The $12.7 Billion Question: Mekong Strategic Capital Report on Cambodia Distressed Debt

Cambodia could unlock billions of dollars in new lending capacity and accelerate economic growth by reforming the way distressed debt is resolved, according to a new report from Mekong Strategic Capital (MSC), which argues that lengthy debt resolution processes have become a growing drag on the economy [S-105].

While rising non-performing loans (NPLs) have attracted increasing attention from investors and policymakers in recent years, the report contends that Cambodia’s challenge is not simply the volume of bad loans within the banking system — it is the amount of time required to resolve them.

The size of the problem

The report estimates that approximately $12.7 billion worth of loans are either more than 30 days overdue or have undergone restructuring, representing around 20 percent of total loans in Cambodia’s financial system and roughly one-quarter of national GDP [S-105].

Loan arrears have risen significantly during the opening months of 2026, which the report attributes to a combination of factors:

• Higher fuel prices
• Disruptions linked to the Thai border situation
• The government’s crackdown on online scam operations
• A reduction in loan restructuring activity compared with 2025 [S-105]

Much of this debt is secured by real estate assets, creating broader implications for Cambodia’s property market.

Why it matters more than you think

Stephen Higgins, Managing Partner of Mekong Strategic Capital, framed the issue clearly:

“The issue is not simply how many loans have become distressed. It’s how long those loans remain unresolved. The longer assets remain tied up in the system, the greater the drag on economic growth.” [S-105]

Using an illustrative example, the report estimates that a financial system resolving distressed loans within two years could maintain a steady-state NPL ratio of approximately 3 percent. However, if resolution periods stretch to seven years, the same rate of new bad-loan formation could result in an NPL ratio exceeding 10 percent [S-105].

Distressed assets that remain unresolved for years contribute to what economists describe as a property market overhang, where investors delay purchases in anticipation of future distressed sales while assets remain tied up in lengthy legal and recovery processes [S-105].

The banking system is not the problem

Despite concerns about rising NPLs, the report notes that Cambodia’s banking system remains well-capitalised:

• Sector-wide NPLs: ~$5.4 billion at end of 2025
• Net NPLs after provisions: ~2.4 percent
• Provisions set aside in 2025: ~$900 million
• Pre-tax profits in 2025: ~$1.4 billion
• Total sector capital: ~$19 billion [S-105]

The report argues the financial sector has significant capacity to absorb existing losses. The larger economic challenge lies in ensuring distressed assets can be recycled back into productive use rather than remaining trapped within the financial system.

The $6 billion opportunity

Mekong Strategic Capital estimates that faster resolution of distressed loans could unlock as much as $6 billion in new lending capacity for Cambodia’s economy. Recoveries would release capital currently tied up in provisions, improve balance sheets, and support additional lending to businesses and households [S-105].

The report calls for targeted reforms:

1. Accelerating insolvency proceedings and secured-creditor enforcement
2. Introducing a personal insolvency framework that provides households with a structured path to address unsustainable debts
3. Shortening the average resolution cycle from the current multi-year trajectory toward a two-year target

According to Higgins, creditor rights and borrower protections should be viewed as complementary:

“Faster resolution benefits everyone. It helps banks recycle capital, helps borrowers find a path forward and helps the economy by putting money back to work.” [S-105]

Implications for property investors

For anyone holding or considering Cambodian real estate, the MSC report offers several actionable takeaways:

• The distressed cycle is real and getting longer. Our earlier analysis of distressed property in Cambodia documented the mechanics of foreclosures and bank sales, but the MSC report adds a critical dimension: the velocity of resolution matters as much as the volume of NPLs. A system that takes seven years to resolve a distressed loan compounds the drag on prices.

• Property overhang persists. Investors delaying purchases in anticipation of distressed-sale discounts may be waiting years, not months, for the resolution machinery to clear the backlog. The opportunity lies in identifying situations where the problem is the seller’s finances, not the asset’s condition — and having the patience for legal processes to run.

• Banks can lend more, and that is positive for demand. The $6 billion in potential new lending capacity, if unlocked, would directly support the demand side of the property market — particularly for developers and homebuyers who have been credit-constrained through the current cycle.

• Watch for policy signals. If Cambodia moves toward the reforms MSC advocates — faster insolvency, personal bankruptcy framework — the impact on property transaction volumes could be significant. Reform would accelerate the clearance of distressed stock and free up bank balance sheets for new lending simultaneously.

The report’s central message for investors is that Cambodia’s next phase of financial sector reform may be less about banking stability and more about improving the legal and institutional mechanisms needed to resolve distressed debt efficiently. If successful, such reforms could play a critical role in supporting credit growth, reducing pressure on the property market and strengthening the foundations for Cambodia’s long-term economic development.

Sources

[S-105] Cambodia Investment Review — “Mekong Strategic Capital Report Calls for Faster Debt Resolution Framework to Unlock Billions in New Credit for Cambodia’s Economy” (June 13, 2026) https://cambodiainvestmentreview.com/2026/06/13/mekong-strategic-capital-report-calls-for-faster-debt-resolution-framework-to-unlock-billions-in-new-credit-for-cambodias-economy/