M edia reports on recent events in Phnom Penh's banking circles have brought the

regulations of commercial banks under public scrutiny. This week's column will

review those regulations, and the authority of the National Bank of Cambodia

("NBC") to regulate commercial bank activity.

The regulatory authority of

the NBC arises from three sources. One, the express provisions of the banking

laws and regulations. Two, international banking practices. And three, the broad

powers of a central bank to intervene in the economy through monetary control or

regulation of financial institutions in order to guide the economy to

prosperity. This column will focus on the first source of authority.

 

The National Bank

The National Bank has the authority to

supervise and regulate all financial institutions in Cambodia. It has the power

to "manage monetary transactions, credit, domestic and international

settlements, and foreign exchange, precious metals and stones."

The

National Bank may require any bank to submit relevant reports on banking

activities. It may appoint an examiner to investigate bank operations, appoint a

control committee to run and manage the bank, establish credit ceilings and

foreign exchange requirements set banking business hours, and establish interest

rate guidelines.

The National Bank has the power to put any bank

operating in violation of the law under conservatorship in order to preserve,

remedy or resolve that bank's financial position. The conservator has the

authority to liquidate the bank's assets, if necessary.

Licensing

The National Bank has the sole authority to license

commercial banks in Cambodia. Licensing is a two stage process. The National

Bank first issues a temporary license, called a "Letter of Agreements in

Principle" which is valid for 12 months. During this twelve month period, the

bank must prepare to comply with the National Bank's technical requirements.

After such requirements are met, the bank will be granted an official banking

license. The law does not contain any eligibility criteria for formation of a

commercial bank.

The National Bank has the power to revoke any banking

license for violation of the banking laws and regulations. The license is not

transferable, except with the prior written approval of the National Bank.

Legal Form

All banks must be formed as limited liability

companies. This means that shareholders of a bank are liable to pay the bank's

debts up to the capital contribution of each shareholder.

According to a

1992 sub-decree, no individual shareholder may own more than 20% of the shares.

Bank shares are fully transferable, upon payment of a fee of 1% of the share

value.

Board of Directors and Management

Certain persons are forbidden

from holding positions on the board of directors of a commercial bank, or act in

a managerial capacity of any kind. For example, persons convicted of crimes of

dishonesty, as well as government officials in political positions, may not hold

such positions.

Capital requirements

Under a 1994 National Bank regulation, the

registered capital of commercial banks must be "at least Riel 10 Billion."

Current bank policy sets this amount at US$5,000,000. All of this registered

capital must be paid into an account in the commercial bank's name at the

National Bank before the bank can begin operations. According to the 1992

Banking sub-decree, this minimum capital must be "maintained at all

times."

A bank cannot lend any amount greater than 20% of its total

capital (paid up capital plus reserves plus retained earnings).

Reserve requirements

Banks must maintain two types of reserves:

a capital reserve of 5% to 15% of the registered capital, and a deposit reserve

of 5% to 50% of deposits and other debts, calculated monthly. Current NBC

regulations sets both the deposit reserve and capital reserve at 5%.

Reporting requirements

Banks are required to issue a monthly

reserve report to the National Bank. Banks will be fined for temporary failure

to maintain proper reserves. Banks which fail to maintain reserves for more than

two consecutive months, or three months during any year may be penalized as

outlined below.

The National Bank may also require commercial banks to

submit reports setting out the amount of deposits on other liabilities, the

amount of cash present at any time (Riel and foreign exchange), and any other

information the National Bank may request.

Accounting

All commercial banks must appoint independent

auditors. The accounting of commercial banks must be performed by independent

auditors who are not employees of the banks.

Penalties

The National Bank has at its disposition a range of

penalties it may use against commercial banks for violations of banking laws and

regulations. The National Bank may "admonish" commercial banks, require a change

of management, suspend operations of banks, and also revoke the license of

banks. Commercial banks and their directors are also subject to fines of 500,000

to 30,000,000 Riels or imprisonment of one month to 5 years. The National Bank

also has the authority to bring judicial action against banks.

There are

currently 29 banks licensed to operate in Cambodia. Of these, five are joint

ventures with the National Bank of Cambodia, six are branches of foreign banks,

one is a representative office of a foreign bank, and sixteen are other private

banks, most of which are unique to Cambodia.

A new draft National Banking

law has been approved by the Council of Ministers and awaits promulgation by the

National Assembly.

- David Doran is the resident Director in the Phnom Penh office of Dirksen

Flipse Doran & Le.. He has been working in and out of Cambodia - and writing

on Cambodian legal issues - since 1992.