Cambodia’s financial system has evolved rapidly over the past two decades, thanks to impressive average economic growth of more than 7% between 1993 and 2016. The banks, some of them foreign owned, have played an important role in attracting foreign investment to the post-conflict country and helped Cambodia join the global economy.
Uniquely, Cambodia’s microfinance institutions, many of them rooted in donor-funded development projects in the war-ravaged countryside, have done an impressive job of dramatically improving financial inclusion, from an estimated 5% to 7% of the adult population in 2003 to about 55% now, according to the National Bank of Cambodia, the country’s central bank. “It was mostly contributed by microfinance,” says Chea Serey, director-general of the central bank.
Cambodia’s most successful microfinancier is Acleda Bank, now Cambodia’s largest commercial bank, which started life as an amalgam of five non-governmental organisations (NGOs) in 1993 – the Association of Cambodian Local Economic Development Agencies – working in the microfinance space in the provinces. Acleda graduated to a ‘specialised bank’ in 2000 and earned a full commercial bank licence in 2004. It now boasts 259 branches nationwide and accounts for about 20% of the banking system’s loans and 20.8% of all deposits. By the end of 2016, it had $4.6bn in assets (up 20% year on year), loans of $2.8bn (up 12%) deposits of $3.1bn (up 15%) and a net profit of $127.4m, according to the bank’s consolidated financial statement.
Acleda is the only Cambodian bank that has been rated by Standard & Poor’s for the past eight years. “The gap is quite big between Acleda and the rest,” says Ivan Tan, director of financial services ratings for S&P. “It would be hard to beat the distribution network that Acleda has, so in terms of microfinance I think Acleda will continue to dominate that space.” S&P rates Acleda and Cambodia’s banking system at B+, signifying high-risk status. “We view the Cambodian banking system as being quite young. Most of the banks are quite new – maybe a 15- to 20-year operating history,” says Mr Tan.
No to corruption
Acleda does not issue bonds, so the S&P rating is more for its reputation, which is good at home in Cambodia for raising funds from abroad from banks and multilaterals. Much of the bank’s past success is attributed to the reputation of its president, In Channy, a survivor of the Khmer Rouge years who spent 10 years in a refugee camp before getting a scholarship to study in the US.
During the early microfinance days Mr Channy adopted a policy of zero tolerance for corruption, which started with his staff refusing to accept food and drinks from farmers when Acleda was still handing out $5 loans to the poor. “Even fruit translates as corruption,” says Mr Channy. “This policy has become the bank policy now. This is why Acleda works so successfully. It is unique. We have formed a unique culture in our society.”
Acleda’s corruption-free approach has helped it establish a client base of 440,000 borrowers, two-thirds of whom are microfinance borrowers accounting in total for less than 9% of Acleda’s loan portfolio. However, many of Acleda’s clients have gone from being microfinance borrowers to being small business loan borrowers.
“Acleda was an NGO when it started out and it gained the trust of its clients and has grown with its clients and supported its clients over the years through Cambodia’s growth curve,” says John McGinley, managing partner of Mekong Strategic Partners, a Phnom Penh-based private investor and financial consultancy. It has also made Acleda a favourite for foreign lenders. “[Mr Channy] has given such a degree of confidence to the development lenders in this world to put their money in Acleda largely on their confidence in him as a leader and the values he continues to maintain,” says Mr McGinley.
Another reason for Acleda’s financial strength is its strong shareholder list, which includes Sumitomo Mitsui Banking Corporation of Japan, Banque Populaire of France, Orix of Japan and the Triodos financial group of the Netherlands, which together account for 49% of its equity. The two local shareholders are the Acleda Financial Trust (25.2%) and Acleda Staff Association (25.8%,) making the staff the single largest shareholder.
Small is beautiful
Microfinance continues to play a crucial role not only at Acleda but in Cambodia as a whole, accounting for an estimated 20% of all lending, with the impact felt especially in the countryside, where more than 75% of the Cambodian population still live. The central bank claims that financial inclusion, defined as access to formal financial services, now covers 55% of the adult population, compared with between 5% and 7% in 2003. A UN Capital Development Fund survey in 2015 estimated that 17% of Cambodia’s adult population were using banks and 24% were using microfinance institutions.
There are many tiers to Cambodia’s financial sector. As of the end of 2016, there were 37 commercial banks, 15 specialised banks, seven microfinance deposit-taking institutions (MDIs), 64 MFIs (non deposit-taking but registered) and 170 unregistered microfinance operators. The big seven MDIs account for an estimated 80% of all MFI lending.
The central bank closely regulates the bigger players but allows the smaller operators more leeway as it does not want to hold back financial inclusion. “No commercial bank would set up a branch in Preah Vihear [province], for instance, while for the small microfinance [operator] this is an opportunity for them,” said the central bank’s Ms Serey.
Prasac pushes on
Prasac Microfinance Institution is the largest MDI in Cambodia and the fourth largest financial institution in the country after banks Acleda, Canadia and Cambodian Public Bank (Campu). Prasac’s total assets at the end of 2016 were $1.25bn, with $1.03bn in loans from 347,000 clients, $619m in deposits and $54m in net profits, with return on equity at 37%. Prasac began life in 1995 as an NGO for an EU development project. Now it has 181 branches. “We are the biggest MFI because we try to reach more people in the country,” says chief marketing officer Say Sony. “Our strategy is to try to reach as many people as soon as we can, and our strong shareholders, who are committed to their strategy, supported us.”
Prasac shareholders include FMO and Oikocredit (both from the Netherlands), Dragon Capital (which is based in Vietnam), LOLC Finance (Sri Lanka) and the Belgium Investment Company for Developing Countries. The shareholders approved Prasac’s investment in a core banking system eight years ago, giving it an advantage over its local rivals, especially in attracting deposits. Prasac’s long-term goal is to grow its deposit base to wean the MDI off excessive reliance on foreign borrowings.
“We have to get more deposits because deposits are easier and cheaper to manage,” says Mr Sony. In the future, Prasac is likely to become a commercial bank.
Sathapana, Cambodia’s third largest MDI, opted to transform itself into a bank in 2016, and two years ago the country’s fourth largest MDI, HKL, was bought by Krungsri Bank of Thailand, which is owned by Bank of Tokyo – Mitsubishi UFL. “Essentially you’ve seen the largest MFIs become the national banking system,” says Mr McGinley. “So Cambodian banks have a different equity structure [to commercial banks]. They were locally owned and they started with a social mission.”
Level playing field
Microfinance is only one part of the Cambodian banking story. Another strand is the foreign-owned banks. Given the legacy of war and the need to boost the economy and rebuild infrastructure, the Cambodian authorities have gone out of their way to make their country an attractive destination for foreign direct investment. There are no capital controls, foreigners can own 100% of their businesses and the economy has essentially been based on the US dollar since 1992 so that investors can avoid foreign exchange risks with the local riel.
Campu, for example, is 100% owned by Public Bank of Malaysia. The bank opened in 1992, and has grown with the Cambodian economy. It now ranks third in the country with assets of $1.6bn, up 12% year on year, loans of $1bn (up 5%), deposits of $1.2bn (up 16%) and a net profit of $60m in 2016 (up 3%). Campu has done good business in retail banking by catering to Cambodia’s growing middle class, usually the domain of local banks. “This is a really free market,” says Phan Ying Tong, regional head for Campu’s Indo-China operations. “That is the beauty of the country. Everything is equal. It is the same level playing field for everybody.”
ANZ Royal Bank (Cambodia), a joint venture between ANZ and the local Royal Group, notched up record profits of $20m in 2016 in corporate banking and by targeting Cambodia’s more affluent people with new technologies.
“When we came here [in 2005] there was only one ATM in Cambodia. And we very quickly introduced a fleet of 100-odd ATMs, which was a pretty significant contribution in terms of access to money,” says ANZ Royal’s CEO, Leonie Lethbridge.
Another dynamic foreign bank on the Cambodian scene is Advanced Bank of Asia (ABA Bank), now 90% owned by National Bank of Canada, which has for three years been gradually buying shares from the original owner, Kazakhstan investment bank Visor Capital. ABA Bank has targeted lending to the small business sector. Its loan portfolio grew 63% in 2016, the fastest in the country, with 36% of all loans going to trade and 30% to the service sector.
“At ABA, our key strategy is to provide productive loans to small and medium-sized enterprises in the real economy of Cambodia. We do not finance consumer lending, we do not finance corporate lending,” says ABA Bank CEO Askhat Azhikhanov.
World-class growth
Cambodia’s banking system is piggybacking on Cambodia’s fast-growing economy, which has joined the “Olympians of growth”, according to the World Bank. “It has grown at a yearly average growth rate of 7.7% for two decades now, making it the sixth fastest growing country in the world over that period,” said a World Bank report of 2014. In 2015 Cambodia graduated to lower middle-income status, with a gross domestic product (GDP) per capita of $1,070 per annum.
Following a shake-up in 1999 when the country’s first banking and financial institutions law was introduced (resulting in 17 banks either pulling out or being shut down), the Cambodian banking system has grown two to three times faster than the economy. Credit to the private sector from both banks and microfinance institutions grew by an average of 30% between 2010 and 2014, peaking in 2014 at 34%, or more than three times GDP growth.
Authorities have been slowly applying the credit brakes, for example by imposing higher liquidity coverage ratios. In March 2016, the central bank required banks to double their registered capital from $37.5m to $75m and MDIs face an increase from $2.5m to $30m. Since then credit growth has slowed to about 28% in 2015 and 23% last year, banking sources said. Another reason for the slowdown in 2016 was the sluggish agricultural sector, affected by both drought and floods as well as low commodity prices.
The key drivers of the Cambodian economy are agriculture, manufacture of garments and shoes, and tourism. A riskier contributor that has also led to a spike in recent growth is the property sector, fuelled by heavy investments in condominium projects, many of them financed by Chinese investors.
To what extent the Cambodian banking system will be exposed to a potential property correction remains unclear, but many of the bigger banks claim to have limited their exposure to the sector. Acleda Bank, for example, says its lending to property accounted for only 7.5% of its loan portfolio in 2016. “We choose first-time home owners, not someone who buys for speculation,” says Mr Channy. “If you have a house already and you buy a second one, we automatically assume that it is for speculation.”
