T HE country's banking system is in a primitive state and confidence in the sector is at an all-time low, according to leading businessmen.

They say there is virtually no lending or deposit activity being undertaken and many banks are merely set-up as fronts to generate respectable images for entrepreneurs. They add that few banking staff having any experience or training in the field.

"Out of the 30 banks in Phnom Penh, only 5 to 10 are presentable," said Georges Loubeyre, Manager of the Indosuez bank.

He said banks in Cambodia made very few loans because the risk of default was high and there were no laws against it.

Michael Stephen, manager of the Cambodia Mekong Bank owned by the Thai Boon Rong tycoon Teng Boon Ma, said there is no way currently of giving credit to clients not personally known to bank staff. The problems stemmed, he said, from the inability to secure guarantees on the loans. Even real estate is not sufficient as there is still no recognized system for the registration of land and property ownership, Stephen said.

"I've already seen someone coming here with gold to get monetary credit. In such a situation we are just money changers," Stephen said.

The Cambodia Mekong Bank's solution to the loan conundrum is to only make business with people they are already making business with-the bank deals with Teng Boon Ma's business partners.

But Loubeyre said: "Some banks in order to get money accept deposits. But without any possibility of issuing credit they are then forced to pay interest on the deposits with the subscription of the next customer..."

"Some people think setting up a bank is easier than running a shop because you don't even have to sell anything to make money."

Loubeyre added that there were very few investment opportunities in the country for financial institutions to place depositors' cash which would enable them to earn a decent return allowing them to safely and justifiably pay interest to depositers.

"Thus some of these banks are condemned in the long term, as in Pakistan where after financial deregulation three banks crashed after paying interest on old deposits with new depositors' money," Loubeyre said.

The National Bank of Cambodia (NBC) is responsible for controlling and regulating the financial institutions in the country. But the controls they set on banks are minimal: They only require banks to issue a monthly report on their deposits and loans and have $5 million in start-up capital.

The NBC began issuing licenses to banks three years ago and currently 31 banks are operating.

Financial experts say that many businessmen have set-up banks merely to give their commercial activities an air of greater importance and respectability .

They add that most banks are managed by people who have very little experience or training in the field, and for many bank owners their only qualification is having a lot of money.

For example, the Chansavang-wonk bank's manager lives in Bangkok and when the Post interviewed the bank's staff they claimed to know very little about the subject but added that there was a bank next door which could attend to our needs. The Chan-savangwonk company is primarily involved with import-export in Cambodia.

But experts say the financial climate is also ripe for scandals such as the incident in Battambang last year where three Thais set up a bank and then simply ran off with the depositors' money.

Such scandals ruin confidence in the whole system which creates problems for the 'honest banks', according to financial experts, who say very few people are willing to risk depositing their money in any banks in Cambodia.

Stephen said because banking activity in Cambodia was so small the country was a poor place to launder money. He said Singapore and Thailand were better places for laundering even though they had greater controls over financial institutions.

In a bid to stem the problems in the Cambodian financial system the NBC stopped issuing new banking licenses on May 31.

The NBC is also in the process of drafting new laws so they can exert a greater control over the commercial banks, said Shea Sok,director of the NBC's Banking Supervision Department .

"The NBC has had a lack of influence over the banks. Banking is new to us. We have perhaps made a few mistakes but in the long term everything will be all right," Sok said.

But the experts say the tighter controls have come too late as numerous fly-by-night banks have already been given licences. They believe they spell a recipe for scandals, which will only be discovered after real harm has been done to Cambodia's already poor image in the banking sector. They also point out that the country's threadbare legal system gives victims little chance of proper redress.