No.8 Deposit Dollarization and Financial Inclusion: Evidence from a Household Survey in Cambodia

Deposit dollarization has long prevailed in developing countries. This paper investigates factors behind household saving behavior in local and foreign currency, respectively, using a nationally representative household survey carried out by the National Bank of Cambodia (NBC) and the JICA Research Institute (JICA RI) in 2017. We empirically assess whether the portfolio selection model, which is frequently used for the explanation of financial dollarization, fits the data from Cambodian households. To test the hypothesis, we develop an empirical approach for currency choice of deposit account by taking into account an important aspect of dollarization; the correlation between choice of foreign currency deposits and financial access for Cambodian households. As a result, we find that portfolio selection models play marginal roles in deposit currency choices in Cambodia. We also find that currency choice of deposits is still to some extent affected by a household’s expectations of inflation rates and exchange rates, and the appreciation of the local currency. For example, a stable inflation rate would facilitate having local currency deposits. In addition, we find that an increase in income level is associated with an increase in both having local currency and foreign currency deposits, while the marginal effects of an increase in income are larger on having local currency deposits for lower-income households and for households in rural areas. The results suggest that financial inclusion by facilitating economic development in rural areas will foster the promotion of local currency. We further find that, in contrast to previous findings from Central and Eastern European countries, younger cohorts are less likely to have local currency deposits than older cohorts. Hence, policies aiming at reducing real dollarization and promoting the awareness of young people towards the importance of using national currency are necessary.

Key words: Dollarization, Financial access, Foreign currency deposits, Household behaviors, Bivariate Probit model.