Chapter 8 : Banking and Finance
The regulatory framework applicable to the banking and finance sector is set forth in the Law on Banking and Financial Institutions promulgated on November 18, 1999 (the Banking Law); the Insurance Law promulgated on August 4, 2014; and various regulations issued by the National Bank of Cambodia (NBC) and the Ministry of Economy and Finance (MEF) since 2000/01. Other important laws and regulations affecting banks and financial institutions include the Law on Negotiable Instruments and Payment Transactions, promulgated on October 25, 2005; the Law on Secured Transactions, promulgated on May 22, 2007; the Law on Anti-Money Laundering and Terrorist Financing, promulgated on June 24, 2007; the Law on the Issuance and Trading of Non-Government Securities promulgated on October 19, 2007; the Law on Financial Leasing promulgated on June 20, 2009; and the Civil Code of 2007 (enforced in 2011). These are discussed further below.
1. The National Bank of Cambodia (NBC)
The NBC is the central bank and is charged with supervising and regulating financial institutions in Cambodia. It has the power to license banks, regulate money transfers, provide credit, conduct foreign exchange transactions, and deal in precious minerals and commodities. The NBC’s authority to supervise and regulate banks includes authority over micro-finance institutions (MFIs), specialized banks and commercial banks (known collectively as “covered entities”). The NBC’s powers extend to insolvency actions involving to covered entities.
The NBC may require all covered entities to submit reports on a monthly, semi-annual, or annual basis regarding their activities and compliance with regulatory requirements. It may appoint an examiner to investigate bank operations, appoint a control committee to run and manage the bank, establish credit ceilings and foreign exchange requirements, set banking business hours, and establish interest-rate guidelines.
If a bank or financial institution is held to have violated or be operating in violation of the Banking Law, the NBC has wide ranging powers – from imposing fines to revocation of the covered entity’s license, seeking a term of imprisonment through a court order and it has the authority to appoint a provisional administrator in order to preserve, remedy, or resolve such a bank’s financial position. The provisional administrator may be appointed by the court as a liquidator with the authority to liquidate the bank’s assets where necessary.
An important development in the banking sector came in late 2006 with the introduction of an indefinite license being provided by the NBC to all forms of banking and financial institutions operating in Cambodia. Moreover, in late 2007, some licensed MFIs that satisfied certain additional regulatory requirements were licensed by the NBC to collect deposits from the public: these institutions are called micro-finance deposit institutions (MDIs).
2. Types of Banks
The Banking Law divides banks into commercial banks, specialized banks, and specialized financial institutions (including securities companies). MFIs and MDIs are not explicitly recognized in the Banking Law but are subject to the Banking Law and supervised by the NBC because MFIs and MDIs engage in banking activities. Only licensed banks, MFIs, and MDIs may engage in the activities set out in the Banking Law.
Banking activities conducted by commercial banks shall be carried out by a public limited company. In terms of licensing, the Banking Law requires the NBC to consider, among other things, the characteristics of any “inﬂuential shareholder,” as defined by law, and to consider the extent that an applicant bank’s ownership would be spread among shareholders. The NBC looks to the above qualities for the purpose of determining whether the proposed shareholders of the Cambodian bank would be able to inject capital where the proposed bank fails to meet its prudential requirements.
All commercial banks that existed before the Banking Law came into eﬀect had to apply for a new license from the NBC after its promulgation. Commercial Banks must have a minimum registered capital of at least KHR 300 billion riel (USD 75 million).
Commercial Banks may carry out all types of banking operations, such as credit operations for valuable consideration, leasing, guarantees and commitment under signature, collection of non-earmarked deposits from the public, provision of means of payment to customers, processing of payments in national or foreign currency, foreign exchange operations, money market intermediation, transactions in derivatives, and spot or forward dealing in precious metals, raw materials, and commodities.
Specialized Banks are licensed by the NBC to engage in a limited subset of the activities which commercial banks are authorized to do. Specialized bank locally incorporated must maintain minimum registered capital of at least KHR 60 billion riel (USD 15 million).
MFIs are, generally, authorized to engage in credit services and saving, but an MDI license is required to collect deposits from the public. MFIs that have portfolios below a certain value and that have a limited number of borrowers are required to register with the NBC, but do not require an MFI license. Any MFI that has a portfolio above a certain value or a number of borrowers above the legally specified amount must be licensed as an MFI. MFI licensure requires the entity to be organized as a limited company or a cooperative. MFI must maintain minimum registered capital of at least KHR 6 billion riel (USD 1.5 million).
The NBC plays a very active role in regulating the banking sector. Several regulations dealing with matters such as corporate governance, insolvency ratios, and liquidity ratios of a bank or financial institution have been issued by the NBC. Amongst other financial activities, it is possible that banking activities are the most regulated business activities in Cambodia.
In practice, most commercial banks will perform overseas wire transfers, oﬀer foreign exchange services, and will issue letters of credit secured by cash deposits. Lending is increasing, supported by recent developments regarding the enforcement of secured interests, as discussed below. Loans are typically for short terms with relatively high interest rates compared to those found in developed countries, and security or collateral is often a necessity.
The Banking Law sets out a step-by-step procedure for provisional administration and subsequent liquidation of banks when they fail to carry out their duties and obligations under the law. In particular, there are procedures for appointing a provisional administrator after attempts at recapitalizing the bank via capital injections from “inﬂuential shareholders” do not succeed. The NBC may appoint a provisional administrator who then has exclusive powers to manage, direct, and represent the bank. The provisional administrator may declare the suspension of payments and refer the case to the court, which will appoint a liquidator.
Under the Insurance Law, only insurance companies, agents, and brokers that are licensed to operate in Cambodia may insure risk, sell insurance products, and conduct an insurance business in the country. Insurance contracts must be prepared in Khmer language and are subject to principles of good faith and mutual benefit to all the parties. Insurance companies, whether state-owned, private, or joint-venture are only allowed to operate in Cambodia in the form of public limited companies.
Life insurance companies and general insurance companies are each separately licensed and required to have registered capital of at least approximately USD 7 million (actual value expressed in SDR (Special Drawing Rights), the exchange rate is for the date on which the license is granted). For companies involved in both life and general insurance, the required registered capital is approximately USD 14 million. The insurance company is required to make a 10 percent fixed guarantee deposit with the NBC. This deposit is maintained until the company ceases its business operations in Cambodia.
Purchase of insurance from a licensed insurance company is required for the following: motor vehicle third-party liability insurance for all types of commercial transport vehicles (including passenger transport); and all buildings, repairs, and installation sites under the responsibility of entrepreneurs, contractors, or sub-contractors, except those of the state. In August 2008, a regulation on the life-insurance business was adopted by the MEF.
4. Financing and Secured Transactions
Domestic lending has expanded in recent years. In 2015, the amounts lent by banks registered in Cambodia increased in value by approximately 33% over the previous year. Cambodia’s legal framework allows relatively unrestricted local and foreign lending and the growth outlook for Cambodia remains positive.
Security over movables may be governed by either the Civil Code or the Law on Secured Transactions. While it is possible to take a pledge or assignment by way of transfer under the Civil Code, such forms of security are rarely used due to the burdensome nature of the requirements. The Law on Secured Transactions, on the other hand, provides creditors with a robust and eﬃcient framework within which they may take security over locally based movables.
Subject to some restrictions, movable property that may be given as security under the Law on Secured Transactions includes both tangible and intangible assets such as; rights, claims, shares, accounts, and secured sales contracts, and they may secure one or more obligations.
The Law on Secured Transactions established the Secured Transactions Filing Oﬃce, under the auspices of the Ministry of Commerce (MOC). Security interests may be registered (or de-registered) quickly and at a low cost. Records of past security filings may be found since the start of operations of the Secured Transactions Filing Oﬃce in early 2008.
The Law on Secured Transactions cannot be used to take security over immovable property, and the Civil Code remains the primary governing legislation in respect thereof. Under the Civil Code, lenders may take a hypothec (similar to a mortgage) over the land. Other forms of security are also possible (e.g. a pledge of land) but these are relatively uncommon in Cambodia.
Generally, the hypothecee will take possession of the hard title to the hypothecated property and register its security interest at the relevant land oﬃce. It is critical for lenders to conduct proper due diligence on the hypothecator’s title to the land.
5. Currency and Foreign Exchange
Cambodia is primarily a cash-based economy; however credit cards are becoming more commonly accepted commercially. The national currency of Cambodia is the Khmer Riel (KHR), which has remained stable since 1998 at around 4,000-4,200 Riel to the US dollar.
Parties are free to denominate their transactions in foreign currencies. The US dollar is in common circulation and is freely traded throughout the country (though less so outside of the capital of Phnom Penh).
The 2003 Investment Law guarantees that investors may freely remit foreign currencies abroad for the purposes of the following:
- payment for imports and repayment of principal and interest on international loans;
- payment of royalties and management fees;
- remittance of profits; and
- repatriation of invested capital upon dissolution of an investment project.
Under the Foreign Exchange Law of 1997, foreign currencies may be freely purchased through the banking system. The law specifically states that there shall be no restrictions on foreign exchange operations, including the purchase and sale of foreign exchange, transfers, and all types of international settlements. However, the law does require these transactions to be performed solely by authorized intermediaries. These intermediaries are the lawfully established banks in Cambodia, required to report transactions in excess of USD 10,000 to the NBC. There is no requirement that the investor sending or receiving the funds make a report on the transaction. The burden rests solely with the bank as the authorized intermediary.
It is important to note that while foreign exchange transfers are not currently restricted, the law does allow the NBC to implement exchange controls in a foreign-exchange crisis. The events that would constitute such a “crisis” are not specified.
6. Negotiable Instruments
Negotiable Instruments are written orders or promises to pay a determined sum of money, transferable by delivery, and where required, also with endorsement. They include checks, bills of exchange, and promissory notes. The Law on Negotiable Instruments, promulgated on October 24, 2005, governs the use of negotiable instruments. The following points are treated in detail: endorsement, acceptant, aval, maturity, payment, recourse for non-acceptance or non-payment, intervention for honor, parts of a set, copies, alternations, limitation of actions of recourse and time calculations.
Payment transactions are transfers of funds, either credit or debit, between or from bank accounts, initiated by means of a payment order, which may be written, electronic, or under some conditions, in oral form.
Payment systems consist of institutions and mechanisms facilitating payments in money and the transfer of monetary value by means of payment transactions. In addition to the sanctions imposed by the Law on Negotiable Instruments and Payment Transactions, such as a fine from KHR 5 million to KHR 50 million, and imprisonment from two to five years, the NBC is granted broad powers to adopt and enforce penalties on persons who fail to pay debts in connection to negotiable instruments and payment orders. The penalties may include: a warning or a reprimand; a prohibition or limitation on issuing any negotiable instruments or authorizing debit transfers for up to 12 months; a penalty payment of 5 percent to 100 percent of the face value of any dishonored instrument, payment order, instrument or authority issued, in violation of a prohibition or restriction.
7. Impact of the Civil Code on the Banking Business
The Civil Code is a relatively recent piece of legislation that applies to obligations generally. It is general legislation and therefore, as a general principle, any provisions of any law applicable to banks and other financial institutions that conﬂict with any provision of the Civil Code are likely to take precedence over the conflicting term in the Civil Code. The main provisions of the Civil Code aﬀecting or that may aﬀect banking business relate to;
- formation of contracts;
- assignment/novation of contractual positions;
- grounds on which a contract may be rescinded (reﬂecting, in part, consumer protection concerns);
- taking of guarantees and the formalities required;
- security interests (described above);
- rates of interest chargeable on “loans for consumption”; and
- requirements on sellers to explain the details and risks of transactions.
Chapter 9 : The Securities Markets
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