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 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 of the end of 2018, there were 43 commercial banks, 14 specialised banks, five representative offices of foreign banks, 80 microfinance institutions (including seven microfinance deposit-taking institutions), 15 financial lease companies, five third-party processors, one credit bureau (Credit Bureau Cambodia), 14 payment service-providing institutions and 273 rural credit institutions in Cambodia.2 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 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 and amended in 2006;
- the Law on Banking and Financial Institutions (Banking Law) promulgated in 1999;
- the Law on Foreign Exchange promulgated in 1997;
- the Law on Anti-Money Laundering and Combating the Financing of Terrorism (AML Law) promulgated in 2007 and amended in 2013; and
- 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 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 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;
- 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 banking and financial institutions; 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 2014.3
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.4 As of the end of 2018, the NBC has 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 independently, such as:
- services that enable cash withdrawals and deposits into a payment account;
- payment transactions, including transferring money from a payment account to another payment account within the payment service institution, or to another payment account at another payment service institution;
- payment transactions where the funds are offered as a credit line to a payment service user;
- issuing payment instruments, including issuing electronic currencies and acquiring payment transactions;
- conducting local and international money remittance;
- providing payment initiation services; and
- other payment services as defined by the NBC.
Banks established in Cambodia must be either a locally incorporated entity or a branch of a foreign bank.5 Foreign banks may also establish representative or liaison offices whose activities are strictly limited to conducting market research and gleaning information.6 In theory, the representative office has a lifespan 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 is 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.7 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.8 The minimum capital requirement for financial leasing companies and rural credit institutions remains the same, at US$50,000.9
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.10 The NBC has 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.11 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 has been greatly improved, as their 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.12
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.13 The audit committee and compensation committee, if any, shall each be chaired by an independent director.14
The Regulation on Corporate Governance vaguely defines an independent director as a person capable of exercising judgement independent of the views of management, any political interests or any inappropriate outside interests.15 The NBC's current interpretation of a non-independent director includes any person exercising any function within an affiliated entity of a company, including overseas subsidiaries. An independent director of an overseas-affiliated entity of a company, however, is permitted to act as an 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 the strong autonomy of the boards 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 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.16
All banking and financial institutions are required to have internal audit and compliance officers. In the case of outsourcing, which is permitted under the current regime, the internal audit cannot be performed by the same firm as the one in charge of the external audit.17 Any designation, dismissal, removal or resignation of the head of internal audit and compliance must be reported to the NBC.18 Recently, the NBC has issued a new Regulation on Customer Complaint Settlement of Banking and Financial Institutions. The Regulation requires all banks and financial institutions to set up a new section or unit for the management of customer complaints, which is to be monitored by a senior customer relations officer who is a senior manager appointed by the board of directors to oversee the implementation of this new measure.19
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.20 In other words, there is no specific restriction on the remuneration package, except that the NBC has the authority to recommend institutions to review decisions that are considered not to be 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 a number of new regulations still need 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.21 The sum of paid-in capital and net worth must at least be equal to or larger than the minimum capital.22 Net worth is composed of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital).23
For commercial specialised banks and microfinance deposit-taking institutions:
- Tier 1 capital must include:
- paid-in capital;
- share premium;
- audited net profit for the last financial year;
- profits as recorded on intermediate dates (subject to the NBC's approval); and
- retained earning limited to 20 per cent Tier 1 capital;
- Tier 1 capital must deduct:
- own shares held by the bank;
- accumulated losses;
- intangible assets;
- loans to related parties; and
- losses determined on dates other than regular year-ends;24 and
- Tier 2 capital, which must not exceed 100 per cent of Tier 1 capital, must include:
- re-evaluation reserves;
- provisions for general banking risks;
- subordinated debt instruments not exceeding 50 per cent of Tier 1 capital;
- a general provision of 1 per cent foreseen; and
- other items with prior approval of the NBC.
Deducted items include equity participation in banking or financial institutions, and other items including deferred charges.25
The Tier 1 capital of microfinance institutions26 is composed of an almost identical structure to that applicable to commercial, specialised banks and microfinance deposit-taking institutions, except that there is no restriction on the retained earnings, and a provision for general banking risks is included (with the prior agreement of the NBC).
Unlike the structure of Tier 2 capital applicable to commercial, specialised banks and microfinance deposit-taking institutions, the Tier 2 capital of microfinance institutions must include:
- re-evaluation reserves;
- provisions for general banking risks (with the prior agreement of the NBC);
- subordinated debt instruments not exceeding 100 per cent of base net worth and with prior agreement of the NBC; and
- other items with prior agreement of the NBC.
In February 2018, the NBC introduced another prudential regulation to determine the capital buffer, which includes the capital conversation buffer and the countercyclical capital buffer, in order to increase the resilience of banks and microfinance deposit-taking institutions.
Capital conservation buffer
The capital conservation buffer is designed to ensure that banks and microfinance deposit-taking institutions build up capital buffers under normal financial situations that can be drawn down when losses occur. The requirements for the capital conservation buffer are as follows: the capital conversation buffer must be equal to 2.5 per cent of the risk-weighted assets; and the sum of the Tier 1 capital ratio (7.5 per cent) plus the capital conservation buffer (2.5 per cent) must not be less than 10 per cent of the risk-weighted assets.
Countercyclical capital buffer
A countercyclical capital buffer is designed to ensure that banks and microfinance deposit-taking institutions have sufficient capital to bear losses where the NBC has found that credit has excessively grown in a manner that would lead to systematic risk. The NBC may consider the setting of the countercyclical buffer requirement at a level between zero and 2.5 per cent of the risk-weighted assets. Based on Circular No. B7-018-001 on the implementation of the regulation of capital buffers, this countercyclical capital buffer ratio is currently set at zero per cent.
Regarding the implementation of capital conservation buffers, banks and microfinance deposit-taking institutions shall implement at least 50 per cent of the conservation buffer by 1 January 2019 and be fully compliant by 1 January 2020. The implementation of countercyclical capital buffers will be determined by particular circular to be issued by the NBC.
Solvency ratio (capital adequacy ratio)
Banks and microfinance deposit-taking institutions must not let their solvency ratio slip below 15 per cent.27 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.28
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 credit risks, while Basel II requires two additional factors: market risks and operational risks.
The weighting system includes the following:
- zero per cent: cash, gold, claims on the NBC, assets collateralised by deposits 100 per cent lodged with a bank, and claims on or guaranteed by sovereigns rated AAA to AA-;
- 20 per cent: claims on or guaranteed by sovereigns rated A+ to A-, and claims on or guaranteed by banks rated AAA to AA-;
- 50 per cent: claims on or guaranteed by sovereigns rated BBB+ to BBB-, and claims on or guaranteed by banks rated A+ to A-;
- 120 per cent: traded securities; and
- 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 categories: 100 per cent of their value if they carry full risk; 50 per cent of their value if they carry medium risk; and 20 per cent of their value if they carry moderate risk. 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 International Financial Reporting Standards applicable to financial institutions.
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 a capital guarantee. This amount was increased in 2001 from 5 per cent.29 Deposits made in riel by 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).30 Microfinance institutions and financial lease companies are required to permanently deposit 5 per cent of their registered capital. Deposits made in riel 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.31 However, deposits made by financial lease companies either in riel or in foreign currencies bear no interest.32 Payment service institutions and rural credit institutions are also required to deposit 5 per cent of their registered capital with the NBC as a capital guarantee.33 A depositing institution may get a refund of its capital guarantee after its liquidation and the settlement of all liabilities.
Under one of the monetary tools available to it, the NBC demands commercial banks to maintain with the NBC reserve requirements against deposits and borrowings at a daily average balance equal to 8 per cent in riel and 12.5 per cent in foreign currencies.34 The reserve requirements had previously been increased to 16 per cent to curb booming credit activities and to limit lending to real estate-related transactions.
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, respectively.
Previously, the NBC also provided 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. At present, these reserve requirements in foreign currencies no longer bear any interest.37
Large exposure and related-party transactions
Large exposure refers to gross exposure larger than 10 per cent of banking and financial institutions' net worth.38 A banking and financial institution's total credit exposure to a single beneficiary is limited to 20 per cent of its net worth.39 Banking and financial institutions are required to maintain a maximum ratio of 300 per cent between total large exposure and net worth.40 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:
- one of them exercises control over the other, whether directly or indirectly;
- they are subsidiaries of the same parent company;
- they are under the same de facto management; or
- one of them holds an equity interest of more than 10 per cent of the other and they have a special business relationship.41
In the event a large exposure is guaranteed by another bank or international financial institution, with the prior approval of the NBC, the exposure will be reduced to half when calculating the solvency ratio.42 Furthermore, the NBC may increase the large exposure ratio to up to 35 per cent of the net worth upon request from the bank, if the NBC finds that the banking and financial institution is satisfactory given by the NBC's internal rating, or benefits from an investment grade rating 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).43
Recently, the NBC extended its control over large exposure not only on individual and legal entities, but also over sectoral concentration, in order to capture the overall risk and keep up with developments in the banking sector.
Related parties are any individual or legal entities who directly or indirectly hold 10 per cent of capital or voting rights, or any person who participates in the administration, direction, management or internal control; and the external auditor.44 Outstanding loans granted to related parties cannot exceed 10 per cent of the net worth of the banks and microfinance institutions,45 and 3 per cent of the net worth for microfinance deposit-taking institutions.46 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 a report is made on a monthly basis. Recently, the NBC also extended its supervision coverage on the basis of entire transactions conducted between related parties instead of on the basis of loan transactions.
Liquidity coverage ratio
NBC has 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 International Monetary Fund (IMF) has opined that although a large portion of banks' balance sheets are invested in liquid assets, they may face short-term liquidity risks.47 Taking into consideration this liquidity risk, the NBC has increased the minimum liquidity ratio imposed on all deposit-taking banks and financial institutions from 50 to 100 per cent.48 The minimum liquidity coverage ratio (LCR) of 100 per cent is set to be fulfilled and maintained within institutions from 1 January 2020. The NBC requires all institutions to comply with the minimum LCR within the following timelines:49
- minimum LCR of 60 per cent from 1 September 2016;
- minimum LCR of 70 per cent from 1 September 2017;
- minimum LCR of 80 per cent from 1 September 2018;
- minimum LCR of 90 per cent from 1 June 2019; and
- minimum LCR of 100 per cent from 1 January 2020.
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 their own net worth.50 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.51
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.52 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 the 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.
Credit risk grading and provisioning on impairment
In the past, the NBC imposed a different measure for asset classification and provisioning of bank and microfinance institution, as banks' assets are classified into five categories:
- normal: with provisioning of 3 per cent for banks and zero per cent for microfinance institutions;
- special mention (not applicable for microfinance institutions): with provisioning of 3 per cent for banks;
- substandard: with provisioning of 20 per cent for banks and 10 per cent for microfinance institutions;
- doubtful: with provisioning of 50 per cent for banks and 30 per cent for microfinance institutions; and
- loss: with provisioning of 100 per cent for both banks and microfinance institutions.
However, from 1 December 2017, all banks and financial institutions are required to maintain the same credit risk grading and classification. Credit risk grading and classification are divided into five categories, and vary depending on the duration of the facilities:53
- facilities with an initial term exceeding one year:
- special mention:
- loss: the repayment is overdue by 360 days or more;
- facilities with an initial term below or equal to one year:
- special mention:
- loss: the repayment is overdue by no more than 180 days.
The provisioning of the above classifications are 1 per cent (normal), 3 per cent (special mention), 20 per cent (substandard), 50 per cent (doubtful) and 100 per cent (loss), respectively.54
iv Recovery and resolution
There are currently no specific regulations or measures in place requiring banks to draw up recovery and resolution plans, or living wills. 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.55 Banks may share clients' negative credit information with other banks for the purpose of sound credit activities and risk management56 provided that the banks obtain prior approval from the clients on exclusive utilisation of the information for assessing creditworthiness.57
Pursuant to the AML Law, banks, through their services, must not participate in the 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.58 The FIU has implemented an electronic reporting system that enables 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.59 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.60
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 National Coordination Committee on AML/CFT (Committee) can freeze suspicious property relating to the predicate offence before obtaining a court order, or can confiscate suspicious property following receipt of a court order. The new Article 30 also allows the Committee to freeze the funds of terrorists, as designated by 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 Cambodia's progressive development of effective tools to combat money laundering and the financing of terrorism, the Financial Action Task Force (FATF) has removed the country from its grey list. As such, Cambodia is no longer under the FATF's close observation. The FIU was accepted as a member of the Egmont Group of Financial Intelligence Units on 10 June 2015.61 The FIU has also published its national strategy regarding anti-money laundering (AML) and countering of the financing of terrorism (CFT) for the period running from 2019 to 2023.62
Should banking or 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 including:
- a reprimand;
- a prohibition on certain operations;
- the suspension or forced resignation of executives;
- the setting up of a provisional administrator;
- withdrawal of a licence; or
- the imposition of a fine not exceeding the minimum capital of the relevant banking or financial institution.63
The core funding of banking and financial institutions is generally sourced from:
- shareholders' capital;
- cash deposits;
- borrowed capital from third-party banking and financial institutions; and
- offering their shares and bonds to public investors.
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.64 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.
Since the launch of the securities market, the Cambodia Securities Exchange (CSX), in 2012, some banking and financial institutions, with the prior approval of the NBC, may go public to source required funds, provided that the number of shares to be listed does not exceed 20 per cent of the total voting right share or the number of bonds to be listed does not exceed 20 per cent of the total assets.65 However, the NBC clearly stipulates that the listing in the CSX must not be a reason to avoid the obligation regarding minimum registered capital applicable to the shareholder.66
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 Law67 explicitly prohibits the practice of chain shareholding companies, where each is holding shares in the others. Under the existing regulations, a transfer of ownership in shares of banking and financial institutions is subject to different notification and approval regimes depending on the amount of shares affected by the relevant transaction:
- less than 5 per cent: no prior notification is required;
- more than 5 but less than 10 per cent: prior notification is required; and
- 10 per cent and above: prior approval is required.68
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 change69 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 the face value of all transferred shares, 0.03 per cent of the face value of all added shares, and 1 per cent of the face value of all deducted shares.70
The NBC has issued a regulation to set out the conditions for banking and financial institutions that intend to offer their shares and bonds on the securities market. It is expected that more specific rules will be introduced to govern these exercises.
VII THE YEAR IN REVIEW
Despite the instability of the region's economic growth, Cambodia's economic growth has increased to 7.3 per cent in 2018.71 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 2018 was strong, with an increase of total assets to 163.1 trillion riel (a 19.4 per cent increase from 2017).72 Funding from borrowings increased by 23 per cent to 16.8 trillion riel and the capital increased by 23.8 per cent to 19.3 trillion riel. Loans and deposits grew by 18.8 per cent to 99.1 trillion riel and 15.3 per cent to 79.5 trillion riel respectively.73
In 2018, the NBC issued a significant number of regulations, such as:
- the Circular on the Implementation of Regulations on Credit Risk Grading and Impairment Provisioning (adopted on 16 February 2018) was adopted for the purpose of providing further guidance to the implementation of some requirements (i.e., the submission of financial statements, the review and classification of facilities, the revision of credit policies, etc.);74
- the Regulation on Capital Buffers of Bank and Financial Institution (adopted on 22 February 2018), which aims to set out capital buffers, including capital conservation and countercyclical capital, to strengthen the durability of banks and financial institutions;
- the Circular on Implementation of Regulations on Capital Buffers of Banks and Financial Institutions (adopted on 7 March 2018);
- the Regulation on Maintenance of Reserve Requirements Against Commercial Banks' Deposits and Borrowings (adopted on 29 August 2018); and
- the Regulation on the Usage of New Forms of Bank Cheque (adopted on 26 September 2018).
Recently, the NBC commenced the soft launch of the Cambodian Shared Switch (CSS) system, with five financial institutions becoming members. Other commercial banks and microfinance deposit-taking institutions, upon becoming members, will subsequently launch the system in phases.75 The CSS system simplifies the interbank payment operation for the use of debit cards in ATMs and point-of-sale machines to accelerate the effectiveness of payment services and reduce the flow of currency in the market.76
Meanwhile, to meet fund demands in a timely manner, commercial banks and 42 microfinance institutions have officially launched the Fast Payment system, seven of which launched the service under their mobile banking operations. The NBC encourages member financial institutions to continue developing the Fast Payment system for mobile transactions, online transactions and other payment instruments in order to widen its adoption and to facilitate customers' needs.77
Additionally, the NBC is developing a real-time gross settlement system to smooth the processing of and mitigate the risks in large interbank transactions, especially financial market transactions. The NBC has completed testing the functioning of the system, and is preparing rules and procedures for managing its operation and risks.78
VIII OUTLOOK AND CONCLUSIONS
At a macro level, to help maintain price and financial system stability, the NBC continues to promote riel over the short and medium term, and de-dollarisation in the long term. Differential treatment between riels and US dollars, under measures similar to the current regime and applicable to reserve requirements, 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 to local people and entities, and 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 to meet 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 financial institutions continues to increase steadily, data on banking transactions as a percentage of GDP suggests that there is still plenty of room for growth in the sector, in particular for new players who could bring innovative financial products and technology, and a solid source of funds. The current fierce competition among banks has not resulted in any negative consequences. It rather results in positive outcomes in terms of liquidity and the quality of services and products offered 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.
The voluntary banking code adopted by the Banking Association, which is applicable to its members, is a specific guideline on consumer protection in the financial sector. The law on consumer protection is being drafted, and will be adopted and applicable to all BFIs at some stage in 2019.79 With its implementation, the conduct of business landscape is expected to be significantly changed.
Moreover, several other drafted regulations will also be prepared and studied by the NBC in the coming year, such as:
- a regulation on net-worth calculations of payment service-providing institutions;
- a regulation on the management of agents of banking and financial institutions;
- a regulation on the protection of customers of payment service-providing institutions; and
- a regulation on AML-CFT.80
The macro financial risks caused by rapid credit growth has been alleviated by policy measures, increased financing by foreign banks, and greater exposure to the real estate and construction sector. The IMF has recommended that the NBC take measures in four areas: safeguarding fiscal sustainability, managing macro-financial risks, supporting inclusive growth, and addressing governance vulnerabilities and corruption.81 Owing to the increase in the minimum capital requirement, we anticipate that some banking and financial institutions will be consolidated, acquired, face voluntary dissolution or have their licence downgraded.
Fintech is developing in Cambodia. Through the Bakorng project, the NBC is finalising the issuance of digital currencies by using blockchain technology. The objectives of this project are encouraging electronic payments to achieve a cashless economy, and financial inclusion. 82
Growth is expected to remain around 7 per cent over the next few years and inflation to be within control.83 The bank credit-to-GDP gap is expected to remain close to the Bank for International Settlements threshold of 10 percentage points. While banks' capital adequacy has increased, vulnerabilities remain. Financial institutions continue to draw on external funding, suggesting liquidity risks as global financial conditions tighten, with the average loan-to-deposit ratio being at around 100 per cent in June 2018.84 Economic activity is projected to remain robust, supported by stronger manufacturing exports, construction and tourism activity. Growth is expected to decline over the medium term owing to moderations in the credit and real estate cycles and challenges in improving economic diversification and competiveness.85
Credit growth remains strong and is increasingly concentrated in the construction and real estate sectors. Further policy measures are needed to address elevated financial prudential measures, such as raising risk weights for real-estate lending, introducing a crisis management framework with a deposit insurance scheme, and continued upgrading of regulation and supervision.86
Cambodia has made significant progress towards establishing sustainable development goals due to years of impressive economic growth and reforms. The level of income growth in Cambodia has outpaced that of other countries in the region, poverty has declined and the economy has begun to gradually diversify. To entrench these gains and enhance productivity growth, the NBC should accelerate implementation of structural reforms aimed at supporting inclusive growth.87
The NBC continues to maintain prices and financial stability, and develop the banking sector, to support and strengthen economic growth. The NBC is also continuing to develop and improve the payment system, in particular by cooperating with the FAST system member institutions to expand the FAST system, monitor the integration of CSS system of member institutions, and prepare to launch the official operating system and cooperate with the Korean government through KOICA to implement the interbank fund payment service development plan.
To mitigate financial stability risks and bolster financial stability, the NBC has adopted key macroprudential policy measures, including a capital conservation buffer to be implemented in phases, a liquidity management framework, and an improvement of banks' loan classification and provisioning rules.88
1 Bun Youdy is a partner at Bun & Associates.
2 See NBC Annual Report 2018, p. 41.
3 See IMF Country Report No. 15/307, p. 10.
4 Article 2 of the Regulation on Licensing of Microfinance Institutions Taking Deposits Institution dated 13 December 2007.
5 Article 12 of the Banking Law.
6 Id., Article 13.
7 Article 1(1) of Circular on Implementation of Minimum Registered Capital for Banking and Financial Institution dated 28 June 2016.
8 Articles 3, 4, 5, 6 and 7 of Regulation on Minimum Registered Capital of Banking and Financial Institutions dated 22 March 2016.
9 Article 3 of the Regulation on Licensing of Financial Lease Companies dated 27 December 2011.
10 See NBC Annual Report 2012, pp. 12–15.
11 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.
12 Article 7 of the Regulation on Corporate Governance.
13 Id., Article 6.
14 Id., Article 8 and 19.
15 Article 6 of the Regulation on Licensing of Microfinance Institutions dated 10 January 2000.
17 Article 7 of the Regulation on Internal Control of Banking and Financial Institutions dated 18 September 2010.
18 Id., Article 8.
19 Articles 4 and 8 of Regulation on Customer Complaint Settlement of Banking and Financial Institutions dated 27 September 2017.
20 Article 18 of the Regulation on Corporate Governance.
21 The old calculation method set in Regulation on Calculation of Banks' Net Worth dated 16 February 2000 was repealed by Regulation on Calculation of Banks' Net Worth dated 15 October 2010.
22 Article 2 of the Regulation on Calculation of Banks' Net Worth dated 15 October 2010.
23 Id., Article 4.
24 Id., Article 5.
25 Id., Article 6.
26 Regulation on Calculation of Microfinance Institutions' Net Worth dated 27 August 2007.
27 Amendment of Regulation Relating to the Banks' Solvency Ratio dated 29 December 2004 and Regulation on Capital Buffer dated 22 February 2018.
28 Regulation on Microfinance Institutions' Solvency Ratio dated 27 August 2007.
29 See Article 16 of the Banking Law.
30 Article 5 of the Regulation on Bank's Capital Guarantee dated 15 October 2001 as amended by Regulation on the Determination of interest rate on Fixed Deposit, Reserve Requirement and Capital Guarantee in USD.
31 Article 13 of the Regulation on Licensing of Microfinance Institutions dated 11 January 2000 as amended by Regulation on Amendment to Regulation on Licensing of Microfinance Institutions dated 13 September 2006.
32 Article 10 of the Regulation on Licensing of Financial Lease Companies dated 27 December 2011.
33 Article 15 of the Regulation on the Management of Payment Services Institution dated 14 June 2017 and Article 6 of the Regulation on Granting Certificate to Rural Credit Institution adopted on 25 October 2017.
34 Article 1 of the Regulation on Maintenance of Reserve Requirements against Commercial Banks' Deposits and Loans dated 29 August 2018.
35 Article 1 of the Regulation on Maintenance of Reserve Requirements for Microfinance Institutions dated 25 February 2002.
36 Article 3 of the Regulation on Licensing of Microfinance Deposit-taking institutions dated 13 December 2007.
37 Regulation on the Maintenance of Reserve Requirements against Commercial Banks' Deposits and Borrowings, dated 29 August 2018.
38 Id., Article 1.
39 Article 2 of the Regulation on Controlling Banking and Financial Institutions' Large Exposure dated 3 November 2006.
40 Id., Article 7.
41 Id., Article 4.
42 Id., Article 5.
43 Id., Article 6.
44 Article 49 of the Banking Law.
45 Article 4 of the Amendment of Regulation on Loan to Related Parties dated 7 June 2002.
46 Article 3 of the Regulation on Licensing of Microfinance Deposit-taking institutions dated 13 December 2007.
47 See IMF Country Report No. 15/307, p. 10.
48 Article 4 of the Regulation on Liquidity Coverage Ratio dated 23 December 2015.
49 Id., Article 5.
50 Article 33 of the Banking Law.
51 Id., Article 32.
52 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 2012.
53 Article 17 of the Regulation on Credit Risk Grading and Provisioning on Impairment dated 1 December 2017.
54 Article 72.
55 Article 47 of the Banking Law.
56 Article 1 of the Regulation on Utilisation and Protection of Credit Information dated 10 May 2006.
57 Id., Article 14.
58 Article 12 of the AML Law.
59 Id., Article 16.
60 Id., Articles 29 and 30.
61 See NBC First Semester Report 2015, p. 43.
62 See NBC Annual Report 2018, p. x.
63 Article 52 of the Banking Law.
64 Article 5 of the Law on Foreign Exchange dated 22 August 1997.
65 Article 5 of Prakas on Conditions for Banking and Financial Institutions to be listed in CSX dated 27 September 2017.
66 Id., Article 6.
67 Article 20 of the Banking Law.
68 Articles 2, 3 and 4 of the Regulation on Transfer of Shares of Banks dated 8 November 2001.
69 Article 7 of the Regulation of Transfer of Shares of Banks dated 8 November 2001. A significant change is defined as any change that requires an authorisation of the supervisory authority of the relevant parent company.
70 Articles 11, 12, and 13 of the Regulation on Fees Determination for Banking and Financial Institutions dated 30 May 2013.
71 See NBC Annual Report 2018, p. i.
72 See NBC Annual Report 2018, p. 42.
74 Regulation on Credit Risk Grading and Impairment Provisioning (adopted on 1 December 2017).
75 See NBC Annual Report 2018, p. 58.
76 See NBC Annual Report 2017, p. 52.
77 See NBC Annual Report 2018, p. 58.
78 See NBC Annual Report 2018, p. 58.
79 See Financial Sector Development Strategy 2016–2025, p. 56.
80 See NBC Annual Report 2018, p. 59.
81 See IMF Country Report No. 17/405, p. 9.
82 See NBC Annual Report 2018, p. 60.
83 See IMF Staff Report on Cambodia 2018, p. 5.
84 See IMF Staff Report on Cambodia 2018, p. 10.
85 See IMF Staff Report on Cambodia 2018, p. 16.
86 See IMF Staff Report on Cambodia 2018, p. 17.
87 See IMF Staff Report on Cambodia 2018, p. 17.
88 Statement by Juda Agung, Executive Director for Cambodia, NBC Annual Report 2018, p. 3.