The number of banks offering advance salary loans has grown since Acleda Bank first introduced the concept in Cambodia in late 2013, though some financial institutions remain wary of offering the unsecured lines of credit.

So Phonnary, executive vice president of Acleda Bank, said while the initial response to her bank’s advance salary loan product was slow, the numbers have grown swiftly since government employees began utilising it. As of end-May a total 2,163 clients from the government and private sector have outstanding advance salary loans at the bank, with a total loan portfolio of about $715,000.

“It is a new source of money for people if they need cash urgently,” she said, adding that the number of clients using the product was increasing by about 15 per cent a year.

Acleda is not alone in offering the small personal loans, often referred to as payday loans, which are provided to individual customers able to prove they are employed with a steady monthly income. The credit can be arranged quickly without the need for collateral or a guarantor – and with no preconditions on how the money will be used.

Canadia Bank began offering advance salary loans in early 2014, while Aeon Specialized Bank provides a similar loan product.

Earlier this month, Phillip Bank Plc, the local banking arm of Singapore’s PhillipCapital Group, joined the three banks, offering its first unsecured personal loans to clients with fixed monthly incomes. Under its terms, customers can borrow up to three times the amount of their net monthly salary without collateral or a guarantor.

Han Peng Kwang, general manager of Phillip Bank, said that in the first few weeks of launching the product the bank has already received a flood of applications.

“We’re tapping into the middle-class sector, mainly professionals and employees from both the private and public sectors,” he said.

“The loan can be used for any purpose, whether for investment or personal consumption.”

Interest rates on advance salary loans vary from institution to institution, but typically run from 1.8 per cent to 2 per cent per month, with repayment periods of up to 36 months.

Ou Sophanarith, chief of financial officer at Canadia Bank, said the loans have proven popular with civil servants because they offer lower interest rates than their alternatives.

“It is more convenient [than other forms of credit] and benefits our clients who work as government officers,” he said. “The interest rate is lower compared to what they get when they borrow from their peers or colleagues.”

According to Sophanarith, Canadia Bank allows civil servants to borrow the equivalent of up to nine months’ salary. On each subsequent payday, a portion of their salary is automatically deducted and transferred to the bank to cover the loan repayment.

As of end-March, more than 3,500 customers had active advance salary loans at Canadia Bank, he added, without disclosing the total loan portfolio.

Some banks have expressed reservations about the advance loan concept, while it could be a long time before independent payday loan companies – a $46 billion industry in the US – set up shop in the Kingdom.

Cynthia Liaw, CEO of Maybank Cambodia, said that her bank has other product priorities and was not considering advance salary loans at this time. She pointed out that the bank already offers its customers a secured overdraft option on its Visa card, allowing them to draw cash for consumption purposes.

“Compared to other loan products that Maybank currently offer, [advance salary lending] is of higher risk, as it is on an unsecured basis without collateral,” Liaw said.

However, Phillip Bank’s Peng Kwang argued that the risk was mitigated when the borrower’s employer had a payroll account at the same financial institution. In such cases, the institution could automatically deduct the loan payment from the borrower’s monthly salary as it was transferred into their personal account.

Kem Ley, an independent socio-economic analyst, said providing loans to Cambodians without requiring collateral or a guarantor was generally a positive move, but required some caution as it could push low-income borrowers into a debt cycle.

“Those who have a low salary and take out loans three or four times bigger than their salary could face more trouble covering their daily expenses,” he warned.

Ley explained that in developed countries, higher wages mean a smaller portion of the advance salary loan is used for daily expenses, whereas in Cambodia much of the loan is spent on covering daily expenses.

“We must carefully think about this,” he said. “We copy the model from others, but sometimes our earning ability and repayment ability is different from them.”