanding, etc. The primary purpose is to assess the borrower’s trustworthiness. Currently, Cambodia Credit Bureau (CBC) provides comprehensive credit reporting on individuals and businesses, which is helpful for banks to evaluate the borrower’s character. However, in some instances, if your credit records are not favorable, you need to strengthen other Cs to convince the banks. For example, during the COVID-19 Pandemic, many businesses face challenges leading to late debt repayment and loan default, adversely impacting their “Character” and “Capital.” In this case, to get loans, the borrowers need to demonstrate a solid business plan which can improve “Condition” and “Capacity” and utilize CGCC’s credit guarantees which can improve “Collateral.”
As we can see, the 5Cs – condition, collateral, capacity, capital, and character – are important factors that banks evaluate the borrowers before deciding to lend. Improving the 5Cs increases the chance of getting loans from banks. A reliable financial statement and business plan can be used to validate every Cs, while a credit guarantee can help address the “Collateral” issue.
Lack of collateral is the main challenge for businesses in Cambodia to get loans. The Royal Government of Cambodia established the Credit Guarantee Corporation of Cambodia (CGCC) to address this challenge. With credit guarantees, borrowing without collateral is no longer impossible. For CGCC to yield the benefits requires a good understanding from relevant stakeholders about how it works.
Simply put, CGCC provides credit guarantees to share the credit risk with the banks on loans made to businesses. In other words, the banks can claim from CGCC if the guaranteed loan defaults. There are two main types of credit guarantee – individual guarantee whereby the guarantee covers individual loans and portfolio guarantee whereby the guarantee covers a portfolio consisting of multiple loans. Since CGCC itself is not a lending institution, it currently collaborates with banks and micro-finance institutions (MFIs) that are the participating financial institutions (PFIs) to provide guaranteed loans to businesses. As a government-backed institution with adequate capital in its account, CGCC is set to provide a wide range of guarantees on loans disbursed to Cambodian-owned businesses across the country.
Why should the lender need the credit guarantee?
When lending, banks normally protect themselves by requiring collateral from the borrowers. When the borrower cannot repay the loan, the banks liquidate the collaterals to cover the loss. If the required collateral is not sufficient, the bank is unlikely to lend. The collateral requirement becomes more stringent, especially during times of uncertainty such as the COVID-19 Pandemic, because businesses are perceived to be riskier, and banks become more risk-averse. Now with CGCC, the banks can protect themselves with the credit guarantee instead of the collaterals. Currently, CGCC provides credit guarantees up to 80% of the outstanding loan principal which means that the bank bears the remaining 20% of the loss if the loan defaults. The credit guarantee empowers banks to remain competitive in the market and to lend out more to underserved borrowers who lack collaterals, what is referred to as “credit additionality.”
Why should the borrower need the credit guarantee?
Credit guarantees increase the borrowing capacity. CGCC provides guarantees that act as collateral on the borrower’s behalf. Needless to say, CGCC cannot be beneficial for every business. By all means, if the business has sufficient collateral and the ability to repay the loan, the chance is that such a business does not need a credit guarantee, and the bank would also be happy to lend even without CGCC’s guarantee. However, it is common that a potential business with the ability to repay the loan is unable to borrow because of insufficient collateral. Businesses simply cannot pledge the collateral on every loan they wish to borrow. The collateral is limited. This is a huge loss to the business and the economy as a whole. With the required loan, the business could have generated more income, employed more workers, and produced goods or services that contribute to the economic growth of the country. When CGCC provides guarantees to the banks, the borrowers now have easier access to loans from the banks because the banks are willing to lend more with less collateral requirement.
Credit guarantees are used by many countries as a policy tool to improve access to finance and financial inclusion. However, never before has a credit guarantee corporation been incorporated in Cambodia. According to the World Bank, “Public credit guarantee schemes (CGSs) are a common form of government intervention to unlock finance for small and medium enterprises (SMEs). More than half of all countries in the world have a CGS for SMEs and the number is growing.” While many credit guarantee schemes have proved successful in supporting the SMEs, many have also failed.
It is still early to assess how far and how fast CGCC can support the businesses. CGCC must continue to strengthen credibility, efficiency, and transparency and adhere to the best practices including the World Bank’s principles for public credit guarantee schemes for SMEs to gain trust and support from all relevant stakeholders. What is also important at this stage is that all the players understand and start to utilize the credit guarantees for the right purposes.
“I’m Financially Literate Program” was successfully launched by Sathapana Bank, in partnership with Khmer Enterprise, Manulife Cambodia, and Credit Guarantee Corporation of Cambodia (CGCC). The second cohort of this program was organized on 08 & 09 and 15 & 16 October 2022 to provide non-financial services to SMEs and MSMEs and especially women in business.
More than 30 Entrepreneurs and business owners attended the second cohort, and shared their experiences as well as related financial issues, and they also had the opportunity to learn more about entrepreneurship, prepare financial statements for Business, understand loans with banks and choose the right loan for their businesses.
This training program is specifically designed to provide practical skills and experience related to financial literacy and business management skills, as well as access to business networks that can drive business growth for entrepreneurs, especially women entrepreneurs.
On 17 September 2022, CGCC and Maybank Cambodia co-organized the “SME Building Capacity and Capability (BCC) Programme” at Maybank Tower, participated by more than 50 SME entrepreneurs to provide business support instruments and technical advisory based on international best practices to support SME growth, productivity and innovation, as well as enhance competitiveness for SMEs.
Mr. No Lida, Deputy CEO of CGCC, remarks on the importance of this program for SMEs beyond the cooperation between CGCC and Maybank Cambodia, and Mr. Duk Sarak, Head of Community Financial Services of Maybank Cambodia, relayed the opening remark for the event. SME participants had the opportunity to learn about the topic of “Business Registration in Cambodia” from SokSiphana & Associates, “The Importance of Financial Discipline for SMEs” from Acclime Cambodia, “Access to Finance and Guarantee Scheme” from Maybank Cambodia.
Upon the collaboration on providing loans with credit guarantee, on November 2021, CGCC and Maybank Cambodia also co-organized the Business Forum on “Supporting SME Businesses in Cambodia” to discuss more details about the possibility of collaboration on how to support SMEs for greater access to finance despite collateral issue and the support of SME’s capacity Building and long-term growth.