The Banking Regulation Review: Cambodia

Introduction

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:

  1. the abolishment of the existing requirement of a 15 per cent NBC stake in all privately owned banks;
  2. a classification of banking and financial institutions (BFIs) into three categories: commercial banks, specialised banks and microfinance institutions; and
  3. 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:

  1. no restriction on foreign ownership;
  2. no local joint venture requirement;
  3. the liberalisation of interest rates;
  4. the free repatriation of benefits;
  5. no exchange control; and
  6. minimum currency risk due to Cambodia's highly dollarised economy.

As at the end of 2020, there were 52 commercial banks, 14 specialised banks, 81 microfinance institutions (including six microfinance deposit-taking institutions), 15 financial lease companies, four third-party processors, one credit bureau (Credit Bureau Cambodia), 24 payment service-providing institutions and 246 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 BFIs are often limited to conventional products, such as deposits and loans; however, a significant diversification has taken place with the introduction of other sophisticated products involving trade finance, payment facilities, foreign exchange and financial leasing. Large loans are usually arranged through cross-border financing by the parent or affiliated company of foreign banks with participation from their locally incorporated subsidiary; however, it is rare to see syndicated loans jointly organised by different banks in the country.

The regulatory regime applicable to banks

In comparison with other sectors, the legal framework governing the banking industry is the most comprehensive, with the NBC's regular updates of existing laws and the introduction of new regulations. Nonetheless, there is no specific regulation that governs cross-border loans provided by overseas financial institutions to non-banking and financial institutions. Close monitoring of cross-border loans to BFIs is overseen by the NBC, particularly when those loans are subordinated loans that may increase the net worth of the BFIs.

The NBC performs the traditional role of a central bank, and all banking activities are under its exclusive jurisdiction. Its main functions are to:

  1. conduct monetary policy;
  2. act as the sole issuer of the national currency and as the supervisory authority of the banking and financial system, having the authority, inter alia, to grant operating licences to BFIs; and
  3. 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 the NBC has the power to exercise consolidated supervision under the existing regulations, current practice demonstrates that sectoral supervision prevails instead. Cambodia has yet to adopt a universal banking system, whereby additional financial services are required to operate under separate entities and be governed by different supervisory authorities.3 All non-banking financial services are now under a single supervisory authority, namely the Non-banking Financial Service Authority. This newly established authority monitors and governs the non-banking financial sector, including providers of insurance, securities, social security, trusts, accounting and auditing services, real estate, pawnbrokers and security transfer services. This is a positive step towards harmonising the oversight and regulation of non-banking financial services.4

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.5 As at the end of 2020, the NBC had granted licences authorising the collection of deposits to six microfinance institutions. Financial lease companies provide the lease of all movable property except land and buildings to the public. There have been some adjustments to the characteristic of players under the current payment system; companies that can retain their legal form as third-party processors are limited to only those companies that conduct the payment service, specifically to remit money and receive money remittance order, by using a bank's premises. In contrast, payment service institutions are eligible to conduct a wider range of payment service transactions.

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

Every banking institution shall be incorporated as a public limited company and must comply with minimum capital requirements. The NBC recently raised the minimum capital of commercial banks, including foreign bank branches whose parent bank does not have an investment grade rating, from US$37.5 million to US$75 million, while the minimum capital of foreign bank branches whose parent bank is rated as investment grade has increased to US$50 million. An investment grade rating is confirmed to be valid for only one year from the reporting date to the NBC.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

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. It has gradually changed its supervisory approach by shifting from compliance-based supervision to risk-based and forward-looking supervision (deploying stress tests and simulations) 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 BFIs 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 BFIs is organised pursuant to the Regulation on Corporate Governance of Banking and Financial Institutions dated 25 November 2008 (the 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 BFIs. 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 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 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.15

All BFIs 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.16

Any designation, dismissal, removal or resignation of the head of internal audit and compliance must be reported to the NBC.17 The NBC has issued a new Regulation on Customer Complaint Settlement of Banking and Financial Institutions. The Regulation requires all BFIs 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.18

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.19 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

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.20 The sum of paid-in capital and net worth must at least be equal to or larger than the minimum capital.21 Net worth is composed of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital).22

For commercial bank, specialised banks and microfinance deposit-taking institutions:

  1. Tier 1 capital must include:
    • paid-in capital;
    • reserves;
    • share premium;
    • audited net profit for the previous financial year;
    • profits as recorded on intermediate dates (subject to the NBC's approval); and
    • retained earnings limited to 20 per cent Tier 1 capital;
  2. 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;23 and
  3. 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.24

The Tier 1 capital of microfinance institutions25 is composed of an almost identical structure to that applicable to commercial banks, 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 and specialised banks and microfinance deposit-taking institutions, the Tier 2 capital of microfinance institutions must include:

  1. re-evaluation reserves;
  2. provisions for general banking risks (with the prior agreement of the NBC);
  3. subordinated debt instruments not exceeding 100 per cent of base net worth and with prior agreement of the NBC; and
  4. other items with prior agreement of the NBC.

Capital buffer

In February 2018, the NBC introduced another prudential regulation to determine the capital buffer, which includes the capital conservation buffer and the countercyclical capital buffer, 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 are as follows: the capital conservation 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. Amid the coronavirus pandemic, the NBC has decided to delay the requirement for BFIs to meet the capital conservation buffer of 50 per cent.26

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 of 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 must have implemented at least 50 per cent of the conservation buffer by 1 January 2019 and been fully compliant by 1 January 2020. The implementation of countercyclical capital buffers will be determined by a 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:

  1. 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-;
  2. 20 per cent: claims on or guaranteed by sovereigns rated A+ to A-, and claims on or guaranteed by banks rated AAA to AA-;
  3. 50 per cent: claims on or guaranteed by sovereigns rated BBB+ to BBB-, and claims on or guaranteed by banks rated A+ to A-;
  4. 120 per cent: traded securities; and
  5. 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.

Capital guarantee

Cambodia has yet to establish any deposit insurance scheme, but to help protect depositors the NBC has imposed a capital guarantee on BFIs. 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-quarter 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.

Reserve requirement

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 reserve requirements are 5 per cent35 for microfinance institutions and 8 per cent36 for microfinance deposit-taking institutions.

The NBC additionally imposes reserve requirements against borrowing funds. Such reserve requirements are 8 per cent and 12.5 per cent applicable on borrowing funds derived from local and foreign currencies, respectively. However, amid the coronavirus pandemic, the NBC has reduced the reserve requirements against deposits and borrowings to 7 per cent for both local and foreign currencies.37

Due to the pandemic, the NBC has requested that BFIs pay particular attention to their customers in the worst-affected sectors, such as tourism (e.g., hotels, guest houses and restaurants), garment manufacturing, construction, and transportation and logistics, and permit these customers to restructure their loans. Loan restructuring will not be granted to any business that has defaulted on payments for more than 90 days but to those experiencing temporary financial and repayment difficulties, with terms of agreement to 31 December 2020.38

Large exposure and related-party transactions

Large exposure refers to gross exposure larger than 10 per cent of BFIs' net worth.39 A BFI's total credit exposure to a single beneficiary is limited to 20 per cent of its net worth.40 BFIs 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:

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

If 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.43 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 BFI is satisfactory in terms of 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).44

Recently, the NBC extended its control over large exposure not only on individual and legal entities, but also over sectoral concentration, 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.45 Outstanding loans granted to related parties cannot exceed 10 per cent of the net worth of the 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 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

The 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.48 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 per cent to 100 per cent.49 The minimum liquidity coverage ratio (LCR) of 100 per cent should have been fulfilled and maintained within institutions by 1 January 2020. The NBC required all institutions to comply with the minimum LCR within the following timelines:

  1. minimum LCR of 60 per cent from 1 September 2016;
  2. minimum LCR of 70 per cent from 1 September 2017;
  3. minimum LCR of 80 per cent from 1 September 2018;
  4. minimum LCR of 90 per cent from 1 June 2019; and
  5. minimum LCR of 100 per cent from 1 January 2020.50

Equity participation

Each BFI 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.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 BFIs, 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 shown 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 NCD 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:

  1. normal: with provisioning of 3 per cent for banks and zero per cent for microfinance institutions;
  2. special mention (not applicable for microfinance institutions): with provisioning of 3 per cent for banks;
  3. substandard: with provisioning of 20 per cent for banks and 10 per cent for microfinance institutions;
  4. doubtful: with provisioning of 50 per cent for banks and 30 per cent for microfinance institutions; and
  5. loss: with provisioning of 100 per cent for both banks and microfinance institutions.

However, since 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:54

  1. facilities with an initial term exceeding one year:
    • normal: the facilities are duly repaid on time and there is no suspicion regarding the future repayment capacity;
    • special mention: the repayment is overdue by 30 days or more;
    • sub-standard: the repayment is overdue by 90 days or more;
    • doubtful: the repayment is overdue by 180 days or more; and
    • loss: the repayment is overdue by 360 days or more; and
  2. facilities with an initial term below or equal to one year:
    • normal: the facilities are duly repaid on time;
    • special mention: the repayment is overdue by no more than 30 days;
    • sub-standard: the repayment is overdue by no more than 60 days;
    • doubtful: the repayment is overdue by no more than 90 days; and
    • 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.55

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. BFIs 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.

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.56 Banks may share clients' negative credit information with other banks for the purpose of sound credit activities and risk management57 provided that the banks obtain prior approval from the clients on exclusive utilisation of the information for assessing creditworthiness.58

On 27 June 2020, Cambodia promulgated the new Law on Anti-Money Laundering and Combating the Financing of Terrorism (the AML/CFT Law), to immediately replace the old AML/CFT Law, which was adopted in 2007 and subsequently amended in 2013. Concurrently, the Law on Combating the Financing of Proliferation of Weapons of Mass Destruction was promulgated to comply with the United Nations Security Council Resolutions on the subject. These new laws provide a coordinated path and comprehensive framework for the competent authorities to strengthen their current work and institutionalise their efforts in the anti-money laundering (AML) and combating the financing of terrorism (CFT) space. Following the adoption of these laws, two sub-decrees were enacted: (1) the Sub-Decree on the Organisation and Functioning of the National Coordination Committee on AML/CFT and Financing of Proliferation of Weapons of Mass Destruction, dated 30 September 2020; and (2) the Sub-Decree on the Organisation and Functioning of the Cambodia Financial Intelligence Unit, dated 1 September 2020.

Pursuant to the AML/CFT Law, banks, through their services, must not participate in the conversion or transfer of proceeds of crimes, and must immediately report these transactions to the Cambodia Financial Intelligence Unit (CAFIU) as soon as they become aware of them.59

The CAFIU has implemented an electronic 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 CAFIU.60 Failure to do so can result in criminal liabilities punishable by: imprisonment of from six days to one year and monetary fines of between US$12,500 and US$50,000 for natural persons; and fines of between US$50,000 and US$125,00061 and at least one additional penalty for legal entities. Proceeds resulting from such violations may also be confiscated.62 A person involved in financing terrorism shall be imprisoned for 10 to 20 years, and a legal entity is subject to monetary fines of between US$250,000 and US$500,000 and may be subject to criminal sanction under the Criminal Code of Cambodia.63

CAFIU cooperated with the Ministry of Justice to prepare a draft of the Sub-Decree on Freezing of Property of Designated Terrorists and Organisations, 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. The CAFIU was accepted as a member of the Egmont Group of Financial Intelligence Units on 10 June 2015.64

The CAFIU has also published its national strategy regarding AML and CFT for the period running from 2019 to 2023.65 The purposes of this strategy are to (1) prevent property from being laundered through Cambodian financial institutions and designated non-financial businesses and professions, (2) detect proceeds of crime and property connected with terrorism financing when it is laundered, and (3) ensure that law enforcement agencies work effectively together to investigate, prosecute, sanction and confiscate the proceeds and instruments of predicate and money laundering and terrorism financing offences.66

After officially implementing the national strategy on AML and CFT in March 2019, the CAFIU receives cash transaction and suspicious transaction reports from real estate companies, casinos and payment service institutions in addition to financial institutions. The CAFIU has ensured that reporting persons are aware of their obligation to provide regular reports in compliance with AML and CFT laws and regulations.67

Upon the issuance of the Regulation on Financial Disciplinary Sanctions, the CAFIU conducted numerous awareness activities on the financial disciplinary sanctions to be imposed on any reporting entities that do not comply with AML and CFT laws and regulations. These activities aimed to promote and raise awareness of each reporting entities' obligation to strictly implement AML and CFT laws and regulations as well as regarding the penalties for any non-compliant entities.68

Funding

The core funding of BFIs is generally sourced from:

  1. shareholders' capital;
  2. cash deposits;
  3. borrowed capital from third-party BFIs; and
  4. 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.69 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 BFIs, with the prior approval of the NBC, have been able to 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.70 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.71

Securities trading in Cambodia has recently expanded and a number of corporate bonds have been successfully issued in the bond market.72 In 2020, three commercial banks and two microfinance institutions issued bonds in the CSX with a total initial offering of 452 billion riels, and one commercial bank issued equity worth 343 billion riels.73

Control of banks and transfers of banking business

There is no restriction on the control structure of banks except that, to prevent capital manipulation, the Banking Law74 explicitly prohibits the practice of chain shareholding in which each company holds shares in the others. Under the existing regulations, a transfer of ownership in shares of BFIs is subject to different notification and approval regimes depending on the amount of shares affected by the relevant transaction:

  1. less than 5 per cent: no prior notification is required;
  2. more than 5 per cent but less than 10 per cent: prior notification is required; and
  3. 10 per cent and above: prior approval is required.75

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 change76 in the shareholding structure of the parent company of a foreign branch operating in Cambodia must 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.77

The NBC has issued a regulation to set out the conditions for BFIs 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.

The year in review

Due to the coronavirus pandemic, for the first time in more than 10 years Cambodia has experienced an economic contraction (of 1.9 per cent).78 The banking sector is considered to be the main factor boosting Cambodia's economic growth and stabilising the country's macroeconomics.

Despite the challenges, the banking sector's performance in 2020 remained strong, with an increase of total assets to 240.8 trillion riels (a 15.7 per cent increase from 2019).79 Capital increased by 10.4 per cent to 25.7 trillion riels. Loans and deposits grew by 14.8 per cent to 151.3 trillion riels and 15.4 per cent to 136.9 trillion riels, respectively.80

Recently, the NBC officially launched 'Retail Pay', a system that diversifies customers' options in relation to money transfers and retail settlement transactions.

In 2020, the Cambodian Shared Switch (CSS) system membership increased to 48 financial institutions. 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.81 Meanwhile, to meet fund demands in a timely manner, 56 BFIs (six of which are microfinance deposit-taking institutions) officially launched the Fast Payment system in 2020.82 The NBC encourages member financial institutions to continue developing the Fast Payment system for mobile transactions, online transactions and other payment instruments to widen their adoption and to facilitate customers' needs.

In addition to the impact of covid-19, Cambodia was also affected by floods in 2020. The NBC and the General Department of Taxation has adopted several measures to address the impacts of both, including:

  1. continued relaxation of loan restructuring to 30 June 2021; the restructuring can be carried out up to three times with the same classification;83
  2. requesting that banks and financial institutions reduce the fees applicable to loans and customer penalties; and
  3. deduction of capital conservation buffer to 1.25 per cent and acknowledgement of quarterly audited income for the calculation of temporary net worth without dividend distribution.

For new loans or top-up loans:

  1. in 2021, domestic banks and micro-financial institutions shall maintain withholding tax at the rate of 5 per cent on the interest paid to resident and non-resident taxpayers (regardless of whether a lender is a resident of a contracting state of a double taxation agreement (DTA));
  2. in 2022, domestic banks and micro-financial institutions shall maintain withholding tax at the rate of 10 per cent on the interest paid to resident and non-resident taxpayers (regardless of whether a lender is a resident of a contracting state of a DTA); and
  3. from 2023, domestic banks and micro-financial institutions shall maintain withholding tax at the normal rate in accordance with Cambodian tax law.

For existing loans:

  1. in 2021, domestic banks and micro-financial institutions shall maintain withholding tax at the rate of 10 per cent on the interest paid to resident and non-resident taxpayers (regardless of whether a lender is a resident of a contracting state of a DTA); and
  2. from 2022, domestic banks and micro-financial institutions shall maintain withholding tax at the normal rate in accordance with Cambodian tax law.

In addition to the above, the following key regulations were issued during 2020:

  1. the Prakas on the Reserved Fund for Liability of Deposits and Loans of BFIs;
  2. the Prakas on Credit Reporting;
  3. the Circular on the Implementation of Prakas on the Capital Buffer in Banking and Financial Institutions;
  4. the Circular on Annex 2 of the Prakas on Liquidity Coverage Ratio;
  5. the Sub-decree on the Establishment of the Credit Guarantee Corporation of Cambodia;
  6. the Prakas on the Bakong Payment System and the Retail Pay System Logo; and
  7. the Prakas on Implementation of the Khmer Quick Response Code for Settlement.84

Outlook and conclusions

At a macro level, to help maintain pricing and financial system stability, the NBC continues to promote the riel over the short and medium term, and de-dollarisation in the long term. Differential treatment between the riel 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. On 28 May 2020, the NBC decided to promote the circulation of riel over smaller denomination US dollar banknotes. This is a big step by the regulator in promoting local currency. 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 these requirements will take a reasonable amount of time, considering the different sizes of BFIs and 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 that 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.

Moreover, several other drafted regulations will also be prepared and assessed by the NBC in the coming year, including:

  1. a regulation on payment systems;
  2. a regulation on the deposit protection scheme;
  3. a regulation on financial lease and hire purchase;
  4. a law on dispute resolution in the banking sector; and
  5. a regulation on bancassurance.85

Fintech is developing in Cambodia. The NBC will continue to promote the implementation of the Bakong payment system and observe the standard of implementation of Bakong's QR code system. The objectives of the Bakong payment system are to encourage electronic payments to achieve a cashless economy and financial inclusion.86 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.87

With the recent entry into the Regional Comprehensive Economic Partnership, Cambodian exports and inbound foreign investment are expected to grow.88 The free trade agreement concluded with China and the upcoming trade agreement with South Korea will further boost the investment climate.89

Footnotes

1 Bun Youdy is a partner at Bun & Associates.

2 See National Bank of Cambodia (NBC) Annual Report 2020, p. 20.

3 See International Monetary Fund Country Report No. 15/307, p. 10.

4 Law on Organising and Functioning of Non-Banking Financial Service Authority 2021.

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

6 id., Article 13.

7 Article ?(?) of the Circular on Implementation of Minimum Registered Capital for Banking and Financial Institutions dated ?? June ????.

8 Articles 3, 4, 5, 6 and 7 of the 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 Specialised 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., Articles 8 and 19.

15 ibid.

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

17 id., Article 8.

18 Articles 4 and 8 of the Regulation on Customer Complaint Settlement of Banking and Financial Institutions dated 27 September 2017.

19 Article 18 of the Regulation on Corporate Governance.

20 The old calculation method set in the 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.

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

22 id., Article 4.

23 id., Article 5.

24 id., Article 6.

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

26 Press Release No. B13-020-002, issued by the NBC on 17 March 2020.

27 Amendment of the Regulation Relating to the Banks' Solvency Ratio dated 29 December 2004 and the 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 the Regulation on Term Deposit Interest Rate Determination, Deposit on Reserve Requirements and Banks Capital Guarantee in US dollars.

31 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.

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 the 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 Article 4 of the Regulation on the Reserve Requirement against Banking and Financial Institutions' Deposit and Loans dated 18 March 2020.

38 Circular No. B7-020-001 on Restructured Loan during Covid-19 Pandemic, issued by the NBC on 27 March 2020.

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 2012.

54 Article 17 of the Regulation on Credit Risk Grading and Provisioning on Impairment dated 1 December 2017.

55 id., Article 72.

56 Article 47 of the Banking Law.

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

58 id., Article 14.

59 Article 12 of the AML/CFT Law.

60 id., Article 16.

61 id., Article 40.

62 id., Article 43.

63 id. Article 44.

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

65 See NBC Annual Report 2018, p. x.

66 See National Strategy for Combating Money Laundering 2019–2023, p. 5.

67 See NBC Annual Report 2019, p. 28.

68 Press Release No. B12-020-055.

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

70 Article 5 of Prakas on Conditions for Banking and Financial Institutions to be listed in CSX dated 27 September 2017.

71 id., Article 6.

72 International Monetary Fund Country Report No. 19/387, p. 14.

73 See NBC Annual Report 2020, p. 22.

74 Article 20 of the Banking Law.

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

76 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 the authorisation of the supervisory authority of the relevant parent company.

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

78 See NBC Annual Report 2020, p. i.

79 id., p. 20.

80 ibid.

81 See NBC Annual Report 2017, p. 52.

82 See NBC Annual Report 2020, p. 32.

83 Notification B.7.20.1748 to the Association of Banks in Cambodia and Cambodia Microfinance Association, issued by the NBC on 18 December 2020.

84 See NBC Annual Report 2020, p. 27.

85 id., p. 49.

86 See NBC Annual Report 2018, p. 60.

87 See NBC Annual Report 2020, p. 30.

88 id., p. 46.

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

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