I INTRODUCTION

The first privately owned commercial bank was established 20 years ago, shortly before the country transformed itself from a mono-banking system to a two-tier banking system, and converted 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 an abolishment of the existing requirement of a 15 per cent NBC stake in all privately owned banks; a classification of the banking and financial institutions into three categories, namely 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, liberalisation of interest rates, free repatriation of benefits, no exchange control and minimum currency risk due to its highly dollarised economy.

As of the end of 2016, there were 37 commercial banks, 15 specialised banks, seven representative offices of foreign banks, 70 microfinance institutions (including seven microfinance deposit taking institutions), 12 financial lease companies and eight third-party processors.2 The Rural Development Bank is the only state-owned specialised bank; its 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 banking and financial institutions 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 its locally incorporated subsidiary; however, it is rare to see syndicated loans jointly organised by different banks in the country.

II THE REGULATORY REGIME APPLICABLE TO BANKS

Banking activities in Cambodia are mainly governed by the Law on the Organisation and Functioning of the National Bank of Cambodia promulgated in 1996,3 the Law on Banking and Financial Institutions (Banking Law) promulgated in 1999, the Law on Foreign Exchange promulgated in 1997, and the Law on Anti-Money Laundering and Combating the Financing of Terrorism (AML Law) promulgated in 2007, as well as a number of implementing sub-decrees, regulations and circulars issued by the NBC. 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 its 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 banking and financial institutions is overseen by the NBC, particularly when those loans are subordinated loans that may increase the net worth of the banking and financial institutions.

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; to act as the sole issuer of the national currency and as the supervisory authority of the banking and financial system, including the authority to grant operating licences to banking and financial institutions; and to oversee the payments system. The NBC has recently upgraded its supervision structure, and is making good progress in 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 capacity building 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, the 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 aiming to move towards a 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 2014.4

The banking system in Cambodia consists of commercial banks, specialised banks, microfinance institutions, financial lease companies and third-party processors. 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 have generally been regarded as banking for the poor. They 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.5 As of the end of 2016, the NBC had granted licences to seven microfinance institutions authorising their collection of deposits.

Banks established in Cambodia must be either a locally incorporated entity or a branch of a foreign bank.6 Foreign banks may also establish representative or liaison offices whose activities are strictly limited to conducting activities for market research purposes and gleaning information.7 In theory, the representative office has a lifespan of two years and may be renewed once only.

Every banking institution shall be incorporated as a public limited company and comply with minimum capital requirements. The NBC has recently raised the minimum capital of commercial banks, including foreign bank branches whose parent banks do not have ‘investment grade', from US$37.5 million to US$75 million, while the minimum capital of foreign bank branches whose parent banks are rated as ‘investment grade' has increased to US$50 million. The confirmation of investment grade is valid for only one year from the reporting date to NBC.8 Likewise, the minimum capital of specialised banks has increased from US$7.5 million to US$15 million. The NBC also requires any newly established microfinance institutions and the 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 the new minimum capital requirement to increase their previous minimum capital from US$2.5 million to US$30 million.9 It is noted that the existing banking and financial institutions have to comply with this new requirement within two years counting from 22 March 2016.10 The existing banking and financial institutions have to increase at least 50 per cent of the required increased capital by the end of March 2017, and the remaining increased capital shall be fulfilled by 22 March 2018.11 However, the minimum capital requirement for financial leasing companies remains the same at US$50,000.12

III PRUDENTIAL REGULATION

i Relationship with the prudential regulator

The NBC acts both as the regulatory and supervisory authority of the banking and financial sector in Cambodia. The NBC has gradually changed its supervisory approach by shifting from compliance-based supervision to risk-based and forward-looking supervision (deploying stress tests and simulations) in order to focus on certain specific high-risk areas such as credit risk, liquidity risk, market risk and operational risk.13 The NBC also issued prudential regulations to strengthen good governance, policy compliance, customer protection and transparency, and the enhancement of financial education among all relevant parties. Thus, its supervisory work is carried out through both off-site examinations and on-site visits.

Banking institutions are required to comply with a series of disclosure obligations, namely periodical reports including daily, weekly, monthly, quarterly and annual reports, as well as internal control reports, reserve requirement reports and audited annual financial reports.14 In addition, the NBC also has the power to require covered entities to provide ad hoc reports whenever necessary. The NBC is developing its supervisory report template, which aims at harmonising the content of the reports and improving the capture of information. The report submission process is greatly improved as the filing can now be done online.

The transparency of banking and financial institutions is generally much more significant compared to companies operating in other financial sectors in Cambodia. Every bank is required to publish its annual audited financial report no later than 30 June of the following year, and such report is available to the public.

ii Management of banks

The management of banking and financial institutions is organised pursuant to the Regulation on Corporate Governance of Banking and Financial Institutions dated 25 November 2008 (Regulation on Corporate Governance), which also defines key good governance principles to be adhered to. Their usual structure consists of a board of directors (except foreign bank branches) and compulsory committees, namely audit and risk committees, as well as other specialised committees as needed or required by the NBC.15

The independent director is an important feature of the management of banking and financial institutions. The board of directors of commercial banks shall be composed of at least two independent directors, while at least one-third of the total number of board members of specialised banks and microfinance institutions shall be independent directors.16 The audit committee and compensation committee, if any, shall be each chaired by an independent director.17

The Regulation on Corporate Governance vaguely defines an independent director as a person capable of exercising judgement independent of the view of management, political interests or inappropriate outside interest.18 The NBC's current interpretation of a non-independent director includes any person exercising any function within an affiliated entity of the company, including the overseas subsidiaries. An independent director of an overseas-affiliated entity of the company, however, is permitted to act as independent director of the relevant bank in Cambodia. Due to the limited availability of qualified people, an independent director is not required to be a resident or a Cambodian national.

The relevant regulation requires a strong autonomy of the board of directors and management of all locally incorporated banks, including foreign subsidiaries. All decision-making, including credit approval, shall be made locally. Such requirements have not been fully implemented by some foreign subsidiary banks, which have long depended on their headquarters due to the lack of adequate resources on the ground.

While a branch of a foreign bank in Cambodia does not have a separate board of directors, it is still required to adopt good governance policies and procedures aimed at complying with the principles set forth in the Regulation on Corporate Governance, including the strength of local governance through the enhancement of management autonomy granted by foreign headquarters to local executives.19

All banking and financial institutions are required to have internal audit and compliance officers. In the case of outsourcing, permitted under the current regime, the internal audit cannot be performed by the same firm as the one in charge of the external audit.20 Any designation, dismissal, removal or resignation of the head of internal audit and compliance must be reported to the NBC.21

With respect to remuneration policies, the board of directors is allowed to determine the company's compensation policies and practices as long as they are consistent with the institution's corporate culture, long-term objectives and strategy, and control environment.22 In other words, there is no specific restriction on the remuneration's package, except that the NBC has the authority to recommend institutions to review decisions it considers are not aligned with the above-mentioned principles; the NBC's current focus is on the financial situation of each institution.

iii Regulatory capital and liquidity

The NBC recognises the importance of adhering to international banking supervision standards, and is working to harmonise its standards and regulations in accordance with the Basel Accords. Cambodian regulatory capital standards are not fully in compliance with Basel II, but the current standards are seen as a mixture of elements found in Basel I, Basel II and Basel III. The compliance process is progressing from a banking supervision technical standpoint, but there are still a number of new regulations to be introduced. The process is time-consuming, as the full implementation of the new standards requires sufficient resources, including a number of qualified personnel within the entire banking sector.

All regulatory capital requirements described below apply equally, without discrimination, to all banks operating in the country whether they are locally incorporated or branches of foreign banks.

Net worth calculation

The NBC has amended its method of calculation of net worth to be in line with Basel III.23 The sum of paid-in capital and net worth must at least be equal to or larger than the minimum capital.24 Net worth is composed of two components: Tier 1 capital (core capital) and Tier 2 capital (supplement capital).25

For commercial and specialised banks

Tier 1 capital must include:

  • a paid-in capital;
  • b reserves;
  • c share premium;
  • d audited net profit for the last financial year;
  • e profits as recorded on intermediate dates (subject to the NBC's approval); and
  • f retained earning limited to 20 per cent Tier 1 capital.

Tier 1 capital must deduct:

  • a own shares held by the bank;
  • b accumulated losses;
  • c intangible assets;
  • d loans to related parties; and
  • e losses determined on dates other than regular year-ends.26

Tier 2 capital, which must not exceed 100 per cent of Tier 1 capital, must include:

  • a re-evaluation reserves;
  • b provisions for general banking risks;
  • c subordinated debt instruments not exceeding 50 per cent of Tier 1 capital;
  • d general provision of 1 per cent foreseen; and
  • e other items with prior approval of the NBC.

Deducted items include equity participation in banking or financial institutions and other items including deferred charges.27

For microfinance institutions28

Tier 1 capital of the microfinance institutions is composed of an almost-identical structure to the one applicable to the commercial and specialised banks, except that there is no restriction on the retained earnings, and there is inclusion of a provision for general banking risks (with the prior agreement of the NBC).

Unlike the structure of Tier 2 capital applicable to commercial and specialised banks, the Tier 2 capital of microfinance institutions must include:

  • a re-evaluation reserves;
  • b provision for general banking risks (with the prior agreement of the NBC);
  • c subordinated debt instruments not exceeding 100 per cent of base net worth and accompanied by prior agreement of the NBC; and
  • d other items with prior agreement of the NBC.
Solvency ratio (capital adequacy ratio)

Banks must not let their solvency ratio slip below 15 per cent.29 Prior to December 2004, the solvency ratio was 20 per cent, and one of the main reasons for scaling down the solvency ratio was to boost credit transactions. The minimum solvency ratio of microfinance institutions is also 15 per cent.30

The numerator of the ratio is the net worth, and the denominator of the ratio consists of the aggregate of assets and off-balance sheet items. Assets are subject to a weighting system according to their risks. So far, Cambodia's risk-weighting system takes into account only the credit risks, while Basel II requires two additional factors: the market risks and the operational risks.

The weighting system includes:

  • a zero per cent: cash, gold, claims on the NBC, assets collateralised by deposits 100 per cent lodged with the bank, and claims on or guaranteed by sovereign rated AAA to AA-;
  • b 20 per cent: claims on or guaranteed by sovereign rated A+ to A-, and claims on or guaranteed by banks rated AAA to AA-;
  • c 50 per cent: claims on or guaranteed by sovereign rated BBB+ to BBB-, and claims on or guaranteed by banks rated A+ to A-;
  • d 120 per cent: traded securities; and
  • e 100 per cent: all other assets.

Off-balance sheet items applicable to microfinance institutions are treated with full risk (100 per cent). However, off-balance sheet items applicable to commercial and specialised banks are classified into the following four categories:

  • a 100 per cent of their value if they carry full risk;
  • b 50 per cent of their value if they carry medium risk;
  • c 20 per cent of their value if they carry moderate risk; and
  • d items carrying low risk are not taken into account.

A review is being conducted to harmonise the standard of loan classification and provisioning to comply with the anticipated implementation of the IFRS applicable to financial institutions.

Capital guarantee

Cambodia has yet to establish any deposit insurance scheme, but to help protect depositors, the NBC has imposed a capital guarantee on banking and financial institutions. Commercial banks and specialised banks must permanently deposit 10 per cent of their registered capital with the NBC as capital guarantee. This amount was increased in 2001 from 5 per cent.31 Deposits made in riels by the commercial banks and specialised banks bear interest at half of the six-month refinancing rate set by the NBC, whereas deposits in foreign currencies will bear interest at one-fourth of the six-month London Interbank Offered Rate (LIBOR).32 Microfinance institutions and financial lease companies are required to permanently deposit 5 per cent of their registered capital. Deposits made in riels by microfinance institutions bear interest at half of the six-month refinancing rate set by the NBC, whereas deposits in foreign currencies will bear interest at three-eighths of the six-month LIBOR.33 However, deposits made by financial lease companies either in riels or in foreign currencies bear no interest.34 A depositing institution may get a refund of its capital guarantee after its liquidation and settlement of all liabilities.

Reserve requirement

Under one monetary tool, the NBC demands that commercial banks maintain, with the NBC, reserve requirements against deposits and borrowings at a daily average balance equal to 8 per cent in riels and 12.5 per cent in foreign currencies.35 The reserve requirements were previously increased to 16 per cent to curb booming credit activities and to limit lending to real estate-related transactions.

The reserve requirements for microfinance institutions and for microfinance deposit taking institutions are 536 and 8 per cent37 respectively.

Recently, the NBC additionally imposes reserve requirements against borrowing funds. Such reserve requirements are 8 and 12.5 per cent applicable on borrowing funds derived from local and foreign currencies.

The NBC also provides interest fees on reserve requirements maintained with the NBC. The first 8 per cent of the reserve requirements bears zero per cent interest, while the remaining 4.5 per cent of reserve requirements in foreign currencies bears an interest rate set by the Regulation on Term Deposit Interest Rate Determination, Deposit on Reserve Requirements and Banks Capital Guarantee in US dollars.38

Large exposure and related-party transactions

Large exposure refers to gross exposure larger than 10 per cent of a banking and financial institutions' net worth.39 A banking and financial institution's total credit exposure to a single beneficiary is limited to 20 per cent of the banking and financial institution's net worth.40 Banking and financial institutions are required to maintain a maximum ratio of 300 per cent between total large exposure and net worth.41 As for the purpose of identifying the beneficiary of large credit exposure, two or more individuals or legal entities will be considered as a single beneficiary if:

  • a one of them exercises control over the other, whether directly or indirectly;
  • b they are subsidiaries of the same parent company;
  • c they are under the same de facto management; or
  • d one of them holds an equity interest of more than 10 per cent of the other and they have a special business relationship.42

In the event a large exposure is guaranteed by another bank or international financial institution, with prior approval from the NBC, the exposure will be reduced to half when calculating solvency ratio.43 Furthermore, the NBC may increase the large exposure ratio to up to 35 per cent of the net worth upon request of the bank if the NBC finds that the banking and financial institution is ‘satisfactory' under the NBC's internal rating or benefits from a rating ‘investment grade' by an international rating agency, and provided that the borrower's financial health is strong (the latter includes good business perspectives, solvency, profitability and management).44

Recently, the NBC has extended the control of large exposure not only on individual and legal entities but also on sectoral concentration to capture the overall risk and keep up with the development of the banking sector.

Related parties are any individual or legal entities who directly or indirectly holds10 per cent of capital or voting rights, or any persons who participate in the administration, direction, management or internal control, and external auditors.45 Outstanding loans granted to related parties cannot exceed 10 per cent of the net worth of banks and microfinance institutions,46 and 3 per cent of the net worth for microfinance deposit taking institutions.47 Even though, in accordance with the existing applicable regulation, banks shall submit reports on related parties' loans on a quarterly basis, in practice, the NBC requires that such report is made on a monthly basis. Recently, the NBC has also extended its supervision to cover on the basis of entire transactions conducted between related parties instead of on the basis of loan transactions.

Liquidity ratio

NBC previously imposed a minimum liquidity ratio of 50 per cent on commercial banks, specialised banks and microfinance deposit taking institutions. Banks can satisfy such minimum liquidity ratio requirement but have a shortfall of maturing assets over maturing liabilities in the next 30 days. The IMF has opined that although a large portion of banks' balance sheets are invested in liquid assets, they may face short-term liquidity risks.48 Taking into consideration this liquidity risk, the NBC has increased the minimum liquidity ratio from 50 to 100 per cent imposed on all deposit taking banks and financial institutions.49 The minimum liquidity coverage ratio (LCR) of 100 per cent is set to be fulfilled and maintained within the institution from 1 January 2020. The NBC requires all institutions to comply with the minimum LCR within the following timelines:50

  • a minimum LCR of 60 per cent from 1 September 2016;
  • b minimum LCR of 70 per cent from 1 September 2017;
  • c minimum LCR of 80 per cent from 1 September 2018;
  • d minimum LCR of 90 per cent from 1 June 2019; and
  • e minimum LCR of 100 per cent from 1 January 2020;
Equity participation

Each banking and financial institution may hold up to 15 per cent of its net worth in each equity participation, provided that the maximum total equity participation is restricted to 60 per cent of its own net worth.51 Under the Cambodian banking regime, equity participation is defined as holding at least 10 per cent of the capital or voting rights of another company.52

Securities trading

All banking and financial institutions, with the exception of microfinance institutions and financial lease companies, are permitted to trade and hold the securities listed on the securities exchange. Based on daily mark-to-market positions held, each institution can hold securities equalling up to 20 per cent of the institution's net worth. The tradable securities' positions held by the institutions are marked-to-market on a daily basis and determined by using the official closing prices showed by the securities exchange.53 The NBC has also launched negotiable certificates of deposit (NCDs), a new securities product, to enable banks to convert surplus deposits into securities. This mechanism allows banks to utilise those securities as collateral for interbank loans. The NCDs is designed to help banks maintain their liquidity in times of economic crisis. It also facilitates the work of banks with deposit shortages by allowing them to borrow funds from other banks with short-term surpluses.

Loan classification and provisioning

The Regulation on Asset Classification and Provisioning in Banking and Financial Institutions dictates the objective and prudential grading system of all loans and assets held by banks. The classification of loans and assets are based on the repayment capacity, which includes:

  • a past payment experience;
  • b financial condition of the borrower;
  • c business prospective and cash-flow projections;
  • d ability and willingness to repay;
  • e financial environment; and
  • f quality of documentation.54

Every bank's assets are classified into five categories: standard, special mention (overdue by more than 30 days), substandard (overdue by more than 90 days), doubtful (overdue by more than 180 days) and loss (overdue by more than 360 days). Each category is subject to minimum provisioning percentage amounts based on the respective gross loan:

  • a standard, 1 per cent;
  • b special mention, 3 per cent;
  • c substandard, 20 per cent;
  • d doubtful, 50 per cent; and
  • e loss, 100 per cent.55

Microfinance institutions' assets are classified into four categories: standard, substandard (overdue by 30 days or more), doubtful (overdue by 60 days when the loan's term is less than one year, and 180 days when the loan's term is one year or more) and loss (overdue by 90 days when the loan's term is less than one year, and 360 days when the term is one year or more). Their provisioning is as follows:

  • a standard, zero per cent;
  • b substandard, 10 per cent;
  • c doubtful, 30 per cent; and
  • d loss, 100 per cent.56

The loan classification and provisioning will be reviewed by the NBC in order to be commensurate with new Basel III guidelines on liquidity ratios, in particular the definition of liquid assets ratio and the off-balance sheet.

iv Recovery and resolution

There are currently no specific regulations or measures in place requiring the banks to draw up recovery and resolution plans, or ‘living wills'. The banking and financial institutions are, however, advised to make their own necessary arrangements.

As part of the crisis prevention and resolution initiative, the authorities are developing a legal framework to empower the NBC and other relevant authorities to take action against failed banks. Pending the adoption of such regulations, any liquidation of failed banks must follow the provisions of the Law on Insolvency, and the NBC is entrusted to oversee the process.

IV CONDUCT OF BUSINESS

The Banking Law prohibits banks, as well as their personnel, from disclosing information related to their clients to any person except the NBC, auditors, provisional administrators, liquidators and the courts.57 Banks may share clients' negative credit information with other banks for the purpose of sound credit activities and risk management58 provided that the banks obtain prior approval from clients on the exclusive utilisation of the information for assessing creditworthiness.59

Pursuant to the AML Law, banks, through their services, must not participate in conversion or transfer of proceeds of offences, and must immediately report those transactions to the Financial Intelligence Unit (FIU) as soon as they become aware of such circumstances.60 The FIU has implemented an electronic reporting system that enables the reporting entities to report cash transactions and suspicious transactions more efficiently. Banks are also required to conduct due diligence prior to doing business with clients, and establish internal programmes to prevent money laundering according to guidelines stipulated by the FIU.61 Failure to do so can result in criminal liabilities punishable by imprisonment from six days to one year and monetary fines from US$25 to US$1,250. Proceeds resulting from such violations may also be confiscated.62 The AML Law was amended in June 2013. The amendment touched three articles of the AML Law (Articles 3, 29 and 30). Under the new Article 3, the definitions of ‘property' and ‘predicate offence' were expanded. In addition, penalties on ‘money laundering' and ‘terrorist financing' were added in the new Article 29, and penalties for legal persons were added with reference to the Criminal Code. Pursuant to the new Article 30, the authority can freeze the suspicious property relating to the predicate offence before obtaining a court order, or can confiscate the suspicious property following receipt of a court order. The new article also allows the authority to freeze the funds of terrorists, as designated by the United Nations Security Council Resolutions 1267, 1373 and successive resolutions. Following the amendment, the FIU cooperated with the Ministry of Justice to prepare a draft of a Sub-Decree on Freezing of Property of Designated Terrorists and Organizations aiming to establish the details of mechanisms and procedures for freezing the assets of terrorist-related organisations, which was later adopted on 10 March 2014. Having noted the Cambodian government's progressive development and effectiveness in combating money laundering and the financing of terrorism, the Financial Action Task Force (FATF) has removed Cambodia from the grey list, and the country is no longer under close observation by FATF. The FIU was also accepted as a member of Egmont on 10 June 2015.63

Should banking and financial institutions contravene any provision of their governing laws and regulations or fail to comply with any injunction imposed by the NBC, the NBC may inflict disciplinary sanctions ranging from reprimanding, prohibiting certain operations, suspending or forcing the resignation of executives, setting up a provisional administrator, withdrawing the licence, or imposing a fine not exceeding the minimum capital of the relevant banking and financial institution.64

V FUNDING

The core funding of banking and financial institutions is generally sourced from shareholders' capital, cash deposits, and borrowed capital from third-party banking and financial institutions. There is no restriction on capital flows between Cambodia and the rest of the world, unless in the event of a foreign exchange crisis, where exchange control may be put in place by the NBC for up to three months.65 If there is a need to prolong the period of exchange control, an approval from the Prime Minister is required. To date, no exchange control has ever been enforced.

As the securities market Cambodia Securities Exchange (CSX) was launched in April 2012, some banking and financial institutions may go public to source required funds, provided that the number of shares to be listed does not exceed a threshold to be determined by the NBC.

VI CONTROL OF BANKS AND TRANSFER OF BANKING BUSINESS

There is no restriction on the control structure of banks except that, to prevent capital manipulation, the Banking Law66 explicitly prohibits the practice of chain shareholding companies, where each is holding shares in the others. Under the existing regulations, a transfer of the ownership of shares of banking and financial institutions is subject to different regimes of notification and approval depending on the amount of shares affected by the relevant transaction: less than 5 per cent, no prior notification is required; between 5 per cent to less than 10 per cent, prior notification is required; and from 10 per cent and above, prior approval is required.67

Nevertheless, in practice, the NBC applies only one single regime, which is to require prior approval of any transfer of shares. As part of the approval process, the NBC mainly focuses on the background of the transferee, and no detailed business plan is required in connection with the application for such approval. Any significant change68 in the shareholding structure of the parent company of a foreign branch operating in Cambodia shall be notified to the NBC.

The NBC levies a fee equivalent to 0.5 per cent of all transferred shares' face value, 0.03 per cent of all added shares' face value and 1 per cent of all deducted shares' face value.69

It is expected that a specific rule be introduced to govern banking and financial institutions that list their shares on the securities market.

VII THE YEAR IN REVIEW

Despite the instability of regional economic growth, Cambodia's economic growth remained steady at 7 per cent in 2016.70 The banking sector is considered to be the main factor in boosting Cambodia's economic growth and stabilising the macroeconomics of Cambodia.

In general, the banking sector's performance in 2016 was strong, with an increase of total assets to 112 trillion riels.71 Loans and deposits grew by 15 and 18 per cent respectively.72 The non-performing loans ratio maintained a notably low level of 2.7 per cent for banking institutions and 1.5 per cent for microfinance institutions.73

The credit granted to the private sector rose to 69 trillion riels (15 per cent growth), mainly driven by funding from foreign banks, local deposits, investments, increases in income and lack of other financial instruments, and the deposit rose to 61 trillion riels (18 per cent growth).74 This resulted in an increase of the loan-to-deposit ratio to over 108.5 per cent. The credit-to-GDP ratio is 18 per cent.75 Owing to higher food prices resulting from extreme weather, inflation has increased to 2.9 per cent.76

In 2016, the NBC issued a number of regulations, such as the Regulation on Membership of FAST System and Central Shared Switch (adopted on 19 May 2016), a Regulation on Provision of Credit in National Currency of Banking and Financial Institutions (adopted on 1 December 2016) and a Circular on Implementation of Minimum Registered Capital for Banking and Financial Institution (adopted on 28 June 2016). The Regulation on Membership of FAST System and Central Shared Switch requires all commercial banks and microfinance deposit taking institutions to become a member of the FAST (Fast And Secure Transfers) system by 1 January 2017.77 The FAST system permits customers to instantly make payment in riels among member institutions at low cost. The same regulation also requires all commercial banks and microfinance deposit taking institutions to become member of the central shared switch system by 1 January 2018. The central shared switch system is a central system that connects all ATM and EFTPOS78 of all members. The Regulation on Provision of Credit in National Currency of Banking and Financial Institutions requires each banking and financial institution to have at least 10 per cent of its credit portfolios in the national currency (riels) by 31 December 2019.79 Each institution must also state the provision of credit in the national currency in its credit strategy and policy. The Circular on Implementation of Minimum Registered Capital for Banking and Financial Institution provides a timeline to increase the registered capital, a list of documents required to be submitted to the NBC, and a list of measures that an institution can choose in the event such institution cannot increase the registered capital on time.80

In October 2016, the NBC launched a liquidity provision collateral operation (LPCO) to provide liquidity under a reasonable rate to banking and financial institutions that need riels for their operation. Under the LPCO, the NBC lends riels to banking and financial institutions through a Dutch auction and takes NCDs as security. The maturity of the LPCO is three months. Through the LPCO, the NBC can influence the market interest rate and lower the interest rate in the future.

VIII OUTLOOK AND CONCLUSIONS

At a macro level, to help maintain price and financial system stability the NBC will promote the riel over the short and medium term, and de-dollarisation in the long term. Differential treatment between riels and US dollars, in measures similar to the current regime and applicable to reserve requirement, will be further introduced to promote the use of the riel. There is also a plan to offer investment products in riels, such as Treasury bills and bills to locals, and to reserve eligible government securities to banks seeking to meet the reserve requirement without using cash reserves that bear zero interest.

While the NBC is pursuing compliance with the 25 Basel Core Principles, the readiness of the banking system and regulatory structure in meeting such requirements will require a reasonable amount of time, taking into account the different sizes of banking and financial institutions, as well as the types of risks relevant to the Cambodian market.

Although the number of banks keeps increasing steadily, data on banking transactions to GDP suggest that there is still plenty of room for growth in the sector, in particular for new players who could bring innovative financial products, technology and solid sources of funds. The current fierce competition among banks has not resulted in any negative consequences. It has rather brought positive outcomes in terms of liquidity and quality of services and products to consumers. However, with the aim of preventing destabilising effects that may be caused by excessive competition and that may, in turn, undermine the sustainability of the banking system, the NBC will likely adopt stricter policies, based on the IMF's recommendations, with respect to licensing. These policies will restrict, if not entirely prohibit, the entrance of new players.

There has been some anticipation that the NBC will introduce more specific measures to facilitate initial public offerings of banking and financial institutions, since the current approval regime on share transfers was not originally designed to deal with shares trading in the securities market. Further to the voluntary banking code adopted by the Banking Association, a specific law on consumer protection in the financial sector is being drafted and will be adopted in the near future (as a short term target from 2016 to 2019),81 and with it, the landscape of the conduct of business is expected to be significantly changed.

Owing to a significant development in the electronic banking sector as well as the settlement system, the NBC is currently working on amending existing regulations governing third-party processors, and is going to introduce a new legal regime in relation to payment service providers during 2017 upon the adoption of a regulation on the management of payment service providers. Moreover, several other drafted regulations, such as a regulation on the liquidity risk management framework of banking and financial institutions, a regulation on asset classification and provisioning, a regulation on capital buffers, a regulation on the limitation of loan-to-value ratios, a regulation on risk management for payment systems and payment service providers, and rules and procedures for the central shared switch system, are also being prepared and studied by the NBC for the upcoming year.82

Having noted the macro financial risks caused by the rapid credit growth, increased financing by foreign banks and the greater exposure to the real estate and construction sector, the IMF has recommended that relevant policies should focus on securing sustained growth and mitigating growing financial sector vulnerabilities, including by enhancing resilience and building buffers pre-emptively.83 Reserve requirements shall be raised, particularly on short-term foreign currency deposits and foreign borrowing, to moderate the pace of credit growth. Prudential regulations, such as loan and asset classifications, capital adequacy ratios, sectoral concentration limits, higher risk weighting for real-estate loans, funding requirements (i.e., limits on loan-to-deposit ratio) and counter-cyclical capital requirements, should be imposed, upgraded or tightened to build resilience and engineer a soft landing of the credit cycle.84 The NBC has agreed that there is a need to engineer a soft landing of the credit cycle, including by focusing on strengthening regulation and improving institutional capacity. In addition to the speed of credit growth, the NBC will closely monitor the quality of credit and sectoral allocation of credit with the objective of increasing credit to productive sectors.85 The NBC is currently working on revising regulations on asset classification and provisioning, as well as on the prompt corrective action framework, and plans to upgrade the solvency regulations. Should the NBC consider it fit and necessary to mitigate those risks by strictly implementing the IMF's recommendation, there may be a significant change ahead.

Owing to the recent increase in the minimum capital requirements, it is anticipated that more consolidations and acquisitions will occur in the coming years.

1 Bun Youdy is a partner at Bun & Associates.

2 See NBC Annual Report 2016, p. 39.

3 Amended in 2006.

4 See IMF Country Report No. 15/307, p. 10.

5 Article 2 of the Regulation on Licensing of Microfinance Institutions Taking Deposits Institution dated 13 December 2007.

6 Article 12 of the Banking Law.

7 Id., Article 13.

8 Article 1(1) of Circular on Implementation of Minimum Registered Capital for Banking and Financial Institution dated 28 June 2016.

9 Articles 3, 4, 5, 6 and 7 of Regulation on Minimum Registered Capital of Banking and Financial Institutions dated 22 March 2016.

10 Id., Article 8.

11 Article 2 of Circular on Implementation of Minimum Registered Capital for Banking and Financial Institution dated 28 June 2016.

12 Article 3 of the Regulation on Licensing of Financial Lease Companies dated 27 December 2011.

13 See NBC Annual Report 2012, pp. 12-15.

14 Article 1 of the Regulation on Reporting Date for Commercial Banks and Specialized Banks dated 13 September 2006, Article 1 of the Regulation on Reporting Date for Microfinance Institutions dated 13 September 2006 and the NBC's Notification on Date and Duration for Submission of Reports by Banking and Financial Institutions dated 22 March 2012.

15 Article 7 of the Regulation on Corporate Governance.

16 Id., Article 6.

17 Id., Articles 8 and 19.

18 Article 6 of the Regulation on Licensing of Microfinance Institutions dated 10 January 2000.

19 Id.

20 Article 7 of the Regulation on Internal Control of Banking and Financial Institutions dated 18 September
2010.

21 Id., Article 8.

22 Article 18 of the Regulation on Corporate Governance.

23 The old calculation method set in Regulation on Calculation of Banks' Net Worth dated 16 February
2000 was repealed by the Regulation on Calculation of Banks' Net Worth dated 15 October 2010.

24 Article 2 of the Regulation on Calculation of Banks' Net Worth dated 15 October 2010.

25 Id., Article 4.

26 Id., Article 5.

27 Id., Article 6.

28 Regulation on Calculation of Microfinance Institutions' Net Worth dated 27 August 2007.

29 Amendment of the Regulation Relating to the Banks' Solvency Ratio dated 29 December 2004.

30 Regulation on Microfinance Institutions' Solvency Ratio dated 27 August 2007.

31 See Article 16 of the Banking Law.

32 Article 5 of the Regulation on Bank's Capital Guarantee dated 15 October 2001 as amended by the Regulation on the Determination of the Interest Rate on Fixed Deposit, Reserve Requirement and Capital Guarantee in US dollars.

33 Article 13 of the Regulation on Licensing of Microfinance Institutions dated 11 January 2000 as amended by the Regulation on Amendment to Regulation on Licensing of Microfinance Institutions dated 13 September 2006.

34 Article 10 of the Regulation on Licensing of Financial Lease Companies dated 27 December 2011.

35 Article 1 of the Regulation on Maintenance of Reserve Requirements against Commercial Banks' Deposits and Borrowings dated 27 September 2012.

36 Article 1 of the Regulation on Maintenance of Reserve Requirements for Microfinance Institutions dated 25 February 2002.

37 Article 3 of the Regulation on Licensing of Microfinance Deposit Taking Institutions dated 13 December
2007.

38 Article 2 of the Regulation on Bank's Capital Guarantee dated 15 October 2001.

39 Id., Article 1.

40 Article 2 of the Regulation on Controlling Banking and Financial Institutions' Large Exposure dated 3 November 2006.

41 Id., Article 7.

42 Id., Article 4.

43 Id., Article 5.

44 Id., Article 6.

45 Article 49 of the Banking Law.

46 Article 4 of the Amendment of Regulation on Loan to Related Parties dated 7 June 2002.

47 Article 3 of the Regulation on Licensing of Microfinance Deposit Taking Institutions dated 13 December 2007.

48 See IMF Country Report No. 15/307, p. 10.

49 Article 4 of the Regulation on Liquidity Coverage Ratio dated 23 December 2015.

50 Id., Article 5.

51 Article 33 of the Banking Law.

52 Id., Article 32.

53 Articles 4 and 6 of the Regulation on Prudential Limits and Regulatory Requirements Applicable to Banking and Financial Institutions Trading in Securities dated 31 December 201.

54 Article 3 of the Regulation on Asset Classification and Provisioning in Banking and Financial Institutions dated 25 February 2009.

55 Id., Article 13.

56 Regulation on Loan Classification and Provisioning Applicable to Specialized Banks for Rural Credit and Licensed Microfinance Institutions dated 13 December 2002.

57 Article 47 of the Banking Law.

58 Article 1 of the Regulation on Utilisation and Protection of Credit Information dated 10 May 2006.

59 Id., Article 14.

60 Article 12 of the AML Law.

61 Id., Article 16.

62 Id., Articles 29 and 30.

63 See NBC First Semester Report 2015, p. 43.

64 Article 52 of the Banking Law.

65 Article 5 of the Law on Foreign Exchange dated 22 August 1997.

66 Article 20 of the Banking Law.

67 Articles 2, 3 and 4 of the Regulation on Transfer of Shares of Banks dated 8 November 2001.

68 Article 7 of the Regulation of Transfer of Shares of Banks dated 8 November 2001. ‘Significant change' is defined as any change that requires an authorisation of the supervisory authority of the relevant parent company.

69 Articles 11, 12 and 13 of the Regulation on Fees Determination for Banking and Financial Institutions dated 30 May 2013.

70 See IMF Country Report No. 16/340, p. 3.

71 See NBC Annual Report 2016, p. 40.

72 Id.

73 Id., p. 41.

74 See NBC Annual Report 2016, p. b.

75 Id., p. 43.

76 Id., p. a.

77 Regulation on Membership of FAST System and Central Shared Switch dated 19 May 2016.

78 Electronic fund transfer point of sale.

79 Regulation on Provision of Credit in National Currency of Banking and Financial Institutions dated 1 December 2016.

80 Circular on Implementation of Minimum Registered Capital for Banking and Financial Institution dated 28 June 2016.

81 See Draft Financial Sector Development Strategy 2016-2025, p. 77.

82 See NBC Annual Report 2016, pp. 46 and 61.

83 See IMF Country Report No. 16/340, p. 1.

84 Id., pp. 10-11.

85 Id., p. 11.