The Asian Development Bank (ADB) partnered with law firm DFDL Cambodia hosted a seminar on the topic “Cambodia’s Regulatory Framework Development and Progression related to Security Interests in Movable Property” on May 8, 2024 at the Hyatt Regency Phnom Penh.
Summary:
- In the current period of post-pandemic recovery, and ongoing global crises impacting Cambodia, the use of immovable property (such as real estate) as collateral has become stagnant.
- Some experts suggest that financial institutions and creditors should consider using movable property (all properties except land and buildings) as collateral. This approach can help more businesses, especially SMEs, access financial support amid the economic downturn.
The seminar featured remarks and presentations by H.E. Buon Sarakmony, Secretary of State at the Ministry of Commerce (MoC); Roberto Leva, Trade and Supply Chain Finance Program Relationship Manager at ADB; and Nearirath Sreng, Co-Head of Banking & Finance Practice at DFDL Cambodia and ADB National Consultant.
The Law on Secured Transactions (LST) was promulgated by the Cambodian government in 2007, following the preparation of its draft in 2003 for Cambodia’s participation in the World Trade Organisation (WTO).
During his opening remarks, H.E. Buon Sarakmony explained that while this law has now existed for 16 years, it is currently being further pushed due to the present economic context and the introduction of new government policy supporting small and medium enterprises (SMEs), particularly encouraging informal businesses and young startups to join the formal economy.
Overview Of Cambodia’s Law on Secured Transactions: Security Interests In Movable Property 2024
Cambodia has an array of laws and legal mechanisms dealing with secured financing, including:
- The Law on Secured Transactions (2007);
- Financial Leases or Operational Leases;
- The Land Law (2001);
- The Civil Code;
- Collateral Pledges;
- and more.
After the Cambodian government adopted the LST in 2007, the Secured Transaction Filing Office (SETFO) was established under the MoC in 2008, with the support of ADB. This law specifically addresses security interests related to movable property.
What Is Movable Property Under Cambodian Law?
According to Cambodia's LST, 'movable property' that is used as secured collateral refers to property of any nature, including tangible or intangible property. This property can be located within or outside the country and can exist currently or come into existence in the future.
- Tangible collateral comprises 'goods' that are movable when a security interest is attached. Examples of tangible collateral include consumer goods, inventory, farm products, equipment, fixtures, and more.
- Intangible collateral may include accounts, secured sales contracts, accounts receivable, documents, instruments, money, and other similar assets.
In October 2023, the MoC issued a new Prakas (declaration) further fleshing out the LST and detailing: the rights of parties to determine notice filling; searching SETFO’s public record; requesting certified reports; caution-listing; and obligations of entities under the MoC.
What Opportunities Exist For Lenders During An Economic Downturn?
“High interest rates due to global conflict, and ongoing recovery from the pandemic, have caused Cambodian banks, which rely heavily on overseas funding, to struggle," explained Nearirath Sreng, Co-Head of Banking & Finance Practice at DFDL Cambodia, and ADB National Consultant.
Sreng also addressed certain real estate issues, such as the oversupply of land and houses in Cambodia, which has led to a decrease in prices.
"Banks and financial institutions are no longer favouring collateral in the form of immovable property," she emphasised.
Therefore, she suggests that financial institutions take the opportunity to consider other forms of collateral, especially movable property.
For Creditors - Why Consider Movable Collateral?
- Increased Demand for Credit: During an economic downturn, businesses often need extra cash flow to survive, which leads to a higher demand for credit, as companies look for working capital or other financial support.
- Higher Interests Rates for Riskier Loans: When creditors decide to accept other collateral instead of immovable property, "this may involve high risk," but high risk often translates into high returns, such as higher interest rates or fees.
- Expansion Into An Underserved Market: Expansion of collateral presents an opportunity to also expand the market, targeting underserved sectors like startups and e-commerce. Sreng underlined the importance of reaching underserved markets by recalling the boom in e-commerce businesses during the Covid-19 pandemic.
- Asset-Based Lending: Creditors should consider asset-based lending — i.e. providing loans based on the assets lenders possess, in addition to immovable property —to increase the amount of available credit. Other collateral such as equity can also be utilised for this purpose.
For Borrowers - Why Expand Assets Of Collateral?
For borrowers, expanding assets or collateral can offer several advantages, suggested Sreng. She encouraged being flexible in utilising assets such as inventory, accounts receivable and equipment.
Additional collateral available to lenders would allow borrowers to benefit from lower interest rates and fees compared to unsecured transactions. Sreng emphasised the importance of having sufficient financing during an economic downturn to support day-to-day operations and business expansion.
She further stressed that it is crucial for borrowers to understand how to evaluate their collateral or assets to ensure that their values remain intact and hold value.
Latest Developments To The Law On Secured Transactions In Cambodia (2024)
Sreng explained that while Cambodia’s LST is on par with similar laws in other countries, practice of the law remains limited, and knowledge and education of the law remains low as well, even within the banking sector.
She cited a survey conducted by the Association of Banks in Cambodia (ABC) in 2021, which found that only 36.4 per cent of banks reported knowing about the law, while 62 to 63 per cent said they had heard about the law, but knew nothing about it.
What Are Security Interests? - Secured Loans vs. Unsecured Loans
In simple terms, security interests are the rights of lenders over the collateral if the debtor defaults, explained Sreng.
Loans are generally divided into two categories: secured and unsecured loans. A secured loan is backed by an asset, while an unsecured loan is not backed by any asset.
A lender may take the risk of offering an unsecured loan due to a high risk-high return principle. Additionally, lenders will typically perform thorough checks of the borrower's credit history to mitigate risk.
How To Register For Perfection of Security Interests in Cambodia?
Under the Law on Secured Transactions, the perfection of security interests on movable property will be done at SETFO.
However, the perfection of security interests on immovable property, which falls under the Law on Land (2001), must be registered with the Ministry of Land Management, Urban Planning, and Construction (MLMUPC).