Building Trust and Confidence in Cambodia’s Financial Sector

ADB

Finance sector reform creates opportunities for Cambodia's small businesses to grow. In 2002, Cambodia had 84,000 bank depositors; today it’s 3 million. Microfinance accounts are 1.5 million, up from 107,000.

For nearly two decades, ADB's Financial Sector Program has helped strengthen Cambodia’s legal framework and expand access to finance.

Phnom Penh, Cambodia – Not so long ago, Cambodia’s economy lay in ruins. Today, it is one of the region’s fastest growing countries. Financial sector reform has been a key driver of this transformation. The Asian Development Bank (ADB) has supported these efforts for nearly two decades. Sam Tukuafu led ADB's contribution and is now the bank's Country Director in Cambodia. He explains how the reform program laid the foundations for growth.

What was the original purpose of the reform program?

Finance plays a very important role in the economic development of a country. In Cambodia the financial sector was decimated during the period of conflict. Even the use of the currency, the riel, was banned. So when the country reopened to the outside world in the 1990s, the government wanted to rebuild the financial sector.

In 1999 the government approached ADB to be the leading partner in the reconstruction of the sector. So we started working with the government on a rolling 10-year reform strategy. Our starting point was to restore confidence in the sector.

In the beginning, no-one trusted the financial sector. Instead of keeping money in banks you could see people carry bags of cash out of banks. No-one wanted to use the currency. So the main challenge was to restore confidence and trust. Now, banks are a major contributor to economic activities and GDP.

Why did this reform work?

One reason is that the government has ownership of the reform agenda. The strategy must be approved at the highest level, the Council of Ministers, whenever it is updated. From the start, the government’s intention was that the economy would develop according to a market-driven approach. It wanted financial sector reforms to take the same approach, and its ownership of the process meant there was strong commitment.

“The latest poverty statistics for Cambodia show 14% of people under the poverty line. Twenty years ago it was above 50%. This is partly because of better and more inclusive access to finance.”
Sam Tukuafu

The second reason is the 10-year financial sector strategy is updated every five years. The updates reveal the successes and the failures of the previous five years, and any lessons for the next 10 years. That has provided the opportunity to learn from experience. And it gives the flexibility to adjust the program to changing circumstances, so the reform agenda remains relevant.

Also, the program was championed by the government. Keat Chhon, the former Deputy Prime Minister and Finance Minister, along with Chea Chanto, Governor of the National Bank of Cambodia were dynamic leaders. Without them, it would not have happened.

What are the program’s main achievements?

In 2001 when ADB started supporting the first program, total credit to the private sector was only 6% of GDP. At the end of 2016 it was around 70%. So the financial sector in Cambodia now is a major player in economic activity. The program established a legal and regulatory framework to support commercial activities. Several laws have been enacted to govern accounting, insurance, corporate entities, securities market, anti-money laundering, and commercial arbitration law, to name just a few.

Also, the government divested its investments from state-owned banks. That’s the first thing this reform pushed. Only the Rural Development Bank is still owned by the government. So there is a level playing field for all commercial and financial institutions. This is a big achievement.

The program also established a credit information bureau, which is a record of borrowers and their performance available to all financial institutions. If a new borrower comes to your bank you will go to this credit bureau to look at their record. There is also now a payment and settlement system to promote trade and commerce, a securities exchange, as well as a commercial arbitration center.

What does this mean for consumers?

People now have credit cards and debit cards. Through the payment and settlement system, people working in cities can remit earnings to their families in the provinces on pay-day, rather than take it home physically. It’s a big deal to them.

More financial institutions means a greater variety of products and services, and competition has lowered the cost of financial transactions. People can save and make investments. In 2002 there were 84,000 bank depositors; now there are 3 million. For microfinance it was 107,000 in 2002 and is now 1.5 million. There were no debit cards. As of 2016, there were 1.5 million. The number of ATMs was zero and now is around 1,260. EFTPOS (electronic funds transfer at point of sale) was zero and now is available at 5,300 places

People can set aside money for emergency needs, school fees, or to invest in their business or careers. This has created a culture of saving. People can plan their lives better. They have access to credit. Before, they’d go to the informal sector where the cost of credit was much higher.

How has the program impacted the economy, or poverty for example?

Cambodia’s average economic growth of 7% over the last 15 years has lifted a lot of people out of poverty. It’s not all due to the financial sector but it has definitely contributed to the financing of economic growth. It has contributed around 70% of the GDP.

The latest poverty statistics for Cambodia show 14% of people under the poverty line. Twenty years ago it was above 50%. This is partly because of better and more inclusive access to finance. Cambodians can save, plan, and borrow and finance productive activities.

How about the financial sector and issues related to competitiveness?

There are more financial institutions and financial products. Diversification from banks to microfinance, going into insurance and the securities exchange market has created opportunities for savings and investment. A lot of companies can list to raise capital, or they can borrow from banks. New banks have started coming in from countries like Japan, the People’s Republic of China (PRC), Thailand, South Korea, and Viet Nam. This brought in new business as well as investment from their countries.

A lot of trading is going on at 11 special economic zones around Cambodia, where there are 300 companies employing 80,000 people. Spare parts, for example, are being manufactured here and exported to Thailand, PRC, or Malaysia.

This is not really coming through from the financial sector. But it’s part of the open market policies. The fact we have banks from Japan, Malaysia, PRC, Thailand and other countries established here makes transaction and settlement much easier for business arrangements. Ten or 15 years ago this wouldn’t have been easy because the financial sector wasn’t ready for it.

So what’s next for the program?

Most Cambodians live in rural areas so this is an opportunity to roll out financial infrastructure and institutions to them. Only 3 million people out of a population of 15 million have access to deposits or loans. So the informal financial sector still plays a major part.

One of the challenges is to reduce the informal sector’s role in finance. A financial literacy program will go with the roll out to the provinces. So will various safety net mechanisms such as deposit insurance, to build the confidence of the rural population.

There are initiatives necessary to connect financial systems across Southeast Asia. Here and elsewhere in the region, securities exchange markets need to be developed so that stocks in this country can be listed in another country. A company operating here in Cambodia with an operation in another country should be able to raise funds in that country. This is important in terms of Cambodia’s exposure to the rest of the world.