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Banks leading governance gains

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Cambodia’s commercial banks are moving even faster than the central bank in adopting international standards of good governance and transparency in a bid to woo customers

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HENG CHIVOAN

ANZ Royal Bank CEO Stephen Higgins says his bank adheres to international transparency and governance standards.

LAX supervision of Cambodia's banks could fuel problems ranging from severe deterioration in credit quality to a loss of public confidence in the country's financial sector, industry leaders and observers told the Post.

Two recent reports - from the World Bank and International Monetary Fund (IMF) - have called on the National Bank of Cambodia(NBC) to enforce transparency regulations already in place. But the sheer number of banks - there are currently 28 - has made stringent supervision difficult to implement, said Stephen Higgins, chief executive officer of ANZ Royal Bank.

"The problem is there are too many banks here, which means the supervision department is spread too thinly," he said.

The January 14 World Bank report, "Sustaining Rapid Growth in a Challenging Environment", states that the banking sector's solid reported performance "might be misleading" and is "difficult to square with" limited transparency and auditing.

The report recommends heightened bank supervision in the form of improved tests for new entrants and an improved credit information system.

International Monetary Fund Resident Representative John Nelmes told the Post Wednesday that the National Bank of Cambodia needs to continue building on recent monitoring improvements.

There are too many banks here, which means the supervision department is spread too thinly.

"[The NBC] has got to be the first line of defence.... In that sense, that's where we really need to see careful work," he said. "The NBC has to increase surveillance of the banking sector."
In its annual report released in June 2008, the NBC identified some of the difficulties in enacting measures recommended by the World Bank. Regarding Cambodia's credit information system, technology was one problem, but there was also a general lack of enthusiasm on the part of banks asked to participate.

"There are difficulties in the technology application so that the system is slow," the annual report states, noting that only a few banks were able to post information into the system "because of internet problems".  

Some progress made

These setbacks aside, the annual report pointed to areas in which the NBC either issued regulations and amendments to regulations - with regard to bank solvency ratios and net open positions in foreign currency, for instance - or prepared drafts of regulations. The latter related to the use of external auditors as well as sanctions to be imposed on banks that violate existing rules.  

Like Nelmes, the World Bank acknowledged in its recent report that the NBC had made some progress but also noted that "much remains to be done".

The NBC needs to pay particular attention to small foreign banks, the report states, arguing that these institutions are "inherently risky because even relatively small loans represent a large fraction of their portfolio".

In addition, the report calls for strengthened evaluation of potential bank customers and other measures that can deter money laundering.

For his part, In Channy, president and chief executive officer of ACLEDA Bank Plc, said ACLEDA has fully complied with local regulations and has also attempted to meet international standards.

The most important aspect of this effort, he said, has been disclosing the financial health of the bank to customers.

"The more we are transparent, the more we can earn public trust," which will prompt more customers to place "the assets they have spent their lifetime earning" with the bank, In Channy said.

ACLEDA is also in compliance with national and international measures against money laundering, he added, which include the "Know Your Customer" rules requiring customers to disclose their business dealings, their funding sources and what they plan to do with their money.  

"If the customers won't reveal about their details, we are not afraid to refuse ... financial services," he said.

Higgins said ANZ Royal adheres to international standards outlined by the ANZ Banking Group, including Basel II, the second round of international Basel Accords approved by the Basel Committee on Banking Supervision.

The bank also employs international accounting standards and sanctions against violators, he said.

Benefits of transparency

When transparency standards are not implemented or not enforced, Higgins said, the banking system "isn't as strong as it could be".

This could become particularly true as the economic crisis progresses, notes the IMF country report released this month.

"NBC continues to strengthen the prudential framework, but more systematic efforts are needed in supervising banks and enforcing regulations, given the likelihood nonperforming loans will rise as the economy further slows," the report reads.  

The report called on the NBC to push for the revision of loan classification standards that would "force banks to take into account borrowers' ability to repay and underlying risks".

A failure to implement this and other supervisory measures could lead to "excessive tightening" of the credit markets and aggravation of risks to the banking system, it states.

The benefits of additional transparency include "a higher level of professionalism" that will give potential customers "more confidence" in the banking system, he added.

"It's in everyone's interest that these regulations are enforced in the long run," he said. "No one should have anything to fear from transparency other than those who have something to hide."

In Channy also said that the financial services sector would suffer if stricter regulations are not approved and enforced.

"It will slow down the level of trust in the banking system, which is already not high compared to other countries in the region," he said.

ADDITIONAL REPORTING BY GEORGE MCLEOD

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