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 lesse r 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.