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Revised capital rules driving financial sector FDI growth

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Afternoon traffic passes an ANZ Royal Bank branch in Phnom Penh’s Daun Penh district in late March. Vireak Mai

Revised capital rules driving financial sector FDI growth

The central bank’s decision last March to raise the minimum capital requirements of financial institutions in order to strengthen and stabilise the financial sector has led to an increase in foreign capital flowing into the banking sector, according to industry experts.

In its annual report released on Sunday, the National Bank of Cambodia (NBC) noted that total foreign direct investment (FDI) into lending institutions accounted for nearly a quarter of the $2.15 billion injected into the economy last year. In total, over $539 million in FDI was directed to the financial institutions, a 5 percent increase over 2015.

In Channy, president and CEO of Acleda Bank, said the increase of foreign capital pumped into the banking sector showed the extent to which financial institutions were still largely dependent on overseas partners.

“The NBC’s regulation that requires commercial banks to increase their minimum capital requirements is double the previous amount, which is a big increase for some banks,” he said. “So they need to rely on partners from abroad to fulfil to it.”

Last March, the NBC implemented regulation that for commercial banks increases minimum capital requirements from $37.5 million to $75 million, while microfinance finance institutions (MFIs) increase from $62,500 to $1.5 million with deposit-taking MFIs seeing the largest increase, from $2.5 million to $30 million.

Financial institutions have until March of 2018 to fulfil the requirements, according to a circular published by the central bank last June.

“Because of this, I think there will be more capital flowing into the financial sector because many institutions fund these [banks and MFIs],” said Channy, projecting even further FDI growth in 2017.

He added that FDI could be expected to grow further as many banks felt pressure to hold more cash than capital and liquidity regulations demand as local deposits remained limited.

Hout Ieng Tong, president of the Cambodia Microfinance Association, said MFIs have had to increase efforts to win over foreign partners or sell larger stakes of their institutions to existing shareholders to meet the NBC’s demands.

However, he said that the majority of MFIs were already in a healthy capital position

“I think for the top 20 to 30 MFIs don’t have many concerns to fulfil the central bank’s requirements, but they still also need funds from partners abroad,” he said.

“Nevertheless, I believe that there will be more flow of foreign capital into Cambodia’s financial institutions and it will help to strengthen our country’s economy.”

Viveka Nand Dubey, chairman of Bank of India’s Phnom Penh branch, told the Post last month that he expects banks appealing to their foreign investors for funds would have to demonstrate that they could generate an adequate return on equity to justify the additional investment.

“Whatever capital we bring in we will have to deploy it, but where?” he said. “We’ll have to increase our loan portfolio, but if you deploy money and it is not returned you’ll not even earn a single penny.”

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