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The BankingRegulation
Review
Law Business Research
Fourth Edition
Editor
Jan Putnis
The Banking Regulation Review
Reproduced with permission from Law Business Research Ltd.
This article was first published in The Banking Regulation Review, 4th edition(published in April 2013 – editor Jan Putnis).
For further information please [email protected]
The Banking Regulation
Review
Fourth Edition
EditorJan Putnis
Law Business Research Ltd
THE LaW REVIEWsThE MERgERS And AcquiSiTionS REviEw
ThE RESTRucTuRing REviEw
ThE PRivATE coMPETiTion EnFoRcEMEnT REviEw
ThE diSPuTE RESoLuTion REviEw
ThE EMPLoyMEnT LAw REviEw
ThE PuBLic coMPETiTion EnFoRcEMEnT REviEw
ThE BAnking REguLATion REviEw
ThE inTERnATionAL ARBiTRATion REviEw
ThE MERgER conTRoL REviEw
ThE TEchnoLogy, MEdiA And
TELEcoMMunicATionS REviEw
ThE inwARd invESTMEnT And
inTERnATionAL TAxATion REviEw
ThE coRPoRATE govERnAncE REviEw
ThE coRPoRATE iMMigRATion REviEw
ThE inTERnATionAL invESTigATionS REviEw
ThE PRoJEcTS And conSTRucTion REviEw
ThE inTERnATionAL cAPiTAL MARkETS REviEw
ThE REAL ESTATE LAw REviEw
ThE PRivATE EquiTy REviEw
ThE EnERgy REguLATion And MARkETS REviEw
ThE inTELLEcTuAL PRoPERTy REviEw
ThE ASSET MAnAgEMEnT REviEw
ThE PRivATE wEALTh And PRivATE cLiEnT REviEw
ThE Mining LAw REviEw
ThE ExEcuTivE REMunERATion REviEw
ThE AnTi-BRiBERy And AnTi-coRRuPTion REviEw
ThE cARTELS And LEniEncy REviEw
ThE TAx diSPuTES And LiTigATion REviEw
www.TheLawReviews.co.uk
PuBLiShER gideon Roberton
BuSinESS dEvELoPMEnT MAnAgERS Adam Sargent, nick Barette
MARkETing MAnAgERS katherine Jablonowska, Thomas Lee, James Spearing
PuBLiShing ASSiSTAnT Lucy Brewer
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hEAd oF EdiToRiAL PRoducTion Adam Myers
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SuBEdiToRS caroline Rawson, Anna Andreoli
EdiToR-in-chiEF callum campbell
MAnAging diREcToR Richard davey
Published in the united kingdom by Law Business Research Ltd, London
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The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:
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ii
Acknowledgements
ELvingER, hoSS & PRuSSEn
F.o. AkinRELE & co
FERRERE ABogAdoS
gERnAndT & dAniELSSon
gidE LoyRETTE nouEL AARPi
hAnnES SnELLMAn
hEngELER MuELLER
kAdiR, AndRi & PARTnERS
kBh kAAnuun
kiM & chAng
LEnz & STAEhELin
LS hoRizon LiMiTEd
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Mkono & co AdvocATES
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MouRAnT ozAnnES
MuLLA & MuLLA & cRAigiE BLunT & cARoE
nAgy éS TRócSányi Ügyvédi iRodA
nAuTAduTiLh
PAkSoy
Acknowledgements
iii
PELiFiLiP ScA
PiMEnTA dioniSio E ASSociAdoS
RuSSELL McvEAgh
ShALAkAny LAw oFFicE
SkudRA & udRiS
SLAughTER And MAy
SyciP SALAzAR hERnAndEz & gATMAiTAn
T STudnicki, k PłESzkA, z ĆwiąkALSki, J góRSki SPk
uRíA MEnéndEz
vASiL kiSiL & PARTnERS
viEiRA dE ALMEidA & ASSociAdoS
wASELiuS & wiST
wEBBER wEnTzEL
zhong Lun LAw FiRM
iv
conTEnTs
Editor’s Preface ...................................................................................................xi Jan Putnis
Chapter 1 inTERnATionAL iniTiATivES ......................................... 1Jan Putnis and Tolek Petch
Chapter 2 AngoLA ................................................................................ 34Mafalda Oliveira Monteiro and Bruno Sampaio Santos
Chapter 3 AuSTRALiA ............................................................................ 45Louise McCoach and David Landy
Chapter 4 AuSTRiA ................................................................................ 85Wolfgang Freund
Chapter 5 BARBAdoS ............................................................................ 95Trevor A Carmichael QC
Chapter 6 BELgiuM ............................................................................. 104Anne Fontaine
Chapter 7 BoLiviA ............................................................................... 115Carlos Pinto-Meyer and Cristian Bustos
Chapter 8 BRAziL ................................................................................. 123José Eduardo Carneiro Queiroz
Chapter 9 cAMBodiA ......................................................................... 129Bun Youdy
Chapter 10 cAnAdA .............................................................................. 145Scott Hyman, Carol Pennycook, Derek Vesey and Nicholas Williams
Chapter 11 cAyMAn iSLAndS ............................................................. 161Richard de Basto
Contents
v
Chapter 12 chinA .................................................................................. 172Wantao Yang and Borong Liu
Chapter 13 dEnMARk ........................................................................... 193Mikkel Fritsch and Tanja Lind Melskens
Chapter 14 EgyPT .................................................................................. 205Aly El Shalakany
Chapter 15 EL SALvAdoR ..................................................................... 215Oscar Samour and Aquiles Delgado
Chapter 16 EuRoPEAn union ........................................................... 226Jan Putnis and Michael Sholem
Chapter 17 FinLAnd ............................................................................. 250Tarja Wist and Jussi Salo
Chapter 18 FRAncE ............................................................................... 262Olivier Saba, Samuel Pariente, Jennifer Downing, Jessica Chartier and Hubert Yu Zhang
Chapter 19 gERMAny ........................................................................... 295Thomas Paul and Sven H Schneider
Chapter 20 gREEcE ............................................................................... 309Dimitris Passas and Vassilis Saliaris
Chapter 21 guATEMALA ....................................................................... 332María Fernanda Morales Pellecer
Chapter 22 guERnSEy .......................................................................... 346John Lewis and Helen Wyatt
Chapter 23 hong kong ..................................................................... 358Laurence Rudge and Peter Lake
Chapter 24 hungARy ........................................................................... 376Zoltán Varga and Tamás Pásztor
Chapter 25 indiA ................................................................................... 389Shardul Thacker
Contents
Chapter 26 indonESiA ......................................................................... 403Ferry P Madian and Yanny Meuthia S
Chapter 27 iRELAnd.............................................................................. 426William Johnston, Robert Cain, Eoin O’Connor and Niall Esler
Chapter 28 iTALy .................................................................................... 440Giuseppe Rumi and Andrea Savigliano
Chapter 29 JAPAn ................................................................................... 452Hirohito Akagami and Wataru Ishii
Chapter 30 JERSEy .................................................................................. 464Simon Gould and Sarah Huelin
Chapter 31 koREA .................................................................................. 476Sang Hwan Lee, Chan Moon Park and Hoin Lee
Chapter 32 kuwAiT ............................................................................... 489Haifa Khunji and Basem Al Muthafer
Chapter 33 LATviA ................................................................................. 503Armands Skudra
Chapter 34 LuxEMBouRg ................................................................... 514Franz Fayot
Chapter 35 MALAySiA ............................................................................ 534Andri Aidham bin Dato’ Ahmad Badri, Julian Mahmud Hashim and Tan Kong Yam
Chapter 36 MALTA .................................................................................. 544David Griscti and Clint Bennetti
Chapter 37 MozAMBiquE ................................................................... 555Paulo Pimenta and João Leite
Chapter 38 nEThERLAndS ................................................................. 565Joost Schutte, Annick Houben and Mariken van Loopik
Chapter 39 nEw zEALAnd .................................................................. 579Guy Lethbridge and Debbie Booth
Contents
viii
Chapter 40 nicARAguA ....................................................................... 592Rodrigo Taboada R
Chapter 41 nigERiA ............................................................................... 605Adamu M Usman and Jumoke Onigbogi
Chapter 42 noRwAy .............................................................................. 620Terje Sommer, Richard Sjøqvist and Markus Nilssen
Chapter 43 PhiLiPPinES ....................................................................... 632Rafael A Morales
Chapter 44 PoLAnd .............................................................................. 648Tomasz Gizbert-Studnicki, Tomasz Spyra and Michał Bobrzyński
Chapter 45 PoRTugAL .......................................................................... 662Pedro Cassiano Santos
Chapter 46 RoMAniA ............................................................................ 679Alexandru Birsan, Carmen Peli and Alexandra Manciulea
Chapter 47 SouTh AFRicA .................................................................. 692Johan de Lange and Matthew Gibson
Chapter 48 SPAin .................................................................................... 704Juan Carlos Machuca
Chapter 49 SwEdEn .............................................................................. 732Niclas Rockborn and Nils Unckel
Chapter 50 SwiTzERLAnd .................................................................. 750Shelby R du Pasquier, Patrick Hünerwadel, Marcel Tranchet and Valérie Menoud
Chapter 51 TAnzAniA ........................................................................... 773Wilbert B Kapinga, Rehema A Khalid and Kamanga W Kapinga
Chapter 52 ThAiLAnd .......................................................................... 783Montien Bunjarnondha and Rahat Alikhan
Chapter 53 TuRkEy ............................................................................... 798Serdar Paksoy and Nazlı Bezirci
Contents
ix
Chapter 54 ukRAinE ............................................................................. 810Denis Lysenko and Yulia Kyrpa
Chapter 55 uniTEd ARAB EMiRATES ................................................ 822Amjad Ali Khan and Stuart Walker
Chapter 56 uniTEd kingdoM .......................................................... 830Jan Putnis, Benjamin Hammond and Nick Bonsall
Chapter 57 uniTEd STATES ................................................................ 868Luigi L De Ghenghi and Reena Agrawal Sahni
Chapter 58 viETnAM ............................................................................ 948Samantha Campbell, Pham Bach Duong and Nguyen Thi Tinh Tam
Appendix 1 ABouT ThE AuThoRS .................................................... 969
Appendix 2 conTRiBuTing LAw FiRMS’ conTAcT dETAiLS .. 1007
xi
Editor’s PrEfacE
2012 may be remembered as the year when practical reality caught up with those who thought that the financial crisis that emerged in Western economies in 2007 would result in more effective cooperation between financial regulators across the world. By one measure – the number of new initiatives and proposals for reform – the amount of cross-border financial regulatory activism has never been higher. But by more useful measures – moves towards solutions to the ‘too big to fail’ problem through the development of effective cross-border resolution mechanisms for banking groups and international cooperation on reform of OTC derivatives regulation – the optimism of the past has faded a little.
Questions are increasingly asked about whether the obstacles to truly productive cross-border regulatory cooperation – political imperatives, different incentives and straightforward differences of view – will ever be surmounted in ways that make international banking groups fundamentally safer. Media speculation in January 2013 that US regulators might not allow banks to assume cross-border regulatory cooperation in the resolution plans that they prepare in 2013 would, if substantiated, highlight this trend.
These apparently negative developments have not made the period since the publication of the last edition of this book in April 2012 any less interesting. It is also worth noting that most of the challenges that we have seen – new law and regulation that creates difficult questions of cross-border consistency and extraterritoriality, differing regulatory philosophies between major financial jurisdictions and the sheer slowness and unpredictability of developments – have rational, if depressing, explanations. For example, fundamental differences between the insolvency law of major jurisdictions, coupled with cross-border recognition issues and disagreements over how to pay for resolution, are nothing if not formidable barriers to the development of workable group-wide resolution plans for banking groups.
However, the past 12 months have not been a period of complete failure of regulatory reform either. Progress has been made, for example, in the enactment of legislation regarding OTC derivatives, most notably the European Market Infrastructure
xii
Editor’s Preface
Regulation (EMIR) in the European Union. But, as noted above, cross-border cooperation in this area remains an issue: it seems that hardly a month goes by without the discovery of a previously unremarked-upon anomaly between the rules in this area in different countries.
Bank liquidity regulation has continued to be the subject of intense debate in 2012, culminating in the Basel Committee’s announcement in January 2013 of its decision to relax and to recommend the gradual phasing in of the liquidity coverage ratio (‘LCR’) for banks. Taking into account the fundamental influence that the LCR will have on many banks’ business models, this was a welcome sign of pragmatism and also a sign of the Basel Committee’s willingness to move the debate on liquidity forward.
Despite the challenges that have arisen in bank resolution initiatives, legislation and rules are developing in this area in multiple jurisdictions, with, for example, the publication of the draft European Union Recovery and Resolution Directive (‘the RRD’) in June 2012.
The European Union is, at the time of writing, enjoying a period of respite from the problems that it faced from the eurozone crisis in 2012, but it would be very optimistic to say that those problems have been brought under control. The European Commission is placing much emphasis on finalising the legislation implementing Basel III (CRD IV) and the RRD as soon as possible in 2013, notwithstanding that each of these initiatives may ultimately be affected profoundly by the parallel ‘banking union’ proposals for the eurozone.
In the United States, the main rules implementing Basel III are also expected to be substantially finalised in 2013. The significance of the restructuring of the financial regulatory regime in the United States, principally under the rules that are emerging from the framework established by the Dodd-Frank Act, continues to unfold and looks set to dominate the careers of a generation of regulators, bankers and their advisers.
The realisation dawned on many banks in 2012 that regulatory reform will be a longer and more drawn-out process than had been anticipated. For this reason, 2012 may also be remembered as the year when the banking sector in Europe, the United States and some other parts of the world began to think seriously about structural change in the long term, accepting that restructuring will have to take place against a backdrop of continuing regulatory reform. We have begun to see more group reorganisations, disposals, and the severe downsizing or closure of some businesses in banking groups, as well as opportunistic acquisitions. Four principal factors have contributed to these developments:a A little more certainty, or at least the perception of a little more certainty, about
rule-making (or, at least, the direction of rule-making) when compared to the past.
b The continuing urgent need that many banking groups have for capital and liquidity, and the related need to ensure that capital is deployed in the most efficient and profitable ways.
c Some specific legal and regulatory initiatives driving structural change, such as the US Volcker Rule (although this rule has not yet been fully defined at the time of writing) and some emerging (though not yet in force) ‘ring-fencing’ proposals in parts of Europe (so far principally in the United Kingdom and France).
Editor’s Preface
xiii
d Continuing regulatory attacks on complexity and actual or perceived barriers to resolution of banking groups.
Accordingly, many banks are refocusing their businesses (or are currently planning how to do so) on what they consider to be the areas that will yield the highest returns relative to cost in regulatory capital and liquidity terms. Consistent with that objective, we are seeing intense competition for capital allocation between different businesses within banking groups and a more widespread appreciation of the relative capital cost (or capital efficiency) of different activities.
2012 was of course also marked by further recrimination about past practices in parts of the banking sector. Allegations that LIBOR and other benchmarks have been manipulated (or subject to attempted manipulation), continuing losses from mis-selling and other past misconduct continue to affect the sector. Attention has turned more recently to the ways in which banking groups quantify and present these problems in their financial statements.
An increasingly orthodox view among senior management of banking groups in Europe and the United States is to conclude that the only way through these difficulties is to adopt a ‘whiter than white’ approach to compliance. This involves banks taking the initiative to present a new way forward on compliance matters and breaking away from the more reactive stance that some of them held in the past. Some commentators have asked where this will lead. Will it result in banking groups that are so hobbled and diminished by internal policies and rules that innovation, efficiency and, ultimately, service to the ‘real’ economy, is put at risk? Observation would suggest that this is a concern unless banks keep in mind four critical objectives when developing their compliance strategy and relationships with financial regulators:
ComplianceThe first and most obvious objective is to ensure that banking groups are and remain compliant with their legal and regulatory obligations. In many countries this involves developing a good understanding of the purpose and spirit of those obligations in addition to (or, in some cases, instead of ) their literal meaning.
PredictabilityIt is desirable to maximise the predictability of relationships with financial regulators. Good and constructive relationships with regulators generally make it more likely that banks will see what is coming around the corner sooner and will be better able to find positive ways to plan ahead.
InfluenceConstructive influence of regulatory policy development in areas affecting banks is also desirable, even if a bank achieves no more than a small proportion of the change that it would like to see. For this purpose I would include within the meaning of ‘influence’ the conveying of cogent arguments even where regulators do not act in response to them. This is simply because the route to influence for a bank includes convincing regulators that it has thoughtful and coherent ideas, even where political or other imperatives have the result that the regulator does not address the bank’s concerns.
Editor’s Preface
xiv
Flexibility and pragmatismFlexibility and pragmatism in the relationships between banks and their regulators is critical. Inflexibility can lead to inappropriate or overly formulaic regulatory approaches to unexpected developments. Flexibility is often difficult to achieve but is worth pursuing in the interests of both banks and regulators, through regular informal contacts and exchanges of views with senior staff at regulators in addition to formal interactions.
Obvious-looking these objectives may be, but serious problems in relationships between banks and their regulators can usually be traced back to a failure to achieve at least one of them.
This updated edition contains submissions by authors provided for the most part between mid-January and mid-February 2013, covering 56 countries (in addition to the chapters on International Initiatives and the European Union). As ever, comments on this book from banks, regulators and governments are welcome.
My thanks go to the contributors to this book, who have once again taken time out from advising on important matters affecting the banking sector to update their chapters – ‘update’ meaning a fundamental revision in many cases.
Thanks are also due to Adam Myers, Lydia Gerges and Gideon Roberton at Law Business Research Ltd, for their continuing support in the preparation of this book.
Finally, the list of credits would not be complete without mention of the partners and staff of Slaughter and May, in particular Ruth Fox, Ben Kingsley, Peter Lake, Laurence Rudge, Nick Bonsall, Ben Hammond, Tolek Petch and Michael Sholem. Once again, they helped not only to make this book possible but also to keep it as painless a project as is currently possible in the field of banking regulation.
Jan PutnisSlaughter and MayLondonMarch 2013
129
Chapter 9
Cambodia
Bun Youdy1
I INTRODUCTION
The first privately owned commercial bank was established 20 years ago, shortly before the country transformed itself from a mono-banking system to a two-tier banking system, along with the conversion from planning economy to market economy. The National Bank of Cambodia (‘NBC’) launched an important reform between 1998 and 2001 which consisted of:a an abolishment of the existing requirement of a 15 per cent NBC stake in all
privately owned banks; b a classification of the banking and financial institutions into three categories,
namely commercial banks, specialised banks and microfinance institutions; andc an increase of the minimum capital of commercial banks from US$5 million to
US$12.5 million, which resulted in numerous banks being forced into liquidation.
Even though the Cambodian banking system is still generally considered to be in its development phase, foreign banks continue to express great interest in the sector, taking into account the country’s continuous economic growth and the entry of new investors in this emerging market located in one of the world’s fastest-growing regions. In addition, the existing legal framework offers notable incentives to which foreign investors might not be entitled in neighbouring countries, including no restriction on foreign ownership, no local joint venture requirement, liberalisation of interest rates, free repatriation of benefits, no exchange control and minimum currency risk due to its highly dollarised economy.
As of January 2013 there are 32 commercial banks, seven specialised banks, four representative offices of foreign banks, 35 microfinance institutions and one financial
1 Bun Youdy is a partner at Bun & Associates.
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leasing firm. 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 still largely composed of cash-based transactions, although ATMs, payment and clearing systems and e-banking are being developed gradually thanks to the recent increase in financial literacy and improvements to the information technology infrastructure. Financial services offered by banking and financial institutions are often limited to conventional products, such as deposits and loans; however, a significant diversification has occured with the introduction of other sophisticated products involving trade finance, payment facilities and foreign exchange. Most of the products currently offered by banks are predominately to serve corporate needs while personal loans are mainly restricted to housing loans. 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
The banking activities in Cambodia are mainly governed by the Law on the Organisation and Functioning of the National Bank of Cambodia (‘the NBC Law’) promulgated in 1996,2 the Law on Banking and Financial Institutions (‘the Banking Law’) promulgated in 1999, the Law on Foreign Exchange promulgated in 1997, and the Law on Anti-Money Laundering and Combating the Financing of Terrorism (‘the AML Law’) promulgated in 2007, as well as a number of implementing sub-decrees, regulations and circulars issued by the NBC. In comparison with other sectors, the legal framework governing the banking industry is the most comprehensive, with the NBC’s regular updates of existing laws and introduction of new regulations. Nonetheless, cross-border loans provided by overseas financial institutions to non-banking and financial institutions remain an unregulated area, while close monitoring is enforced by the NBC when the recipients of such loans are 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, including the authority to grant operating licences to banking and financial institutions, as well as to oversee the payments system. The NBC has recently upgraded its supervision structure and is making good progress in achieving full compliance with the 25 Basel Core Principles. Despite the country’s considerable challenges in securing qualified human resources, the NBC has continued to improve the capacity building to cope with the increasing workload and complexity of the sector.
Even though under the existing regulations the NBC has the power to exercise consolidated supervision, the current practice demonstrates that sectoral supervision
2 Amended in 2006.
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prevails instead. The Securities and Exchange Commission of Cambodia (‘SECC’) oversees the securities market while the insurance sector is under the jurisdiction of the Financial Industry Department of the Ministry of Economy and Finance (‘MEF’). Cambodia has yet to adopt the universal banking system, whereby a banking institution intending to conduct additional related financial services, such as securities or insurance business, is required to operate under separate entities and be governed by different supervisory authorities. Together, the NBC, the MEF, and the SECC, are working on a framework aiming to move towards a joint or coordinated supervision, commencing with information sharing.
The banking system in Cambodia consists of commercial banks, specialised banks, microfinance institutions and newly introduced financial leasing firms.3 Specialised banks operate in the same way as finance companies, since they are not allowed to collect deposits but are permitted to provide credit facilities. Microfinance institutions have generally been regarded as banking for the poor. 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 Currently, the NBC has granted licences to seven microfinance institutions, authorising the collection of deposits.
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 solely limited to information purposes.6 In theory, the representative office has a lifespan of two years and may be renewed once only. Even though in the past additional renewals have been granted on exceptional basis, the NBC will likely end such practice.
Every banking institution shall be incorporated as a public limited company and comply with minimum capital requirements. Even though the Banking Law sets different levels of requirements applicable to commercial banks and specialised banks, depending on the background of their influential shareholders,7 in practice, the NBC requires that all commercial and specialised banks have a minimum capital of at least US$37.5 million and US$7.5 million respectively. Similarly, the NBC also usually requires any newly established microfinance institutions to have a much higher minimum capital (approximately US$500,000) than the amount set by the existing regulation (US$62,500).8
3 Regulation on Licensing of Financial Lease Firms dated 27 December 2011.4 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 Article 13 of the Banking Law.7 Shareholder directly or indirectly holds at least 20 per cent of capital or voting rights. See
Article 26 of the Banking Law.8 Article 4 of the Regulation on Licensing of Microfinance Institutions dated 10 January 2000.
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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 a compliance-based supervision to a risk-based and forward-looking supervision (deploying stress tests and simulations) in order to focus on certain specific high-risk areas. 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.9 In addition, the NBC also has the power to require covered entities to provide ad hoc reports whenever necessary. The NBC is developing its supervisory report template, which aims at harmonising the content of the reports and improving the capture of information. The report submission process is greatly improved as the filing can now be done online.
The transparency of banking and financial institutions is generally much more significant compared to companies operating in other financial sectors in Cambodia. Every bank is required to publish its annual audited financial report no later than 30 June of the following year and such report is available to the public.
ii Management of banks
The management of banking and financial institutions is organised pursuant to the Regulation on Corporate Governance of Banking and Financial Institutions dated 25 November 2008 (‘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.10
The independent director is an important feature of the management of the 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 director(s).11 The audit committee and compensation committee, if any, shall be each chaired by an independent director.12
9 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.
10 Article 7 of the Regulation on Corporate Governance.11 Article 6 of the Regulation on Corporate Governance.12 Id., Article 8 and 19.
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The Regulation on Corporate Governance vaguely defines an independent director as a person capable of exercising judgement independent of the view of management, political interests or inappropriate outside interest.13 The NBC’s current interpretation of a non-independent director includes any person exercising any function within an affiliated entity of the company, including the overseas subsidiaries. An independent director of an overseas-affiliated entity of the company, however, is permitted to act as independent director of the relevant bank in Cambodia. Due to the limited availability of qualified people, an independent director is not required to be a resident or a Cambodian national.
The relevant regulation requires a strong autonomy of the board of directors and management of all locally incorporated banks, including foreign subsidiaries. All decision-making, including credit approval, shall be made locally. Such requirements have not been fully implemented by some foreign subsidiary banks, which have long depended on their headquarters due to the lack of adequate resources on the ground.
While a branch of 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.14
All banking and financial institutions are required to have internal audit and compliance officers. In the case of outsourcing, permitted under the current regime, the internal audit cannot be performed by the same firm as the one in charge of the external audit.15 Any designation, dismissal, removal or resignation of the head of internal audit and compliance must be reported to the NBC.16
With respect to remuneration policies, the board of directors is allowed to determine the company compensation’s policies and practices as long as they are consistent with the institution’s corporate culture, long-term objectives and strategy, and control environment.17 In other words, there is no specific restriction on the remuneration’s package, except that the NBC has the authority to recommend institutions to review their decisions considered not aligned with the above-mentioned principles; the NBC’s current focus is on the financial situation of each institution.
iii Regulatory capital and liquidity
The NBC recognises the importance of adhering to international banking supervision standards, and is working to harmonise its standards and regulations in accordance with the Basel Accords. Cambodian regulatory capital standards are not fully in compliance with Basel II, but the current standards are seen as a mixture of elements found in Basel I,
13 Article 6 of the Regulation on Licensing of Microfinance Institutions dated 10 January 2000.14 Id., Article 6.15 Article 7 of the Regulation on Internal Control of Banking and Financial Institutions dated 18
September 2010.16 Id., Article 8.17 Article 18 of the Regulation on Corporate Governance.
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Basel II and Basel III. The compliance process is progressing from a banking supervision technical standpoint but there are still a number of new regulations to be introduced. The process is time-consuming as the full implementation of the new standards requires sufficient resources, including a number of qualified personnel within the entire banking sector.
All regulatory capital requirements described below apply equally, without discrimination, to all banks operating in the country whether they are locally incorporated or branches of foreign banks.
Net worth calculationThe NBC has recently amended its method of calculation of net worth to be in line with Basel III.18 The sum of paid-in capital and net worth must at least be equal to or larger than the minimum capital.19 Net worth is composed of two components: Tier I capital (core capital) and Tier II capital (supplement capital).20
For commercial and specialised banksTier I capital must include: paid-in capital; reserves; 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 I capital. Tier I 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.21
Tier II capital, which must not exceed 100 per cent of Tier I capital, must include re-evaluation reserves; provisions for general banking risks; subordinated debt instruments not exceeding 50 per cent of Tier I capital; 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.22
For microfinance institutions23
Tier I capital of the microfinance institutions is composed of almost an identical structure to the one applicable to the commercial and specialised banks, except that there is no restriction on the retained earnings, and there is inclusion of a provision for general banking risks (with the prior agreement of the NBC).
Unlike the structure of Tier II capital applicable the commercial and specialised banks, the Tier II capital of microfinance institutions must include re-evaluation reserves;
18 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.
19 Article 2 of the Regulation on Calculation of Banks’ Net Worth dated 15 October 2010.20 Id., Article 4.21 Id., Article 5.22 Id., Article 6.23 Regulation on Calculation of Microfinance Institutions’ Net Worth dated 27 August 2007.
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provision for general banking risks (with the prior agreement of the NBC); subordinated debt instruments not exceeding 100 per cent of base net worth and accompanied by prior agreement of the NBC; and other items with prior agreement of the NBC.
Solvency ratio (capital adequacy ratio)Banks must not let their solvency ratio slip below 15 per cent.24 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.25
The numerator of the ratio is the net worth, and the denominator of the ratio consists of the aggregate of assets and off-balance-sheet items. Assets are subject to a weighting system according to their risks. So far, Cambodia’s risk-weighting system takes into account only the credit risks while Basel II requires two additional factors, the market risks and the operational risks.
The weighting system includes:a zero per cent: cash, gold, claims on the NBC, assets collateralised by deposits 100
per cent lodged with the bank, and claims on or guaranteed by the sovereigns rated AAA to AA-;
b 20 per cent: claims on or guaranteed by the sovereign rated A+ to A-, and claims on or guaranteed by banks rated AAA to AA-;
c 50 per cent: claims on or guaranteed by sovereign rated BBB+ to BBB-, and claims on or guaranteed by banks rated A+ to A-; and
d 100 per cent: all other assets.
Off-balance sheet items applicable to microfinance institutions are treated with full risk (100 per cent). However, off-balance sheet items applicable to commercial and specialised banks are classified into the following four categories:a 100 per cent of their value if they carry full risk;b 50 per cent of their value if they carry medium risk;c 20 per cent of their value if they carry moderate risk; andd items carrying low risk are not taken into account.
Capital guaranteeCambodia has yet to establish any deposit insurance scheme, but to help protect depositors, the regulator has imposed capital guarantee on banking and financial institutions. Institutions must permanently deposit 10 per cent of its minimum capital with the NBC as capital guarantee. This amount was increased in 2001 from 5 per cent.26 Deposits made in riel 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
24 Amendment of Regulation Relating to the Banks’ Solvency Ratio dated 29 December 2004.25 Microfinance Institutions’ Solvency Ratio dated 27 August 2007.26 See Article 16 of the Banking Law.
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six-month SIBOR (Singapore Interbank Offered Rate).27 The depositing institution may get a refund of its capital guarantee after its liquidation and settlement of all liabilities.
Reserve requirementAs one of the monetary tools, the NBC demands a commercial bank 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.28 The reserve requirements were previously increased to 16 per cent in order to curb booming credit activities and to limit lending to real estate-related transactions.
The reserve requirements are 5 per cent29 and 8 per cent30 for microfinance institutions and for microfinance deposit-taking institutions respectively.
The NBC also provides interest fees on reserve requirements maintained with the NBC. The first 8 per cent of the reserve requirements bears zero per cent interest, while the remaining 4.5 per cent of reserve requirements in foreign currencies bears an interest rate set by the Regulation on Term Deposit Interest Rate Determination, Deposit on Reserve Requirements and Banks Capital Guarantee in American dollars.31
Large exposure and related-party transactionsLarge exposure refers to gross exposure larger than 10 per cent of the banking and financial institutions’ net worth.32 A banking and financial institution’s total credit exposure to a single beneficiary is limited to 20 per cent of the banking and financial institution’s net worth.33 Banking and financial institutions are required to maintain a maximum ratio of 300 per cent between total large exposure and net worth.34 As for the purpose of identifying the beneficiary of large credit exposure, two or more individuals or legal entities will be considered as a single beneficiary if:a one of them exercises control over the other, whether or not directly or indirectly;b they are subsidiaries of the same parent company;c they are under the same de facto management; ord one of them holds an equity interest of more than 10 per cent of the other and
they have a special business relationship.35
27 Article 5 of the Regulation on Bank’s Capital Guarantee dated 15 October 2001.28 Article 1 of the Regulation on Maintenance of Reserve Requirements against Commercial
Banks’ Deposits and Borrowings dated 27 September 2012.29 Article 1 of the Regulation on Maintenance of Reserve Requirements for Microfinance
Institutions dated 25 February 2002.30 Article 3 of the Regulation on Licensing of Microfinance Deposit Taking Institutions dated 13
December 2007.31 Article 2 of the Regulation on Bank’s Capital Guarantee dated 15 October 2001.32 Id., Article 1.33 Article 2 of the Regulation on Controlling Banking and Financial Institutions’ Large Exposure
dated 3 November 2006.34 Id., Article 7.35 Id., Article 4.
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In case a large exposure is guaranteed by another bank or international financial institution, with prior approval from the NBC, the exposure will be reduced to half when calculating solvency ratio.36 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 a rating ‘investment grade’ by an international rating agency, and provided that the borrower’s financial health is strong (the latter includes good business perspectives, solvency, profitability and management).37
Related parties are any individual or legal entity who directly or indirectly holds 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.38 Outstanding loans granted to related parties cannot exceed 10 per cent of the net worth of the banks and microfinance institutions,39 and 3 per cent of the net worth for the microfinance deposit-taking institutions.40 Even though, in accordance with the existing applicable regulation, the banks shall submit report on related parties’ loans on a quarterly basis, in practice, the NBC requires that such report is made on a monthly basis.
Liquidity ratioDespite the presence of numerous banks, the regulations governing interbank markets are still being developed and the interbank transactions are still limited. In order to remedy the liquidity shortfall in the banking sector, the NBC has imposed a minimum liquidity ratio of 50 per cent on all banking and financial institutions,41 except on microfinance institutions, which are subject to 100 per cent.42
Equity investmentEach 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.43 Under the Cambodian banking regime, equity
36 Article 5 of the Regulation on Controlling Banking and Financial Institutions’ Large Exposure dated 3 November 2006.
37 Article 6 of the Regulation on Controlling Banking and Financial Institutions’ Large Exposure dated 3 November 2006.
38 Article 49 of the Banking Law.39 Article 4 of the Amendment of Regulation on Loan to Related Parties dated 7 June 2002.40 Article 3 of the Regulation on Licensing of Microfinance Deposit Taking Institutions dated 13
December 2007.41 Article 1 of the Amendment of Regulation on Liquidity Ratio of Banking and Financial
Institutions dated 29 December 2004.42 Regulation on Liquidity Ratio Applicable to Licensed Microfinance Institutions dated 25
Febraury 2002.43 Article 33 of the Banking Law.
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participation is defined as holding at least 10 per cent of the capital or voting rights of another company.44
Loan classification and provisioningThe Regulation on Asset Classification and Provisioning in Banking and Financial Institutions (‘the Regulation on Asset Classification’) dictates the objective and prudential grading system of all loans and assets held by banks. The classification of loans and assets are based on the repayment capacity, which includes:a past payment experience;b financial condition of the borrower;c business prospective and cash-flow projections;d ability and willingness to repay;e financial environment; andf quality of documentation.45
Every bank’s assets are classified into five categories: Standard, Special Mention (overdue by more than 30 days), Substandard (overdue by more than 90 days), Doubtful (overdue by more than 180 days), and Loss (overdue by more than 360 days). Each category is subject to minimum provisioning percentage amounts based on the respective gross loan: Standard, 1 per cent; Special Mention, 3 per cent; Substandard, 20 per cent; Doubtful, 50 per cent; and Loss, 100 per cent.46
Microfinance institutions’ assets are classified into four categories: Standard, Substandard (overdue by 30 days or more), Doubtful (overdue by 60 days when the loan’s term is less than one year and 180 days when the loan’s term is one year or more), and Loss (overdue by 90 days when the loan’s term is less than one year and 360 days when the term is one year or more). Their provisionings are: Standard, zero per cent; Substandard, 10 per cent; Doubtful, 30 per cent; and Loss, 100 per cent.47
iv Recovery and resolution
There are currently no specific regulations or measures in place requiring the banks to draw up recovery and resolution plans, or ‘living wills’. The banking and financial institutions are, however, advised to make their own necessary arrangements.
As part of the crisis prevention and resolution initiative, the authorities are developing a legal framework to empower the NBC and other relevant authorities to take action against failed banks. Pending the adoption of such regulations, any liquidation
44 Id., Article 32.45 Article 3 of the Regulation on Asset Classification and Provisioning in Banking and Financial
Institutions dated 25 February 2009.46 Article 13 of the Regulation on Asset Classification and Provisioning in Banking and Financial
Institutions dated 25 February 2009.47 Regulation on Loan Classification and Provisioning Applicable to Specialized Banks for Rural
Credit and Licensed Microfinance Institutions dated 13 December 2002.
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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 to the NBC, auditors, provisional administrators, liquidators, and the court.48 The banks may share clients’ negative credit information with other banks for the purpose of sound credit activities and risk management49 provided that the banks obtain prior approval from the clients on exclusive utilisation of the information for assessing creditworthiness.50
Pursuant to the AML Law, banks, through their services, must not participate in conversion or transfer of proceeds of offences, and must immediately report those transactions to the Financial Intelligence Unit (‘FIU’) as soon as they become aware of such circumstances.51 At the moment the reporting entities are using their own reporting formats when submitting the FIU; however, the FIU is currently drafting a standardised reporting format for all banking and financial institutions. Banks are also required to conduct due diligence prior to doing business with clients, and establish internal programmes for the prevention of money laundering according to guidelines stipulated by the FIU.52 Failure to do so can result in criminal liabilities punishable by imprisonment from six days to one year and monetary fines from US$250 to US$1,250. Proceeds resulting from such violations may also be confiscated.53
Should the banking and financial institutions contravene any provision of their governing laws and regulations or fail to comply with any injunction imposed by the NBC, the NBC may inflict disciplinary sanctions ranging from reprimanding, prohibiting certain operations, suspending or forcing resignation of executives, setting up a provisional administrator, withdrawing the licence, or imposing a fine not exceeding the minimum capital of the relevant banking and financial institution.54
The Credit Bureau of Cambodia (‘CBC’) serves as the repository of credit histories for all participating financial institutions. It was recently established in accordance with the Regulation on Credit Reporting dated 24 May 2011 by a joint venture between the Association of Banks in Cambodia, Cambodia Microfinance Association and a private company. The system is already operational and starting to have significant positive effects on the credit reviewing processes. Before the establishment of the credit bureau, the credit reviewing process conducted by all banks relied heavily on fragmented and
48 Article 47 of the Banking Law.49 Article 1 of the Regulation on Utilisation and Protection of Credit Information dated 10 May
2006.50 Id., Article 14.51 Article 12 of the AML Law.52 Article 16 of the AML Law.53 Articles 29 and 30 of the AML Law.54 Article 52 of the Banking Law.
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informal information. Since most companies do not have audited accounts, the banks have adopted their own methodologies mostly depending on their experience in trying to arbitrarily assess the creditworthiness of each borrower. This is also the main reason that most loans are secured by real estate-based collaterals.
V FUNDING
The core funding of banking and financial institutions is generally sourced from (1) shareholders’ capital, (2) cash deposits, and (3) borrowed capital from third-party banking and financial institutions. There is no restriction on capital flows between Cambodia and the rest of the world, unless in the event of a foreign exchange crisis, where exchange control may be put in place by the NBC for up to three months.55 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. An overdraft not exceeding 50 per cent of the reserve requirement may be extended by the NBC to banking and financial institutions.56 The overdraft facility only serves as a means to assist banking and financial institutions to overcome short-term liquidity shortages, ranging from one week to one month. The NBC may consider extending such facility for a new period of time that shall not exceed one month and that shall not be rolled over more than two times.57
As the securities market (CSX, Cambodia Securities Exchange) was launched in April 2012, some banking and financial institutions may go public to source required funds, provided that the number of shares to be listed does not exceed a threshold to be determined by the NBC.
VI CONTROL OF BANKS AND TRANSFER OF BANKING BUSINESS
There is no restriction on the control structure of the banks except that, in order to prevent capital manipulation, the Banking Law58 explicitly prohibits the practice of chain shareholding companies, where each is holding shares in the others. Under the existing regulations, a transfer of the shares’ ownership of banking and financial institutions is subject to different regimes of notifications and approvals depending on the amount of shares affected by the relevant transaction:a less than 5 per cent, no prior notification is required;b between 5 per cent to less than 10 per cent, prior notification is required; andc from 10 per cent and above, prior approval is required.59
55 Article 5 of the Law on Foreign Exchange dated 22 August 1997.56 Article 11 of the Regulation on Overdraft Facilities made available by the NBC to Banking and
Financial Institutions facing temporary liquidity shortage dated 20 January 2009.57 Id., Article 12.58 Article 20 of the Banking Law.59 Articles 2, 3 and 4 of the Regulation on Transfer of Shares of Banks dated 8 November 2001.
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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 change60 in the shareholding structure of the parent company of a foreign branch operating in Cambodia shall be notified to the NBC.
The NBC levies a fee equivalent to 0.5 per cent of all transferred shares’ face value.It is expected that a specific rule be introduced to govern banking and financial
institutions that list their shares on the securities market.
VII THE YEAR IN REVIEW
Cambodia’s macroeconomy continues to maintain a high level of GDP growth at a rate of 6.5 per cent61 for 2012 despite the global economic slowdown. The driving sectors include exports, mainly garments, to the European Union; tourism benefiting from new flight routes; and construction, thanks to the real estate rebound. Credit grew significantly. Most of the large banks have seen their loan portfolios increase by approximately 30 per cent, which is among the highest in Asia, and their profits have soared accordingly. The revenues generated from non-interest transactions such as mobile banking have also become notable.
Non-performing loans have also substantially declined from 3.2 per cent in June 2011 to 2.5 per cent in June 201262 due to the reinforcement of prudential regulation.
The recent increase of reserve requirement by 50 basis points does not necessarily cause tighter credit conditions, as many banks still have excess liquidity, a number of them are lowering interest spreads to compete for market share, and some increasingly rely on cheaper external funding from foreign banks. Cambodia banks’ foreign liabilities have more than doubled, and reached US$1.2 billion in September 2012.63
There were notable acquisition transactions involving banking and financial institutions in 2012, namely the acquisition of 70 per cent stake of the Cambodian-based Singapore Banking Corporation by Cathay United Bank, a subsidiary of the Taiwan Stock Exchange listed company Cathay Financial Holding Company and the acquisition of a 95.1 per cent stake of the third-largest microfinance institution Sathapana Limited by MARUHAN Japan Bank.
The CBC is at an early stage of its operations and the banking and financial institutions have not yet fully benefited from this newly introduced system. Its current limited efficiency is caused by several factors. First, the data collection process is still ongoing. Second, the discrepancy in the spelling of customers’ names written in Khmer
60 Article 7 of the Regulation of Transfer of Shares of Banks dated 8 November 2001. `Significant change’ is defined as any change that requires an authorisation of the supervisory authority of the relevant parent company.
61 Average of Asian Development Bank, International Monetary Fund and World Bank.62 See NBC Annual First Semester Report 2012 p. 16.63 See IMF Country Report No. 13/2 published on January 2013, p. 14.
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and Latin risks undermining the quality of the search result. Third, both customers and banks’ staff have a limited awareness of the system. Fourth, no detailed complaint procedure has been put in place.
In December 2012, the NBC launched the national clearing system in an effort to build efficiency and to expand clearing and settlement services for interbank transfers. The system previously used solely for cheques is now available for wiring transfers via electronic systems within one day. Such an improvement will help to reduce the cash-based transactions in the economy and require human capital to process the clearances when the volume of interbank transactions becomes significant.
An important milestone has been reached in the area of financial leases since the relevant governing law was introduced in 2009. The NBC has enacted implementing sub-regulations institutionalising the delivery of such financial product and establishing operational procedures to grant licences to specialised financial lease firms. One financial lease firm has started its operation by first focusing on motorbike leasing. Such diversification of services will help support businesses that are not in a position to provide real estate-based collaterals.
Though the Civil Code and its implementation law have been in force for over a year, at least two major issues with an impact on past, ongoing and future financing transactions carried out by banking and financial institutions including the securitisation of collaterals and the interest rates ceiling, still persist. First, all existing mortgages under the former legal regime are converted to a hypothec that has two new features: (1) the creditor (bank) may not retain the physical document of the title deed; and (2) the hypothecated property shall be allowed to be re-hypothecated with multiple creditors. From a legislative perspective, this new securitisation process will optimise the use of collaterals. However, the cadastral office in charge of handling the registration of hypothecs is still developing its technical capacity to fully ensure the transparency of the system. The practice previously permitting the institutions to place the physical title deed under its custody mitigates the general concern over the transparency of the land offices. Since, under the new hypothec regime, banks can no longer assume that they are the only secured creditor over a collateral provided by the borrower, banks are likely to consider that credit operations have become more risky. The credit review process will become more sophisticated as the assessment of the value of collaterals will be more challenging until the concern as mentioned is remedied.
Furthermore, the Ministry of Justice’s new regulations set an interest rate ceiling at 18 per cent and a maximum interest rate for liquidated damages calculation at 27 per cent,64 and any capitalisation of interest will be permitted only after payment default reaches a period of one year. Nonetheless, banking transactions could arguably be considered special by nature and therefore would be covered by the special regulation specifically applicable to banks and financial institutions,65 as opposed to being subject to
64 Article 1 of the Regulation on Maximum Interest Rate dated 21 December 2011.65 See Article 1 of the Regulation on Liberalisation of Interest Rate Setting dated 9 September
2009. Banking and financial institutions have the rights to determine interest rates on deposits and interest rates on loan according to each institution’s ability and interest rate policy.
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the restriction under the common legal regime established by the Civil Code. However, it is still unclear at this stage whether such interpretation will be adopted by the courts, and the NBC has not yet provided any clarification on this matter. The interest rate ceiling, if applicable to all banking and financial institutions, will significantly affect the business of microfinance institutions since their average interest rate per annum is 33.6 per cent.66
VIII OUTLOOK AND CONCLUSIONS
At a macro level, in order to help maintain price and financial system stability, the NBC will promote riel over the short and medium term, and de-dollarisation in the long term. Differential treatment between riel and US dollars, in measures similar to the current regime and applicable to reserve requirement, will be further introduced to promote the use of riel. There is also a plan to offer investment products in riel, such as Treasury bills and bills to the locals, and reserve eligible government securities to banks seeking to meet the reserve requirement without using cash reserves that bear nil interest.
While the NBC is pursuing compliance with the 25 Basel Core Principles, the readiness of the banking system and regulatory structure in meeting such requirements will require a reasonable amount of time, taking into account the different sizes of banking and financial institutions, as well as the types of risks relevant to the Cambodian market. The NBC has taken the initiative to review the exiting NBC Law and Banking Law for the purpose, inter alia, of conforming to those requirements. The amendment will likely materialise in the next few years. As part of the government’s Financial Sector Development Strategy, the NBC is also working on development of new regulations and measures in the areas of crisis prevention and resolution.
Although the number of banks keeps increasing steadily, data on banking transactions to 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, technology and solid source of funds. The current fierce competition among banks has not resulted in any negative consequences. It rather brings positive outcomes in term of liquidity and quality of services and products to consumers. However, with the aim of preventing destabilising effects that may be caused by excessive competition and that may, in turn, undermine the sustainability of the banking system, the NBC will likely adopt stricter policies, based on the IMF’s recommendations, with respect to licensing. These policies will restrict, if not entirely prohibit, the entrance of new players. For supervision improvement purposes, and taking into account the fact that certain businesses including money changers and third-party processors are reaching a new level of complexity, it is likely that those businesses will be required to be upgraded into specialised banks.
The NBC is working on the development of the interbank market through the introduction of negotiable certificates of deposit. Even though the demand for the interbank market is limited at the present time due to the banks’ excess liquidity, the
66 Cambodian Institute of Development Study, Impact of Microfinance Services in Cambodia (2011), p. 6.
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implementation of such a market is necessary in the long run. An interbank market will assist banks having difficulty covering their reserve positions or alternatively seeking temporary investment for their excess funds.
There has been some anticipation that the NBC will introduce more specific measures to facilitate initial public offerings of banking and financial institutions, since the current approval regime on share transfers was not originally designed to deal with shares trading in the securities market.
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Appendix 1
about the authors
Bun YoudYBun & AssociatesYoudy is the firm’s practice leader of the corporate, banking and finance and commercial litigation practices. He is currently a panel lawyer for numerous foreign banks operating in Cambodia, including one of the largest banks in terms of assets and loan portfolio. Youdy’s expertise includes cross-border financing, derivatives and other related financial instruments. He provided advice to some of the largest financial institutions and securities firms in Asia on their business expansion and strategies for entry into Cambodia. Youdy has handled numerous business acquisition transactions, including significant deals in the banking and financial sector. He has also counselled a large Japanese electronics manufacturer with a US$65 million investment project, establishing the first electronic large-scale facility in the country. He previously counselled one of Cambodia’s biggest conglomerates on the acquisition of a US$60 million turnkey brewery plant, and assisted a foreign fund in a transaction for the partial debt assignment of the largest loan ever granted in the telecommunications sector. Youdy is one of the first commercial arbitrators listed in the National Arbitration Centre of the Kingdom, where he currently serves as an executive board member. He is an attorney-at-law admitted to the Bar Association of the Kingdom of Cambodia and its former Secretary-General. He studied at prestigious universities in Cambodia, France and the United States. Youdy has been consistently ranked as a leading lawyer in Cambodia in Chambers Asia-Pacific, and is praised as a ‘detailed and meticulous’ lawyer who specialises in foreign investment, banking and corporate and commercial litigation. He is fluent in Khmer, English and French.
About the Authors
970
Bun & AssociAtesNo. 29, St 294, Phnom PenhCambodiaPO Box 2326Tel: +855 23 999 567 / +855 12 817 817Fax: +855 23 999 [email protected]