An extract from The Banking Regulation Review, 11th Edition
The first privately owned Cambodian commercial bank was established more than 20 years ago, shortly before the country transformed itself from a mono-banking system to a two-tier banking system, along with the conversion from a planning economy to a market economy. The National Bank of Cambodia (NBC) launched an important reform between 1998 and 2001, which consisted of:
- the abolishment of the existing requirement of a 15 per cent NBC stake in all privately owned banks;
- a classification of banking and financial institutions (BFIs) into three categories: commercial banks, specialised banks and microfinance institutions; and
- an increase of the minimum capital of commercial banks from US$5 million to US$12.5 million, which resulted in numerous banks being forced into liquidation.
Even though the Cambodian banking system is still generally considered to be in its development phase, foreign banks continue to express great interest in the sector, taking into account the country's continuous economic growth and the entry of new investors in this emerging market located in one of the world's fastest-growing regions. In addition, the existing legal framework offers notable incentives to which foreign investors might not be entitled in neighbouring countries, including:
- no restriction on foreign ownership;
- no local joint venture requirement;
- the liberalisation of interest rates;
- the free repatriation of benefits;
- no exchange control; and
- minimum currency risk due to Cambodia's highly dollarised economy.
As at the end of 2019, there were 46 commercial banks, 15 specialised banks, 82 microfinance institutions (including seven microfinance deposit-taking institutions), 15 financial lease companies, five third-party processors, one credit bureau (Credit Bureau Cambodia), 20 payment service-providing institutions and 248 rural credit institutions in Cambodia. The Rural Development Bank is the only state-owned specialised bank, whose principle role is to service and refinance loans to licensed financial institutions, associations, development communities and small and medium-sized enterprises that take part in rural development in Cambodia.
The Cambodian banking system is gradually shifting from a cash-based economy to an electronic payment culture as more financial institutions launch internet or mobile banking and expand their ATM networks. Financial services offered by BFIs are often limited to conventional products, such as deposits and loans; however, a significant diversification has taken place with the introduction of other sophisticated products involving trade finance, payment facilities, foreign exchange and financial leasing. Large loans are usually arranged through cross-border financing by the parent or affiliated company of foreign banks with participation from their locally incorporated subsidiary; however, it is rare to see syndicated loans jointly organised by different banks in the country.
The regulatory regime applicable to banks
In comparison with other sectors, the legal framework governing the banking industry is the most comprehensive, with the NBC's regular updates of existing laws and the introduction of new regulations. Nonetheless, there is no specific regulation that governs cross-border loans provided by overseas financial institutions to non-banking and financial institutions. Close monitoring of cross-border loans to BFIs is overseen by the NBC, particularly when those loans are subordinated loans that may increase the net worth of the BFIs.
The NBC performs the traditional role of a central bank, and all banking activities are under its exclusive jurisdiction. Its main functions are to:
- conduct monetary policy;
- act as the sole issuer of the national currency and as the supervisory authority of the banking and financial system, having the authority, inter alia, to grant operating licences to BFIs; and
- oversee the payments system.
The NBC has recently upgraded its supervision structure and is making good progress towards achieving full compliance with the 25 Basel Core Principles. Despite the country's considerable challenges in securing qualified human resources, the NBC has continued to improve building the capacity to cope with the increasing workload and complexity of the sector.
Even though under the existing regulations the NBC has the power to exercise consolidated supervision, current practice demonstrates that sectoral supervision prevails instead. The Securities and Exchange Commission of Cambodia (SECC) oversees the securities market, while the insurance sector is under the jurisdiction of the Financial Industry Department of the Ministry of Economy and Finance (MEF). Cambodia has yet to adopt the universal banking system, whereby a banking institution intending to conduct additional related financial services, such as securities or insurance business, is required to operate under separate entities and be governed by different supervisory authorities. Together, the NBC, the MEF and the SECC are working on a framework with the aim to move towards joint or coordinated supervision, commencing with information sharing. A memorandum of understanding on establishing information sharing was signed by the MEF, the NBC and the SECC in July 2014. The banking system in Cambodia consists of commercial banks, specialised banks, microfinance institutions, rural credit institutions, financial lease companies, third-party processors and payment service institutions. Specialised banks operate in the same way as finance companies, since they are not allowed to collect deposits but are permitted to provide credit facilities. Microfinance institutions and rural credit institutions have generally been regarded as banking for the poor. Microfinance institutions are generally not permitted to accept deposits unless they have obtained a separate licence from the NBC after fulfilling certain conditions including, inter alia, being in operation for at least three years. As at the end of 2019, the NBC had granted licences authorising the collection of deposits to seven microfinance institutions. Financial lease companies provide the lease of all movable property except land and buildings to the public. There have been some adjustments to the characteristic of players under the current payment system; companies that can retain their legal form as third-party processors are limited to only those companies that conduct the payment service, specifically to remit money and receive money remittance order, by using a bank's premises. In contrast, payment service institutions are eligible to conduct a wider range of payment service transactions.
Banks established in Cambodia must be either a locally incorporated entity or a branch of a foreign bank. Foreign banks may also establish representative or liaison offices whose activities are strictly limited to conducting market research and gleaning information. In theory, the representative office has a life span of two years, which may be renewed once only.
Every banking institution shall be incorporated as a public limited company and must comply with minimum capital requirements. The NBC recently raised the minimum capital of commercial banks, including foreign bank branches whose parent bank does not have an investment grade rating, from US$37.5 million to US$75 million, while the minimum capital of foreign bank branches whose parent bank is rated as investment grade has increased to US$50 million. An investment grade rating is confirmed to be valid for only one year from the reporting date to the NBC. Likewise, the minimum capital of specialised banks has been increased from US$7.5 million to US$15 million. The NBC also requires any newly established microfinance institutions and existing microfinance institutions to have a minimum capital of US$1.5 million, which is much higher than the amount set by the previous regulation (US$62,500). Microfinance deposit-taking institutions are also subject to a new minimum capital requirement to increase their previous minimum capital from US$2.5 million to US$30 million. The minimum capital requirement for financial leasing companies and rural credit institutions remains the same, at US$50,000.