Cambodia's Financial Sector Development and Policies

UNDP & ACLEDA. November 7, 2007
Cambodia’s s Financial Sector
Development and policies
H.E. Neav Chanthana
Deputy Governor
www.nbc.org.kh
1

Table of Contents
1. History of NBC
The Role of NBC
2. Banking Sector Development
Growth of banking sector
3. Financial Sector Development Strategy 2006-2015
NBC challenges for a sound financial system
to support sustainable economic growth
2

History of NBC
• The National Bank of Cambodia (NBC) was
established in December 1954
• From January 01, 1955 NBC became fully
operational.
• April 17, 1975 the NBC was closed, money and
markets were abolished.
• October 10, 1979 the Central Bank was re-opened
and named The People’s s Bank of Cambodia in
mono-banking system
• 1980 the national currency, the “Riel” was
introduced
3

National Bank of Cambodia (1975-1979)
• Between 1975 and 1979,
destruction of all
infrastructures (markets,
trade, money, banks, etc.);
destruction of the NBC.
• 1979: commercial transactions conducted mainly in the form of barter, or
using rice and gold, and later also Vietnamese dong.
• 1980: re-establishment of the NBC, re-issuance of the riel as the
country’s legal tender.
• Confidence in the riel remained low, given the political structure and the
security situation. But the use of USD and THB was restricted by the
centrally planned economy.

National Bank of Cambodia (2004-Present)
5

Dual Role of The National Bank of Cambodia :
Legal basis: Law on the Organization and Function of the National Bank
of Cambodia (Jan. 26, 1996).
The principle Mission is to maintain price stability.
To formulate and implement monetary and exchange policies;
To license, delicense, regulate and supervise banks, financial
institutions, liquidators and auditors;
To oversee payment systems and to enhance interbank
payments;
To issue the national currency and Manage International
Reserve
6

Monetary policy of the NBC
The NBC adopts a tight monetary policy.
Exchange Rate policy: Managed float, occasionally NBC
intervenes on the market to maintain the exchange rate
stability.
Foreign exchange policy: Liberal free to transfer money
abroad; no restriction on the exchange market. (Foreign
Exchange Law; Aug. 22, 1997)
Interest rate : Liberal
As a lender of last resort the NBC offers credit to commercial
banks in Riels only; Interest rate is at 0.50% per month or 6%
per annum.
Payment System: the economy is highly cash based; check is
the main payment instrument NBC runs the clearing house in
both USD and Riels.
7

Second Major Role of NBC : financial sector
development and stability of the financial system:
Objectives: to support
• Economic stability
• Resource mobilization
• Private sector development
• Employment
• Foreign direct investment
Therefore the government is committed to conduct
banking sector reforms and adopted financial sector
Development Plan I and II to foster efficiency, solvency
and sound functioning of the financial system
8

2 - The Banking Sector Development
Legal Framework : To support the reforms, legislative framework has
been improved. New Laws and regulations were issued in
anticipating the banking restructuring.
The Law on Banking and Financial Institutions, November 1999,
promoting a sound financial system and providing a framework for
the licensing, organization, operations and supervision of financial
services and Prakas/regulations issued since 2000 for the
enforcement of the laws
Law on Negotiable Instruments and Payments Transaction (24 Oct.
2005).
Law on Anti-Money Laundering and Combating Financing of
Terrorism (24 Jun. 2007).
Law on Financial Lease (draft)
9

The Banking System in Cambodia (September, 2007)
National Bank of of
Cambodia
17- 17-Commercial Banks
7-Specialized Banks
MFIs MFIs
14- Local
Banks
CPB, CNB, UCB, CCB, CAB,
ABA, SBC, VB, ACLEDA, FTB,
CMB, ANZ, CAMKO, SKB
3- Foreign Branch
Banks
2 Repre.
Offices
1- State-owned
Banks
RDB
6- Local Banks
PHB, CAISB,FIB,
ANCO,CDSB, PISB
17-Licensed
26- Registered
NGOs over 60
21 NBC
3,808 Exchange
Branches
Bureaus
MYB, FCB, KTB
Bank provincial branches: 74
10

Progress in banking: New entries
As more and more players enter into the
industry, and competition become intensify causing
banks to upgrade themselves to stay in business.
Both credits and deposits grow rapidly showing
an increase of public confident in the sector .
Banks are now more profitable as the interest
rate spread remained high.
Despite prudential ratio dropped gradually the
overall enforcement is improved.
11

24.07 24.65
23.1
20.5
Aug-07
Jul-07
Jun-07
2006
Financial Deepening
Financial Deepening (M2/GDP), in %
30
25
20
18.6 18.7
15.6
16.5
15
12.6
13.0
8.5 9.3
10.1
9.5
10
5
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005

Loans to Customer – in US dollars
Banks & MFIs Loans
1,400,000.00
1,303,405.68
160,000.00
1,200,000.00
141,235.63 140,000.00
In Thousand US dollar
1,000,000.00
800,000.00
600,000.00
400,000.00
482,712.14
360,575.24
41,370.22 40,846.29
598,405.16
47,840.99
882,288.14
91,972.87
120,000.00
100,000.00
80,000.00
60,000.00
40,000.00
200,000.00
20,000.00
-
2003 2004 2005 2006 September-07
-
Banks - loans (gross)
MFIs - Loans (gross)
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Credit by Economic Sectors
90.15
127.49
66.85
64.95
101.20
120.61
12.50
35.99
73.67
104.59
24.33
35.25
66.32
16.08
16.85
36.66
61.01
27.56
41.44
35.16
52.00
129.33
113.23
132.20
139.01
167.78
197.08
193.12
264.90
282.51
276.29
379.63
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
-
Credit by Economic Sectors
Services WSR Manufacturing RE & PU Construction Agriculture Import Others
2004 2005 2006 Sep-07
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In Million US dollar

Banks – Earning Trend
Banks - Return on Equity and Return on Assets
16.00%
14.00%
12.00%
14.18%
13.47%
Percentage
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
7.87%
5.73%
3.83%
3.92%
2.84%
1.73%
1.06%
1.20% 1.76%
2.35%
0.93%
0.58%
2001 2002 2003 2004 2005 2006 Sep-07
Return on Equity
Return on Assets

Banks – Capital Adequacy Ratio & Liquidity
300.00%
276%
250.00%
200.00%
150.00%
117%
118%
108%
108%
100.00%
75.84%
79.00%
77.63%
79.95%
82.56%
50.00%
40.58%
24.16%
21.00%
34.50%
22.37%
31.89%
26.46%
20.05%
17.44%
24.77%
0.00%
2003 2004 2005 2006 Sep-07
Equity to total assets Solvency ratio Debt to total assets Liquidity Ratio

Banks – Prudential Ratio
NPL and Large Exposure loans
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
90.41%
64.27%
47.23%
49.87%
19.18%
26.39%
21.68%
18.69%
16.82%
9.87%
10.88%
14.63% 12.76% 5.66%
9.64% 7.26%
1.17%
2.54%
2002 2003 2004 2005 2006 Sep-07
NPL/TL LE/NW LRP/NW

3. Financial Sector
Development Strategy
2006-2015
18

Recent financial sector reforms that geared toward enhancing
the role of financial sector in private sector development
Strengthening Banking system through bank restructuring
Strengthening bank supervision capacity
Capacity building for both NBC and bank staffs – CBS,
Modernization of NBC operation ( IT, a reliable payment system, and clearing
house for USD and Riels checks),
Institutional development ABC (2001),MFA (2005), CBS (2002) and CIS (2006),
Rural finance – MFI licensing and registration, strengthen institutional
development, upgrading supervision and regulations for their sustainability,
Development of Fundamental legal basis for money markets and capital market
establishment are now exist (Law on NIPT, Law on Government securities and non
government securities)
Development of legal infrastructure to underpin the development of capital market:
law on commercial enterprise, the secured transaction law , Law on arbitration, law
on corporate accounts, auditing and accounting profession .
Drafting Law on financial lease to allow SME access finance to expand their
business.
19

Continue Reforms
In 2001, the Royal Government adopted Financial Sector
Blue print for 2001-2010 to develop the financial sector.
Since then, much progress has been made during the
past five years, however there is a lot remained to be
done toward a sound, market financial system (
competitive, integrated and efficient).
To support the growth and to address the issues, on June
2006, a revised blueprint for 2006-2015 was launched
to reflect changes in circumstances,
to address priorities, and
sequencing for financial sector development.
20

The remaining issues and risks
Highly dollarized economy which limit the ability to conduct monetary policy
Poor collateral registration and valuation;
High credit risk (NPL,LE, and real estate collateral and personal guarantees
which could lead to systemic risk);
Huge expansion of risk weighted assets;
High operating cost and low competition as a result of significant market
segmentation
Low access to formal finance
Weak institutional framework for private sector activity
Slow progress of money market development
Lack of reliable information in lending environment- business credit worthiness
Lack of legal framework to enforce commercial contracts
21

Financial sector development strategy 2006-2015
The challenges for the NBC :
Improving confidence and financial
intermediation;
maintaining stability in the financial sector;
promoting good governance, and
enhancing efficiency.
22

Improving confidence and financial intermediation
Automate the payment, clearance and settlement system by
using check standard and moving to a RTGS,
Enhance consumer access to credit – expanding branch net
work and speed up the development of Law on financial
lease
Encouraging product and service innovation (CR card, debit
card and ATM in USD an Riels;
To improve disclosure and transparency in the financial
reports – bank financial audited to make available on its own
website as well as NBC website www.nbc.org.kh
To enhance Credit Information Sharing System (CIS).
Linking MFI. In future, is to transfer the CIS to function as a
credit bureau to private sector ownership.
To promote sound credit assessment and risk management
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within the banking system (regulation on internal control)

Maintaining stability in the financial sector
To continue strengthen financial institutions and
prudential capacity for both banks and MFIs
To strengthen prudential supervision, surveillance and
enforcement of infringements banks
The recent establishment of Supervision Consultative Committee
To enhance the regulatory framework to strengthen
enforcement – new prakas to be issued:
Penalty,
Good governance,
MFI deposit taken,
Development trust fund in banking and financial institutions
To enhance good governance by strengthening fit and
proper test for manager of banks;
24

Enhancing efficiency
Enhance the legal foundation to support financial and
commercial transactions including exit procedures for
nonviable banks.
Review laws and regulations especially the Law on Banking
and Financial Institutions of 1999 to align with current
development.
Strengthen and upgrade its own capacity (IT) to tackle new
risks emerge from the increase in number of Financial
Institutions, new products and services tandem the
development.
25

Conclusion
Financial sector development is important to the
speed and direction of economic growth, since a
strong and well functioning financial sector can
mobilize idle financial resources for productive
investment needs.
To link up saving, investment, and economic
growth, the financial sector development must go hand
in hand with private sector development and
governance reform to support the Government policy
of generating growth to reduce poverty which is the
ultimate goal of the Government's economic policy.
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Thank You !
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