National Bank to Begin LPCO

KHMER TIMES
SOK CHAN

The National Bank of Cambodia, in its monetary policy, wants banks to increase their use of riel. Reuters

The National Bank of Cambodia (NBC) will unveil its initial rates that banks and microfinance institutions (MFIs) will be able to use, as the NBC begins its liquidity-providing collateralized operation (LPCO) to boost the country’s riel liquidity, according to a senior bank official.

Chea Serey, NBC director-general, explained that the announcement tomorrow would be an important first step in the LPCO.

“This Tuesday we will announce the amount of capital which the NBC will allow microfinance institutions and commercial banks to do [repurchase] transactions with a low interest rate set by the NBC,” Ms. Chea Serey told reporters on Friday.

“The first repo transaction will be on the 18th of this month, and the NBC will inform the next repo transaction date according to the demand from financial institutions on local currency for their lending operation,” she added.

An open market operation, like the LPCO, is an activity by a central bank to give or take liquidity in its currency to or from a bank or a group of banks. A central bank uses an open market operation as the primary means of implementing monetary policy. It can enter into a repo or secured lending transaction with a commercial bank, where the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral. The usual aim of open market operations is to indirectly control the total money supply ‒ either expanding or contracting it.

Ms. Chea Serey said that the purpose of the LPCO is to establish a benchmark rate for the market so as to serve the conduct of monetary policy based on the market mechanism, to promote negotiable certificates of deposit, which then be used as collateral in inter-bank market transactions to promote the use of the riel, to support agricultural sector development, and to contribute to lowering the current high interest rate in riel.

“Through this instrument, [the NBC] hopes that it will influence the interest rate in the market since the NBC will issue riel to MFIs and commercial banks for their lending operations [and]...if it is successful, it will add convenience to managing the Cambodian banking sector,” Ms. Chea Serey said.

“The demand for riel will increase by having more demand on LPCO while the NBC could absorb more dollar currency and issue riel currency to the market,” she said.

The LPCO will initially last for three months, and will be extended based on how effective it proves to be. The program will be insured by putting non-convertible debentures up as collateral, in either riel or US dollars.