Policy Brief: Challenges of Women-owned SMEs in Getting Bank Loans

Phnom Penh, 13^th June 2021

By Seng Sopheak – Cambodia Women Entrepreneurs Association

Executive Summary

• Small and medium-sized enterprises (SMEs) are significant drivers of Cambodia’s economic growth. They contribute significantly to the country’s economy, accounting for 70% of employment, 99.8% of companies, and 58% of GDP.
• The proportion of women-owned SMEs in Cambodia accounts for 61%, which is significantly higher than many ASEAN countries. However, women-owned businesses in Cambodia are mainly micro and informal. Women entrepreneurs own 62% of micro-businesses and a notable 26% of SMEs.
• Women entrepreneurs were reported to have faced some difficulties in running and expanding their businesses. Lack of financing source is the top challenge for women entrepreneurs. Given that most women entrepreneurs run micro and informal businesses, getting loans from banks has never been easy for them. They face some difficulties such as collateral requirements, complex loan procedures, high loan interest rates, and limited financial literacy when they apply for bank loans.
• To help women-owned SMEs recover from the financial crisis and overcome the challenges they are facing, some recommendations are given, such as:

• Providing flexible lending conditions to women-owned micro-businesses without collateral;
• Suspending debt collection temporarily for women micro-loan borrowers who are facing financial crisis due to the Covid-19 pandemic;
• Providing loans to women-owned micro-businesses with a lower interest rate;
• Introducing some flexibility and increasing the financial flow to women-owned SMEs, such as loans or funds, combined with capacity-building programmes.

Introduction

Small and medium-sized enterprises (SMEs) are one of the significant drivers to the economic growth of Cambodia.  SMEs have played an essential role in (i) creating jobs, (ii) generating income for low-income individuals and vulnerable population, and (iii) promoting economic growth, social stability and contributing to the growth of a dynamic private sector[1]. According to the 2018 annual report of the Ministry of Industry, Science, Technology and Innovation, as cited in the KAS’s case study, SMEs contributed to Cambodia’s economy significantly, accounting for 70% of employment, 99.8% of companies, and 58% of GDP. SMEs employed 13% of the labour force, micro-enterprises accounted for 58%, and large enterprises accounted for 28%[2].

There is a scarcity of statistics relating to women-owned SMEs due to the lack of recent, extensive, and accurate data on Cambodian SMEs and their contribution to the country’s economy. However, the International Finance Corporation (IFC) report reveals that the proportion of women-owned SMEs in Cambodia accounts for 61%, significantly higher than many countries in Southeast Asian [3]. Therefore, the women-owned SMEs play a significant role in boosting the country’s economy.

Nevertheless, women entrepreneurs were reported to have faced some difficulties in running and expanding their businesses. Lack of financing source was reported to be a top challenge for women entrepreneurs. Most women entrepreneurs, especially those who own micro-businesses, start their business from scratch using their own funds, while others borrow loans from banks and microfinance institutions (MFIs). According to the National Bank of Cambodia (NBC), the number of women borrowing loans from banks and MFIs from 2017 to 2020 has significantly increased, from 1.61 million to 2.27 million, 49% of which have borrowed the loans for business purpose [4].

Challenges of Women Entrepreneurs in Getting Loans from Bank

Despite the growing number of women entrepreneurs borrowing loans from banks and MFIs for business operations in the last few years, several challenges of women entrepreneurs regarding getting loans have drawn attention. The 2019 IFC report suggests that women-owned businesses in Cambodia are largely micro and informal. Women entrepreneurs own 62% of micro-businesses and a notable 26% of SMEs.

Given the fact that most women entrepreneurs run micro and informal businesses, getting loans from banks and MFIs has never been easy for them. In the KAS’s case study, many women entrepreneurs emphasised that they faced difficulties such as collateral requirements, complex loan procedures, limited financial literacy, and tax compliance when they applied for bank loans^[2^]. For those who approached banks and MFIs, 66% were rejected because of the lack of guarantee or collateral^[3^]. Likewise, a survey of Cambodia Women Entrepreneurs Association (CWEA), and its result from road forums conducted in several provinces with women entrepreneurs across the country, difficulties in getting bank loans was one of the biggest challenges they have encountered. This challenge has become greater since the second wave of the Covid-19 pandemic hit Cambodia in 2021. Their businesses have been severely affected, and they need new funding source to rescue their businesses. 

Some of the challenges women entrepreneurs have raised regarding loans from banks and MFIs are the following:

• The loan interest rate is too high for most women entrepreneurs to afford to;
• The amount of loan offered by the banks and MFIs is lower than the actual needs;
• Most loan requests are rejected due to the lack of financial records, history credit, and business plans;
• The process of borrowing loans from banks and MFIs is complicated for micro-businesses;
• Collateral is required for all loan requests;
• Some women entrepreneurs have been blacklisted by banks and MFIs due to the lateness of repayment;
• There is no repayment pause on loan, although the business cannot generate adequate revenues due to the Covid-19 pandemic;
• Refinancing is not allowed for micro-businesses that have been affected by the Covid-19 pandemic; and
• Women entrepreneurs in the tourism industry are unlikely to get more loans to rescue their businesses during the Covid-19 pandemic.

Conclusions and Recommendations

Collateral requirement, high-interest rates, and complex procedure for bank loan requests are the common challenges most women-owned SMEs have long faced. The challenges have become more significant when the second wave of the Covid-19 pandemic hit Cambodia from February 2021. Most women-owned SMEs have faced financial difficulties, and some could not even repay the bank loans. In order to help women-owned SMEs recover from the financial crisis and overcome the challenges they are facing concerning getting bank loans, some recommendations are given below for both the Cambodian Government and Financial Institutions to consider.

First, SMEs have contributed significantly to the county’s economic growth. Given the fact that women own the majority of SMEs, financial institutions should consider providing flexible lending conditions, specifically to women-owned micro-businesses who do not have collateral so that they can rescue their businesses. Thus, the country’s economic activities will be recovered quickly after the pandemic.

Second, the government, the NBC, and financial institutions should consider suspending debt collection and interest accruals temporarily for women micro-loan borrowers facing financial crisis due to the Covid-19 pandemic. This will allow women-owned micro-businesses to recover after the pandemic; otherwise, they might shut down their businesses permanently. 

Third, the financial institutions should provide loans to women-owned micro-businesses with a lower interest rate. This will allow women entrepreneurs to getting more loans to expand their businesses to make their businesses more profitable. Hence, they will be able to repay their bank loans without delay.

Last but not least, the government should introduce some flexibility and increase the amount of financial flow to women-owned SMEs, such as loans or funds that invest with a gender lens. This intervention can be appropriately combined with capacity-building programmes.

References 

[1] International Finance Corporation (2010). Understanding Cambodian Small and Medium Enterprise: Needs for Financial Services and Products

[2] KAS (2020). The Path to Success: How Women-owned Businesses Transform in the Era of Digitalization: Lessons from Cambodia

[3] International Finance Corporation (2019). Exploring the Opportunities for Women-owned SMEs in Cambodia

[4] National Bank of Cambodia (2020). 2020 Annual Report