No.143 Foreign Currency Borrowing and Risk-Hedging Behavior: Evidence from a Household Survey in Cambodia

Foreign currency borrowing, a phenomenon sometimes referred to as financial dollarization, is a growing issue in developing countries. This study investigated the determinants of foreign currency borrowing behavior of households in Cambodia using household survey data; and this allowed use of the currency-wise information in tracking households’ financial activities.

We found that Cambodian households engage in risk-hedging behavior against exchange rate risks, and are likely to borrow in a foreign currency if this makes up the major portion of their income stream. We also found that expectation of a depreciation of their local currency leads households to take out local currency loans in line with the predictions of theoretical models.

Furthermore, education plays a role in the choice of currency for loans; the better educated households are more likely to engage in risk-hedging behavior, and to seek to match the currency composition between loans and income, than the lesser educated are. We also found that variables related to the use of financial services are also positively correlated with the intensity of risk-hedging behavior against currency mismatches. These results suggest that financial literacy has the potential to enhance risk-hedging behavior against exchange rate risks for Cambodian households.

Keywords: Foreign currency borrowing, Dollarization, Risk-hedging behaviors, Financial literacy, Household survey