Using the multinomial logit model also allows us to calculate the probability that individuals belong to a particular outcome group given their characteristics and the barriers that they faced. Table 6 below presents the simulation results:
Table 6: Probability to be formal/informal financial included or financial excluded
Barriers Low interest rate on loans is not
important
NA NA NA 0.29 0.21 0.50
Financial knowledge-related barrier
Financial literacy score=0 0.05 0.34 0.62 0.28 0.13 0.59
Financial literacy score=1 0.08 0.34 0.57 0.32 0.16 0.53
Financial literacy score=2 0.12 0.37 0.51 0.30 0.17 0.53
Financial literacy score=3 0.19 0.43 0.38 0.28 0.17 0.56
Psychological-related barrier
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No trust to bank or MFI 0.05 0.49 0.46 0.13 0.16 0.72
Trust to bank or MFI 0.10 0.35 0.56 0.30 0.15 0.55
Strongly trust to bank or MFI 0.11 0.35 0.53 0.34 0.16 0.50
Trust in investing in stock or shares 0.10 0.31 0.60 NA NA NA
No trust in investing in stock or shares 0.12 0.43 0.45 NA NA NA It is embarrassing to borrow money or
buy on credit NA NA NA 0.28 0.18 0.55
It is not embarrassing to borrow
money or buy on credit NA NA NA 0.32 0.13 0.55
People in the community borrow
money to manage their lives NA NA NA 0.31 0.16 0.53
People in the community do not
borrow money to manage their lives NA NA NA 0.28 0.14 0.58
Financial needs-related barrier Enjoying money now is better than saving for the future
0.08 0.44 0.47 NA NA NA
Enjoying money now is not better than
saving for the future 0.11 0.33 0.57 NA NA NA
Possibility to borrow money from the community when needed
NA NA NA 0.29 0.18 0.53
Cannot borrow money from the
community when needed NA NA NA 0.31 0.13 0.56
Possibility to borrow money from the
family when needed NA NA NA 0.29 0.17 0.54
Cannot borrow money from the family
when needed NA NA NA 0.31 0.12 0.57
Other determinants
Female 0.11 0.36 0.53 0.30 0.16 0.54
Male 0.09 0.33 0.58 0.30 0.14 0.56
Single 0.09 0.25 0.66 0.21 0.07 0.72
Married 0.10 0.36 0.54 0.31 0.16 0.53
No formal education 0.06 0.38 0.56 0.28 0.16 0.56
Primary education 0.09 0.35 0.56 0.33 0.15 0.52
Secondary education 0.11 0.36 0.54 0.28 0.16 0.56
Above secondary education 0.17 0.34 0.50 0.20 0.17 0.63
Monthly income less than 60 USD (Q1) 0.06 0.33 0.61 0.28 0.18 0.55 Monthly income between 61 and 135
USD (Q2)
0.07 0.39 0.54 0.27 0.16 0.57 Monthly income between 136 and 350
USD (Q3) 0.10 0.36 0.54 0.32 0.14 0.54
Monthly income higher than 350 USD
(Q4) 0.14 0.35 0.52 0.33 0.13 0.54
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Use of cell phone 0.10 0.38 0.52 0.30 0.16 0.54
No cell phone 0.10 0.28 0.62 0.29 0.14 0.56
Use of cell phone x Internet 0.13 0.36 0.51 0.30 0.14 0.56
No cell phone or no Internet 0.09 0.35 0.55 0.30 0.16 0.55
From the Table 6, the probability that an individual, who lives just around 5 minutes from the financial institutions, uses formal saving equals 15%9. This probability decreases to 9% if their houses are between 5 minutes and 1h 59 from financial institutions, and no one would use this formal service (Probability equals zero) if they need to spend at least 2 hours to reach the nearest financial institutions. Besides the distance, we find that financial literacy is also a main barrier to formal saving usage. For instance, the probability that an individual would use this product equals only 5% if their score for financial knowledge equals 0. It increases to 8% if they score 1, 12% if they score 2 and 19%
if they score 3, other things being equal. Next, the trust to financial institutions appear to be another main barrier. If an individual does not trust financial institutions, the probability that they use formal savings equal only 5%, and it doubles if they trust or strongly trust those institutions.
Looking at the credit products, distance is not the barrier to formal credit. Indeed, even though the lowest probability of borrowing from formal financial institutions is among adults who live at least 2 hours away from financial institutions (19%), we find that adults who live just around 5 minutes from the institutions are less likely to borrow from financial institutions (24%) compared to those who live between 5 minutes and 2h (31%). A deeper investigation is still needed to clarify if this correlation is due to the fact that adults who live near financial institutions do not have financial needs or because they are shy to borrow when they are too near their creditors. Similarly, the role of financial literacy is not clear in the case of credit, suggesting to improve the use of formal credit, improving financial literacy is not enough. Nevertheless, the psychological barrier related to trust in financial institutions does have a remarkable impact like the case of savings. Indeed, without trust, the probability that adults take formal credit equals 13% and it increases up to 30% if they trust and 34% if they strongly trust. Next, having a payslip does play a main role in accessing to formal credit as the probability that individuals use formal credit equals 41% if they have payslip against 29% if they haven’t.
It is also interesting to note that women in Cambodia are more likely to save than men, either formally or informally. This is partly contrast to the literature because in general, men tend to save formally while women tend to save informally (Ouma et al., 2017). Lastly, education, income and the use of
9 The values of other variables equal to their mean values.
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mobile phone with the access to the Internet are also the key determinants of formal savings in Cambodia but their roles to promote formal credit are not evident.
To sum up, we find that the trust to financial institutions is the main barrier to formal financial service usage for both saving and borrowing. The distance to financial institutions and the level of financial literacy are also crucial to improve the access to formal saving, however, it is rather documents-related barrier (payslip, the title deed) that is another key barrier to formal credit usage.
This shows that when we analyze the determinants of and barriers to financial inclusion, we need to distinguish the type of financial products/services. In addition, we should also distinguish the group of people who use informal services and those who are financially excluded. For instance, we find that adults who are more sensitive to the costs of credit are more likely to be financially excluded, but if they access to credit, they rather use the formal credit than the informal credit. Therefore, grouping adults who do not use formal financial services in one group could yield bias estimation.
To promote the formal financial inclusion in Cambodia, based on these results, we need to continue restoring people’s confidence and trust in financial institutions given that there are still one third of adults who do not trust or just slightly trust in Microfinance Institutions. Maintaining macroeconomic and political stability could be one of the solutions. Continuing promoting financial literacy may also help building people’s trust and changing their behavior from saving cash at home to saving in banks or MFI. Improving the physical infrastructure is also important given that the long distance to financial institutions could decrease the probability of formal saving, especially in the rural area providing that 66% of adults must spend at least 30 minutes (25% for more than 1h) to reach the nearest banks or MFI. This barrier could be also overcome by improving the technology, but this also needs a good quality of Internet access across the country and complemented by a high level of financial knowledge. Next, if we are successful to encourage formal savings, it would also help us to reduce the cost of credits-and thus this would promote the formal credit-given that the current low rate of saving in Cambodia induces financial institutions to acquire funds from abroad, which is more costly. Next, providing written employment contracts and payslips would help workers when they want access to formal credit. This result seems to show a relationship between labor market and credit market: People working in informal sector might be less likely to have a pasylip, and thus less likely to have access to formal credit market. Lastly, given that the level of education has a strong impact on the probability of formal savings, and the important role of women in Cambodia’s society, we need to keep pushing women to study higher because only 30.6% of female adults in the data have continued their studies until secondary education or above against 44.2% of male adults.
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V- Conclusion
This article seeks to find what are the determinants and barriers to financial inclusion in Cambodia. We apply a multinomial logit model to the FinScop survey data conducted in late 2015, which represents the adult population in Cambodia. A key contribution of this article is to distinguish the formal financial inclusion in two different products/services, saving and credit, and at the same time, we also distinguish the group of adults who use informal financial products from those who are financially excluded. Results show that the trust to financial institutions is the main barrier to formal financial inclusion in Cambodia for both saving and borrowing. Other psychological variables such as the trust in investing in the stock or shares and the feeling embarrassed to borrow money, also have some roles in encouraging or discouraging the formal or informal savings/borrowings. Then, the distance to financial institutions and financial literacy are found to play a crucial role in promoting the formal saving in Cambodia, while the obstacles towards the formal credit are rather driven by the costs and documents-related barriers. Besides these barriers, gender, marital status, education, income and the use of mobile phone with the access to the Internet are the key determinants of formal savings in Cambodia as well.
To promote the formal financial inclusion in Cambodia, we need to continue promoting financial literacy among adults and young population, which help them understand the benefits of using formal financial services. Financial literacy may also contribute to building the individual trust towards financial sector in a country that experienced several decades of political and economic instability. With the access, quality and reasonable cost of the Internet service, financial literacy would also help to overcome the physical barrier to formal financial product usage such as the distance to banks or MFI. Reducing the costs of credit and encouraging the provision of payslip to employees would also help adults having higher chances to access to formal credit usage.
We acknowledge, however, that this research still possesses some shortcomings. First, in terms of data, we could not clearly separate individuals who are financially excluded because of the self-exclusion or being rejected when they requested for credits from financial institutions. In addition, we only focused on saving and credit strands, while it is also possible to consider other financial products/services such as remittance and insurance. Second, in terms of method, we did not deal with the problem of endogeneity of some potential variables such as financial literacy, trust to financial institutions and personal income for example. The future research concerning the determinants of and barriers to financial inclusion in Cambodia should try to address these issues.
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