W ith the first new banking licenses in over two years just granted, and other regional
players eying up the market, Robert Lang sizes up the state of the banking
THE National Bank of Cambodia (NBC), the Kingdom's central bank, recently granted
four new bank licenses -the first licenses granted since May 1994. This brings the
total number of banks to 33.
At first glance, the entrance of four additional banks appears to signal that the
economy is on the cusp of significant growth. "When investors come, banks come,"
said Niev Chanthana, Banking Supervision Advisor at NBC. In addition, banks from
Taiwan and South Korea are also reportedly applying for licenses, and several banks
from Japan are conducting market research.
However, many industry executives believe that 33 banks is too many for a country
where banks do not play a major role in financing economic growth, the citizenry
does not trust banks, and central bank supervisory capabilities exist on paper but
not in reality.
The IMF recommended, as early as 1993, that Cambodia reduce the number of banks or
at least cease issuing new bank licenses, except for well-known international banks.
Officials believed that 25-30 banks were more than enough, especially given the central
bank's weak supervisory capabilities. Moreover, the quality and activities of the
banks had become a matter of concern.
Before the new licenses, there were 6 foreign banks branches, and 22 locally incorporated
The four new licenses were issued to Lippo Bank of Indonesia, Advanced Bank of Asia
(ABA), Cambodia Agriculture Industrial Merchant Bank (CAIM), and Khmer Bank. Although
its management is South Korean, ABA is locally incorporated. It doesn't have any
branches in South Korea, and is planning to get involved with financing business
from South Korea.
Lippo Bank, part of the US$6 billion dollar Lippo Group which earns significant income
from banking and other financial operations in Indonesia, Hong Kong, and China, applied
for a banking license in 1994. In Cambodia, Lippo Bank plans to lend to its customers
from Hong Kong, China, and Taiwan, according to observers familiar with the bank's
operations. Lippo would particularly like to tap into investment from China since
that is a sector with little competition.
Lippo is optimistic about Cambodia's future and expects that in coming years Taiwan
and China will commit substantial investment in the economy, particularly in the
purchase of land and development projects in Kompong Som, said the observer.
Although Lippo Bank doesn't expect to earn a profit for several years, setting up
a branch in Cambodia fits into its long-term regional growth strategy. Moreover,
as part of the Lippo Group, it can afford to absorb losses from its Cambodian operations
for several years.
Lippo's characteristics and its likely strategy point to the appeal of strong regional
banks for the Cambodian economy. The IMF had excepted well-known foreign banks in
its 1993 recommendation to cease issuing new bank licenses because of their strength
and because they bring with them a full array of professional banking activities.
The Cambodian government would like Standard Chartered to upgrade its representative
office, established in 1992, to a branch office. "The head office is still thinking
about this," said Pamela Huy, Manager of Customer Services.
Industry executives were nearly unanimous in expressing optimism about the future
of Cambodia's economy. Profits for banks, however, are only expected 3-5 years down
In the meantime, most banks - foreign and locally owned - operate in the red, according
to observers. Expect 5 years to make a profit, said several bank executives.
The Cambodian market is challenging because there is not a significant amount of
loan activity taking place. Most foreign banks do not extend loans to local companies;
most project financing occurs offshore.
Foreign banks earn revenues from fees and commissions, which includes fees for transferring
money, remittances, and letters of credit. "A bank cannot make money on wire
transfers," said one bank executive. "Fee income is insufficient to cover
Most foreign banks established branches in Cambodia in order to service their existing
customers who have set up business here. For example, Thai Farmers Bank extends 75%
of its total loans to Thai customers, according to Terawat Singtong, Manager. Its
most well-known customer is CP Cambodia, a subsidiary of Thailand's largest conglomerate
Cambodian-owned banks extend loans and earn fee-based income, but they, too, find
profits elusive. Part of the reason is the widespread mistrust of banks.
Creative Marketing Required
Many Cambodians don't save their money in banks, primarily because they don't have
experience with banks. Instead, they buy gold, consumer goods -TVs, a home, a car
- or invest in the informal economy.
To educate consumers and build confidence, banks must be creative in how they market
their services. "We don't want to be high class," said Pung Kheav Se, General
Manager of Canadia Bank. "Our employees don't wear uniforms. Our lobby is very
simple. We want to make the customer feel comfortable when they come into our bank."
"A lot of customers don't know how to use our bank services," said Teng
Danee, Managing Director of Pacific Commercial Bank. "The younger ones don't
know, and the old ones know but they are afraid."
Pacific Commercial sends employees cold calling on residents to try to pique their
interest in the bank services.
"There's been a change from the days when customers used to take off their shoes
before they entered the lobby," said Bob Yap, General Manager of Singapore Banking
Corp (SBC), a locally incorporated bank. "People are beginning to save more,
but it's still not much."
This means that the national savings rate is very low, and underscores the as-yet
negligible role that banks play in mobilizing savings and fostering economic development.
This phenomena - mistrust, education, and growing trust - is partly the natural growth
process that banking sectors of other Southeast Asian countries have gone through.
However, part of the blame, observers say, lies with the government for not enacting
confidence-building measures in the sector. Possible policies include increasing
the efficiency of the banks' intermediary process and encouraging the use of banks
and checks among government employees.
"It is not enough to increase the number of banks," said another observer,
"the government needs to instill trust in the riel, the economy, and the country."
Absence of a Security Law Hinders Loans
One positive step would be the passage of a security law. Currently, there are no
legal provisions that detail collateral conditions, several executives complained,
which impedes the rate of loan growth. The Ministry of Commerce is reportedly drafting
a contact law which, among other things, would cover the security issue, but it will
most likely not become law for several years.
"Real or personal property is the only collateral," explains one industry
observer, "and it is uncertain [in the event of default] whether the bank can
collect on that collateral." The amount of a loan is based on 50-100% of the
value of the borrower's property. In other words, the owner of a house valued at
US$100,000 is eligible, depending on the particular policy of the bank, to receive
a loan of US$50,000-100,000.
Locally incorporated banks try to minimize the risk created by the absence of a security
law by taking possession of the title deed. Foreign banks prefer to lend to customers
with whom they have an ongoing relationship in their originating country, thereby
obviating the need to seek recourse in Cambodian courts.
The absence of a security law increases the risk of lending but it is not what hampers
loan growth or the entrance of additional foreign banks, according to some observers.
Rather, foreign banks are reluctant to set up operations in the Kingdom because the
market is too small: there is not enough banking activity to justify the presence
of additional banks. This observation underscores the difficulty in explaining why
NBC recently approved the new licenses.
Revenues from Interest on Loans
The picture may not be completely bleak, however. Several Cambodian-owned banks claim
to be making money from loan activity. One of the problems of extending loans is
that many companies don't use financial or cash flow statements. Most banks don't
base their decision on a financial statement due to creative accounting practices
in the Kingdom. "[Granting loans] is a very informal process," explained
Most locally incorporated banks interviewed claimed that nearly all of their loans
go to local trading companies. Nearly all loans are short-term, usually 6 months,
with an annual interest rate of 15-20%. For instance, Canadia Bank charges an annual
rate of 18%. It pays depositors 8.5-9.5%.
Similarly, Pacific Commercial Bank - partly owned by Vice Chairman of the Cambodian
Chamber of Commerce Kong Triv - primarily extends small and medium-sized loans to
trading companies. It prefers 3-month term loans for new customers, with an annual
interest rate of 19.8%. The bank pays 9% annual interest on deposits.
Revenues From Speculative Activities
High deposit rates found at locally incorporated banks raise concern about how the
bank can afford to pay the high rates. (Most foreign banks don't pay interest on
Most of the assets - both foreign and local banks - are held overseas. This not only
means that the vast majority of assets are not circulated back into Cambodia's economy,
but also opens up questions about how these deposits are used. Several observers
were concerned that deposits are used in unsafe ways, if not involved in risky speculative
In May 1995, Credit Bank of Cambodia closed after failing to meet the minimum capital
requirement. It lost US$1.5 million on the Chicago futures market. Amid allegations
that NBC handled the case with serious improprieties, the bank's license has been
removed and the case is still pending in court.
The extent that deposits are used in unsafe ways is unknown. NBC does not have the
structure or the capability to monitor the use of deposits.
Indeed, as the bankruptcy of Barings and Sumitomo Corp's estimated US$2.6 billion
losses in copper futures attest, it is difficult to monitor the use of derivatives
even in countries with a more stringent regulatory system.
Most bank observers agree that Cambodia's banking supervisory skills are in disarray.
Part of the problem is the dearth of trained supervisory personnel. "They don't
have the manpower," explained one executive. "So banks are rarely, if ever,
audited. Plus, [central bank] officials don't know what they are looking for and
we have to show them. The bank could easily hide any information they want to."
Moreover, when NBC does locate a irregularity, it lacks the teeth or political will
to implement the law. Shortly after the closure of the Credit Bank of Cambodia, central
bank auditors were met by armed guards who refused them entrance to review the books.
Since the central bank must be aware of its weaknesses, why has it added to its burden
by recently increasing the number of banks?
Revenues From Illicit Activities
The potential to earn profits from illicit activities at least partially explains
the appeal of some banks to establish operations in Cambodia, particularly in an
environment where it is difficult to make money from legitimate banking activity.
Cambodia has many of the factors conducive for laundering money, such as a weak legal
system, the absence of central bank supervision, and the unrestricted movement of
capital. Illicit activities not only include laundering drug money but also revenues
from prostitution, illegal gambling, tax evasion, logging, robberies, and kidnapping.
While all 33 banks technically have the authority to operate normal banking facilities,
roughly a dozen are truly legitimate banks, according to several bank executives.
"How do you know if a bank is legitimate?" asked an executive. "Stand
outside and look at how many customers come in. Try to make a deposit, exchange money,
or even get change for a $100 bill."
Allegations of money laundering are extremely difficult to prove, despite the seemingly
infinite supply of circumstantial evidence. Indeed some observers claim that these
allegations are misplaced and overstated in Cambodia's cash economy. It is not unusual,
they say, for legitimate bank customers to make deposits or withdrawals of US$100,000
in the same week. Plus, cash substitutes -credit cards, checks, even cashier checks
- are virtually unknown among customers and merchants. Therefore, it is nearly impossible
for NBC to differentiate between cash transactions of legitimate and non-legitimate
The Business of Regulating Banks
One observer claimed that NBC has a powerful incentive to issue additional licenses:
money. After abruptly notifying a bank that it has been granted a license and setting
an arbitrary deadline, NBC charges nearly US$2000 for each day it is late in establishing
operations. NBC requires that at least 60% of the incoming bank's employees come
from its employment roster. Plus, there are numerous other fees and expensive license
Perhaps this last factor most adequately explains why NBC recently granted four new
bank licenses. If accurate, it points to the need to add competence and teeth to
the bank supervisory capabilities as well as to adopt a transparent and standardized
process of granting licenses.