Prior to coming into force of the Civil Code on 21 December 2011, interest rates applicable to loans were governed by Decree No. 38, dated 28 October 1988 (the “Contract Law”), which defined a loan as “a contract whereby one person delivers money to another person and the latter is obligated to repay that amount together with an additional amount (“Interest”) according to the duration of the contract”. This provision of the Contract Law applied only to monetary loans, and limited the interest rate to 5% per annum, unless otherwise provided by law. The National Bank of Cambodia (“NBC”), as empowered by the Law on Organization and Functioning of the NBC, permits banks and financial institutions, licensed to operate in Cambodia to freely negotiate interest rates with borrowers above the 5% limitation.
The interest rate provisions of the Civil Code are wider in application than those of the Contract Law and apply to any “loan for consumption” which is defined as a contract pursuant to which a lender lends money, food-related products, paddy or other fungible goods, and the borrower, who presumably consumes the borrowed goods, is obligated to return to the lender, goods of the same type, quality and quantity as those borrowed, at an agreed future date. A loan for consumption may be with or without interest, and must be in writing only if interest is charged. Where the parties to a loan for consumption fail to specify a rate of interest to be charged, the Civil Code provides for an interest rate of 5% per annum. If the rate of interest agreed to by the parties exceeds 5%, it must nevertheless comply with the maximum rate which will be fixed by the Ministry of Justice (“MOJ”) within a range of between 10% and 30% per annum (the “Ceiling Rate”), and adjusted from time to time. Effective 21 December 2011, the MOJ set the Ceiling Rate at 18% per annum. If the parties agree to an interest rate exceeding the Ceiling Rate, the portion of interest owing in excess thereof shall either be abrogated or applied to repayment of the loan principal.
All monies, (other than principal, execution fees and expenses incurred in making repayment) received by the lender in relation to the loan shall be deemed to be interest, regardless of whether they are described as such in the loan agreement. Additionally, under the Civil Code, interest on interest is expressly permitted. Where payment of interest is in arrears for one year or more, and if the borrower fails to pay such interest after receiving a demand for payment from the lender, the lender may demand additional interest on the interest already owing. Likewise, a pre-agreed amount of compensation or a penalty interest rate as damages for late payment (“Penalty Rate”) is expressly permitted under the Civil Code, provided, however, that the Penalty Rate must not exceed a rate fixed by the MOJ within a range of between 1.2 and 2 times of the Ceiling Rate. Effective 21 December 2011, the Penalty Rate was set by the MOJ at 1.5 times the Ceiling Rate; 27% per annum.
We are undertaking extensive consultations with the relevant authorities to determine whether there any exceptions to the application of the Ceiling Rate and Penalty Rate provisions of the Civil Code and, in particular, whether such provisions apply to all bank loans.
If you have any questions or require further clarification about how this development will impact your business, please do not hesitate to contact us.