As the countdown to the ASEAN Economic Community integration nears an end, Cambodia’s banking sector is gearing up for the entry of new players and a realignment of business models to compete on a regional level.
Cambodia currently has 36 commercial banks bringing in $311 million in profits and a credit portfolio exceeding $9 billion, fueled by a boom in construction, real estate and housing mortgages.
Given that AEC’s successful implementation partly hinges on financial and banking integration, Cambodia’s open and free market model is already conducive to ASEAN banks setting up in the Kingdom.
But in order to maintain this openness across the region, the ASEAN Banking Integration Framework, agreed upon earlier this year, is meant to facilitate the liberalization of domestic financial markets and harmonize regulations across the region by 2020.
Of all the sectors looking to create such a unified regulatory framework, Grant Knuckey, CEO of ANZ Royal Bank in Cambodia, said banking is the closest to achieving this.
According to Knuckey, banks, especially from Singapore and Indonesia, will take advantage of this and follow their customers into new markets like Cambodia but will impact smaller local banks who will be up against stiff competition.
“The question is what happens to smaller local banks once we have 50 plus institutions here, which we will within a couple of years,” he said.
“The answer is they are unlikely to survive that transition.”
In Channy, President and Group Managing Director of Acleda Bank, said unlike the European Union, the AEC will have 10 different currencies and regulators, with countries at different levels of financial maturity.
While countries like Singapore, Philippines and Thailand have relatively more mature financial systems, Myanmar, Cambodia and Laos are playing catch up, he said.
“It is hard to bring unified regulations,” Channy said.
While the AEC is attempting to create this holistic and uniform regulatory framework, it also hinges on bilateral agreements between countries.
According to Channy, while a bilateral agreement could smoothen regulatory issues between two countries, it will present some challenges.
To illustrate this, Channy said a commercial banking license in Cambodia allows banks to offer a gamut of services to customers, whereas as there are more limitations, like ownership agreements, which restrict what a bank can do in Myanmar, creating a disparity for companies looking at both as potential markets.
“Bilateral agreements are good. But we also need to look at the differences of foreign banking laws of member states,” he added.
Cambodia currently has an open and free economy already conducive to foreign banks, but certain countries could become protectionist when it comes to their domestic baking sector, said Hiroshi Suzuki, senior economist at Business Research Institute of Cambodia.
“The negotiation among the ASEAN member countries would be very tough even after AEC.”
He said the pressure would be on local Cambodian banks that will have to work on the low quality of their services, especially information technology, customer services and risk management.
“This means that there is some good possibility for some good banks to win the competition in the Cambodian banking sector. There is not only new space but also an existing field to be targeted for occupation,” said Suzuki.
An inviting banking market may lure ASEAN banks to invest in Cambodia, but ground level issues like skilled labor and technical capacity could hold back these ambitions.
According to an International Labor Organization and Asian Development Bank report last year, the demand for high-skill jobs will jump 41 per cent, or 14 million, and grow by 22 per cent for medium skilled, or 38 million jobs, in 2015.
Joe Farrugia, CEO of Hong Leong Bank (Cambodia), said banks can find space in the Cambodia’s cluttered banking sector but will have problems finding the right match of skilled labor to run these operations.
“The biggest challenge that I see in this market is human resources or people talent, particularly at the management level,” Farrugia said.
“With job-specific or specialized roles, say global markets or finance, as opposed to the generalist roles, like relationship manager, it is very difficult to train someone up from scratch.”
“We have really got to look to balancing out the inflow or new entrants against the level of training.”