BFG issue 1 by APLUS ASIA NETWORK

BANKING FINANCE

C A M B O D I A

G U I D E

Your insightful guide to the Kingdom of Cambodiaâ&#x20AC;&#x2122;s finance industry

OCT 2015 - APR 2016

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CONTENTS

Welcome to the first issue of the Banking & Finance Guide Cambodia. This guide is designed to help one better understand the finance sector in Cambodia by providing overviews and insights, facts and figures and insider opinions and advice. We thought it was a necessary and timely publication given Cambodia is set to integrate into the ASEAN Economic Community at the end of 2015. Published every six months, we hope you find this guide interesting and insightful, and that it deepens your understanding of the current status of the sector. For those who contributed to this issue, we extend our gratitude for the valuable information you provided for the benefit of our readers. Thank you for your generous support and we hope to have your ongoing contribution as the publication develops so we can make it even more relevant and purposeful for those working within the sector as well as those potential investors looking to enter the market in the kingdom. If you wish to contribute to the editorial content, please do not hesitate to contact our editorial team with your ideas.

CONTENTS 5

CAMBODIAN FINANCE SECTOR OVERVIEW

THE NATIONAL BANK OF CAMBODIA (NBC)

18 22

CAMBODIA CREDIT BUREAU

26 30

THE MINISTRY OF COMMERCE

34 40 46

MINISTRY OF ECONOMY & FINANCE

47 48

SPECIALISED BANKS

CAMBODIAN MICROFINANCE ASSOCIATION (CMA)

58 60 64 68 74

CAMBODIA SECURITIES EXCHANGE (CSX)

Please Enjoy! EDITORIAL Managing Editor: Jessica Sander, Designer: Stéphane Dartoux PRODUCED BY APlus Asia Network Country Director: Eric Lim ADVERTISING APlus Asia Network. Tel: +855 (023) 864 438 Website: www.aplusasianetwork.com All content © APlus Asia Network No part of this publication may be reproduced in print or electronically, broadcast, rewritten or redistributed without prior written approval from the publisher.

BANKING & FINANCE GUIDE CAMBODIA

Q&A. DIALOGUE WITH H.E. SOK CHENDA SOPHEA

CAMBODIA INDUSTRIAL DEVELOPMENT POLICY 2015-2025

COMMERCIAL BANKS THE ASSOCIATION OF BANKS IN CAMBODIA

THE CAMBODIAN MICROFINANCE SECTOR

INSIDER INVESTMENT ADVICE FINANCE TECHNOLOGIES LEGAL MATTERS THE INSURANCE SECTOR

INTRODUCTION

CAMBODIAN FINANCE SECTOR OVERVIEW CAMBODIA’S ECONOMIC PROFILE

he Kingdom of Cambodia is located within the heart of Southeast Asia, a rapidly expanding region within the world economy. Cambodia’s 1999 membership in to the Association of Southeast Asian Nations (ASEAN) and 2004 accession to the World Trade Organization (WTO) have opened the country up to the global marketplace. The integration into the ASEAN Economic Community (AEC) by the end of 2015 promises additional opportunities for investment in Cambodia and throughout the ASEAN community. The Cambodian government actively procures foreign investment, offering numerous incentives and tax considerations to qualifying investors, boasting a generally solid legal infrastructure and business-friendly regulatory environment. Whilst Cambodia is not without its problems, its consistent economic growth of around 7 percent year on year makes it attractive for potential investors. Tourism, construction, agriculture, garment and services industries are all vibrant contributors to Cambodia’s ongoing economic expansion.

The real economic growth rate for 2015 is expected to reach 7.5 percent up from 7.2 percent in 2014, with nominal growth close to 11 percent according to the World Bank’s latest estimates. The Asian Development Bank (ADB) outlook estimates that GDP will reach 7.3 percent this year and 7.5 percent in 2016. However in late September the ADB revised their outlook for Cambodia’s economy to 7 percent this year and 7.2 percent in 2016, due to the region’s economies bearing

H.E. Chea Serey, Director General and Chairwoman of the CBC/NBC.

the brunt of slower than expected growth in India as well as China, along with concerns over US dollar appreciation in major industrial markets. Her Excellency

BANKING & FINANCE GUIDE CAMBODIA

INTRODUCTION

Ms. Chea Serey, Chairwoman of the National Bank of Cambodia (NBC) forecasts that GDP for this year would be around 7 percent. “We expect nominal GDP to lower than last year because inflation is very contained at the moment,” adds Grant Knuckey, CEO of ANZ Royal Bank Cambodia has held up well despite the domestic uncertainty and instability in neighbouring countries. The ADB predicts that economic growth will be driven by the gradual diversification into light manufacturing and construction and is projected to grow by 9.7 percent this year.

Cambodia is becoming one of the sixth fastest growing economies in the world. Foreign Direct Investment (FDI) has remained steady for the past two years according to the Council for the Development of Cambodia (CDC). China, Malaysia and Japan were the largest investors with the CDC approving approximately USD 4 billion worth of investments in 2014. However, the CDC notes that increases to the minimum wage and systematic issues such as high electricity prices and logistical costs would be Cambodia’s challenges for 2015 in an ongoing attempt to attract further FDI.

THE FINANCIAL SECTOR

ccording to the NBC, at the end of 2014, there were 36 commercial banks, 11 specialised banks, one of which is a state-owned bank. There are 38 registered microfinance institutions (MFIs), and the NBC has also granted permission to seven MFIs to collect deposits from the public. In addition, there are over 60 NGOs that offer basic financial products and services in rural areas but are not subject to NBC supervision. The total assets of the Cambodian banking system is approximately USD 16 billion, as reported by the NBC at the start of 2015. Lending growth in 2014 was 23.6 percent, compared to 25.7 percent in 2013. The slight decrease in loan growth was due to prevailing market conditions and the effects

BANKING & FINANCE GUIDE CAMBODIA

INTRODUCTION

BANKING & FINANCE GUIDE CAMBODIA

INTRODUCTION

of the prudential measures that NBC implemented to strengthen loan quality and maintain financial stability. Deposit growth in 2014 was 23.7 percent, compared to 12.24 percent in 2013, demonstrating the Cambodian public’s increasing confidence in the banking system. The NBC reported that as of March 2015, the upward trend continued with up to 10 billion in deposits which H.E. Serey described as “very encouraging”. As per NBC statistics from March 2015, the number of people with bank accounts was 2.3 million and those with MFI accounts came to 1.2 million, with a total number of 3.5 million which equates to almost 20 percent of the total population. The NBC estimates that at least 50 percent of the total population has access to finance in some form. According to the NBC’s Supervision Annual Report 2014, lending across the board, rose to USD 9.5 billion in 2014 up 30 percent from the previous year, with the highest growth rates seen in construction, which grew by 37 percent, housing mortgages by 54 percent and real estate by 55 percent. However credit in mining shrunk by 40 percent and information media and telecommunications fell by 36 percent in 2014. As of March 2015, the NBC reported that lending rose again to USD 9.8 billion with the number of individual borrowers from MFIs sitting at 1.7 million and half a million corporate borrowers from banks.

The NBC’s 2014 report revealed an industry-wide loan-to-deposits ratio of 95.9 percent, just 1 percentage point lower than 2013, yet still quite higher than the 76 percent in 2009, with the industry average petering close to the one-to-one ratio. But some banks have well surpassed the 100 percent mark and are supplementing their loan financing from local and foreign inter-bank lending. The interest rate on USD loans in 2014 hovered around 11.5 percent with the majority of lending occurring in US currency. However, the NBC has been encouraging banks and MFIs to offer competitive rates to promote more use of the Cambodian Riel. Over the past 10 years interest rates on US dollars lending have been on a downward trajectory, declining from 18.8 percent in 2004 to 11.5 percent at the start of 2015. Interest rate drops were the result of efforts by the government and the NBC to maintain financial stability and facilitate sustainable financial development. “We have been able to achieve quite stable inflation for the past 20 years”, commented H.E. Serey at an AEC seminar, quoting that the inflation rate sat at 1.2 percent in 2014 as maintained through applying solid monitoring and policy decisions.

BANKING & FINANCE GUIDE CAMBODIA

INTRODUCTION

Exchange rates compared to neighbouring countries have been relatively stable hovering around KR 4040 to USD 1, plus/minus 2 percent over the past 15 years again thanks to the NBC’s tightening of monetary policy.

STABILITY OF THE CAMBODIAN FINANCIAL MARKET

he NBC has worked hard at maintaining financial stability and sturdy monetary policy in order to contribute to the rapid development of the Cambodian economy, according to their current leader, H.E. Serey. “We expect this growth trend to follow on for at least the next medium term”, she says. The overall consensus across the industry is that the financial sector is relatively stable and will remain so for the next few years. “The sector is currently well funded. If credit growth continues at the sort of pace we’ve seen for the past five years, then over time that will create more latent risk. But at this point it is fairly stable,” says Knuckey.

Michael Lor, CEO of Canadia Bank PLC.

Stephen Higgins, Managing Partner of Mekong Strategic Partners agrees, “The sector is fairly well regulated, the banks here carry a lot of capital and they’re not particularly reliant on off-shore wholesale funding. So they are less prone to off-shore lenders taking all their money out, which is what happened during the GFC in many countries.” Michael Lor, CEO of Canadia Bank PLC, echoes this sentiment, “Due to the diligent implementation of international standards and policies, Cambodia’s banking system continues to develop at a very rapid pace, creating an increasingly sound, stable and safe banking environment. At the same time the banking sector has strong competition and is well integrated into the regional and global banking system.”

Stephen Higgins, Managing Partner of Mekong Strategic Partners.

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The NBC has played an important role in stabilising the sector, applying supervision, monitoring and governance with the goal of strengthening the banking system and protecting public interests. By ensuring that banking and financial institutions comply with prudential laws and regulations, the NBC has been successful in its duties and continues to advance and strengthen international cooperation, including cooperation with other central banks, financial institutions and training centres to promote information exchange and technical cooperation. Much of these efforts are in preparation for ASEAN integration, and to help ensure Cambodian banks are not merely stable but also strong.

BANKING & FINANCE GUIDE CAMBODIA

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NBC

THE NATIONAL BANK OF CAMBODIA (NBC) A BRIEF HISTORY

he National Bank of Cambodia (NBC) was established in December 23, 1954, after the country gained independence from being a French Colony and the Indochina Printing Institution was closed. The National Bank of Cambodia printed its own national currency of Riel in order to completely terminate its monetary alliance with the Vietnamese and Laos currencies. Meanwhile, the establishment of a local banking system in which the state banks and private banks operated together occured in the territory of Cambodia. On April 17, 1975, the National Bank of Kampuchea was closed, the banking system was totally destroyed by the Khmer Rouge regime, and the Riel currency was no longer used. Until October 10, 1979, the People’s Bank of Cambodia called “Bank of Cambodia” was re-established as the Central Bank of the country. Since 1989, the banking system has been gradually reformed through transforming the 20-provincial and municipal banks

BANKING & FINANCE GUIDE CAMBODIA

into specialised provincial and municipal banks with economic and financial autonomy in their territory. The People’s Bank of Kampuchea played its role as the monetary authority to direct and supervise these banks. In 1991, the first Commercial Bank (Cambodia Commercial Bank “CCB”) was established under the form of a state Joint Venture Bank for attracting investors and serving the activity of the United Nations Transitional Authorities in Cambodia (UNTAC).

In January 1992, the National Assembly of the State of Cambodia adopted the Law on the Change of Organisation’s name and duty from the People’s Bank of Kampuchea to the National Bank of Cambodia, which was promulgated by the Council of State in February 8, 1992.

GENERAL FUNCTIONS

he NBC determines monetary policy objectives, and in consultation with the Royal Government, formulates, implements and monitors monetary and exchange policies aimed at determined objectives, conducts regular economic and monetary analysis and makes results accessible to the public, issues licenses, regulates and supervises banks and financial institutions and other relevant establishments such as auditors and liquidators; and oversees payments systems in the Kingdom.

Cambodian people are young and keen to learn new skills. Besides acting as the sole issuer of the national currency of the Kingdom, the NBC participates in the management of external debt and claims, issues licenses, regulates and supervises all those operating in the securities and foreign exchange markets, the market for precious stones and precious metals; and sets interest rates. “The NBC is continuously strengthening its supervisory and regulatory capacity to cope with the rapid development of the banking sector. At the same time, we are also enhancing financial infrastructures (payment system, foreign exchange and interbank market) to further support this rapid development forging further financial deepening, inclusion, integration and financial stability”, says H.E. Ms. Chea Serey, Director General of the NBC. “The NBC is actively promoting the use of the local currency and submitted a draft strategy to the government for review and approval. We expect a national strategy of promotion of the use of Riel to be launched sometime within this year,” says H.E. Serey.

CBC

CAMBODIA CREDIT BUREAU FUNCTIONS

he Cambodian Credit Bureau (CBC) was launched in 2012 to promote better transparency and responsible borrowing and lending within the finance sector. The CBC aims to reduce over-indebtedness by encouraging responsible borrowing and lending through the provision of accurate and reliable credit reporting that is essential to the financial stability, development and economic diversification of the Cambodian economy. The CBC provides information, analytical tools and credit reporting services to organisations and consumers within the Kingdom and assists customers in managing the risk and reward of commercial and financial decisions. Using a comprehensive suite of credit reporting tools, the bureau helps organisations find, develop and manage customer relationships in order to increase profitability. The credit bureau plays an instrumental role in helping lending institutions reduce credit appraisal processing times and costs, while improving credit appraisal assessments and helping to reduce default rates.

BANKING & FINANCE GUIDE CAMBODIA

The CBC promotes greater financial stability by maintaining an accurate real time database that enables credit providers to control the financial aspects of their business such as credit risk and fraud prevention and learn about customers repayment histories in order to make sound loan decisions. As H.E. Ms. Chea Serey, Director General and Chairwoman of the CBC explains, “The CBC provides the credit history of individual borrowers to Banking and Finance Institutions (BFIs) with which the borrower has a relationship with. The information disclosure is done in a very confidential manner and requires appropriate consent from the borrower. BFIs can then use this credit report to assess the borrower behavior in prompt repayment, verify the identity of the borrower etc.” The consumer especially benefits from the credit bureau, helping to facilitate greater access to loans, lower interest rates that are reflective of lower risk, and helping educate borrowers understand there is a correlation between their credit worthiness and willingness of lenders to extend credit at competitive rates. Players in the sector have welcomed the CBC and value its contribution. “The CBC has made a very positive contribution to the sector,” says Higgins, “Particularly in the MFI sector,

CBC

Currently the CBC is working on credit scoring and corporate credit reports. “The CBC is also contemplating offering many other value-added services to members for better risk management and business strategy management,” says H.E. Chea Serey. “An accurate and reliable credit reporting capability is essential to financial stability, development and economic diversification, “agrees Lor.

CREDIT GROWTH

A H.E. Chea Serey, Director General and Chairwoman of the CBC/NBC.

where there was a lot of concern about multiple lending. For example, people out in the provinces would have loans from eight different MFIs. The credit bureau makes sure that doesn’t happen, or that it doesn’t happen without the MFIs knowing.” The bureau also helps borrowers to check their credit report to assess their accessibility to finance and protects against identity theft.

The data accountability and transparency it provides to the lending process is fundamentally crucial. Knuckey echoes this sentiment, “It’s been a real success story for the country. I haven’t seen many, if any examples where a bureau went from concept to working model and universal coverage within the consumer side within 12-18 months. The NBC helped a lot with that, being in a position to push the use of the bureau and penalise anyone who did not use it. It was pretty remarkable”. “The data, accountability and transparency it provides to the lending process is fundamentally crucial to establishing stability and predictability, as well as mitigating risk and fraud sector-wide”, says Lor.

BANKING & FINANCE GUIDE CAMBODIA

ccording to the Central Bank of Cambodia, credit growth in Cambodia is driven by many sectors namely; wholesale (19% of total loans) and retail (15%) trade, agriculture forestry and fishery (10%) and construction (9.3%). As Cambodia’s economy continues to grow, so does the demand for credit. A recent report by the Cambodian Credit Bureau estimated that credit will grow to USD 14 billion by 2020. However, some industry insiders believe this is a significant underestimation. “I do think the bureau’s estimates are very low for a few reasons. One reason is that the measure they’re using does not include all existing debt but is focused on individual borrowers and not corporates. It leaves out a good proportion of existing credit in the economy. Certainly it will be in excess of 20 billion,” says Knuckey. H.E. Chea Serey explains further, “The CBC is currently gathering information on individual borrowers, not yet corporate borrowers. The result generated by CBC relied on the information they had at the time, to estimate the proportion of individual‘s borrowings to the total borrowings and made a linear projection of growth. However in Cambodia, it is very difficult to distinguish between individual loans and business loans. Often, an individual name is registered as borrower even though the purpose is not for consumer spending but rather doing business. As far as NBC is concerned, we are more focused on sustainable financial deepening and financial stability rather the mere percentage of growth.” An analysis by Mekong Strategic Partners also concluded that the CBC’s prediction was a vastly

USD 30 billion is a little too high. How would this be funded? Above 20 billion is very easily visible. Knuckey questions this, “USD 30 billion is a little too high. How would this be funded? Above 20 billion is very easily visible”. The CBC did a study that looked at all the different age groups and how they will progress through their lifecycle, over the next five years. It was found that on average, the number of borrowers should increase by about 12 percent per annum. Prime borrowing years were found to be 30-40 years of age, suggesting that as the younger generation comes through, growth will increase by about 12 percent per year. “That’s going to add a lot of growth; growth to credit and GDP, and why we have a positive view on the sector”, reflects Higgins. The Asian Development Bank (ADB) noted that private sector credit expanded by 31.3 percent in 2014 largely driven by construction and property development.

IS THIS GROWTH SET TO CONTINUE?

or the past three years financial institutions have maintained a rapid rate of growth, including expanding their branch network across the country, particularly to the rural areas. This has had a direct and dramatic effect on supporting the country’s strong

economic development and helping reduce poverty, including improving access to financial services for more Cambodians. In 2000, less than 20 percent of Cambodian adults had any formal relationship with a financial institution. Sector leaders believe that growth will maintain an upward trajectory at least in the short-term. “If you look at the credit growth last year, most of that credit growth was driven by construction and property development as well as consumption, which was a new source of credit growth. Those things will definitely continue this year and the debt from these will continue at a very strong pace,”says Knuckey. Lor agrees, “I believe the systemic growth will continue, possibly with an even more aggressive trajectory. Given the rapid acceleration of economic development, construction projects, and increased investments entering the country, not to mention the ASEAN economic integration later this year, I foresee strong growth prospects for the banking sector.”

CBC

underestimated. They suggested that the figure will more like USD 30 billion. The report noted that in order to reach USD 30 billion by 2020, credit only had to grow on average 20 percent per year, however they calculated that growth had been averaging 30 percent for the past five years. Mekong Strategic Partners suggested that credit only has to grow by 16 percent now on average until 2020 to reach their estimation of USD 30 billion.

INTERVIEW

A Q &

DIALOGUE WITH H.E. SOK CHENDA SOPHEA

Minister attached to the Prime Minister & Secretary General of the Council for the Development of Cambodia (CDC)

1 What are the roles and functions of the CDC portfolio?

2 What does your role as Secretary General of the CDC involve?

According to investment law (Chapter 2), the CDC is the sole and one-stop service organisation responsible for the rehabilitation, development and the oversights of investment activities in Cambodia. The CDC is the chief staff body of the Royal Government responsible for the evaluation and decisionmaking of all rehabilitation, development and investment project activities.

I take care of FDI. I am involved in any activities involved with investment now and in the future. The CDC is an Investment Promotion Agency (IPA ). Each country in ASEAN has an IPA. For example, in Thailand and the Philippines, it is the Board of Investment, in Vietnam and Laos it is the Ministry of Planning and Investment.

In 1994, a year after the first ever organised general elections were held after three decades of war, the government saw the need to co-ordinate the inflow of capital coming from bi-lateral assistance, multilateral assistance and Foreign Direct Investment (FDI), and thus the CDC was formed. The main activities of the CDC are co-ordinating and mobilising Official Development Assistance (ODA) and FDI. 22

BANKING & FINANCE GUIDE CAMBODIA

Our key role is to attract and promote investment. We also provide assistance services to investors who are already in the country. Our new mandate under this government is to provide aftercare services. For instance, regarding companies who face problems, we assist the company to solve their problem. The CDC wants to do more systematically. We are also being more proactive, e.g., if a company is doing well, we can assist them

with strategies to become more competitive in the market. If the company can become more competitive, then Cambodia will become more competitive. The CDC provides advisory services on how companies can become better, move faster, and grow more. This is very good for the private sector. In taking care of existing clients, the CDC recognises that companies and investors will have different activities and thus face different challenges and as such our assistance will be tailored to suit their specific needs. There are also common challenges for them. One is the high cost of electricity. All industries comment that the price of electricity is too high compared to neighbouring countries. So we should find ways to convey this message to the highest level of government and convince our colleagues in charge of electricity of the issue and lobby them to address it.

So in that sense, the CDC also provides advocacy and lobbies on policy directions.

INTERVIEW

Cambodia is a free market full of opportunities.

The CDC engages in both incountry and overseas promotional activities, speaking at seminars or meeting investors in-country. We engage with the private sector community via a dialogue mechanism on a regular basis. I am of the view that you cannot do your job properly by sitting in your office, you have to know what is going on and engage. 3 Describe some of the largest challenges you face in your current role as Secretary General.

A Q &

Working in an IPA, you have to face all the other ministries. We are the meat in the sandwich between the interests of the government and the interests of the investors. We meet, problem-solve, co-ordinate and inform policy and make recommendations. I used to work previously in the private sector so I understand the needs of investors. Morning to evening I am engaged in negotiation. We are a coordinating agency. Co-ordination is the art of negotiation. Because when u co-ordinate, you have all the ministries to take into consideration. Itâ&#x20AC;&#x2122;s a tough job! 4 What are the CDCâ&#x20AC;&#x2122;s key objectives over the next 5 years? How do these fit within the governments overarching strategic policies?

In response to Cambodia joining the AEC and the inevitable evolving regional landscape, the cabinet approved the Industrial Development Policy 2015-2025 (IDP) on the 6th March 2015. BANKING & FINANCE GUIDE CAMBODIA

INTERVIEW

We developed this new policy because flexibility and adaptability is key to surviving and winning in the region. Although Cambodia has had GDP in the seven percent range for two decades, we have some serious weak points and our growth is narrow -based. We have built our economy on agriculture, tourism, garments and construction. These are the four pillars of the economy. Of these, three are very sensitive to external factors, for example, whenever the US or EU is struggling, exports of garments drop, or when the SARS outbreak led to a steep decline in tourist arrivals. For these reasons we have to mitigate risks. The IDP is a framework that provides indication and orientation to all stakeholders, Ministries and agencies of the Royal government, private sector and development partners. The government has entrusted the CDC to take on the role of coordinating and implementing this policy. We have been fully mandated to make policy decisions and implement reform. All ministries are working hard but working in synchronicity is proving to be more challenging. 5 What are the priority actions in the governments Development Cooperation & Partnerships strategy 2014-2018?

We know that the landscape is changing with AEC. Twenty years ago Cambodia partnered with donors to see how they could best help Cambodia to rehabilitate. We are no longer in rehabilitation, now it’s about development co-operation. Before we were in the rehab phase, where the ultimate aim of the assistance was to help 24

BANKING & FINANCE GUIDE CAMBODIA

A Q

Cambodia to survive and reduce poverty.

My view is we should find ways to enable the private sector to develop and push for more business because then it will mean more job creation, more income and then we will deal with equity at a later stage.

Job creation is the key to alleviating poverty. If not, then its just assistance, donation and begging. My view is that we should focus more on vocational training outside of Phnom Penh. Invest in the provinces, up skill the labour force there, it will encourage investors to go there. It is not a good idea to propose Technical and Vocational Education and Training (TVET) in and around Phnom Penh because this contributes to the ongoing rural exodus. Instead help them to stay near their villages and with their families. If you do this, you will save money otherwise spent to try solving some of the social problems . There is a paradigm shift happening. Now it’s about knowing which co-operation will contribute to economic development and competitiveness. How can our development partners add value?

We have a vision, policy and action plan. The main objective of the strategy is to strengthen partnerships with all stakeholders within this new context.

Cambodia must address two main challenges: Firstly, the necessity to redefine the role of co-op financing due to the global decline in financing in development partnership arrangements. Secondly, the anticipated decline in concessional financing when Cambodia reaches a middle income country status in the near future. The Development Co-operation & Partnerships Strategy does its best to address these challenges. 6 Advice for potential investors?

Do your homework online first then come to visit the country. Like a hunter, you must be here and smell the situation. At first glance you will see how busy and messy Cambodia is but that also translates to vibrancy and dynamism. Then do something you’re good at. For example, if you are an hotelier back home, open a hotel here. Don’t try to move out of your expertise, be pragmatic. Cambodia is a free market full of opportunities. This interview has been edited for length and clarity purposes.

MOC

THE MINISTRY OF COMMERCE

he main mission of the Ministry of Commerce of the Kingdom of Cambodia is promoting job creation, economic growth, sustainable development and improvements to the living standards for all Cambodians. The ministry focuses on imports and exports, and negotiations of free trade agreements within ASEAN and the wider economic community.

“Our main objective is to expand trade volume in the hope of attracting more FDI”, says H.E. Sun Chanthol, Senior Minister, Minister of Commerce and Vice Chairman of the Council for the Development of Cambodia (CDC), “We are also trying to expand and strengthen the private sector especially in the provinces, because if the private sector is strong, then the economy can grow.”

The ministry works in partnership with other government ministries, businesses, universities, organisations and the country’s labour force as well as with development partners.

BUILDING BILATERAL TRADE RELATIONS

ambodia benefits from both the Generalised System of Preferences (GSB) and the Everything But Arms (EBA) schemes, thus making the kingdom an attractive climate for investment. Under these schemes, import tariffs on many products from beneficiaries are exempt or reduced if requirements such as rules of origin are fulfilled.

Ministry of Commerce, Phnom Penh.

BANKING & FINANCE GUIDE CAMBODIA

Seeing as Cambodia is categorised as a Least Developed Country (LDC), it is also entitled to additional preferences under which more of its products are subject to duty-free reductions particularly under the EBA scheme to the major markets of the US, Japan and EU.

MOC

In addition, the ministry was working on building bilateral trade relations between ASEAN member states and other countries in the region, as His Excellency points out, “Right now we are working together with other ASEAN member states to finalise regional economic partnerships between ASEAN, China, Japan, India, Korea, New Zealand and Australia. At the same time, we are evaluating whether it makes sense for Cambodia to enter into bilateral Free Trade Agreements (FTAs) with the US and Canada.”

The data accountability and transparency it provides to the lending process is fundamentally crucial. “Another area where we would like to have FTA is with the Eurasia Economic Union (which includes Russia, Kazakhstan, Belarus and Armenia). We want to be part of that and can’t just wait for the whole regional FTA. Thus, the Cambodian government has set up an inter-governmental committee to expand trade and investment bilaterally with countries such as Russia, China, Belarus and Kuwait.” A critical question for all investors in Cambodia, whether already established or potentially considering, is how the ministry is addressing the concerns of the private sector about the challenges of doing business in an emerging economy, such as dealing with complicated processes, bureaucracy, corruption, and perceptions of risk? The ministry’s response centres on the automation of bureaucratic processes. By taking some processes online, the ministry aims to improve efficiency in terms of time and costs, whilst at the same reducing manual handling and thus reducing errors and bribe temptations. “There are two main systems that we are working on; automation of the Certificate of Origin (CO) for exported products from Cambodia and online business registration. Previously this was all done manually so these processes were time -consuming and prone to mistakes. Now we receive all this information by email.”

H.E. Sun Chanthol Minister of Commerce. He is the Senior Minister and Vice Chairman of Council for the Development of Cambodia.

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MOC

“You can now name check and register your business in Cambodia online from anywhere. I wanted to get this done before AEC integration.” H.E. Sun Chanthol continues, “These two systems will cut down bureaucracy tremendously and company registration will only take one hour. At the same time we still need to make amendments to company law in order to accommodate the new system.” With regards to corruption, the minister believes, “When you cut down the physical interface of the CO process between the officials and private sector then obviously you can cut down on unofficial payments. With this in mind, we are trying to work towards 100 percent automation.” This also extends out to the provinces of Cambodia, “We are also de-concentrating and de-centralising some of the work and responsibility to our provincial departments of commerce so all processing can be done there rather than needing to come into Phnom Penh.” “We are continuing to do the process mapping within our department to see what we can do differently in terms of processes and regulations,” he adds.

PRIVATE SECTOR STRENGTHENING

I would like to see the next Alibaba & Amazon rise out of Cambodia. Piloted for the first time this year, the MOC 101 Incubator program allows 101 selected students to participate in two months of training provided by the ministry which includes “boot camps” and educational sessions on how to write a business plan, how to present and package a product and branding. Boot camp sessions have focused on creativity, technology and agriculture. Upon graduating from the MOC 101 Incubator program, participants then have the opportunity to directly market and sell their products. “We take them to AEON mall where they can sell the product. Out of that exercise, we select only 10 students. Then these 10 students have the chance to pitch and present their ideas to potential investors. They have five minutes to present. If they are successful in gaining investor interest, then we continue to support them by providing platforms such as e-commerce,” explains His Excellency. “This is how we help young entrepreneurs. Anyone can sign up. There are no criteria restrictions. I would like to see the next Alibaba and Amazon rise out of Cambodia,” he says.

ith the ministry’s goal of strengthening the private sector, the department created a private sector development unit who is dedicated to doing just that. Working in conjunction with the various Chambers of Commerce and Federations, the unit facilitated six business seminars this year so far, covering topics such e-commerce, food security and climate change, leadership and compassion, digital economy and branding. The likes of John Rice, Vice President of General Electric and the Vice President of Google, David Drummond, have presented at these sessions open to all private sector local businesses. The department is also giving much time and resources to supporting budding young entrepreneurs and thus investing in the next generation.

Read us online:

www.bankfinancecambodia.com

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Key government officials and business leaders celebrated the opening of the first Customs Bonded Warehouse Zone in Cambodia.

MOC

“Today there is a mismatch between what we produce from our universities and what investors and the market want. We produce a lot of MBAs but investors actually need engineers, carpenters and electricians. But it’s also about the mindset of the culture. Parents prefer their children to get their masters rather than do vocational training.”

The direction is to diversify our export portfolio. “We have a shortage in technical skills in terms of market demand so we need to have better training in these areas, “he continues. The minister also purports that Cambodia needs to diversify its export portfolio.

READINESS FOR AEC

ith the AEC integration set for December 2015, it is important to know how ready Cambodia is to join the regional community in terms of institutional reform. According to the minister, Cambodia is almost ready, “There are close to 300 items in the AEC blueprint that each country is required to implement. Cambodia has already implemented 92 percent of that. We are ranked only behind Vietnam and Singapore in terms of the actual implementation of the blueprint”.

There are close to 300 items in the AEC blueprint that each country is required to implement. Cambodia has already implemented 92% of that His Excellency puts this down to liberalisation, “There are very little restrictions in Cambodia, so we can move very fast in implementing the AEC. So in that regard Cambodia is ready but in order to capitalise on this we need to push hard in building our capacity to be able to supply a skilled labour force to investors.”

“We cannot rely solely on the garment industry however we can’t eliminate this sector either as the direct and indirect impacts are too great. But we need to strengthen this sector by trying to attract more FDI in the upstream and not in the downstream. That means diversifying our production services into more weaving and dying for example.” “We must move away from labour intensive industries into more light manufacturing, food processing and component assembly.” Another area the ministry identified that needs to be addressed in preparation for the AEC is logistics and utilities. Reducing the costs in logistics by automating more processes and working with the Ministry of Mines and Energy to lower the costs of electricity will help improve the attractiveness of Cambodia to potential investors. The minister remains hopeful, “We hope the AEC will benefit Cambodia in terms of attracting more FDI. Cambodia is a small open economy already and the location can serve the markets to the west and the east.” “I’m sure investors will make their shareholders happy by in investing in our country”, he says, “They can help rebuild Cambodia and improve the standard of living of the Cambodian people.”

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IDP

CAMBODIA INDUSTRIAL DEVELOPMENT POLICY 2015-2025 TOWARDS MARKET ORIENTATION AND ENABLING AN ENVIRONMENT FOR INDUSTRIAL DEVELOPMENT

aunched in late August and driven by its long-term vision toward 2030, the Royal Government of Cambodia (RGC) has adopted an Industrial Development Policy (IDP) as a guide to promote the country’s industrial development in order to help maintain sustainable and inclusive high economic growth through economic diversification, and strengthening competitiveness and promoting productivity. The Royal Government envisages a transformation and modernisation of Cambodia’s industrial structure moving from a labour-intensive industry to a skillbased industry by 2025. The policy seeks to tackle the country’s heavy economic reliance on traditional sectors and low skilled, low value-added jobs and instead plans to diversify industrial activities. By linking with the global value chain, integrating into regional production networks, developing

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industrial “clusters” and improving the productivity of domestic industries, the RGC hopes to move towards developing modern technologies and knowledgebased industries as a way to remain competitive within the region. The IDP aims to serve as a platform to attract more FDI. “With AEC coming, we have to find ways to remain on the map and stay competitive and attractive,” says H.E. Sok Chenda Sophea, Secretary General of the CDC, “It is a framework that provides indication and orientation to all stakeholders, ministries and agencies of the Royal Government, private sector (so they know the direction) and development partners (where they can add value by joining forces with the government).”

A transformation and modernisation of Cambodia’s industrial structure from a labour-intensive industry to a skill-based industry by 2025.

CURRENT INDUSTRIAL CHALLENGES

he government identified that Cambodia’s industrial sector is currently challenged by several obstacles; namely the lack of leadership, coordination and effective decision-making especially related to the inadequate supply of electricity, infrastructure and logistics, human resources with significant gaps in basic technical knowledge and skills within the labour force, inadequate industrial infrastructure, limited financial market development and financing mechanisms for public and private sector projects, as well as needing to strengthen labour market stability, productivity and increasing the livelihoods of workers. Cambodia’s current economic growth does not rely much on investment, which signifies that there is still room for attracting further investment. As detailed by the IDP, an analysis on the contribution of expenditure

to GDP indicates that the source of growth of over 70 percent of GDP depends on private consumption, 21 percent in investment, 12 percent in public expenditure of the government and other organisations, leaving exports covering the rest.

IDP

The Royal Government has provided a full mandate to the CDC to lead, coordinate and enhance the implementation of the IDP. The CDC is required to submit a quarterly report to the plenary session of the Cabinet meeting on the progress and challenges on the implementation of the policy.

By the standards of other developing nations, the contribution rate of investment should be between 30- 40 percent or possibly higher in order to boost the economy to jump to the next level of development. As it stands, Cambodia’s economic growth relies heavily on the garment, tourism, construction and rice sectors, implying there is a need to invest more in propping up new economic growth opportunities such as light manufacturing, electrical assembly and food processing, and thus broaden the current industrial base.

The industrial sector is a growth strategy priority for the government. “In broad terms, Cambodia will take a two pronged approach,” explains His Excellency of the policy, “First, we should capitalise on our strengths and assets. We have huge potential in agriculture, agro-business and food processing. We only use 15 percent of our potential, thus most remains untapped. We can do much more. We have a big margin for growth.” “The second direction is taking into account the regional integration and the rest of the globe. We should make Cambodia part of the regional supply chain and production team,” he adds.

SMALL & MEDIUM ENTERPRISES

nother key aspect of the policy is the formalisation of the small- and medium-size enterprises [SMEs], with the aim to “officially register 80 to 95 percent of SMEs, out of which 50 to 70 percent will have accurate accounts and balance sheets by 2025”.

H.E. Sok Chenda Sophea, Secretary General of the Council for the Development of Cambodia.

Strengthening the management mechanism and development of SMEs through promoting their official registration is an attempt to promote good corporate governance across the board.

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IDP

In addition, the CDC currently is in the process of drafting a law on Special Economic Zones, as well as a new law governing investment that will be submitted to the Council of Ministers for approval by the end of October 2015.

IMPROVING TECHNICAL KNOWLEDGE & SKILL BASES SPECIAL ECONOMIC ZONES (SEZs)

he proper planning of locations for manufacturing facilities is essential. Cambodian manufacturing enterprises are currently geographically concentrated in and around Phnom Penh. Microenterprises are scattered all over the country depending on population density and most SMEs are located in Phnom Penh, and surrounding provinces primarily because there is better access to transport infrastructure, electricity networks and public services serving for the production and exportation. As it stands, enterprises are so scattered geographically they will not benefit from a clustering effect. Therefore the policy sees a need to focus on creating industrial cluster areas and SEZs in some provinces away from the capital to ensure cross-border production connectivity within the region. These have to be accompanied by stable physical infrastructure such as water, electricity, transportation and communications to provide supportive facilitation to these investment operations. The high costs of electricity remain an obstacle to attracting more manufacturing investment. Reductions in electricity tariffs for these industrial zones are in the pipeline.

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he government recognises that a critical mass of skilled workers is vital to the advancement envisaged for the development of a robust manufacturing sector. Thus technical skills training is a priority to increase productivity levels and better opportunities for workers through ongoing up skilling. The policy gives due attention to the formal education as well as the technical and vocational sectors and aims to create inroads to improve and enhance this area through the creation of technical secondary schools, improving curriculums to incorporate the essential skills needed to build the base of industrial development and apprenticeship programs, and promoting at least a Year 9 level education and reducing dropout rates. Although the drafting of the kingdom’s first industrial strategic policy is praiseworthy, the success of the policy lies in its implementation. The key actions and priorities of the document require consistent and measured strong co-ordination. His Excellency acknowledges this point, “All the ministries are already working hard but working in synchronicity is going to be more challenging,” he says. As Cambodia looks to the future, only time will tell whether it is able to realise its goals to maintain steady economic growth, further job creation and to become a competitive regional force to be reckoned with.

MOEF

H.E. Vongsey Vissoth, Secretary of State at the Ministry of Economy and Finance.

MINISTRY OF ECONOMY & FINANCE

he Ministry of Economy and Finance’s vision is to lead and manage Cambodia’s economy and finances with the purpose of economic development and promoting livelihood underpinned by the principles of market economy and social equity. The ministry’s mandates are macro economical management, fiscal management, finance sector development, and state asset management. “One of our main goals is sustained growth at over 7 percent for next 3-5 years, says H.E. Vongsey Vissoth, Secretary of State at the ministry, “but this growth has to be inclusive, robust and resilient.” “Inclusive means growth has to be shared and broad, balanced between a growth base and beneficiaries. Not just benefiting the urban and the rich. We must be able to narrow down the gap in terms of benefits and the divide these between the rich and the poor.” “In terms of resilience, Cambodia is very exposed to international environment, so if something is happening

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outside, we are not immune. The economy has to be resilient and therefore we have to be competitive, diversified, and be ready and able to respond when crisis comes,” says His Excellency, “We have to develop our fiscal policy very carefully and rigidly as cautionary measures because our banking system is subject to dollarisation.”

Growth has to be shared and broad, not just benefiting the urban and the rich. Current precautions taken by the ministry include taxation law enforcement, prudent spending and revenue building. “The debt level of Cambodia is relatively low compared to our neighbours. We manage to have governmental savings every year. We are doing so well in keeping up our surplus, currently reaching 3-4 percent of GDP. Our micro indicators show strong performance,” notes H.E. Vongsey.

MOEF

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MOEF

The ministry plans to increase revenue by half a percent every year. “Our target for 2018 according to our revenue mobilisation strategy, of 17.35% of GDP as revenue will already be reached by next year, two years ahead of what we expected.” How has this been achieved? Through enforcing existing law and tax administration practices, tax compliance has improved. Law enforcers hope to have better revenue and tax services, and promote an emerging new mindset in terms of tax culture and compliance, hence leading to lower informality. After 2018, a new tax system will be introduced aimed at accommodating industry from an economic perspective, and increasing revenue and equity.

General Department of Taxation, Phnom Penh.

Currently Cambodia relies heavily on consumption tax. There is speculation around whether future major reforms will include greater income tax.

COMPANY TAX STRUCTURE

Profit tax

“For a country like Cambodia, large portions of consumption tax are easy to collect. But from an equity and fairness point of view, it hurts the poor more. The poor pay the same tax. If we move to income tax, overall it will be fairer but more sophisticated methods. In the long run I believe, income tax will become part of our income because the young population could be a big base for us. This has to be the future of our tax system,” says H.E. Vongsey.

Range depends on the company

QIP 0

QIP is % For certain addition period Normal Corporation Industry

20%

30%

VAT

ECONOMIC DRIVERS

Subject to every company

n maintaining the government’s goal of 7 percent growth over next five years, the ministry predicts that the drivers of drivers of growth will change over time.

Withholding tax Profit tax 1

Minimum % if the company is profitable, tax deducted from the profits. If not profitable, company is still liable to pay the %.

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Source: Ministry of Economy & Finance

For company or person that has a contract with a local company

“The manufacturing sector has been one driver of growth for the last 10 years but now we see a diversification taking place, explains H.E. Vongsey, “Garments and footwear used to be the only products exported. Now they only account for just 10 percent GDP, with exports valued at USD 5 billion. There will be more drivers emerging from the manufacturing sector such as more electronics assembly.”

H.E. Vongsey predicts that there will be a continued need for infrastructural construction but is concerned about a looming housing bubble.

“If we look at lending portfolios, construction accounts for about 12 percent. I think housing supply will hit a bubble. If the money comes from the informal banking sector then it could be dangerous. 12 percent is manageable but I suspect shadow banking is behind more of the housing funding. The NBC will need to look into this. Next year’s budget report will set up a framework to monitor and intervene in case there is a risk,” he says.

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MOEF

The garment sector used to be the main growth industry but over the past two years, construction has taken over which includes commercial, residential, and infrastructure.

MOEF

“Agriculture is slowing down”, he continues, “Rice still remains strong accounting alone for 15 percent GDP. But we need more agro-processing and valueadded commodities. Rubber is attracting interest from many investors in the form of semi-products, such as tyres and glue but they need to see a critical mass of production in the country first before they commit.” “More investors are coming to produce cassava chips for export, along with cassava starch. 12.5 million tonnes

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exported per year. There is also a movement towards sodium nitrate, a cassava semi product. Cassava could potentially outperform rice.” On the service sector, H.E. Vongsey sees that tourism has a lot of room for improvement as it currently doesn’t add much value to the economy. “Tourism is the weakest performer accounting for only 5 percent GDP. The sector needs to diversify their products and add more value. Promote longer stays and better travel facilitation.”

MOEF

Sago and noodles from cassava starch, Kampong Cham Province.

His Excellency believes the key to Cambodia’s sustained economic growth is about resiliency, “Being able to diversify our industries as a response to the global volatile environment. In order to stay competitive, we must do what we are most competitive in”. His outlook remains very optimistic about the country’s future, “Cambodia is attractive for the time being but we want to be more attractive. This

Tourism is the weakest performer accounting for only 5 percent GDP.

government is working hard on that . We are part of ASEAN, such a dynamic region. It will be the future growth centre of the world,” he smiles.

In order to stay competitive, we must do what we are most competitive in.

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COMMERCIAL BANKS

COMMERCIAL BANKS COMMERCIAL BANKING SECTOR

or the past three years banking institutions have maintained a rapid rate of growth, including expanding their branch network across the country, particularly to the rural areas. This has had a direct and dramatic effect on supporting the country’s strong economic development and helping reduce poverty, including improving access to financial services for more Cambodians.

loss of $2.28 million, and Cambodia Mekong Bank and Cathay United Bank losing $2.2 million and $1.83 million respectively. In reflecting on his banks performance, chief executive Lor explains that Canadia takes a disciplined approach to banking, “If you look at our results, we are not the most profitable. However we are still profitable. This is due to us placing significant importance on the need to safe and prudent.”

The banking sector’s financial growth in 2014 was particularly noteworthy, with significant percentage of GDP increases. The National Bank of Cambodia’s Supervision Annual Report 2014 showed that profits for the banking sector stood at $311 million, a 30 percent increase from 2013, with commercial banksbringing in major portion of these profits – $305 million. Leading the pack was Acleda Bank with $82 million in profit, followed by Canadia bank with $61.2 million, $40.1 million for Cambodian Public Bank and $18.6 million for ANZ Royal Bank. The NBC report shows that the greatest losses came from new entrant Hong Leong Bank, with a

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Grant Knuckey, CEO of ANZ Royal Cambodia.

Bank and financial assets increased to 63 percent and 112 percent of GDP respectively ($18.6 billion), deposits increased to 64 percent of GDP ($10.6 billion), and loans increased to 68 percent of GDP ($11.4 billion). This represents a bank sector wide increase of assets of 28 percent, and deposits and loans each increased at a rate of 31 percent.

From here, I expect a combination of cost inflation, rising Non-Performing Loans (NPLs) and the need to increase capital levels will see RoE falling. According to Grant Knuckey, CEO at ANZ Royal Bank, while the industry was in good shape overall, he expects returns to have peaked for the sector. “From here, I expect a combination of cost inflation, rising Non-Performing Loans(NPLs) and the need to increase capital levels will see the RoE falling,” he says. “The NBC has certain ratios and requirements for banks to be managed and monitored. To some extent, some of these could be even stricter such as provisioning for NPLs,”adds Lor. Across the board, lending rose to $9.5 billion in 2014 up 30 percent from the previous year, with the highest growth rates seen in construction, which grew by 37 percent, housing mortgages by 54 percent and real estate by 55 percent. Credit in mining shrunk by 40 percent and information, media and telecommunications fell by 36 percent in 2014. The NBC’s 2014 report revealed an industry-wide loan-to-deposits ratio of 95.9 percent, just one percentage point lower than 2013, yet still quite higher

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At present, Cambodia does not have the benefit of a lender of large resources as yet and no deposit insurance. “So for a local bank like Canadia,” continues Lor, “We have to make sure our liquidity rate gives creditability and confidence to the customers who bank with us. We maintain very conservative loan-to-deposit ratios bearing in mind that in Cambodia you will have to take care of yourself.”

than the 76 percent in 2009, with the industry average petering close to the one-to-one ratio. But, some banks have well surpassed the 100 percent mark and are supplementing their loan financing from local and foreign inter-bank lending. Knuckey says that it would be prudent not to exceed the 100 percent ratio, and that this could eventually “sideline smaller banks here”.

THE RISE OF INSTITUTIONAL BANKING AND CAPITAL MARKETS

he Royal Government of Cambodia has given great attention to Cambodia’s economic development, local businesses and international investors. The governments’ level of commitment to establishing Cambodia as a first rate country in which to invest has never been stronger, and it includes concrete activities surrounding that commitment. “In many ways there is an industrial revolution taking place, which is spawning a need for much more sophisticated financial and capital options, including advisory services, “says Lor. It is expected that as the industry continues to develop and flourish, there will be increasing demand for services such as managing mergers and acquisitions, investments and divestments, managing treasuries, creating corporate strategies and developing opportunities for long term growth on a national and global level. “As the development and growth in Cambodia continues, and even in some sectors picks up more aggressively, corporate customers will seek long-term financing options, and require more tailored capital products, including advisory services surrounding debt and equity markets, and risk management,” predicts Lor, “The nascent capital market today is showing signs of inevitable change, which will dramatically transform the business landscape in Cambodia. As of today there are two companies listed on the Cambodian Stock Exchange. By this time next year that number could increase threefold.” BANKING & FINANCE GUIDE CAMBODIA

COMMERCIAL BANKS

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ABC

THE ASSOCIATION OF BANKS IN CAMBODIA

he Association of Banks in Cambodia (ABC) was formed in 1994 and is the official organisation to represent the country’s private banking sector. The association’s main aim is to promote the development of the Cambodian financial system, working in close cooperation with the National Bank of Cambodia (NBC) and serving as a channel of constructive communication between the NBC and member banks, as well as to serve as an industry voice to the public and the Government. ABC’s membership consists of local and foreign owned banks and branches. Membership in the Association is required under Chapter XXII of the Law on Banking and Financial Institutions, which states that all banks operating in Cambodia must belong “to a single professional association, whose Articles of Association shall have been endorsed by the supervisory authority.” The Association meets at least once a month and more often if required by urgent matters. The Association also has regular working committees that focus on specific issues. Since 1998, the Association has been an active member of the ASEAN Bankers Association and participates in all of its meetings and functions. The ABC released Code of Banking Practice earlier this year in their efforts to contribute towards a robust, inclusive, ethical and customer-oriented banking system. The code sets out the standards of good banking practice that individual customers, business customers, and guarantors can expect when dealing with Financial Institutions including banks, specialised banks, and Micro-Finance Institutions (MFIs).

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SPECIALISED BANKS

pecialised banks are foreign exchange banks, industrial banks, development banks, export-import banks catering to specific needs of these unique activities. These banks provide financial aid to industries, heavy turnkey projects and foreign trade. Specialised banks function in the same way as finance companies since they are not allowed to collect deposits but are permitted to provide credit facilities. There are currently 11 licensed specialised banks operating in Cambodia offering a range of products and services including short/medium term consumer loans, fixed and overdraft loans for SMEs, rural credit (agricultural loans-medium/long term), property transactions, and portfolio management.

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MICROFINANCE

THE CAMBODIAN MICROFINANCE SECTOR HUMBLE BEGINNINGS

ith its first roots sprouting from the NGO sector in the early 1990s, the microfinance industry (MFI) emerged slowly, initially demonstrating poor performance with around 10 percent NPLs, leaving donors discouraged and considering withdrawing their support.

Before 2000, MFIs were not so successful because their operators were not skilled enough. “Before 2000, MFIs were not so successful because their operators were not skilled or experienced enough to manage the business and clients were ill-experienced. The quality was not so good. Donors were frustrated and didn’t want to continue to support,” reflects Dr. Bun Mony, CEO of Sathapana Limited and Chairman of the Cambodia Microfinance Association (CMA).

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Hout Ieng Tong, President and CEO of Hattha Kaksekar Limited (HKL).

“After 2000, many donors ceased funding MFIs and turned their focus to other countries such as Kosovo and East Timor because they felt Cambodia had received enough support over the past 10 years. We tried to start educating clients on the functions of MFIs. The sector eventually began to recover and grow again.” After the NBC commenced applying official regulation to the sector, MFIs gradually gained ground and over time, strengthened their capacity which is

MICROFINANCE

reflected in a significant reduction in sector NPLs to less than one percent nowadays. The philosophical foundation on which micro finance is built is to facilitate economic empowerment and hence impact poverty reduction. “The MFI philosophy believes that in order for people to move out of the poverty trap, they must become empowered to become an entrepreneur. They then become the owner of a business. They will offer everything they can to their business to ensure its success,” explains Dr. Mony. There are currently 44 CMA members including 39 licensed and 6 NGOs (Rural Credit Operators) that function in Cambodia with a gross loan outstanding portfolio of around 2,028 million USD and a borrower base of 1,901,153 accounts, predominately located in Phnom Penh and large provincial towns. The amount of loans issued by MFIs increased 47 percent, from $1.63 billion in the first six months of 2014 to about $2.4 billion over the same period this year, according to the CMA. Approximately 80 percent of MFI clients live in rural areas and 81 percent of clients are women with the repayment rate from clients almost up to 98 percent before the financial crisis in 2008. MFIs in Cambodia have been shown to empower women as the head of the family who often have good cash management skills. MFIs service approximately 1.8 million Cambodians, which equates to a penetration rate of 60-70 percent of households according to the CMA.

MFI loan officers assist clients with filling out important financial paperwork.

“There too many MFIs in Cambodia right now”, says President and CEO of MFI, Hattha Kaksekar Limited (HKL), Hout Ieng Tong, “However, each MFI has a limited amount of capital to provide loans, so the amount available is much lower than the market demand, hence the need for many MFIs to service the market”.

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MICROFINANCE

The development of regular commercial lending activities has been stifled by the high costs of operations, the inability to verify and enforce property rights, and the low levels of economic activity. As a result, the vast majority of the rural population has had limited access to formal forms of financial services. Despite these obstacles, CMA and its members are working diligently to advance the course of the microfinance sector. The prevalence of multiple lending, whereby an individual has taken out loans from more than one MFI which they are unable or unwilling to repay,was at a crisis point until the Credit Bureau of Cambodia was established in 2012 and implemented measures to tackle this. This has had a positive impact, by protecting MFIs and borrowers from multiple lending and ensuring MFIs make sound lending decisions. In September 2014, the Credit Bureau of Cambodia released its first ever credit outlook. It stated that microfinance institutions (MFIs) are expected to increase existing portfolios from USD 1.5 million accounts by 159 percent over the next six years. Hout agrees with this prediction, “I think it’s about right because growth is still expanding and if we look at the market overall, it’s still possible for all operators to grow at this rate over the next few years. Overindebtness will not happen.” However, some sector experts are skeptical of this estimation such as AMRET CEO, Chea Phalarin, “I think it’s too optimistic. Over the next few years it will continue to grow but in six years this trend will decline and slow down”.

THE MFI SECTOR CURRENTLY OUTPERFORMS THE COMMERCIAL BANKING SECTOR

recent report by Mekong Strategic Partners found that MFI sector in Cambodia is one of the best performing in the world, with an average Return On Equity (ROE) of 22 percent amongst the top four performing MFIs in 2013, compared to the leading four commercial banks who were averaging an ROE of 11 percent.

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MICROFINANCE

practice standards to management of its daily business and Hout believes many of the top performing MFIs do the same. “At HKL we invest heavily in staff training and internal policies to enhance our capacity to better serve the sector”. Dr. Mony agrees, “It’s due to good skilful management. Managers try to save on staff and funding costs. The interest rates costs reduce every year. In the past seven years, the annual yield for the industry was 31-32 percent per annum. Last year we reduced it down to only 21 percent declining by 10 percent. This is the result of good MFI management.”

Chea Phalarin, AMRET CEO.

Cambodia still has a significant portion of the population that is “unbanked” using unofficial banking facilities. Being an emerging market, official reports suggest that the unbanked population is between 80-90 percent. “This population is where MFIs predominantly service out in the provinces, where they don’t have access to formalised banking services. So in that regard you can see that MFIs have seen tremendous growth over the last 4-5 years, averaging between 20-40 percent. It is not surprising that they have very high ROE, “says Lor. Banking penetration is high within Phnom Penh and other key larger cities and MFIs reach beyond these areas into the provinces where access to financial services is low and remains a huge untapped market.

NPLS between the years 2012-2014 further declined to a mere 0.5 percent. Hout attributes the strong performance of the MFI sector to good management, “The regulators have been controlling and monitoring the sector very well, the high ROE is driven by good management controlling costs, high productivity, and having higher interest rates than the commercial banks which produces better ROE.” HKL applies international best

He continues, “NPLs are the major concern of the industry. In the history of Cambodia’s MFI sector, we have maintained NPLs after 30 days at lower than 1 percent. In 2011 after the GFC, the industry’s performance was around only 0.78 percent. NPLS between the years 2012-2014 further declined to a mere 0.5 percent.” Chea notes that another explanation behind the success of the sector is due to equity investment, “For MFIs equity investment is quite low compared to the banks. According to the regulations, banks require high capital requirements and MFIs have low capital requirements. So this is one factor where we (MFIs) generate profit than divide by equity so its better than the banks.”

INTEREST RATES IN THE MFI SECTOR IS HIGH, AVERAGING 25 PERCENT

lthough interest rates in the MFI sector are substantially higher than what commercial banks offer, it is less than the median scale of the international market. “Whilst the rates may seem high, the MFI sector in Cambodia is one of the lowest globally. You can get MFI interest rates as high as over 80 percent in other countries such as the Philippines. Often people take out loans for only six months, paying 6 percent interest per month. Thus on an international scale, Cambodia is considered very low,” says Higgins.

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MICROFINANCE

MDIs TRANSFORMING INTO COMMERCIAL BANKS

here is a trend in the MFI sector where many of the top performers are aspiring to transform into commercial banks. “It’s inevitable”, says Knuckey, “Because of the scale that they’ve got, they’re looking for more growth and they see their future growth as being more in the SME segment working with a slightly different individual borrower than the traditional MFI customer.”

Chea adds, “Rates need to adapt to the market. At the moment rates are high but over the past five years, rates have been trending down so we only make small portion of profit.” “Higher interest rates do not affect lending growth rates very much. There’s still a lot of demand in the MFI sector. Because of the competition in the sector, interest rates are being adjusted and getting lower, says Hout, “Stronger competition means more benefits to the user. This is the main mechanism for competition between MFIs. I am very happy with the governments free market strate-gy for developing the country. It is very good and very fair.” Compared to the rest of the region, Cambodia’s interest rates are still considered reasonable. “Our rates are much lower than Philippines or Laos. We are similar to Myanmar but compared to Thailand and Vietnam, we are higher. Overall interest rates in Cambodia are more acceptable; not too high and not too low. The price should be dictated by the market. That is the best strategy to use, “explains Hout. “25 percent is one of the lowest in the region but compared to banks it is high. But we can’t compare MFIs and banks,” adds Dr. Mony, “MFIs want to see interest rates drop and still be able to make profits for the shareholders. We want both our clients and investors to get benefits. We have to balance both sides.”

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“The top 4 or 5 MFIs are generally playing in a slightly different part of the market and moving into territory that has been occupied to some extent by commercial banks. So there’s more direct competition as they look for more sources of growth. Therefore I think it’s a natural progression,” he continues.

The concept that MFIs use is one of empowerment. H.E. Chea Serey also agrees, “The transformation is a natural process if qualification criteria are met. Once becoming a commercial bank, the ex-MDI will be competing in a different playground with different set of rules. As such one would have to make sure that they will continue to serve the lower segment of the market the way they used to.” “MDIs are moving in the right direction,” adds Dr. Mony, “MFIs have been accused by NGOs that we are forgetting about the poor when moving towards being more commercialised. They feel we should continue to fund micro loans forever. From my point of view, doing this will keep Cambodia poor forever. We prefer to empower people to become independent, let them decide how much money they need to work towards their goals. If you keep giving, the person who receives never learns to do things for themselves. They become weak and if you stop giving then they will die. The concept that MFIs use is one of empowerment.”

THE CREDIT BUREAU OF CAMBODIA (CBC) & THE MFI SECTOR

he Credit Bureau of Cambodia has been well received by the sector and continues to make positive contributions through supporting MFIs with essential information to ensure responsible lending, protecting both borrowers and corporations. “The credit bureau makes all financial institutions check on client information before loan disbursement.

They bring all the consolidated data from MFIs and banks, and when we access client information, we can have clear information on how much money the client borrows from each institution, then we can use our technology to assess the client and how much, ” comments Chea. Hout believes the CBC has been a helpful contributor, “I think they contribute a lot to the sector. They have helped to stabilise the sector by preventing over-indebtness.” Historically, over-borrowing from multiple lenders as been a feature of the microfinance sector; however the CBC has been able to successfully combat this ongoing challenge through consistent comprehensive governance and the promotion of stronger transparency.

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MICROFINANCE

Moving from an MFI into a commercial bank is not an easy process and requires diligent management, “It places a lot of new constraints on the MFI- more capital, more investment on technology, infrastructure, which will impact their returns. They have to trade growth for return. It’s difficult but also at the same time, they don’t want to stand still,” Knuckey says.

CMA

Dr. Bun Mony, Chairman of the CMA.

CAMBODIAN MICROFINANCE ASSOCIATION (CMA)

ormed in January 2004, the Cambodia Microfinance Association (CMA) is a professional body representing the MFI sector. Composed of several MFI operators, the CMA aims to support microfinance operators in their operations and to strengthen communication with authorities, national and International donors, creditors and investors. It envisions a Cambodia where citizens will receive financial services in a timely fashion through a sustainable and professional microfinance system. “We began running on our own without external support,” reflects Dr. Bun Mony, Chairman of the CMA for the past three years, “Each of its founding seven members contributed USD 2000 each to employ one staff member and purchase the equipment we needed.” Few years later the association received a small grant from a French donor supporting MFIs around the world which enabled them to begin providing

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some training to members. Professional development activities are still high on the priority of the CMA and happen on a regular basis, not only for its members but also for the wider community and the clients of microfinance operators.

APPLYING INTERNATIONAL STANDARDS

ne of the objectives that CMA is striving for is applying an industry standard across Cambodia. The Client Protection Principles (CPP) developed by the Smart campaign based in India, are the only licensee to provide certification for these stringent MFI industry standards. “For last four years, we committed to help support our major MFIs to adopt the certification. It’s difficult, there 92 points that need to be met”, comments Dr. Mony. The CPP is based on seven key principles: appropriate product design, prevention of over-debtness, transparency, responsible pricing, fair respect for clients (no discrimination based on political affiliation, religion, or gender), mechanisms of complaint resolution and maintaining the privacy of clients. So far only one MFI in the kingdom has been successful in acquiring the certification. “The CPP helps not only the client but also the MFI industry to grow with sustainability. It respects the social environment”, adds Dr. Mony. The CMA also aims to promote better transparency and healthy competition in the market. “Before CMA, there were many conflicts between operators regarding staff poaching and competition over clients. When the CMA formed, we invited all members to join and discuss their issues in order to come to a resolution,” explains Dr. Mony, “An MOU was then developed and signed. It’s not 100 percent respected but it provides guiding principles.” For example, the MOU advises against badmouthing of competitors, and if an MFI takes staff from another MFI, then they have a duty to inform that MFI.”

CMA

“We recognise that some clients don’t have enough knowledge to manage their business so we try best to target them through education on financial sustainability. In partnership with different experts from abroad and with donor support, we continue to promote financial literacy within the community. We want to upgrade knowledge and educate our clients in financial management,” says Dr. Mony.

STABILITY OF THE MICROFINANCE SECTOR

t is common knowledge amongst industry insiders that the microfinance industry is performing so well that it is even outperforming the commercial banking sector. With high ROE, good net profits and extremely low rates of NPLs, the microfinance sector appears to be growing from strength to strength. “The function of microfinance is helping the poor to upgrade their living standards as soon as possible, so they can move out of the poverty trap. A World Bank study found that poverty levels in Cambodia dropped by 30 percent between 2004-2011. I believe that MFIs have played a significant role in this”, says Dr. Mony. “MFIs have a total penetration rate of around 60-70 percent of total households in Cambodia. 1015 years ago the average MFI loan size was less than USD 100 per client, while today its USD 1200. This is a stark increase.” “We can keep increasing loan sizes based on the capacity of the client. Cambodia still has huge potential but it depends on each individual MFI and whether they are professional enough to manage and ensure they are growing with sustainability. Then they will be able to move with a more stable market,” he says. The CMA wants to study the qualitative and quantitative impacts that MFIs have had on those they service, however without adequate funding this will not be possible. “We are looking for support from a big donor to fund a impact survey to prove to the public and international community how the industry helps the poor. We are very successful but we do not have the proof of how well we function. We need an independent report,” says Dr. Mony.

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STOCK EXCHANGE

CAMBODIA SECURITIES EXCHANGE (CSX)

ccording to the Securities and Exchange Commission of Cambodia (SECC), the CSX is “a place to exchange stock and other financial tools”. The definition as set out by the Law on Public Offering and Stock Exchange says the CSX “refers to a market or a place of securities exchange or a system as a means to sell, transfer, or buy stock”. According the SECC website, the CSX will improve the Kingdom’s economy by collecting capital and investing it directly. The SECC also expects the CSX to promote more investment in the national economy among individuals. The Ministry of Economy and Finance has majorityowned shares in the CSX, with the other portion (45 percent) owned by the Korean Stock Exchange. Currently there two publicly listed companies since its creation four years ago. The first is the Phnom Penh Supply Authority (PPWSA) which listed in April 2012 and the following year, Grand Twins International, a Taiwanese garment company joined the exchange.

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The Building Inauguration Ceremony of the Cambodia Securities Exchange (CSX) on February 26, 2015.

However, it has been a slow start, as H.E. Sok Chenda Sophea, Secretary General of the CDC explains, “We count on the private sector as an engine o f growth as a means of mobilsing funds. So capital markets are for that purpose. In Cambodia it has been slow as many people still don’t use formal banking institutions and the system is in its infancy. You cannot expect that all of a sudden people jump onto the stock exchange? It’s a process.” All that being said, industry experts have been critical of the choices made around the best candidates to kick-start trading.

STOCK EXCHANGE

“We have chosen the wrong sectors to list first”, says Jake Nam, CEO of SBI Royal Securities, a securities underwriter and M&A advisory, “If you look at other successful Asian equity markets usually telecommunications and banking financial institutions would be the top two picks for the first “commodity” stocks to be listed so they can lead the whole market into the right path of success. The long history of capital markets demonstrated by other advanced economies in Asia has seen telecommunications and full-fledged commercial banks as the most preferred choices to be invested as the first stocks by investors.” Nam noted that other candidates were being considered to be listed however they were not able to have their financials and corporate governance ready in time. Although government sectors are not usually the favourite choice for investors, the Cambodian economy needed to start somewhere and it is important for its growth to privatise government assets. For most of the foreign investors looking to enter capital markets in the Kingdom, government sector stocks are preferred, “It’s because they think that government assets are the only reliable sector in Cambodia, as opposed to general industries sector”, explains Nam.

NEVERTHELESS, THE MARKET IS STILL RECOVERABLE

“T

he nascent capital market today is showing signs of inevitable change, which will dramatically transform the business landscape in Cambodia. As of today there are two companies listed on the CSX. By this time next year that number could increase threefold,” says Lor. Nam agrees, “It is late but it is not too late to select the right sectors to be listed as early as possible which should include leading financial institutions and telecommunications companies. All retails would be suitable candidates for listing as well IT and real estate.” “Canadia Bank has established CANA Securities in order to meet the demand that we expect for more tailored capital products and services. Underwriting public

Jake Nam, CEO of SBI Royal Securities.

listings activity is picking up, and we are engaged with a select group of companies and prepared to assist them. We see this activity increasing significantly, “predicts Lor. In fact industry insiders all foresee that at least three, if not more companies will be publicly listed on the exchange by the year’s end. “Right now we have only an extremely negligible equity capital market, “says Nam, “This will grow and expand substantially because right now SBI Royal alone has a multiple number of mandates to complete listings by the end of this year and early next year.” In fact as BFG was going to print, Cambodia’s market regulator released new listing criteria for a debut trading platform aimed at making it easier for SMEs to list on the CSX on a new “Growth Board”. The minimum operating capital has been downsized from USD 10 million to USD 500,000 for the main board and companies will only be required to release one year of audited financial results instead of three years which is required for larger companies. Firms looking to list are offered further incentives of paying lower eligibility assessment and listing fees and will not have requirements on the minimum amount to be raised in a public offering, thus providing the flexibility for companies to decide for themselves. Lor predicts that as the development and growth in Cambodia continues, corporate customers will seek longterm financing options and advisory services surrounding debt and equity markets, and risk management. Thus the financial sector will flourish in response.

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ADVICE

INSIDER INVESTMENT ADVICE H.E. VONGSEY VISSOTH, Ministry of Economy & Finance

nvesting in Cambodia gives you access to the ASEAN market, as well as access to other countries as we are low income country with trade agreements with EU and US. Make sure you captialise on these connectivity accessibility factors.

H.E. CHEA SEREY, NBC

ambodia is o n e o f t h e most open economies in the region with no restriction on capital flow and foreign ownership of enterprises. Our macro-economics are strong with a low and stable inflation rate (1.5% in 2014), stable exchange rate, great ease of access to finance (ranking number 42 worldwide in the World Bank doing business report 2014), young demo graphy and labour force. Cambodiaâ&#x20AC;&#x2122;s policy makers are very investor friendly and the introduction of online business registration and CO certification as well as the planned amendment of investment law, will further facilitate doing business in Cambodia.

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H.E. SUN CHANTHOL, Ministry of Commerce - CDC

ome to the Kingdom of Cambodia. It is an open economy with generous investment incentives. Our investment regime is the most open of all ASEAN countries. Invest in Cambodia and serve 600 million consumers in both the ASEAN and the world markets where you will benefit from GSP and the EBA schemes.

STEPHEN HIGGINS, Mekong Strategic Partners

et advice! A lot of people come here without doing their homework properly, get advice from the locals because this is an exciting market, high growth market, but if it was easy everyone would be doing it. Be very careful with who you partner with if you choose to enter into a partnership.

DR. BUN MONY, Sathapana & CMA

he MFI sector is doing a good job and I am impressed with the growth in the last five years. It is greatly expanding and operators are strengthening. The Kingdom is a good potential investment option.

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ADVICE

GRANT KNUCKEY, ANZ Royal

encourage investors to come! It is an easy place to do business and thereâ&#x20AC;&#x2122;s a thriving foreign sector here. Be prepared to commit to developing human resources. Any entry market strategy here must be about developing talent and building skills. Donâ&#x20AC;&#x2122;t expect labour pool to already have the skills you require.

CHEA PHALARIN, AMRET

isit the country and see the real situation, buy information from researchers on the market, the Cambodian Credit Bureau can help with information on capital investment. It is concerning that people get information from abroad instead of here, with may not always be accurate. Cambodia has land, roads, electricity, good water resources, and other natural resources that can fit with investors needs. The country has the ability to bring money to other countries and has products to sell via free trade. Cambodia maintains good relations with China and India; these are large markets that can absorb products.

HOUT IENG TONG, HKL

earn about the C a m b o dian market. Learn about how much and when you should make an investment within the market. Be aware of competition before making investments. Find out about how their investment will compete with yours within the market place because the competition is getting stronger and stronger.

MICHAEL LOR, Canadia Bank

his is a very significant time for Cambodia when commercial and trade opportunities are making this country more competitive in ASEAN and globally. With ongoing improvements to infrastructure, a stable banking sector and a business friendly environment that welcomes and supports foreign investment, now is the right time to invest in Cambodia.

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TECHNOLOGY

FINANCE TECHNOLOGIES

ambodia has been experiencing a shift from traditional microfinance and banking services to the digital and mobile world over the past few years.

Metfone’s eMoney service, a collaboration with MB Bank, operates as a “third party processor” and Smart telecommunications company have been granted a license to be a third party processor for ABA Bank which will launch later this year.

Financial inclusion has been evolving thanks to efforts by the MFI sector and Cambodia is now following in the footsteps of other emerging economies with increasing collaborations between mobile network providers or payment providers and banks to broaden accessibility to financial products. Given much of the population of the “unbanked” live in rural areas, MFIs and payment providers have had to innovate finance technologies to reach these people. AMK MFI has been providing a mobile deposit/ withdrawal and money transfer service for some time, as have ACLEDA and AMRET. Wing, a leading third party payment provider who recently obtained a license to become a specialised bank, is one such company who has been driving finance technological advancements. Being a specialised bank, Wing has become independent and accountable to the NBC, and will be able to offer more basic products and services beyond mobile payments.

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Anthony Perkins, CEO of Wing Specialised Bank.

Wing’s corporate solutions include payroll services, electronic bill payments for a variety of companies ranging from utilities (electricity and water bills), through to TV companies, internet service providers, along with loan and premium collections for other financial institutions. Wing also provides solutions for supply chain payments, helping both small businesses pay their wholesalers and suppliers, right through to the giants in the industry to accomplish the same and reduce their costs and cash risks.

DIGITAL TRENDS

ambodia remains a primarily a cash-based society. Will the kingdom follow the global trend towards being cashless and will mobile phones replace the need for debit and credit cards? Anthony Perkins, CEO of Wing, believes the country will embrace these changes eventually in the longer term, “Cash is still king in Cambodia,” he says, “But this is not unusual. Recently in another more developed ASEAN country, the Philippines, the central bank urged financial institutions and consumers to embrace digital payments over cash as the situation there is still 99 percent cash ratio to 1 percent digital.” “Even in a developed nation such as the UK, the ratio is 48 percent cash to 52 percent card/digital. There is a long way to go for Cambodia, but I can certainly see mobile payments overtaking card -based payments very quickly. No bank in Cambodia has really succeeded in card/POS payments, and credit card ownership is still very low reflecting the lack of trustworthy data on consumers. Either way, I expect to see a stronger growth in pre-paid and debit cards, but ultimately I see mobile payments overtaking even those in the long run,” predicts Perkins.

TECHNOLOGY

Wing has been working in partnership with the MFI sector for several years providing means for MFI customers to repay their loan installments either through their Wing account or via Wing’s enormous Wing Cash Xpress network, with some 3,000 outlets nationwide covering every district within the country. In addition, Wing it also works closely with other financial institutions such as leasing companies, banks and insurance providers.

WHAT ARE THE FACTORS DRIVING FIN-TECH INNOVATIONS?

ambodia has extremely high mobile penetration and this is one factor pushing advancements. “The move from feature phones to smart phones is gradually picking up pace,” says Perkins, “This is also a great innovation as one of the biggest challenges of the older mobile technology is their ability to display Khmer language on feature phones. Less than 10 percent of the phones in the market support Khmer language via USSD. This means that customers must access services like Wing generally in English, which is a big barrier to adoption, particularly in rural areas. As mobile operators improve their 3G and 4G services, along with Smart phones, I think we’ll see a much better uptake of mobile financial services.”

Cash is still king in Cambodia but I can certainly see mobile payments overtaking card -based payments very quickly. In other nations, attempts to reduce money laundering and terrorist activities are other factors influencing finance technology innovations. Bio-metric data collection is one solution to combat these issues. “Pakistan now collects bio-metric data when a customer buys a new SIM card, “explains Perkins, “Once the telecom operator obtains this high security data, they can immediately offer that customer mobile financial services. I would love to see this in Cambodia where currently SIMs are effectively given away by some operators. If mobile financial service companies could rely on the SIM registration data, everyone in the nation could immediately be given access to financial services overnight.” Cambodians are still yet to embrace e-commerce trade platforms with only a minimal number of companies taking the plunge often using Facebook as their main commerce podium. With software piracy still rampant, the online world in Cambodia remains open to IT security risks, and the minimal use of credit cards

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TECHNOLOGY

entrepreneurs in this space, it remains a ‘buy online-pay offline’ model as most sites fall down on the logistics of delivering their products with the lack of a functioning post office and addressing system nationwide,” says Perkins, “Some of the larger e-commerce sites are now addressing this and I expect e-commerce to flourish over the coming years as the demand is certainly there.” One area Wing has witnessed strong growth potential is in online cinema ticket bookings, “This is working well as customers can reserve their preferred seats and then simply show their receipt on their mobile when they go to the cinema, and no longer need to queue.”

TECH INNOVATIONS and the absence of a national postal system or adequate logistics make buying and selling online a widespread challenge. One of the main security issues faced in Cambodia with mobile-based services is the lack of understanding by locals of the importance of PIN security. “Consumers are far too trusting of friends, family or colleagues and share their account number, card and PIN too easily. Wing has spent a lot of effort improving the education of its customers in this regard, and the situation has improved hugely since 2009, however it remains an issue,” says Perkins, “As mobile financial services continue to grow and become more entangled with the internet, e-commerce and mobile-apps, there will be new threats that need to be tackled such as spoof sites and phishing attacks.”

As mobile financial services continue to grow there will be new threats that need to be tackled such as spoof sites and phishing attacks. Wing currently provides online payment services to its customers on the handful of e-commerce websites in the kingdom. “Whilst there are many Cambodian

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ambodia is an emerging player in the region with regard to tech start-ups, with hubs appearing in Phnom Penh and Siem Reap and strong support from entities such as USAIDs DAI program. The USAID/Social Innovation Lab–Kampuchea (SILK) is a three-year pilot supplying an innovation lab space to host social and technology professionals and entrepreneurs who design programs and tools to support social innovation and new media technologies, with the aim of advancing social issues. “Not many are touching on financial services just yet,” says Perkins on tech start-ups, “But the universities

TECHNOLOGY

the big corporates switching to cloud,” agrees Perkins, “Banks traditionally are the slowest to move to new technology until they are 100 percent certain with the security aspects.”

are producing the talent and I’m sure with a bit of imagination we’ll see some very innovative start-ups in Cambodia in the coming years.” Global trends in cloud and wearable technologies as well as corporate solutions such as big data management are unchartered territory in Cambodia. Although cloud-based computing has more benefits than traditional, this trend in Cambodia may be awhile off, “I think it will be a long time before we see any of

“Big data is another area drawing a lot of attention worldwide as companies beyond Google, Facebook, and Amazon, etc, realise that they are sitting on a gold mine of information that can be used to tailor their product offerings to specific consumers,” comments Perkins, “Wing is no different in this regard as we already makes use our six-plus years of customer data to allow our clients to get a phone top-up balance advance, a nano-credit line less than a dollar without any paperwork effectively, the repayment rate is nearly 100 percent”. The potential for technological innovations and advancement in Cambodia is enormous especially in the financial services sector. The tech landscape is rich with opportunities, and with the right education and infrastructure, the masses will adapt and embrace this new age of convenience.

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LEGAL MATTERS

ambodia is home to a number of local legal firms and several regional professional business advisory companies. Due to bar association rules, firms may not provide legal advice unless they are licensed by the bar association. However, some such firms offer a full scope of services to foreign investors, ranging from advice and assistance with respect to company establishment and market entry to industry-specific licenses, regulatory compliance, labour considerations and tax, accounting and banking matters.

Another reason to seek advice from knowledgeable lawyers based in this country prior to making an investment is that â&#x20AC;&#x153;international standardâ&#x20AC;? documents prepared by industry bodies (e.g. the Loan Market Association) are not always the best starting point for preparing agreements and instead the locally accepted

Patrick Smith, Managing Partner of Sciaroni & Associates, a leading professional services and investment advisory firm based in Cambodia, says that the key to successful investment in Cambodia is to speak with lawyers who have in-depth knowledge of the local legal and business sector prior to taking any action. He notes that there are some key reasons to seek appropriate legal advice before plunging into an investment in the kingdom and that it is important to know that the courts and government authorities may interpret laws in a way that differ from the common or even literal interpretations.

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Patrick Smith, Managing Partner, Sciaroni & Associates

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LEGAL MATTERS

form may be a better starting point. Such lawyers are also well placed to advise on who the most relevant local people and/or companies to “team-up” with to create the right partnerships.

RULES & REGULATIONS: TYPICAL CHALLENGES

here are general challenges facing investors with regard to the clarity, robustness and consistency of rules and regulations and their application within Cambodia. These may be compounded by a lack of official guidance from the courts who do not generally publish their judgments, and government authorities with respect to variance in the interpretation of such rules.

court system is that court decisions are generally not published, resulting in a lack of judicial guidance. However the highest court of the country, the Supreme Court, has commenced publishing its judgments. Smith anticipates that in the near future specialised courts will be created, including a court dedicated to commercial matters. He further anticipates the creation of a number of regional Courts of Appeal in certain provinces to assist the single Court of Appeal in the capital of Phnom Penh, therefore easing the pressure on the current overloaded system. However, Smith notes that there are some transparency issues that remain in the judicial process but fortunately strong measures are being taken to resolve these issues and Cambodia remains committed to improving its judicial system.

DISPUTE RESOLUTION

n March 2013, Cambodia launched the NCAC, created under the 2006 Law on Commercial Arbitration, which is known to largely conform to the UNCITRAL Model Law. A key objective in setting up the NCAC is to offer the business community an alternative to the Cambodian system.

The Supreme Court in Phnom Penh.

“The Cambodian court system has improved overall in recent years, particularly since the introduction of the new Civil Procedure Code in 2006,” says Smith, “Nonetheless, it is still perceived as being overburdened, understaffed and at times inexperienced when dealing with complex commercial disputes.”

Transparency issues remain in the judicial process but fortunately strong measures are being taken to resolve these. The industry welcomed the introduction of the National Commercial Arbitration Centre (NCAC) and it is expected to provide some relief to the overloaded the court system over time. In addition, a common challenge facing parties intending to utilise the Cambodian

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If foreign courts are chosen for dispute settlement, local enforcement would be impossible unless the requirements mandated by the 2006 Code of Civil Procedure are satisfied, including a condition for a treaty or similar bilateral agreement guaranteeing reciprocity between Cambodia and the foreign country in which the court is based.

TRADE LAWS

n 2004, Cambodia was admitted to the World Trade Organization (WTO), which expanded trading opportunities between Cambodia and the rest of the world. Under its WTO membership, The General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade and Services (GATS) are likely to have the most significant impact on Cambodia’s international trade, followed by the Agreement on

Cambodia has entered into bilateral free trade agreements with numerous countries, primarily aimed at mutually protecting and promoting investments, preventing nationalisation and providing more freedom for dispute resolution choices. These FTAs have also provided Cambodia’s exporters and importers with improved access to partner markets and reducing trade barriers. Exporters of Cambodian products also enjoy preferential tariff treatment from the European Union and other developed countries. By the end of 2015, Cambodia will be economically integrated into the AEC further expanding regional trade agreements.

PROPERTY LAWS

ccording to Smith, a foreign-owned company is afforded all the same rights and benefits of a locallyowned company, with a key exception that it cannot own land. Under the laws of Cambodia, only Cambodian citizens or Cambodian entities are legally allowed to own land in Cambodia. Cambodian entities are defined as having been incorporated in the country with 51 percent or more of the voting shares held by Cambodian citizens or Cambodian entities. Notwithstanding, to the extent required, wholly foreign-owned companies typically create long-term leases, security interests and minority share landholding companies to preserve their interest in land. Additionally, under the 2010 Law on Providing Foreigners with Ownership Rights in Co-Owned Buildings,

LEGAL MATTERS

Trade Related Aspects of Intellectual Property (TRIPS) and the Customs Valuation Agreement (CVA).

foreigners are permitted to own certain qualifying condominiums provided that the building in question has been approved for “strata” titles, the condominium is located above the ground floor and that foreign ownership does not exceed 70 percent of the total floor space of the building.

Foreign-owned companies are afforded all the same rights and benefits of locally-owned companies, with the exception that they cannot own land. Smith explains that foreigners can enter into either short-term leases (where the duration is less than 15 years) or long-term leases, “Under the Civil Code, long-term leases (also known as perpetual leases) have a duration no less than 15 years and not exceeding 50 years (but may be renewable for a further term of up to 50 years).” “A long-term lease constitutes a right in rem over immovable property and such rights may be assigned for valuable consideration or transferred by succession,” continues Smith, “However it is important to note that a long-term lease does not reflect an ownership right. To be enforceable against third parties, long-term leases should be registered on the title certificate for the land with the relevant Land Office.” Regarding building construction, Smith says that investors who are the owners of the structures must obtain a once-off construction permit for each proposed structure prior to commencing any type of construction on land in Cambodia. “Certain conditions and requirements may be stated in the construction permit if deemed necessary by the Ministry of Land Management, Urban Planning and Construction (MLMUPC) when the total size of the construction is greater than 3,000 square metres or by the Municipality of Phnom Penh when the total size of the construction is less than 3,000 square metres.”

Purchasing condominiums has been easier for foreigners since new laws were passed in 2010.

In addition to construction permits, an Environmental Impact Assessment (EIA) is required for certain development projects due to their nature, size or

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LEGAL MATTERS

activity. Developers will also require a real estate development license from the Ministry of Economy and Finance. Supporting documents required for the license applications vary according to the different classifications under which the developer falls.

TECHNOLOGY LAWS

“T

he development of a legal framework governing technology in Cambodia is in its nascent stage,” says Smith, “It will undoubtedly require the introduction of more robust regulations to keep pace with technological advancements and to retain competitiveness.”

Investors who are the owners of the structures must obtain a once-off construction permit for each proposed structure prior to commencing construction. A Royal Decree was issued in 2012, established the Telecommunications Regulator of Cambodia (TRC) as an autonomous institution of the government responsible for the technical and administrative control and management of the construction, operation, and provision of Cambodia’s telecommunication network and related communication and information technology services. The TRC implements the policies for the telecommunications sector as determined by the Ministry of Posts and Telecommunications. A draft of a telecommunication law is in the final stages of development, but it is unclear when this legislation will be enacted in the future. Regarding personal data, Smith says at present there are no consolidated regulations specific to data privacy or data protection in Cambodia and no definition as to what constitutes “personal data” under Cambodian law. Smith notes that the banking and finance laws in the kingdom appear to be the only such laws dealing with the privacy of customer data. Concerning intellectual property, Smith states that “while copyright arises automatically under law and trademarks may be registered, the process of registering a patent still remains cumbersome due to lack of

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technical ability to assess prior art and novelty.” He adds that here is still room for development in this area.

RISK LANDSCAPE

ne factor that remains in the forefront of investors’ minds is the risk of dealing with corruption when interacting with some of Cambodia’s public institutions. Smith says, “The relatively high level of risk presented by inadequate law enforcement in Cambodia and the persistent lack of transparency in certain public institutions continues to deter investors. Investor concerns relating to anti-corruption compliance are further exacerbated by the stringent rules of extra-territorial anti-corruptions laws, particularly the US Foreign Corrupt Practices Act, Australian Criminal Code and UK Bribery Act, to which many foreign investors are subject.” However, Smith adds that the Cambodian authorities are beginning to recognise the undeniable deterrent subsistent corruption presents to foreign investors, and is being addressed by the governments’ recent implementation of the National Strategic Development Plan 2014-2018.

Of further note, Smith says the recent introduction of prescribed official fees by various Ministries has had a positive impact in reducing low-level corruption and reduced barriers in daily business. Another factor which characterises the current risk landscape within the market is investors’ reliance on employing foreign workers as opposed to the local labour pool due to their technical skill shortages in certain industries. Investors need to be aware that there are quotas with respect to the hiring foreign employees in Cambodia.

LEGAL MATTERS

Infrastructural challenges and high power costs present hazards. “The regional push led by the Asian Development Bank to develop the Greater Mekong Sub-region transport corridors and the increasing trend in investments relating to large power projects will, in time, ease the abovementioned market constraints, “adds Smith. Cambodian Prime Minister Samdech Akeak Moha Sena Padey Techo Hun Sen greets Asian Development Bank (ADB) President Takehiko Nakao in Phnom Penh.

Smith remains optimistic despite of the general lack of a skilled labour force, due to the combination of a remarkably young population, substantial assistance from non-governmental organisations inter-governmental bodies and the implementation of promised education reforms by the Cambodian authorities to reduce Cambodia’s labour skills deficiencies and contribute to the kingdom’s transition from a developing nation to a middle-income country. “This is particularity important given the fact that Cambodia is beginning to witness a gradual decrease in agricultural and garment factory activities and, instead, the emergence of more sophisticated, albeit nascent, manufacturing and services industries,” adds Smith.

The persistent lack of transparency in certain public institutions continues to deter investors. Infrastructural challenges and high power costs also present hazards. Smith agrees, “A combination of high electricity costs relative to neighboring countries and an overburdened and inadequate transport network is restricting the potential for the diversification and development of the Cambodian investment market.” However, the government’s recent launch of the Industrial Development Policy (IDP) is aimed at addressing those very issues, in an attempt to alleviate investor concerns over costs.

TAX & ACCOUNTING

he taxation system in Cambodia is evolving and laws governing taxation are actively being enforced after lying dormant for some years.

“We have not introduced any new tax policies but instead we have been enforcing the law and tax administration by enforcing compliance,” explains H. E Vongsey Vissoth, Secretary of State at the Ministry of Economy and Finance, “At the same time we are working really hard to simplify tax services such as registrations and filing.” According to the Ministry of Economy and Finance, a new tax system will be introduced after 2018, but until then enforcement under the existing law will continue. With an increasing number of tax agents joining the General Department of Taxation, tax audits have grown in frequency and numbers, with several accounting firms offering audit and corporate finance services to suit all business needs. There are four major accounting firms operating in Cambodia, namely Deloitte, KMPG, Price Waterhouse Coopers and Ernst Young in addition to several legal advisory firms who are available to help clients be aware of their compliance obligations under Cambodian law. International Financial Reporting Standards (IFRS) for Small Medium Enterprises (SMEs) have also been launched and businesses are expected to comply with these reporting standards.

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INSURANCE

THE INSURANCE SECTOR

ambodia’s insurance industry is still developing and in general Cambodians and business communities are not fully informed of the insurance system and lack understanding. Limited local expertise in the field, a weak judicial system and a limited number of compulsory insurances has placed constraints on the industry’s expansion. However despite this, the Cambodian insurance sector continues to grow, mainly due to the favorable climate of economic growth. According to the Insurance Association of Cambodia, the sector produced a 27 percent increase in 2014 and has grown at a robust 25 percent per annum, with this growth expected to continue in the coming years in line with a stable economy, increasing customer confidence, understanding of insurance benefits and the effectiveness of controlling technical frameworks, as well as laws and regulations of the government aimed to preserve the benefits to insured and insurer. The breadth of products available is increasing with a variety of corporate and personal insurances. Health and medical evacuation is well sort after along with corporate healthcare packages and accident policies.

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The sector has grown at a robust 25 percent per annum with this growth expected to continue. “Demand traditionally has been for products such as accident and health, and property and casualty products for corporations and businesses, “says Charles Cheo, CEO of Forte insurance in Cambodia. “Today, however, we see a demand for construction and engineering-based products, as well as a growing need for cargo insurance as trade activity increases throughout the country. There is also an on-going demand for health, travel and motor insurance within the consumer products sector.”

INSURANCE LAW

he Royal Government of Cambodia released a new insurance law in mid 2014 aimed at bringing sustainability and more accountability to the sector. Forte Insurance, which began operating in Cambodia in 1996 and is one of the first insurance companies here, advised the government on the development of this

INSURANCE

Further, the new insurance law clearly specifies the procedures for insurance company liquidation and also provides a forum for dispute resolution. Under the new law, dispute parties may decide to seek the conciliation from the Ministry of Economy and Finance before resorting to commercial arbitration or the courts.

Failure to implement adequate best operational risk practices can result in substantive damage to a company’s brand as well as its bottom line. Charles CHEO, CEO of Forte Insurance.

insurance law. “The new law has made a positive change to the insurance industry in Cambodia,” says Cheo. Under this new law, every type of insurance company, except micro insurance companies, is obligated to have to have the amount of USD 7 million worth of capital which must be deposited in whole at the time of their opening. This strictly requires that all insurance companies must have sound capital before they can start their business. “This requirement builds trust and confidence among customers,” says Cheo. Cheo explains that the new insurance law also provides the mechanism to enforce provisions relating to compulsory insurance by establishing the insurance inspection process. “The main role of insurance inspections is to ensure that all businesses required to have insurance comply with this requirement.”

Under the new law, every type of insurance company, except micro insurance, is obligated to have the amount of USD 7 million worth of capital ready at the time of their opening.

A fire tariff introduced in mid 2014 regulates coverage on property risks up to USD 10 million for any one property in conjunction with pricing. Further regulations around third-party liability and private car ownership are being implemented. Presently by law, only commercial vehicles are required to have insurance.

COMMON OPERATIONAL RISKS OF FINANCIAL INSTITUTIONS OPERATING IN CAMBODIA

t is important that financial institutions need to understand various operational risks they face and the various damaging consequences arising from inadequate operational risk management. “The risks and costs which can result from inadequate attention to good operational risk management can be significant, from both a financial and reputational perspective. A failure to implement best operational risk practices can result in substantive damage to a company’s brand as well as its bottom line, along with personal exposure to company employees and directors,” said Cheo. Most insurance companies offer corporate insurance packages providing comprehensive financial protection for those institutions against major operational risks.

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INSURANCE

“The packages we offer at Forte keeps businesses protected should a failure or loss occur within the organisation as a result of wrongful acts, fraudulent acts by employees, collusion with a third party, physical attacks and cyber-attacks from outsiders,” explains Cheo. Depending on the type of business, there a several types of insurance a company should consider purchasing. Personal accident, hospital and surgical cover for employees are highly recommended and most insurance firms will tailor products to fit your company’s needs. For corporate property and investments, fire and perils insurance is available as well as professional indemnity insurance. Solène Favre, CEO of PKMI micro insurance.

MICRO INSURANCE

he micro insurance segment of the industry is booming. The International Association of Insurance Supervisors (IAIS) defines micro insurance as “protection of low income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.” Micro insurance companies offer affordable health, life and personal accident insurances to low- middle income individuals and businesses and is often sold in conjunction with micro finance loans. “Micro insurance differs from traditional insurance in that there are limits to what is covered and duration of the policy,” says Solène Favre, CEO of Prévoir

Kampuchea Micro-Life Insurance Plc (PKMI), the first micro insurance provider in Cambodia, “Our products are designed for people with low insurance literary. We develop our products to fit with our target populations’ capacity to understand, use and pay for policies. The needs of someone who living in the countryside with USD 80 per month income is different to someone living in the city earning USD 300 per month.” “We have to develop products that are simple, understood, accessible, valuable and effective. These factors define micro-insurance, “she continues.

Micro insurance products have to be simple, understood, accessible, valuable and effective. Micro insurance policies are mainly promoted and distributed through MFIs, although claims are generally settled by the insurer rather than the MFI. Given the industry is still emerging; one of the main challenges for insurance companies in general is insurance literacy. Many locals simply do not understand the concept of insurance.

Due to poor infrastructure, building fires are common in Phnom Penh.

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“Public awareness of insurance is still very low, says Favre, “In addition, people here are not confident about insurance providers. There is a lack of trust in people

INSURANCE

asking for some money and not giving back something immediately. Unlike MFIs, they go there in order to get a loan and get results quickly.” Favre attributes this attitude to previous mismanagement and abuse by companies towards the local population; she speculates that these companies may have taken money from their clients and closed down due to lack of funds, leaving people still seeking reimbursement. “Paying for something that may happen; this idea is not common here. However this is improving, with more education the trust is growing.” Mainstream insurance also sees challenges in the areas of education and awareness. “Most people don’t understand the benefits of insurance and mistaken it as an expense rather than an investment in protection. We constantly have to relook at how we communicate the benefits of our products and evaluate if it meets the needs of a particular segment,” adds Cheo.

Paying for something that may happen; this idea is not common here. Micro insurance providers such as PKMI provide extensive training to their MFI partners who use special developed pictorial tools to educate potential customers on the social benefits of insurance as well as facilitating community workshops on road safety, health and how to reduce risks. This seems to be paying off for PKMI in that 133,000 voluntary policies have been taken out within the three years that they have been in operation. Favre is optimistic that policy numbers will continue to grow rapidly. “Health costs are rising. Product demand today exists mostly around health insurance for people. That’s because it’s most immediate and because there is no social security in this country,” explains Favre.

“PKMI just launched one product with Vision Fund MFI. If a client opens a saving account, they get their insurance for free. This provides incentive for people to save but it does come with conditions. We will see more and more of this kind of product in the future,” she predicts.