Information about Asia and the Pacific Asia y el Pacífico

Chapter 9. Modernizing Supervision in Support of Stable Financial Development

Olaf Unteroberdoerster
Published Date:
February 2014
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Rodolfo Maino

Safeguarding the stability of Cambodia’s rapidly evolving financial system requires more coordinated and forward-looking supervision. The National Bank of Cambodia (NBC) has strengthened the regulatory framework, taken a stricter stance on bank licensing, and restructured its banking supervision. It has also addressed credit risks by introducing a new credit reporting system coinciding with the launching of a credit information bureau. However, a crisis management framework encompassing key financial supervisors is yet to be fully developed, and supervisory capacity remains stretched.

In this chapter we review the milestones achieved in recent years and key issues going forward in developing a financial supervision function commensurate with Cambodia’s increasingly diverse and interconnected financial system.

Cambodia’s Financial System: Moving Beyond Banks

Banking Institutions

Cambodia has a bank-centric financial system (Figure 9.1). After the abolition of the use of money and banking by the Khmer Rouge in the late 1970s, banks re-entered the system in the 1980s under a mono-bank framework typical for centrally planned economies. In 1989, a multilayered system was introduced with the NBC at the helm, and commercial bank functions were separated from the NBC. The financial system has witnessed rapid growth since 2006 (Table 9.1), although the scope for further financial deepening remains large, since the broader economy remains cash-based, especially in rural areas.

Figure 9.1Structure of the Financial Sector, 2010

Source: National Bank of Cambodia.

Table 9.1Cambodia: Banking Institutions
Number of Institutions
Type of Institution2006200720082009201020112012
Total number of banks20243033363839
Commercial banks15172427303132
Foreign branch banks3335799
Locally incorporated12142122232223
Specialized banks5766677
Privately owned4655566
Microfinance institutions16171826253236
Representative offices2222224
Source: National Bank of Cambodia.
Source: National Bank of Cambodia.

As discussed in detail in Chapter 4, Cambodia’s banking system has a concentrated structure and significant foreign presence (Table 9.1). As of end-2012, the “big five” banks held almost 60 percent of total banking sector assets and accounted for the same share of net credit from the banking sector. Together, the foreign-owned banks held 45 percent of total assets and 40 percent of total deposits. With the rural economy largely cash-based, most of the banks in Cambodia operate in urban centers such as Phnom Penh—albeit the largest banks have already started to develop regional networks. As a result, most banks are competing for market share with a limited range of products. The rapid growth in the number of banks that has occurred along with this structure not only poses challenges to financial stability, as highlighted in Chapter 4, but also stretches the NBC’s supervisory capacity to assess credit expansion, loan portfolio quality, risk management, operational risk, and profitability—which are the focus of this chapter.

Microfinance Institutions

Among financial institutions, microfinance institutions are witnessing rapid growth and have the widest distribution networks in rural areas. Some of the fast-growing ones are entering into the commercial banking area. The loan portfolios of the 35 registered microfinance institutions exceeded US$1 billion (about one-fifth of the banks’ total loan portfolio) and grew by 41 percent (year-over-year) by March 2013. Although these institutions relied heavily on external sources to fund their growth in the past, they are now relying increasingly on domestic funding.1

Insurance Sector

The Cambodian insurance market is small and has a nascent life insurance segment. There are currently six insurers, including two bank subsidiaries, one reinsurer, 2 and one life insurance company that started operation in 2012. 3 The sector’s total assets stood at around US$86 million and its total premiums at about US$30 million in 2011, which accounted for a mere 0.9 percent and 0.3 percent of GDP, respectively. Although it started from a low base, the industry is growing steadily, reflecting an increase in the utilization of insurance and the relocalization of businesses previously abroad. The entry of new insurance companies has also contributed to increased competition, the introduction of new operating models, and reductions in premium costs. 4

Securities Market

The development of capital markets in Cambodia is still in an embryonic stage. Markets for corporate debt and government debt securities do not yet exist. A stock market opened in April 2012, but currently only one company is listed there. The stock market’s development is part of a road map adopted by the government, which contains strategies for developing the financial sector from 2011 to 2020. To this end, the Cambodian authorities have entered into a strategic alliance with the Korean Stock Exchange, which aims to have around 40 listed companies registered on the Cambodian Securities Exchange over the next five years. In addition, the Cambodian Mercantile Exchange is to serve as an organized exchange for the buying and selling of commodities as well as derivative products. To implement these strategies, the country needs to actively promote market development, including by improving accounting and auditing practices; correcting deficiencies in the judicial system; strengthening the legal infrastructure; increasing technical capacity among market participants and supervisors; and further developing broad-based financial literacy.

Foreign Exchange Market

It is expected that the stock market will over time increase the supply and demand for foreign exchange, especially given Cambodia’s open capital account and growing foreign investor interest. However, the foreign exchange market currently lacks the ability to manage large capital flows. It is centered on licensed money changers, with commercial banks playing a minor role. 5 Moreover, the NBC is currently constraining exchange rate flexibility in a very thin market, either by dealing directly with large customers or by regularly auctioning foreign exchange to clear the retail spot market, which impinges on the development of the foreign exchange market.

Deepening the foreign exchange market will likely require the NBC to gradually step back from the market by dealing less with retail money changers and more with banks, while also allowing some flexibility in the exchange rate to give the foreign exchange market a chance of clearing itself. This enhanced flexibility should be carefully sequenced with progress in developing the monetary framework, as discussed in the previous chapter. The NBC could also review the possibility of offering foreign exchange swaps of riels for dollars to help encourage the development of a forward foreign exchange market (see Box 9.1).

Financial System Soundness and Reform

Cambodia’s financial system transformation will continue to play an important role in the country’s economic development. The current goals for the financial sector are framed in a road map for its development over the period 2011–2020; 6 they are complemented by the findings and recommendations of the 2010 IMF-World Bank Financial Sector Assessment Program (FSAP). The ultimate objective of this master plan is the development of a sound market-based financial system to support resource mobilization, effective financial resource allocation, and broad-based sustainable economic growth.

Along with a steady transformation of the Cambodian economy since the 1980s, the legal framework and supervisory and regulatory regimes have been further developed to provide effective recourse against financial sector risks. Nonetheless, progress in implementing high-priority 2010 FSAP recommendations has been uneven (Table 9.2). On the one hand, a higher minimum capital requirement for banks was delivered as scheduled and noncompliant banks are being dealt with, while the NBC is continuing to upgrade its supervisory capacity. The recent update of the national payments system (Box 9.2) and the launch of the credit information bureau have encouraged better risk management in the system. On the other hand, work on key elements of a crisis management framework remains at an initial stage. Agreement on the delineation of responsibilities among different supervisors is still pending, while the NBC’s supervisory capacity remains stretched. This section will review progress in key areas, while the following section outlines future reform challenges.

Table 9.2Cambodia: Key 2010 FSAP Recommendations of High Priority
RecommendationTime frame1StatusNotes
General Stability
  • Improve the quality of data to enable an appropriate assessment of risks, and to enhance the reliability of stress tests, including through strengthening supervision; and collecting additional credit-related information.
Short-termIn processStructural project involving the NBC as well as the whole financial sector
  • Ensure that banks retain an appropriate level of liquid assets to be able to meet short-term obligations by enforcing existing regulations.
Short-termIn processAmendments to the Prakas already drafted
  • Upgrade law to formalize delineation of responsibilities among supervisors, and establish procedures, through MoUs, for practical information exchange, coordination and accountability among domestic supervisors (NBC, MEF, SECC), and with foreign supervisors.
Short-termInitiated but not concludedIn process with many foreign authorities but lagging with domestic supervisors
  • Upgrade both the number and capacity of staff in the areas of banking, insurance, securities and payment system supervision; develop training programs for financial institutions on accounting, corporate governance, risk management, and for the external audit profession.
Medium-termIn process-
  • Develop and implement a strategic plan to address the conflicts and overlaps in the financial sector legal and regulatory framework.
Medium-termIn processIn cooperation with World Bank (WB)
Supervision and Regulation
  • Develop supervisory strategy to deal with banks that cannot meet the new capital requirement.
  • Conduct comprehensive upgrades to the legal framework.
Short-termIn processIn cooperation with WB
  • Reprioritize the work performed by the staff to facilitate forward-looking, risk-based supervision.
Short-termIn processAction plan after reviewing compliance with BCPs
  • Impose a moratorium on the issuance of new bank licenses as long as supervisory capacity and resources remain inadequate.
Short-termUnder NBC reviewStance tightened toward the issuance of licenses
Nonbank Financial Sector
  • Revise capital regulations in concert with liability, investment, and accounting rules to better reflect the risks in a growing insurance market.
  • Enhance powers for intervention, corrective measures, and enforcement.
Short-termIn processIn cooperation with WB
  • Conduct a readiness study prior to the launch of the stock exchange.
Access to Finance
  • Enhance supervisory practices to keep pace with the development of microfinance deposit-taking institutions, and impose a moratorium as long as supervisory capacity and resources remain inadequate.
Medium-termIn process-
Crisis Management Framework
  • Revise PCA framework by developing additional triggers for asset quality, liquidity, and earlier intervention based on the solvency ratio.
Medium-termIn preparationIn cooperation with WB
  • Introduce regulation allowing banks to use their fixed deposits at the NBC and any issue of government (including government bodies) or government-guaranteed securities as eligible collateral for interbank and NBC repos.
Short-termIn processProject for issuing NBC’s negotiable certificates of deposits
  • Develop a crisis management framework.
Medium-termIn preparationIn cooperation with WB
Transparency of Monetary and Financial Policies
  • Introduce due process for the dismissal of NBC Board members and the Governor by specifying the legal grounds for doing so, and defining an appeal process.
Medium-termNot initiatedTo be considered with the assistance of WB
  • Amend the law to reduce the government’s representation on the Board of the NBC; and to reflect the practice of appointing two Deputy Governors.
Short-termNot initiatedTo be considered with the assistance of WB
Corporate governance of banks
  • Draft and/or implement banking regulations on internal audit and controls, risk management, and compliance functions at banks.
Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT)
  • Introduce new rules measures for conducting overall AML/CFT risk assessments and risk profiling of financial institutions.
Short-termNot initiatedTo be considered with the Financial Intelligence Unit
Note: FSAP = the IMF-World Bank Financial Sector Assessment Program. BCPs = Basel Core Principles for Effective Banking Supervision; MEF = Ministry of Economy and Finance; MoUs = memoranda of understanding; NBC = National Bank of Cambodia; PCA = prompt corrective action; SECC = Securities and Exchange Commission of Cambodia.

Short-term: up to one year; medium term: one–three years. Status of implementation as of May 2013.

Note: FSAP = the IMF-World Bank Financial Sector Assessment Program. BCPs = Basel Core Principles for Effective Banking Supervision; MEF = Ministry of Economy and Finance; MoUs = memoranda of understanding; NBC = National Bank of Cambodia; PCA = prompt corrective action; SECC = Securities and Exchange Commission of Cambodia.

Short-term: up to one year; medium term: one–three years. Status of implementation as of May 2013.

Box 9.1Toward a Deeper and More Resilient Foreign Exchange Market

An active foreign exchange market would boost financial sector development by building trust among banks and by providing basic infrastructure and liquidity for further financial market development, for example by smoothly intermediating foreign capital flows related to expected growth in the volume of stock market transactions. The NBC is considering steps to make banks the primary participants in its auctions. The strategic goal is to gradually transition the foreign exchange market from one dominated by retail money changers to one dominated by wholesale banks. Moreover, the NBC should consider these points:

  • In the first instance, the NBC should build a relationship with the foreign exchange divisions of the banks and advise them to participate in the NBC’s auctions.
  • Over time, the NBC could look to tighten the criteria applied to eligible participants in its foreign exchange auctions with a view to limiting participation to the banks and the large money changers who meet prudential guidelines. The objective is to place the banks at the center of the market and have retail customers and money changers deal with the banks, which would then deal with the NBC, if necessary. The central bank law suggests that only “financial institutions” should deal with the NBC (Article 5 of the NBC law) and that money changers do not meet the definition of a financial institution. This strategy could also interact with and support the authorities’ intentions to dedollarize the economy.
  • This approach could take the form of a primary dealer system, in which primary dealers have the right to come to the NBC and participate in their auctions and interventions. The privilege of being primary dealers could come with some obligations. For example, there might be requirements for them to regularly report information on market developments and market turnover to the NBC. In addition, it is common for primary dealers to be required to quote prices to other interbank wholesale market participants and to customers. This sort of measure is useful in bringing depth to the market. In addition, the NBC could consider:
  • Promoting the development of foreign exchange brokers. The NBC should look at developing a role for foreign exchange brokers by setting up a relevant broker licensing regime, seeking guidance from the Securities and Exchange Commission of Cambodia (SECC), as brokers currently exist in the equity market.
  • Developing foreign exchange hedging tools. Some very basic foreign exchange products are not available in Cambodia, but they will be needed to allow (i) the Cambodian market to be able to handle the capital flows associated with the opening of the equity market, and (ii) the NBC to step back from the market.
  • Encouraging the development of a foreign exchange (currency) swap market which would then enable foreign exchange forward transactions to occur. In the global foreign exchange market, foreign exchange swaps, forwards, and spot foreign exchange are the three most important foreign exchange hedging products traded. This would necessitate developing the interbank market and the market for NBC securities. The NBC has periodically transacted foreign exchange swaps with banks through the format of a U.S. dollar-collateralized riel loan from the NBC. The foreign exchange swap market can provide a money market benchmark interest rate in its own right, which can be useful for the conduct of monetary policy, thus aiding dedollarization and providing the market with riels that can be used to purchase riel-denominated NBC securities.

Box 9.2Payment Systems

In December 2012, the NBC launched a new National Clearing System to further facilitate the clearing of checks and the distribution of cash through 21 branches located in the provinces. Membership in the Clearing House currently stands at 32 institutions for U.S. dollar clearing and 26 for riel clearing. Other relevant participants in the payment services provision are microfinance institutions.

Cash is the predominant means of payment in Cambodia (see also Chapter 3). Two currencies dominate the market: the Cambodian riel and the U.S. dollar. In certain areas of the country, where Cambodia and Thailand share a border, the Thai baht is also in use. Most of the population’s payroll is paid in cash. Until recently, even large purchases were completed in cash. The use of the riel is generally limited to small routine purchases, government purchases, payment of taxes and utilities, and banks required to hold reserves in accounts at the NBC. Checks are the second most common form of payment instrument in the country, aided by the successful introduction of some new checking standards within Cambodia’s banking system in 2012.

As of end-2012, there were only 406 automated teller machines (ATMs) in Cambodia and 3,300 point-of-sale terminals, but this represented an increase of over 130 percent since 2007. However, this structure introduces inefficiencies into the market, reduces the use of card services (because there are limits to where customers can access the services), creates barriers to entry for new service providers, and ultimately translates to increased costs to the consumers. However, there has been some, albeit limited, sharing of ATM networks by a few banks.

Cambodia’s national payment system still requires substantive improvements to fully conform to international standards. There is a need to further strengthen the legal soundness of the payment system by completing the work that is under way on a new, overarching National Payment Systems Law. Once enacted, this law could reduce or eliminate the need for an individual Prakas (regulation). A well-formulated strategy to promote an electronic means of payment would help, too. Finally, the migration from paper-based instruments to electronic ones is a key element in increasing the efficiency of the payment system, potentially yielding real and noticeable benefits to bank customers and to the economy as a whole.

Improved Credit Risk Management by Banks

In February 2009, the NBC adopted a Prakas (regulation) on asset classification and provisioning that aimed to provide a better tool for portfolio assessment. This Prakas replaced a 2002 regulation, requiring that all loans and assets of banking and financial institutions be evaluated regularly using a risk-based and forward-looking method. In particular, the classification of all assets was updated from four (standard, substandard, doubtful, and loss) to five categories (normal, special mention, substandard, doubtful, and loss). Timely and appropriate provisions and write-offs were also required to build reserves for loan loss accounts in order to accurately reflect the true condition and operating results of the institutions. In addition, in September 2010, the NBC issued a Prakas on internal control, aiming at supporting the implementation of risk-based and forward-looking supervision and achieving compliance with the Basel Core Principles for Effective Banking Supervision. The organization and the efficiency of these internal control systems are assessed by the NBC’s Banking Supervision Department—both its off-site and on-site divisions—as well by the banks themselves in a dedicated annual report submitted to the NBC. Indeed, for over two years, banking institutions in Cambodia have implemented their own internal control systems, adjusting their risk management processes and mitigating operational risks and supervisory concerns.

In addition, the introduction of a new credit reporting system signals a key effort to deal with credit risks. In May 2011, the NBC adopted a Prakas to establish a credit reporting system (CRS). It requires that all financial institutions in Cambodia, defined by the Law on Banking and Financial Institutions and approved by the NBC, contribute the credit information to the CRS. The new reporting system is updated monthly and available online, which is crucial to improving the timeliness and accuracy of information reporting and to reducing the burden and cost related to previous paper reporting submissions. Moreover, the NBC now has the authority to set up relevant regulations, to monitor all credit reporting activities, to oversee the CRS, and to issue licenses to Credit Reporting System Service Providers.

In line with the introduction of the CRS, the Credit Bureau of Cambodia was launched in March 2012. With all the banks, regulated microfinance institutions, and three unregulated entities as its members, the credit bureau provides access to personal credit histories and makes it possible for different financial institutions to access customer information on a common platform. It also helps to alleviate the concerns of overlapping loans, particularly among small lenders, and thus to mitigate the credit risks. 7 With electronic data submissions from all covered entities, the Credit Bureau of Cambodia is currently the single Credit Reporting System Service Provider for the CRS, and is now working on creating a commercial bureau (company database).

Transition to Risk-Based Supervision by the NBC

The NBC has made progress in transitioning from compliance-based to risk-based supervision. The supervision department has started to conduct risk forecasting on individual banks and on a consolidated basis. Off-site examination teams have begun to compile risk profiles to be used for making on-site inspection plans. A working group was formed to review compliance with the Basel Core Principles and has concluded a first detailed assessment. Specifically:

  • The NBC issued a Prakas in February 2011 announcing the transition from compliance-based supervision to risk-based and forward-looking supervision. The Prakas stressed that (i) the NBC will implement risk-based and forward-looking supervisory monitoring aimed at anticipating potential adverse developments and at addressing them in a timely manner; (ii) the supervisory monitoring processes will be based on risk-profile assessments, examinations’ findings and extrapolations, and stress testing; and (iii) the NBC will perform comprehensive risk-profile assessments at the banking institution level and also, where applicable, at the consolidated level.
  • The new banking supervision system has started to take shape with the support of external technical assistance. A template has been used to conduct risk forecasting both on an individual bank level and on a consolidated level. On-site inspection plans are being made based on the compiling of risk assessments by the off-site department. A working group was also set up in 2011 to review the Basel Core Principles. Following the completion of the review, a program was developed aiming to comply with the principles. A detailed assessment of compliance with the Basel principles has been summarized and submitted to the senior NBC management. Following broad compliance with the Pillar I standardized approach, the NBC is now working toward full implementation of Basel II (the second accord on recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision).

The Road Ahead: Future Challenges

Achieving the above milestones now provides a solid basis for ongoing reforms. Meeting higher minimum capital requirements and adopting stricter enforcement of new regulations on asset classification and provisioning have buttressed the NBC’s credibility as a supervisor, as have the regulations for risk-based and forward-looking supervision. That an adequate regulatory and supervisory framework for the securities market is being developed as well is also valuable. Financial soundness indicators for banks presently do not seem to point to immediate financial stability risks over the medium term (Table 9.3). Nevertheless, the supervisory framework needs to keep pace with the development of a broader financial system, which means that modalities are needed to enhance cooperation and coordination between the NBC and other domestic supervisors. From a supervisory perspective, two main challenges to financial system stability stand out:

  • Supervisory capacity. Against the backdrop of a rapidly developing banking system, the NBC is addressing its human resources and technical capacity constraints, including through the training and hiring of new recruits. In addition, technical assistance continues to play an important role in knowledge transfer as the NBC seeks to upgrade its surveillance of financial stability risks (e.g., stress testing).
  • Crisis management framework. This will be critical to help maintain confidence in the financial system and minimize fiscal risks. The “prompt corrective action” regulation for the NBC needs to be strengthened, given the absence of financial safety nets. The crisis management framework will also need to establish a mechanism for dealing with systemic and illiquid or insolvent banks. An explicit financial stability mandate for the NBC is also needed, while memoranda of understanding (MoUs) between Cambodia’s three supervisory agencies (the NBC, the Ministry of Economy and Finance, and the SECC) are needed to avoid gaps in information sharing and responsibilities for crisis resolution. Moreover, deposit insurance, an important feature of a financial safety net, is absent, and depositors’ claims are not accorded adequate priority.
Table 9.3Cambodia: Core Financial Soundness Indicators (FSIs), 2008–11(In percent)
Capital-based FSIs
Regulatory capital to risk-weighted assets27.632.433.134.232.331.531.331.531.431.229.027.526.229.128.8
Regulatory Tier 1 capital to risk-weighted assets27.732.837.234.833.032.733.332.632.129.527.726.326.329.328.9
Nonperforming loans net of provisions to capital5.
Return on equity112.
Net open position in foreign exchange to capital0.
Asset-based FSIs
Nonperforming loans to total gross loans2.
Return on assets12.
Liquid assets to total assets14.215.416.219.819.416.118.017.618.017.917.919.
Liquid assets to short-term liabilities30.620.822.427.326.822.424.824.525.225.225.327.023.024.324.4
Sectoral distribution of loans to total
gross loans
Central bank0.
Other financial corporations0.
General government0.
Nonfinancial corporations70.672.474.471.371.168.969.272.472.372.271.371.169.565.863.8
Other domestic sectors20.119.318.917.517.516.216.815.415.114.914.815.115.114.414.0
Income- and expense-based FSIs
Interest margin to gross income48.367.066.464.160.868.967.867.962.267.765.363.664.363.165.6
Noninterest expenses to gross income64.265.466.965.464.265.362.961.263.256.857.956.157.553.954.7
Source: National Bank of Cambodia


Source: National Bank of Cambodia


These two challenges will be discussed in detail in the remainder of this chapter.

Supervisory and Licensing Capacity

A confluence of factors gives rise to supervisory capacity constraints:

  • Institutionally, the Banking Supervision General Directorate of the NBC needs to attract and retain more qualified staff to effectively supervise the dynamic financial sector, including through competitive remuneration and adequate control over the directorate’s own resources and hiring decisions. The directorate also needs to ensure that staff has sufficiently long tenure in the department to deepen specialized knowledge.
  • The introduction of risk-based supervision imposes a higher demand on qualified staff to conduct risk-profile assessments, on-site and off-site examinations, analyses of findings, and stress-testing, and thus further strains the supervisory capacity.

Overall, notwithstanding an improvement in the quality of supervision, the relative shortage of staff, particularly the more experienced and qualified staff, has become a more binding constraint given the proliferation of banks and the introduction of risk-based supervision. However, the NBC has recently signed an MoU with foreign bank supervisors to improve supervisory collaboration. In light of the significant role of foreign-controlled banks in Cambodia, this step represents a potentially useful tool to ease capacity constraints and initiate cross-border supervision. In addition, the newly created Financial Stability Team of the NBC is an important capacity-building step. 8

For as long as supervisory capacity remains relatively limited, a moratorium on new bank licenses, which was a key recommendation from the 2010 joint IMF-World Bank FSAP, remains applicable. The NBC has recently taken a more cautious stance toward the issuance of new licenses, including by encouraging potential applicants (domestic and foreign) to consider mergers with existing banks. To make bank licensing more stringent and transparent, the NBC should develop and document comprehensive criteria and guidelines for licensing and execute the power to reject applications that do not meet the standards. Considering the recent surge in foreign funding and the lack of constraints on foreign capital inflows into the country, the NBC’s gatekeeper function of licensing needs to be strengthened rather than used as a means to attract foreign investment. 9 Along these lines, the BSD could also seek collaboration from the Consultative Supervisory Committee, which was established as an oversight committee within the NBC.

The effectiveness of efforts to improve supervisory and licensing capacity will also depend on improvements to the legal infrastructure (Box 9.3). For instance, the existing Law on Banking and Financial Institutions does not explicitly provide legal protection to the supervisory staff or the NBC from prosecution for the supervisory actions that they might take and all costs of defending their actions. The 2010 FSAP recommended that this law be amended and the legal framework be enhanced to incentivize the NBC to take prompt corrective actions effectively, and to empower the NBC to undertake a wider range of supervisory responses. Furthermore, to enhance the capability of off-site examination, technical assistance may be needed to support the Banking Supervision General Directorate team to conduct stress testing, particularly in the area of macro-financial linkages and scenario analysis skills.

Crisis Management Framework

In the absence of financial safety nets and given the very limited lender-of-last-resort capability of the NBC arising from Cambodia’s high degree of dollarization (see Chapters 3 and 5), strengthening the financial crisis management framework remains key to reducing systemic risks. Financial stability arrangements involve multiple government entities and a set of explicit and implicit arrangements. The key players are the prudential supervisor, the central bank, the fiscal authority, and the deposit insurer, if any. Cambodia’s recent economic upswing offers an opportune window to agree on MoUs among the NBC, the SECC, and the Ministry of Economy and Finance on establishing a coordinated supervision framework. A two-step approach has been initiated with a view to

  • identifying areas where cooperation, including information sharing, can be readily achieved for the signing of an initial MoU that focuses on coordinated surveillance and crisis prevention; and
  • agreeing on a time-bound process toward a second MoU on crisis resolution in order to complete the crisis management framework, with clearly defined roles and responsibilities of each supervisory agency (Ministry of Economy and Finance, SECC, and NBC).

Moving from process to substance, while the NBC has a broad understanding of the relevant roles and the nature of the response in the event of severe stress, the interagency crisis management framework requires a clear delineation of responsibilities, defined by (i) the apex crisis management committee, comprising the Governor of the NBC and the Minister of Economy and Finance; (ii) MoUs for cooperation and coordination among the regulators (among the Ministry of Economy and Finance, the NBC and the SECC, and with foreign supervisory/regulatory authorities); (iii) crisis management teams within the NBC and the Ministry of Economy and Finance; (iv) a crisis management manual with plans for addressing several contingencies; (v) a communication plan for the public; (vi) a market and institutional monitoring framework; and (vii) periodic crisis simulations.

Focusing on the role of the NBC, specifically in crisis resolution, the absence of an explicit financial stability mandate for the NBC constitutes an important gap. The NBC law defines the principal mission of the central bank as determining monetary policy objectives aimed at price stability, and ascribes the duties of overseeing payment systems, setting interest rates, and monitoring monetary and exchange rate policies. In this context, it would be appropriate to include financial stability as an explicit mandate. The NBC, as the central bank, the monetary authority, and the banking system supervisory authority, is best equipped to discharge this important responsibility. Giving the NBC the necessary legal mandate for maintaining financial stability would help to define oversight roles and provide legal support for relevant oversight duties.

Box 9.3Legal Infrastructure

The legal framework for the financial system has progressed rapidly in the past five years, expanding the foundation of the legal system, along with institutional arrangements for the implementation of laws. Notable advances include the Law on Commercial Enterprises, the Law on Negotiable Instruments and Payment Transactions, the Law on Secured Transactions, the Law on the Issuance and Trading of Non-Government Securities, the Civil Procedure Code, the Commercial Arbitration Law, and the Law on Insolvency.

However serious gaps, inadequacies, and ambiguities remain:

  • The Law on Banks and Financial Institutions lacks adequate provisions on prompt corrective action, safety nets, and bank resolution mechanisms—such as assumption and control and crisis management. This law vests the NBC with powers to provide approvals and exemptions without stating minimum criteria to guide the exercise of discretionary power. Notwithstanding regulations, the law itself is also silent on the NBC’s power to oversee and regulate the payment system and credit information system.
  • There are conflicts and overlaps in the regulatory laws, and they are uniformly silent on the legal basis for cross-supervisory cooperation. For instance, Article 31 of the Law on the Issuance and Trading of Non-Government Securities provides that no person can conduct a securities business unless licensed by the SECC. Yet Articles 4 and 5 of the Law on Banks and Financial Institutions do permit banks and specialized financial institutions to carry out securities business, including custodial and securities management services. There is no provision in either law on the reconciliation of these two provisions, on consolidated supervision, on the respective roles and responsibilities of the NBC and SECC over bank subsidiaries, or on matters of coordination and cooperation. Until the laws are amended, it is critical for the NBC and SECC to enter into an MoU to deal with these issues. Another serious conflict is the order of priority in the event of insolvency.
  • Land is the predominant form of collateral in Cambodia and is preferred by lenders, but despite the importance of this collateral, not all land has been mapped and titled. Many landowners have so-called soft titles—certificates that are issued and certified by lower authorities (village, commune, or district authorities). The certificates are necessary for the landowners to apply for an official land title, but the costs (a tax of 8 percent on the value of land) and red tape prohibit most landowners from registering the title with the land office. Since financial institutions accept titles issued only at the national level, vast amounts of land end up being untapped as collateral. At the same time, the movable collateral registry established is hardly used, because it is not well known by either lenders or borrowers, and the enforcement of collateral is difficult.

Effective insolvency and creditor rights systems are particularly important in promoting the stability of the financial system. In Cambodia, banks prefer to restructure or roll over loans instead of going to court to recover their debt. Similarly, parties to commercial disputes also seek out-of-court means to settle their disputes. The Insolvency Law—a critical instrument to deal with unproductive and unviable businesses—remains untested, and it is not clear whether the necessary institutional arrangements are in place and the courts have the capacity to handle this important mechanism.

Another gap concerns the ability of the NBC to provide speedy liquidity support and, more broadly, to play an active role in managing liquidity in the system. The NBC can technically provide liquidity to the banking system through three modes: (i) by purchasing or through repurchase agreements (repos) of eligible assets from the banking system; (ii) by granting advances against government or government-guaranteed securities; and (iii) by granting overdrafts against banks’ loans. The first two of these facilities are effectively absent, as they are generally dependent on government or central bank securities, which do not exist in Cambodia. The NBC’s overdraft facility with loans as collateral has legal and operational shortcomings, which impairs its function as lender of last resort. Key recommendations to the Cambodian authorities include

  • making available securities that qualify as eligible collateral for promoting the development of the interbank markets and the central bank liquidity facilities, while exercising caution against moral hazard (as discussed in the previous chapter, this is being achieved by the NBC’s granting “collateral” status to fixed deposits placed in it by commercial banks, known as “negotiable certificates of deposit,” including government-guaranteed securities);
  • establishing legal recognition of the overdraft facility and streamlining its sanctioning process, to have it perform an effective safety net role; and
  • empowering the NBC to extend loans, in addition to extending overdrafts, against the collateral of banks’ loan portfolios.

A third gap concerns the absence of deposit insurance, an important feature of a financial safety net. 10 The NBC is currently working toward achieving the preconditions for the establishment of deposit insurance, in particular strong supervision. Work has also begun on a feasibility study for a deposit insurance scheme for riel deposits. In the meantime, there is a need to improve the preferential status of depositors’ claims vis-à-vis claims of all other creditors, to remove the discrimination between deposits denominated in domestic currency and those denominated in foreign currency; and to consider establishing an improvised and unconventional buffer in each bank to protect depositors’ interests. 11

In the absence of the essential elements of a safety net, the burden of crisis prevention falls squarely on the NBC’s supervisory framework in general, and on the prompt corrective action framework in particular. 12 The existing mechanisms need to be strengthened to allow for more effective and timely intervention to ensure financial stability. The main improvements required include: (i) a broader assessment of the financial institution’s condition for earlier supervisory response by the NBC; (ii) increased specificity in triggers of responses; (iii) powers to undertake a wider range of supervisory actions; (iv) use of stress test outcomes to influence an early warning system; (v) streamlining and documenting the operational aspects of the prompt corrective action framework; and (vi) enhanced supervisory powers to intervene.

The final “missing” element in the crisis management area is an adequate bank resolution framework. Outside of official administration and liquidation, detailed in the Law on Banking and Financial Institutions, other resolution mechanisms for problem banks are not specified. While the law allows a weak bank to be resolved through liquidation or through an administrator process, the triggers for placing the bank under an administrator and in liquidation are not clearly defined. As highlighted in Box 9.3, the legal framework does not provide for private sector solutions or assisted-bank-resolution options, such as restructuring through mergers and acquisitions, purchase and assumption transactions, and bridge banks.


Cambodia’s financial system is rapidly evolving, creating new challenges and reinforcing old ones. A robust framework for financial sector oversight is a precondition for a more resilient financial system, one that would enable Cambodia to meet its economic potential. Progress in implementing high-priority FSAP recommendations has been mixed, reflecting in part capacity constraints and the need to forge consensus within the government. On the positive side, the NBC has taken a stricter stance on bank licensing, restructured its banking supervision, and addressed credit risks by introducing a new credit reporting system coinciding with the launching of a credit information bureau and also by increasing reserve requirement rates.

Still, a full-fledged crisis management framework encompassing all financial supervisors is lacking, while further improving the capacity of banking supervision, both in quantitative and qualitative terms, remains a challenge. At the same time, policy coordination has become even more critical since the launch of the Cambodian stock exchange in April 2012. Also, Cambodia’s financial sector is increasingly becoming more interconnected and, hence, idiosyncratic risks may have a systemic impact.

The process of reforms to strengthen supervision faces multidimensional challenges. The first of these has to do with human resources. The relative shortage of qualified technical staff and the lack of capacity may limit the speed of the reform process. There is a scarcity of trained financial professionals, including in the supervisory and regulatory bodies, which can hinder adequate surveillance and timely financial sector supervision. As the financial sector becomes larger and more complex, there is a need to strengthen financial stability oversight to address emerging risks, such as credit expansion, the quality of capital, and shadow banking.

Other important elements that need to be addressed are the establishment of a comprehensive crisis management framework comprising an apex crisis management committee and crisis management team(s); an explicit financial stability mandate for the NBC; a framework for assessing and supervising systemic institutions; crisis management manuals and handbooks; contingency and communication plans; and periodic crisis simulation exercises. A mechanism for dealing with systemic and illiquid or insolvent banks will also help enhance financial stability. Until a supervisory response and prompt corrective action framework are in place, gaps need to be addressed to allow for more effective and timely intervention. Also, work should be initiated toward achieving the preconditions for establishing a deposit insurance scheme.

1Seven microfinance institutions are currently licensed to take deposits. These deposits reached US$346 million in March 2013, increasing by 145 percent in the preceding 12 months.
2The reinsurer is a joint venture between the Ministry of Economy and Finance (MEF) and a regional insurance group.
3Cambodian Life Insurance Company Plc. (Cambodian Life) is a joint venture established on January 10, 2012 by Cambodia’s MEF and four other partners.
4So far, reported industry level profitability has been largely maintained. Claims ratios are low and underwriting profits continue to be healthy. Further growth will depend on innovative approaches in products and distribution to the underserved Cambodian population.
5At present, there are 12 licensed money changers that are at the core of the foreign exchange market and 2,547 accredited money changers, who deal with very small cash transactions. Among these 12 licensed money changers, four or five dominate the market and manage large transaction flows.
7The increasing usage of reports from the Credit Bureau of Cambodia is transforming the risk landscape in the formal financial system by helping banks and microfinancial institutions avoid riskier loans, some of which are shifting to the informal sector and shadow banking activity. The number of credit inquiries increased from 6,000 to 158,000 a month (of which 30,000 were from banks) in the 12 months to February 2013.
8As part of its functions, the team now issues a quarterly Banking Stability Dashboard, a set of risk indicators for the financial system.
9In this context, going forward, bank flows and their sectoral destination, including to real estate, and their financial stability implications warrant closer monitoring.
10Depositors holding deposits denominated in riels rank fifth and depositors holding deposits in other currencies will rank sixth, along with creditors that are banks and financial institutions.
11The specific authority should be established in the law with clarifications set forth in regulations.
12The prompt corrective action is set forth in a Prakas.

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