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 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.
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
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
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,
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
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
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
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.