With oil deposits discovered and tourism and FDI booming, Nick Freeman reports from Phnom Penh on the nascent development of Cambodia’s banking sector.

Not often thought of as one of east Asia’s star performers, the Cambodian economy has been showing rapid and sustained growth in recent years. And consequently, investor interest in the country, including the fledgling banking and finance sector, is on the rise. Last year, the Cambodian Investment Board approved $2.3bn in foreign direct investment (FDI) pledges, gross domestic product (GDP) growth was thought to be about 9%-10%, and according to John Nelmes, the International Monetary Fund’s resident representative in Cambodia, inflation was contained at a mere 3.5%.

This year should see a broadly similar pace of economic growth for Cambodia, although aggregate FDI inflows may struggle to match the bumper figures of last year.

This economic trajectory in turn is raising general income levels in Cambodia, from an average of less than $300 per year in 2000 to an expected $500 by the end of this year. With urbanites in particular becoming more affluent, and popular confidence in banks steadily increasing, the banking sector is burgeoning at an even faster rate. Thanks in part to the introduction of more suitable and innovative banking products, more individuals are opening accounts.

Lending boom

Deposit growth in the banking sector probably exceeded 45% in 2006. And with the local private sector expanding (albeit from a very low base point), loan growth is also rising, possibly by as much as 50% last year.

A large part of this lending activity has recently been focused on construction and real estate, and there is some concern that a property bubble may be forming, most notably in Siem Reap. Located close to the fabled ruins of Angkor Wat, Siem Reap’s local economy has benefited considerably from a boom in tourist arrivals over recent years. This year should see about two million foreign tourists enter Cambodia, most of whom will visit Angkor Wat.

Cambodia currently has 19 banks in operation, comprising 12 local or joint venture commercial banks, a handful of specialised banks (not permitted to offer the full range of banking services), three foreign bank branches, and a couple of representative offices. This is down from about 40 banks operating in the mid-1990s, until both changes in the banking law (including a rise in the minimum paid-up capital from $5m to $13m) and the impact of the Asian financial crisis prompted about half of them to halt operations between 2000 and 2002. High profile withdrawals included Banque Indosuez, among others, and Standard Chartered Bank scaled down its branch to a representative office.

But the size of the resident banking community is expected to increase again in 2007, as several overseas banks, notably Taiwanese and South Korean, enter Cambodia for the first time. (And there has been speculation that at least two global banking heavy-weights are also considering entering.)

One of the most high profile entrants of recent years has been ANZ Royal, a joint venture established in late 2004 between ANZ (55%) and Royal Group (45%) – a diversified family-owned conglomerate that includes Cambodia’s leading mobile telecommunications company.

Setting the standard

ANZ Royal’s emphatic entrance into the market, offering the full suite of retail commercial banking products, has raised the bar in several ways. “Our proposition is about building long-term customer relationships and adding value to their business interests,” notes Dean Cleland, CEO of ANZ Royal. “This has meant complete transparency around pricing, a strong public focus around international governance and a long-term view around building trust in relationships with our clients. These have all been elements that consumers in the market have been actively seeking.”

Competition in Cambodia’s banking sector is growing, due in large part to the recent and impending entrance of more international players. This in turn is translating into an improved service for local customers. For example, ANZ Royal’s decision to install more than 50 ATMs in a country where less than 10 such machines previously operated has spurred another seven banks to embark on a similar ATM roll-out programme.

Provincial catch-up

However, much of this banking activity in Cambodia is currently confined to Phnom Penh and Siem Reap. A handful of commercial banks have established branches in major towns such as Battambang and Sihanoukville, but business in these locations remains relatively thin on the ground. Microfinance institutions of various kinds, numbering about 36, tend to be the only source of formalised funding source in most of Cambodia’s 21 provinces.

One notable exception is ACLEDA Bank, itself a former microfinance institution that graduated to full bank status in late 2003, and is now the second largest bank in the country, by loan size, after Canadia Bank. ACLEDA Bank has the most extensive branch network in the country by far, with more than 150 branch offices. Uniquely, 19% of ACLEDA’s equity is held by the employees’ association, in what must be one of the first formalised ESOP (equity stock option) schemes in Cambodia.

Other investors include the International Finance Corporation and several financial development institutions from Europe.

Another local bank starting to make a name for itself is Vattanac Bank. Established in late 2002, it currently operates just two branches – in Phnom Penh and Siem Reap – but is developing a strong brand, under the helm of general manager Chan Kok Choy, formerly the head of Cambodian Public Bank. Both deposit and loan growth at Vattanac Bank has risen roughly four-fold in the past four years, while gross revenues and pre-tax profits have risen six-fold and eight-fold respectively, over the same period. Vattanac Bank is one local bank that appears well positioned to compete with ANZ Royal in attracting new customers looking for a high standard of banking service.

Domestic transparency

Although Cambodia is yet to have a sovereign risk rating, ACLEDA Bank received a rating from Moody’s (of Ba1/B3 for deposits) as early as 2004. “The Cambodian consumer is becoming more discerning, and the future winners in the banking sector will be those banks that are transparent in providing financial information to the public and who demonstrate their respect for the central bank’s prudency regulations,” says John Brinsden, vice-chairman of ACLEDA Bank. It is conceivable that the country may follow ACLEDA’s lead in acquiring a rating in 2007, with an eye to a possible future sovereign bond issue.

Cambodia’s foreign exchange reserves have been steadily growing since 2000, ensuring that the economy has consistently held at least three months of import cover. In January, Phnom Penh requested Moscow to forgive $1.52bn of debt that remains outstanding, on loans dating from the late 1970s and early 1980s, after the fall of the Khmer Rouge regime. If Moscow were to agree, this would roughly halve Cambodia’s $3.2bn total external debt at a stroke.

The other major bilateral holder of Cambodian debt is the US, on loans dating from the early 1970s, before the Khmer Rouge seized power. Much of the rest is made up of long-term loans from various multilateral development agencies, provided at concessional rates.

Looking ahead, there is much the banking sector can do to assist in developing a more robust corporate sector in Cambodia. Until now, the economy has been too reliant on garment manufacture (accounting for more than 80% of total exports, and run mostly by foreign investors), tourism and the inputs of the international donor community. With Vietnam joining the World Trade Organization in January, there is some justifiable concern as to whether Cambodia’s garment industry can compete against a neighbour that will now enjoy equal quota privileges.

Tourists may get a boost with the recent opening of Sihanoukville airport, but the country lacks adequate physical infrastructure to fully exploit its tourism potential. A recent offshore oil find has raised hopes of additional earnings from the export of crude, but this is unlikely to transpire much before 2010.

Although about 70% of the population relies on agriculture-related activity for their income, this sector accounts for just 30% of GDP and a mere 3% of exports. There is therefore a need to try to develop local firms in the agro-industry sector, and assist them to advance up the value chain.

“The immediate challenge for the banking sector in Cambodia is to recycle surplus liquidity to finance productive domestic enterprises,” argues Mr Brinsden of ACLEDA Bank. This is one of the challenges confronting the Financial Sector Blueprint for 2006-2015, which the Asian Development Bank has been assisting the Cambodian government in developing.

Regulatory reform

Among other things, the latest blueprint envisages improvements in Cambodia’s monetary policy implementation, as well as financial sector supervision (in terms of legislation and its enforcement). There is a clear need of an electronic payment and settlement system. A recent secured transactions law and an impending leasing law should herald the introduction of financial leasing, which has often played an important role in bringing financing to small firms unable to meet the collateral demands of loan providers.

A credit information system is being piloted by the National Bank of Cambodia, with support from the Asian Development Bank. Beyond the banking sector, the Blueprint contains plans to develop the insurance industry, including the possible privatisation of the Cambodia National Insurance Company, and to begin to put in place the legislative framework necessary to support a fledgling capital market.

Meanwhile, there are ongoing efforts to develop the depositor base. The National Bank of Cambodia estimates that for every $1 deposited in the banking system, a further $10 is probably held outside. So the upside potential appears considerable. In this context, interest in Cambodia’s burgeoning banking sector seems destined to increase.


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