A number of new laws and regulations governing commercial banking have been enacted

by the National Assembly and National Bank in recent months.

These new laws and regulations establish a regulatory regime for the operation and

supervision of banks in Cambodia that is quite different from the former regulatory

regime established by the 1992 Banking Law.

Under the new banking laws, the National Bank has greater authority to supervise

and control commercial banks. Banks, for their part, have a more transparent regulatory

structure to guide their activities.

The laws also create a number of new penalties that will impact the actions and decisions

of bank managers, directors and shareholders. One of the major goals of these reforms

is to increase confidence in the financial sector.

The new laws include the "Law on Banking and Financial Institutions", enacted

in November 18, 1999, the "Prakas on Specialized Rural Credit Banks", "Prakas

on Licensing of [Commercial] Banks", and "Prakas on Micro Finance institutions".

There are also a number of draft Prakas addressing other banking matters in detail,

which are expected in the next couple of months.

It is important to note that the new laws repeal all prior banking and financial

institution laws and regulations that are contrary to their provisions.

A. Types of Banks and Financial Institutions

The new banking laws divide banks and financial institutions into Commercial Banks,

Specialized Banks (including rural credit specialized banks), Specialized Financial

Institutions (including real estate credit institutions and securities companies),

and Micro-Finance Institutions.

Only licensed banks may engage in the activities set out in the laws. Please note

that for the purpose of this article, we will refer to all financial institutions

described by the new laws simply as "banks".

Specialized Banks and Micro-Finance Institutions are two types of banks not mentioned

in the previous banking laws.

The many Micro-Finance Institutions which now operate as non-governmental organizations

are required by new banking laws to be licensed by the National Bank.

Again, the purpose of this is to bring all financial organizations in the Kingdom

under the authority of the National Bank.

Commercial Banks

Commercial Banks may carry out all types of banking operations, such as: credit operations

for valuable consideration; leasing; guarantees and commitment under signature; collection

of non-earmarked deposits from the public; provision of means of payment to customers

and the processing of said means of payment in national currency or foreign exchange;

foreign exchange operations; money market intermediation; and all operations in negotiable

claims on the market; transaction in derivatives; and spot or forward dealing in

precious metals, raw materials and commodities.

Security Trading

Commercial Banks and Specialized Financial Institutions may carry out securities

transactions which constitute financial intermediation, such as taking deposits for

the purpose of subscribing or purchasing securities, pursuant to instructions received

from individual customers or from open-end investment companies. However, the license

granted to the Commercial Bank or Specialized Financial Institution must permit such

activities. In addition, a special commission will be formed to regulate the activities

of this sector. The commission will pay particular attention to regulating institutions

that engage in both traditional banking activities such as deposit taking, and securities

activities.

This greatly expands the role of Commercial Banks and other financial institutions

in securities trading transactions, a gray area under the previous law.

B. Licensing and Re-Licensing of Banks

All Commercial Banks in Cambodia are required to apply for a new license from the

National Bank within 6 months from the entry into force of the Law. If any Commercial

Bank fails to apply within six months, it shall be required to stop operations and

be liquidated by the National Bank.

Other banks such as Specialized Banks and Micro-Finance Institutions, which were

not previously licensed as banks, are now required to apply for a license to the

National Bank within three months from the date the new laws enter into force.

The main purpose for re-licensing existing banks is to bring such banks under regulations

set out in the new laws - in particular, under the increased capital requirements.

All Commercial Banks now must have a minimum registered capital of 50 billion riels

(or approximately US$13 million). Most of these banks were licensed when only a 10

Billion riels minimum capital was required. Previously licensed Commercial Banks

must also reorganize their financial structure and activities in line with the new

law. Thus, this relicensing requirement is likely to force some undercapitalized

banks to close or merge with other banks.

C. Banking Supervision

The Law empowers and imposes a duty on the National Bank to supervise and regulate

the banking system and its related activities such as the money market, the interbank

settlement system, and financial intermediation. These powers include, but are not

limited to, issuing of licenses, defining the licensing process and issuing regulations

to implement the Banking Law.

The above supervisory powers and duties, if strictly implemented, would ensure the

sound management and control of the banking and financial systems by the National

Bank.

D. Customer Protection

The National Bank is required to set out a clear code of conduct to ensure the protection

of customers. In particular, the transparency, openness and the level of charges

and remuneration for banking and financial operations, the opening and determination

of credit lines, and the re-negotiation of loans.

The new laws also impose a duty on banks and their employees or related persons to

keep the utmost professional secrecy of information about its customers except disclosure

to the supervisory authority, auditors, provisional administrators, liquidators,

or courts.

E. Unlimited Liability

The new banking laws take some unusual steps regarding the liability of shareholders

and officers. Shareholders and officers of a bank can be held liable/accountable

for strategic errors, mistakes or errors in the operation of the bank. In addition,

shareholders with 20% or more of the shares in a bank can be held liable for bank

losses above their share capital. Such shareholders can also be required to input

additional capital into the bank as required by the National Bank to comply with

the law.

Because of these powers, officers of a bank may now be hesitant to make important

business decisions or change business strategy for fear of errors or mistakes. Also,

a domestic bank, in need of foreign capital and technical know-how, is less likely

to get foreign participation because the foreign bank may assess the risks of being

a shareholder with 20% or more of shareholding or voting rights as too high to get

involved, and the effects of making a strategic mistake.

F. Disclosure of Net Worth

The National Bank requires individual managers, directors and shareholders of a Commercial

Bank to disclose their own personal net worth in the form of an audited statement.

This is a new requirement that may surprise many managers, directors and shareholders.

The requirements reflect the concern of the National Bank that such persons may breach

their fiduciary duty and embezzle the bank's money or otherwise act detrimentally

to the financial position of the bank and their customers.

G. Disciplinary Sanctions and Penalties

The National Bank may take disciplinary sanctions against a licensed bank, the bank's

manager, directors or shareholders, or any third parties. These disciplinary sanctions

may involve sanction as light as a warning and as stringent as withdrawal of the

license, fines and imprisonment.

The National Bank is authorized to bring action in court against banks once the disciplinary

sanctions permitted under the banking laws are exhausted. The court may jail a person

for 1 to 5 years and levy a fine of up to 250 million riels if the person breaches

an important provision of the Law.

H. Administration and Liquidation

The new banking laws set out a step-by-step procedure for provisional administration

and liquidation of banks when officers or shareholders of a bank fail to carry out

their duties and obligations under the Law. A provisional administrator will be appointed

by the National Bank with exclusive powers to manage, direct and represent the bank.

If the provisional administrator determines that a bank is not solvent, the license

will be immediately withdrawn and the provisional administration will be converted

into a liquidation by order of the court, at the expense of the bank. The provisional

administrator will declare the suspension of payments and the case will be referred

to the court, which shall appoint a liquidator.

Liquidation may take place by voluntary action or by order of the court and upon

the withdrawal of license by the National Bank as a disciplinary sanction imposed

on the bank. The liquidator will liquidate the assets and meet the liabilities under

the control of the court and in compliance with bankruptcy proceedings under ordinary

law.

I. Conclusion

The new banking laws serve as a major reform of the Kingdom's banking and financial

systems. The most significant of these reforms are the strict and broad supervisory

powers granted to the National Bank and the increased financial requirements. The

provisions for customer protection as well as the provisions requiring disclosure

of information will also result in the tightening of the National Bank's control

over banks.

To ensure success of the law, the National Bank must ensure strict compliance by

banks and their officers. In order to reform the banking system and build confidence

among the Cambodian people, the National Bank must have the will to carry out what

the law has equipped it to do.