The central bank’s efforts to foster development of an interbank lending market appears to be taking off as the demand for negotiable certificates of deposits (NCDs) increased sharply last year, with the financial tool seeing wider usage among the Kingdom’s financial institutions.
According to the 2016 annual report of the National Bank of Cambodia (NBC), total issuance of NCDs tripled last year, with $11 billion in US dollar-denominated certificates and 12 trillion riel ($3 billion) in riel-denominated certificates placed on the market over the course of the year.
NBC director-general Chea Serey said the growing demand for NCDs was largely the result of an increased awareness of the benefits of the financial tool, such as its use as collateral for the liquidity-providing collateralised operation (LPCO), a quick-fix liquidity solution available through weekly auctions.
“Banks and financial institutions know better about how to use NCDs, which is a risk-free instrument to manage their liquidity more effective,” she said.
“When NCDs become more attractive for banks and microfinance institutions [MFIs], they will use it as collateral to trade with each other and this creates a secondary lending market.”
The central bank first introduced NCDs in 2013 in an effort to end the high-risk informal interbank lending system that financial institutions were employing to overcome temporary liquidity shortages. A scheduled weekly issuance has been in effect since last October.
Banking analysts say the weekly format encourages financial institutions to attain the short-term interest-bearing certificates, which can be traded with each other before and after the weekly sale date.
Hout Ieng Tong, president of the Cambodia Microfinance Association (CMA), said the increased use of NCDs was a positive sign for the financial industry because now banks and MFIs can immediately access funds from sources that have a surplus.
He explained that without this NCD and LPCO trading component, surplus funds would sit idle without a proper channel for interbank movement.“Through the trading of NCDs and the LPCO, financial institutions that are short on liquidity are now able to obtain funds from other institutions,” he said.
“This is a helpful mechanism to promote interbank lending and allows financial institutions to provide services to more people.”
Rath Yumeng, group chief treasury officer of Acleda Bank, said that at the end of 2016, the bank held almost $500 million in NCDs comprised of both US dollar- and riel-denominated certificates, an increase of 172 percent compared to the previous year.
Besides the switch to weekly issuance of NCDs, he said one possible factor to explain the rapid growth of usage of this financial tool was that some banks and MFIs have seen a rapid growth of deposits compared to lending, freeing up liquidity for interbank lending.
“This interbank market will support the short-term funding of all players in the financial sector with competitive pricing,” he said. “NCDs help to build collateral that supports the interbank market and is an improved financial instrument for secondary lending.”