Foreign currency borrowing and risk-hedging behavior: Evidence from Cambodian households

Foreign currency borrowing, also known as financial dollarization given the dominance of the U.S. dollar, is a growing issue in developing countries. This study investigates the determinants of foreign currency borrowing of households in Cambodia using survey data. We find that Cambodian households engage in risk-hedging behavior against exchange rate risks in the sense that their likelihood of borrowing in foreign currency increases as the share of foreign currency in their incomes increases. We also found that expectations of depreciation in the local currency inclined households more toward borrowing in local currency, as would be predicted. Finally, better educated households are more likely to make loan currency choices consistent with risk hedging while less educated households are more inclined to be influenced by the currency used in purchases. Similarly, household use of financial services, which like education may serve to proxy financial literacy, is correlated with risk-hedging behavior against currency mismatch risks. These results suggest that financial literacy has the potential to enhance risk-hedging behavior against exchange rate risks for Cambodian households.