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H.E. Neav ChanthanaH.E. Neav ChanthanaDeputy GovernorDeputy Governor

UNDP & ACLEDA. November 7, 2007UNDP & ACLEDA. November 7, 2007

www.nbc.org.kh

CambodiaCambodia’’s Financial Sector s Financial Sector Development and policiesDevelopment and policies

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Table of Contents

1. History of NBCThe Role of NBC

2. Banking Sector DevelopmentGrowth of banking sector

3. Financial Sector Development Strategy 2006-2015NBC challenges for a sound financial system to support sustainable economic growth

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History of NBCHistory of NBC

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

Between 1975 and 1979, destruction of all infrastructures (markets, trade, money, banks, etc.); destruction of the NBC.

1979: commercial transactions conducted mainly in the form of barter, or using rice and gold, and later also Vietnamese dong.1980: re-establishment of the NBC, re-issuance of the riel as the country’s legal tender.Confidence in the riel remained low, given the political structure and the security situation. But the use of USD and THB was restricted by the centrally planned economy.

National Bank of Cambodia (1975-1979)

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National Bank of Cambodia (2004-Present)

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Dual Role of The National Bank of Cambodia :Dual Role of The National Bank of Cambodia :

Legal basis: Law on the Organization and Function of the National Bank of Cambodia (Jan. 26, 1996).

The principle Mission is to maintain price stability.

To formulate and implement monetary and exchange policies;

To license, delicense, regulate and supervise banks, financial institutions, liquidators and auditors;

To oversee payment systems and to enhance interbank payments;

To issue the national currency and Manage International Reserve

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Monetary policy of the NBCThe NBC adopts a tight monetary policy.

Exchange Rate policy: Managed float, occasionally NBC intervenes on the market to maintain the exchange rate stability.

Foreign exchange policy: Liberal free to transfer money abroad; no restriction on the exchange market. (Foreign Exchange Law; Aug. 22, 1997)

Interest rate : Liberal

As a lender of last resort the NBC offers credit to commercial banks in Riels only; Interest rate is at 0.50% per month or 6% per annum.

Payment System: the economy is highly cash based; check is the main payment instrument NBC runs the clearing house in both USD and Riels.

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Second Major Role of NBC : financial sector Second Major Role of NBC : financial sector development and stability of the financial system:development and stability of the financial system:

Objectives: to supportObjectives: to support•• Economic stabilityEconomic stability•• Resource mobilizationResource mobilization•• Private sector developmentPrivate sector development•• EmploymentEmployment•• Foreign direct investmentForeign direct investment

Therefore the government is committed to conduct Therefore the government is committed to conduct banking sector reforms and adopted financial sectorbanking sector reforms and adopted financial sector

Development Plan I and II to Development Plan I and II to foster efficiency, solvency foster efficiency, solvency and sound functioning of the financial and sound functioning of the financial system system

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2 2 -- The Banking Sector DevelopmentThe Banking Sector Development

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

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The Banking System in Cambodia (September, 2007)

National Bank of Cambodia

National Bank of Cambodia

17- Commercial Banks17- Commercial Banks

14- Local Banks

3- Foreign Branch Banks

7-Specialized Banks7-Specialized Banks

1- State-owned Banks

6- Local Banks

MFIsMFIs

17-Licensed

NGOs over 60

21 NBC Branches21 NBC Branches

3,808 Exchange Bureaus

3,808 Exchange Bureaus

CPB, CNB, UCB, CCB, CAB, ABA, SBC, VB, ACLEDA, FTB,

CMB, ANZ, CAMKO, SKB

MYB, FCB, KTB

RDB

PHB, CAISB,FIB, ANCO,CDSB, PISB

26- Registered

2 Repre. Offices

Bank provincial branches: 74

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Progress in banking: New entries

As more and more players enter into the industry, and competition become intensify causing banks to upgrade themselves to stay in business.

Both credits and deposits grow rapidly showing an increase of public confident in the sector .

Banks are now more profitable as the interest rate spread remained high.

Despite prudential ratio dropped gradually the overall enforcement is improved.

Financial Deepening

Financial Deepening (M2/GDP), in %

8.5 9.3 9.5 10.112.6 13.0

15.6 16.518.6 18.7

20.523.1 24.07 24.65

0

5

10

15

20

25

30

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Jun-

07

Jul-0

7

Aug

-07

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Loans to Customer Loans to Customer –– in US dollarsin US dollars

Banks & MFIs Loans

360,575.24

482,712.14

598,405.16

882,288.14

1,303,405.68

41,370.22 40,846.2947,840.99

91,972.87

141,235.63

-

200,000.00

400,000.00

600,000.00

800,000.00

1,000,000.00

1,200,000.00

1,400,000.00

2003 2004 2005 2006 September-07

In T

hous

and

US d

olla

r

-

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

140,000.00

160,000.00

Banks - loans (gross) MFIs - Loans (gross)

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Credit by Economic SectorsCredit by Economic Sectors

167.

7819

7.08

282.

5137

9.63

90.1

5 127.

4919

3.12

276.

29

66.8

564

.95 10

1.20

120.

61

12.5

0 35.9

973

.67

104.

59

24.3

3 35.2

566

.32

129.

33

16.0

816

.85 36

.66

61.0

1

27.5

641

.44

35.1

652

.00

113.

2313

2.20

139.

0126

4.90

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

In M

illio

n U

S do

llar

Services WSR Manufacturing RE & PU Construction Agriculture Import Others

Credit by Economic Sectors

2004 2005 2006 Sep-07

Banks Banks –– Earning TrendEarning Trend

Banks - Return on Equity and Return on Assets

2.35%

7.87%

5.73%3.83%

3.92%

1.73%

14.18%

13.47%

0.58%1.06% 0.93% 1.20%

2.84%1.76%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2001 2002 2003 2004 2005 2006 Sep-07

Perc

enta

ge

Return on Equity Return on Assets

Banks Banks –– Capital Adequacy Ratio & LiquidityCapital Adequacy Ratio & Liquidity

24.16%40.58%

75.84%

276%

21.00%34.50%

79.00%

117%

22.37%31.89%

77.63%

118%

20.05%26.46%

79.95%

108%

17.44%

24.77%

82.56%

108%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

2003 2004 2005 2006 Sep-07

Equity to total assets Solvency ratio Debt to total assets Liquidity Ratio

Banks Banks –– Prudential RatioPrudential RatioNPL and Large Exposure loans

26.39%

47.23%

1.17%5.66%14.63% 12.76% 9.64% 7.26%

9.87%

90.41%

64.27%

49.87%

10.88%19.18%

2.54%

16.82%18.69%21.68%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2002 2003 2004 2005 2006 Sep-07

NPL/TL LE/NW LRP/NW

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3. Financial Sector Development Strategy

2006-2015

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Recent financial sector reforms that geared toward enhancingthe role of financial sector in private sector development

Strengthening Banking system through bank restructuring

Strengthening bank supervision capacity

Capacity building for both NBC and bank staffs – CBS,

Modernization of NBC operation ( IT, a reliable payment system, and clearing house for USD and Riels checks),

Institutional development ABC (2001),MFA (2005), CBS (2002) and CIS (2006),

Rural finance – MFI licensing and registration, strengthen institutional development, upgrading supervision and regulations for their sustainability,

Development of Fundamental legal basis for money markets and capital market establishment are now exist (Law on NIPT, Law on Government securities and non government securities)

Development of legal infrastructure to underpin the development of capital market: law on commercial enterprise, the secured transaction law , Law on arbitration, law on corporate accounts, auditing and accounting profession .

Drafting Law on financial lease to allow SME access finance to expand their business.

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Continue Reforms

In 2001, the Royal Government adopted Financial Sector Blue print for 2001-2010 to develop the financial sector.

Since then, much progress has been made during the past five years, however there is a lot remained to be done toward a sound, market financial system ( competitive, integrated and efficient).

To support the growth and to address the issues, on June 2006, a revised blueprint for 2006-2015 was launched

to reflect changes in circumstances,

to address priorities, and

sequencing for financial sector development.

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The remaining issues and risks

Highly dollarized economy which limit the ability to conduct monetary policy

Poor collateral registration and valuation;

High credit risk (NPL,LE, and real estate collateral and personal guarantees which could lead to systemic risk);

Huge expansion of risk weighted assets;

High operating cost and low competition as a result of significant market segmentation

Low access to formal finance

Weak institutional framework for private sector activity

Slow progress of money market development

Lack of reliable information in lending environment- business credit worthiness

Lack of legal framework to enforce commercial contracts

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Financial sector development strategy 2006-2015

The challenges for the NBC :

Improving confidence and financial intermediation;

maintaining stability in the financial sector;

promoting good governance, and

enhancing efficiency.

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Improving confidence and financial intermediation

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

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Maintaining stability in the financial sector

To continue strengthen financial institutions and prudential capacity for both banks and MFIsTo strengthen prudential supervision, surveillance and enforcement of infringements banks

The recent establishment of Supervision Consultative Committee

To enhance the regulatory framework to strengthen enforcement – new prakas to be issued:

Penalty, Good governance,MFI deposit taken,Development trust fund in banking and financial institutions

To enhance good governance by strengthening fit and proper test for manager of banks;

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Enhancing efficiency

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

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Conclusion Financial sector development is important to the

speed and direction of economic growth, since a strong and well functioning financial sector can mobilize idle financial resources for productive investment needs.

To link up saving, investment, and economic growth, the financial sector development must go hand in hand with private sector development and governance reform to support the Government policy of generating growth to reduce poverty which is the ultimate goal of the Government's economic policy.

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Thank You !