The legal regime governing the banking sector in Cambodia is quite sophisticated compared to other segments of the financial sector. Nonetheless, there is no specific regulation which governs cross-border loans provided by overseas financial institutions to entities that are not banking or financial institutions. The National Bank of Cambodia (NBC) closely monitors cross-border loans to banking and financial institutions, particularly when those loans are classified as subordinated loans by those institutions for the purpose of calculating the net worth of the banking and financial institutions concerned.
Interest rate ceiling
The interest rates that can be charged by financial institutions remain a matter of concern for the NBC. Since 1995, the interest rates on deposits and loans have been liberalised, allowing financial institutions to charge interest at any rate on loans. On March 13 2017, in the face of growing concern from consumers, the NBC issued its Regulation on the Interest Rate Ceiling for Loans (Interest Rate Regulation). Under this Regulation, the highest interest rate that can be charged is 18% per annum. However, this Regulation applies only to microfinance institutions (MFIs) and microfinance deposit-taking institutions (MDIs). Other financial institutions, such as commercial banks and specialised banks, are technically not subject to the new restrictions. This is an evolving issue where it is possible that the interest rate cap could be extended to include the entire banking sector. All sector players are actively working on measures to adjust to these new circumstances.
Credit risk grading and impairment provisioning
The Regulation on Credit Risk Grading and Impairment Provisioning dated December 1 2017 (Impairment Regulation) aims to impose obligations on banks and financial institutions to implement a more stringent credit risk management framework and set out new requirements for loan classifications and the calculation of impairment provisioning. Before the Impairment Regulation was in place, commercial banks, specialised banks and microfinance institutions were subject to two different rules regarding loan classification. The new regulation streamlines and harmonises the loan classification process for all financial institutions in Cambodia and provides for further elements for financial institutions to consider when classifying their loans in different categories (those classifications being: ‘normal’, ‘special mention’, ‘substandard’, ‘doubtful’ and ‘loss’).
Financial institutions must also observe the impairment provisions when loans are being restructured or refinanced. The Impairment Regulation also provides circumstances under which a loan is considered as being restructured. In the refinancing area, a financial institution is not allowed to enter into any refinancing transaction with a customer when there is a suspicion that the repayment of the refinancing facility has been allowed thanks to another borrowing facility with another fund provider. This would apply whether that provider were an institution or a person that/who fell outside the authority of the NBC (also including any offshore lenders).
On February 16 2018 the NBC issued the Circular on the Implementation of the Regulation on Credit Risk Grading and Impairment Provisioning, to provide further guidance on the implementation of some of the requirements (specifically, the submission of financial statements, the review and classification of facilities, the revision of credit policy, and so on). The introduction of these new regulations had resulted in an abrupt increase in the number of bad and doubtful loans being made by banking and financial institutions.
The Regulation on Capital Buffers of Banking and Financial Institutions dated February 22 2018 aimed to set out the capital buffer, including capital conservation and countercyclical capital, to strengthen the durability of the banking and financial institutions. The capital conservation buffer includes the registered capital and/or the non-distributable reserves. Thus, any distribution that affects the capital conservation buffer such as dividends, share buybacks, discretionary bonus payments to staff and so on, is subject to restrictions. As for the countercyclical capital buffer, as of August 2019, the NBC set its rate at 0% to support the maintenance of strong financial conditions and credit growth.
Payment service providers
Before June 2017, payment service providers (PSPs) were only allowed to operate under the umbrella of commercial banks and under third-party processor licences. It was difficult for PSPs to introduce new services due to the strict risk management policy of the banks that acted as their guarantors. In June 2017, the NBC introduced the Regulation on the Licensing and Management of Payment Service Institutions. This new regulation offered PSPs more flexibility for growing their business. As separate independent licensed entities, the PSPs were no longer required to obtain consent from the banks acting as guarantors before launching new products, as had been previously necessary when they were operating under third-party processor licences. At the same time, the PSPs were required to comply with reasonably strict regulations that are in line with the NBC’s sandbox approach to fintech development: ‘watch, learn, and execute’.
Retail payment system infrastructure
The NBC has recently introduced ‘FAST Payment’ a service that allows end-user customers to transfer an e-wallet account with a PSP to a bank account and vice versa. At the same time, the NBC also introduced ‘Cambodia Shared Switch’, the ATM/POS interoperability system which allows customers who hold ATM or debit cards from one bank to use other banks’ ATM/POS terminals to make cash withdrawals, balance enquiries, and fund transfers. Finally, the NBC has just launched the Bakong Project, which is a central bank digital currency project for interbank settlement with state-of-the-art, blockchain technology. Bakong allows the end-users to make payment transactions (send, pay, deposit, and receive) through NBC and Bakong participants’ applications.
Development of the capital market sector has also been making substantial progress. Legal and institutional frameworks for the sector have been adopted and put into place. Trading on the Cambodia Securities Exchange began in April 2012. Subsequently, several regulations were adopted to deal with the issuance of both equity and debt securities to the public, along with other forms of fund collection that the Securities and Exchange Commission of Cambodia (SECC), as the supervisory authority in the securities sector, deemed to be securities products.
Regulation on the Public Offering of Debt Securities
This Regulation was issued by the SECC to implement the Law on Non-Government Securities. This Regulation prescribes the requirements, mechanism, processes, procedures, and approval involved in the public offering of debt securities in Cambodia. The debt securities that fall under this Regulation are plain bonds, secured bonds (with collateral) and guaranteed bonds (with qualified guarantors). However, asset-backed securities will be governed by a separate regulation. On January 4 2019, the government of Cambodia issued a sub-decree that granted entities that had issued equity and/or debt public offerings and listed the securities on the Cambodia Securities Exchange (CSX) a 50% reduction in tax on income (also known as corporate income tax in some countries) for a period of three years. Furthermore, listed entities approved by the SECC within three years of the issuance date of the sub-decree will be exempt from tax debt (if any) on certain types of taxes within a prescribed period. Also the investors in the securities will benefit from a 50% deduction of withholding tax liability imposed on interest and/or dividends from securities for three years after the issuance date of the sub-decree (that is, until 2021).
Regulation on Licensing and Management of Collective Investment Schemes (CIS Regulation)
The SECC issued the CIS Regulation on May 29 2018 for the purpose of managing all kinds of capital collection from the public in Cambodia by the way of collective investment schemes and the investors involved in those schemes. The CIS Regulation simply provides further detail on the licence application procedure and the type of CIS actors that are subject to the licensing requirements. Basically, companies which create, manage and organise public or private funds (having up to 30 investors) will be subject to the licensing.