Banks, MFIs told to Raise Capital Requirements

May Kunmakara / Khmer Times No Comments Share:

The National Bank of Cambodia is doubling minimum capital requirements for banks and sharply increasing those for microfinance institutions (MFIs) to strengthen the rapidly expanding finance sector, according to a prakas, or directive, from the NBC issued on Tuesday and released publicly yesterday.
 
Banks and MFIs will have two years to raise their minimum capital requirements, the prakas says.
 
The sector has grown 750 percent since the NBC last raised capital requirements eight years ago, according to a client note from consultancy Mekong Strategic Partners, which described the latest step as a “sensible, carefully calibrated move by the NBC [that] will strengthen the Cambodian financial system.”
 
“Our overall take – an unquestionably good move … [the] NBC continues to impress,” it said.
 
The rise in capital requirements, the third since 1999, will require commercial banks, including subsidiaries of foreign banks, to have $75 million in capital reserves by the end of 2018, up from $37.5 million now. Subsidiaries of investment grade foreign banks will be required to increase their capital reserves from $12.5 million to $50 million, while specialized banks will need to raise their reserves to $15 million from $7.5 million.
 
Deposit-taking MFIs are required to increase reserves to $30 million, up from $2.5 million now, while other MFIs will have to increase their reserves to $1.5 million, up from $62,500, according to the prakas.  
 
Chea Serey, the director general of the NBC, said the increases are part of the central bank’s prudential measures to strengthen the capital base of banks and MFIs.
 
The increase in the minimum capital requirement and the recently introduced liquidity coverage ratio will ensure that banks operate in a safe and sound manner and ensure financial stability, she said.
 
She said the move was being introduced now because the sector is healthy.
 
“Measures are introduced when banks are doing well… This is like payment insurance. You don’t start an insurance policy when you are already sick. No one will insure you. We feel that the banking system is healthy enough now to introduce new measures to further strengthen it,” Ms. Serey said.  
 
Acleda Bank CEO In Channy also applauded the move, saying it was in line with Cambodia’s expanding economy. Raising capital requirements at banks and MFIs will made the sector stronger and better equipped to compete regionally, Mr. Channy said.
 
Mr. Channy also noted that services and products offered by banks had become far more sophisticated since 2000, risk levels had changed and competition was more intense. As a result, banks have to be in very firm financial positions, he explained.
 
Mr. Channy said Acleda already has $265 million in registered capital and plans to inject another $50 million more this year.
 
The emergence of the ASEAN Economic Community, which is allowing the free flow of goods, services and skilled labor throughout the region, also requires that Cambodia strengthens its finance sector so it can be competitive, Mr. Channy said.
 
Ms. Serey noted that most MFIs in Cambodia began from small NGOs with a social mission. This was factored into minimum capital requirements at the time, she said, adding that the NBC also avoided over burdening MFIs with excessive regulatory costs.
 
“However the MFI landscape now is completely different. Now it constitutes 20 percent of the banking sector and is growing rapidly,” she said, adding that the customer base of MFIs was expanding.  
 
Sim Senacheert, president and CEO of MFI Prasac, which is also an MFI with a license to take deposits, said the increase in capital reserves reflected the development of Cambodia’s finance sector over the past two decades.
 
The increase will also raise a barrier for new entrants to the sector, Mr. Senacheert said.  
 
Prasac has registered capital of $72 million and plans to increase this to $110 million this year, he added.
 
The client note from Mekong Strategic Partners said deposit-taking MFIs either had already met the new target or were on the path to doing so by the deadline set by the prakas – March 22, 2018. The note agreed with Mr. Senacheert that the rise in capital requirements would raise the bar for new entrants.
 
According to the last annual report by the NBC, Cambodia had 36 commercial banks, 11 specialized bank and 58 MFIs, including seven that took deposits.
 
The rise in capital requirements ends the “proliferation” of banks in Cambodia and could usher in a period of consolidation, Mekong Strategic Partners said. The “proliferation of banks in Cambodia has come to an end,” it said. – Additional reporting by Vincent MacIsaac
 

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