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Chapter 2

ADVANCING INCLUSIVE FINANCIAL SYSTEM IN THENEXT DECADE: A PERSPECTIVE FROM CAMBODIA’S

BANKING SECTOR

ByOu Sokpanha1

1. Background of Cambodia

1.1 Geographical and Economic Background

Cambodia, known as the Kingdom of Cambodia, is one of the ASEANmember economies located in the southern portion of the Indochina Peninsulain Southeast Asia. Cambodia is described as a unitary parliamentary constitutionalmonarchy. Cambodia has gone through many historic turns, including Frenchcolonisation from 1867 to 1953 and the infamous Khmer Rouge regime, just toname a few, where almost everything was demolished. Cambodia is presentlyconsidered as a low income country in which 80% of its total population of 14.8million is engaged in agricultural sector. The total land mass of the nation is181,035 square kilometers, which is divided into 25 provinces and municipalitiesand bordered by Laos, Vietnam, Thailand and the Gulf of Thailand. As atDecember 2013, Cambodia’s GDP was US$15,251 million, while the per capitaGDP stood to US$1,043. Cambodia’s economy has expanded remarkably overthe past few years as reflected by the rapid increase of its GDP as well as itsper capita income. However, these increases still remain relatively low comparedto other countries in the region. As mentioned earlier, the majority of theCambodian people are presently engaged in the agricultural sector which is theprioritised sector recognised by the Royal Government of Cambodia. In additionto this, Cambodia’s economy has also relied heavily on its tourism industry whichearns huge revenues for the nation. Rice, fish, timber, garments and rubber arethe major exports.. Unlike many of the ASEAN member economies, Cambodia’seconomy is cash-based and highly dollarised. Huge amounts of US dollars arebeing circulated within the banking and financial system as well as within theeconomy as a whole. Dollarisation has a long history in Cambodia. Althoughthere is no administrative action against the use of US dollars in the economy,

________________1. Deputy Section Chief, Licensing Department, National Bank of Cambodia.

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the relevant regulatory authorities have been trying to contain dollarisation, whilepromoting the use of the local currency, Khmer Riel (KHR).

1.2 Banking and Financial Development

The National Bank of Cambodia (NBC) was established in 1954, a yearafter Cambodia’s independence as a former French colony and together withthe closure of the Indochina Printing Institution. The local banking system wasalso established thereafter in the country in which privately-owned banks operatedalongside state-owned banks under the supervision of the NBC.

The entire banking system as well as the economy were destroyed in early1975 due to the civil war. It was not until 1979 that the Central Bank was re-established and the banking system was restored from ground zero. From thelack of physical infrastructure to the loss of human resource, Cambodia’s bankingsystem regressed far behind its neighboring countries. It was a long and arduousprocess for the Cambodian government to revive the banking system. Thedevelopment of Cambodia’s banking system in this context is nascent. Beforeachieving its current status, Cambodia’s banking system has gone through manytransitional periods, including a shift from a mono-banking system to two-tieredbanking system in 1991, bank restructuring in 2000, and new capital requirementscheme in 2008, etc. The reforms have brought about remarkable improvements.The number of banking and financial institutions is increasing gradually over theyears, while Cambodia’s banking system is integrating into the internationalfinancial markets. Although it is challenging for the NBC to maintain financialstability and bring more development to Cambodia’s banking system, theperformance of the banking institutions as a whole has been satisfactory, andCambodia’s banking system keeps growing in many aspects.

1.3 The Need for Inclusive Financial System

Financial inclusion has become more important and relevant in the currentcontext. Mahendra (2006) defined financial inclusion as the availability of bankingservices at an affordable rate to the large segment of the vulnerable and low-income groups. According to Khan (2011), financial inclusion, especially whenviewed in the context of overall economic inclusion has the ability to improvethe financial status and standards of living of the poor and the vulnerable classof the society. In addition, the access to basic financial services will lead toincreased economic activities and employment opportunities for the rural

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households. He also remarked that this has a multiplier effect on the economythat will lead to higher disposable income for the rural households which will inturn result in more savings and a robust deposit base for the banks and otherfinancial institutions. Based on the study by Hariharan and Marktanner (2012),financial inclusion is a huge source of economic growth and development. It isa strong and significant correlate of a country’s total factor productivity and,therefore, possesses the ability to create capital. The study also concluded thatfinancial inclusion has the potential to increase the financial sector savings portfolio,the efficiency of financial intermediation, and allows for tapping of new businessopportunities.

Among the total population of 14.8 million, there is a huge gap between thepeople who get access to banking and financial services and those who don’t.More importantly, there is also a constraint on public awareness and confidencewith regard to the banking and financial sector that makes the majority of thepeople reluctant to access formal banking and financial services. Therefore,financial inclusion has become one of the significant development policy areasfor the Royal Government of Cambodia that is being addressed in the latest“Financial Sector Development Strategy 2011-2020.” Inclusive financial systemwill help the general public, especially the disadvantaged and low-income groups,to equally benefit from the formal banking and financial services at affordablecosts that can significantly contribute to the poverty alleviation, as stated in theRectangular Strategy by the Royal Government of Cambodia. Cambodia’sfinancial inclusion aims at these low-income strata in the rural and hard-to-reachareas who constitute the majority of the population. As recognised by the NBC,rural finance is one of the important ingredients for sustainable economicdevelopment. Therefore, widening access to inclusive finance will help inenhancing the economic growth for the whole nation.

1.3.1 Objectives of the Study

Besides discussing the significance, issues and challenges that Cambodia’sbanking sector faces in promoting an inclusive financial system, this researchpaper aims to present the available data related to the current situation of bankingand financial development, particularly financial inclusion, including the actionplans to be implemented for the next decade that will contribute to advancingfinancial inclusion in Cambodia.

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2. Financial Inclusion Policies and Institutions

In Cambodia’s banking sector, financial inclusion policies were initiated mainlythrough the channel of microfinance institutions (MFIs) which first started asprojects by non-governmental organisations (NGOs) since the early 1990s.Microfinance plays a very important role as a supplementary banking servicein broadening financial access of the rural population. The main activities ofthese microfinance institutions involve social rehabilitation, health care, andhumanitarian assistance related-sector, particularly for disadvantaged and poorpeople. Many years ago, the MFIs were not able to reach people in the ruraland remote areas. Therefore, those poor and low-income people had no choicebut to rely entirely on informal sources of finance which were available atconsiderably high interest rates. A number of constraints contributed to the lowlevel of financial inclusion in the rural and hard-to-reach areas, including lackof physical infrastructure, hard-to-reach areas which pose greater securityproblems for the MFIs, limited economic activities, lack of income-generatingactivities and vocational training, lack of financial literacy and business knowledge,unavailable formal loans, high credit risks, and so forth.

The role of the MFIs in economic development is assuming greatersignificance over the years. To date, the Royal Government as well as the NBCacknowledge microfinance and its stakeholders as having a crucial role incontributing to the alleviation of poverty under the Cambodian MilleniumDevelopment goal to halve the proportion of people living below the nationalpoverty line between 1993 and 2015. The development of the microfinance sectorand advancement of an inclusive financial system have been addressed by theRoyal Government in its financial blueprint since 2001. Once again, the RoyalGovernment of Cambodia has included financial inclusion into its action plan forthe Financial Sector Development 2011-2020 under the future reforms of theMicrofinance Sector. The development policy areas related to financial inclusionwere specifically addressed and divided into 3 phases, notably short-term,medium-term, and long-term. The agencies concerned include the Ministry ofEconomy and Finance (MEF), NBC and Cambodia’s Microfinance Association(CMA). The development policy areas include the expansion of financial inclusion,deepening of financial services, expansion of access to financial products andservices to individuals in hard-to-reach-areas (particularly the poor and the hard-core poor), strong consumer protection, MFI consumer protection and financialliteracy, and so forth. Although the financial blueprint does not stipulate specificor detailed measures to implement in the action plans, it does provide cleardirection and targets for the banking and financial sector to achieve within itstimeframe.

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Table 1Financial Inclusion in Future Reforms for Microfinance Sector

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2.1 Credit Bureau Company

The launch of a private Credit Bureau company (CBC) back in early 2012was a very important milestone and a big achievement for the NBC in promotingthe quality of lending and transparency, and especially in preventing credit riskresulting from excessive lending to one single borrower by different institutions.Meanwhile, the establishment of CBC also contributes significantly to theenhancement of access to finance, especially for the borrowers in the rural andremote areas. Assuring sound credit worthiness of the borrowers in addition to,or in the absence of, collaterals facilitates the expansion of credit in the bankingsystem. The credit reports help in reducing the transaction costs of processingand assessing loan applications and they can be used by individual borrowersfor easy and quick access to credits from the banking and financial institutions,especially for loan applicants who have good credit profiles. According to thePrakas2 on Credit Reporting, the CBC acts as the intermediary to collect anddistribute information to member institutions based on rules of reciprocity.Institutions under the supervision and regulations of the NBC are required todisclose their customer’s credit information, with customers’ consent, to the CBCand to check customers’ credit information at every stage of the loan cycle. Bythe end of 2013, the CBC’s database contained data of 1,920,176 borrowersfrom 35 commercial banks, 9 specialised banks, 36 microfinance institutions and2 financial leasing companies.

2.2 Third-Party Processor and Mobile Banking

In year 2010, the NBC issued the Prakas on Third-Party Processors allowingbank to outsource one or more parts of their payment transaction services through

Source: Financial Sector Development Strategy 2011-2020.

________________2. Prakas: written legal announcement issued by the National Bank of Cambodia for regulated

institutions to follow.

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one or more third-party processors, as may be agreed between the bank andthose third-party processors, and subject to prior approval from the NBC, inconformity with Article 204 of the Law on Negotiable Instrument and PaymentTransactions. The major products and services offered by the third-partyprocessors include balance enquiry, fund transfer, bill payment, mobile phone topup, money transfer within Cambodia, and large-scale payrolls, etc. The majorityof these transactions are carried out through mobile phone which is one of themost popular devices among the Cambodian people. Over the past few years,the products and services offered by third-party processors have contributedsubstantially to increasing the level of access to finance by both city dwellersand even those living in the rural and remote areas of Cambodia. In the meantime,due to the increasing popularity of the Internet and mobile banking, the NBCis in the process of drafting the guideline on mobile banking which will help instrengthening the safety and soundness of the mobile banking operation as wellas in expanding access to finance.

2.3 Cambodia Securities Exchange (CSX)

To take one step further in the implementation of the Financial SectorDevelopment Strategy 2006-2015, the Royal Government of Cambodia decidedto establish the Cambodia Securities Exchange (CSX) as a public enterprisewith government shareholding of 55% and with the remaining stake held by theKorea Exchange, a well-known securities exchange operator of the Republic ofKorea. The CSX was launched on 18th of April 2012 with its mandate aimedat establishing and operating a securities market, a clearing and settlement facility,and a depository, in accordance with the Law on the Issuance and Trading ofNon-Government Securities and its subsequent regulations. Currently, the CSXis in the early stage of development, with only one listed company which is thePhnom Penh Water Supply Authority.

3. Current Status of Cambodia’s Financial Inclusion

Cambodia’s economy has developed gradually over the past 4 years asreflected by the steady growth of real GDP by 7.6% as at December 2013,while the per capita GDP reached US$1,043. Based on the UNDP’s data inCambodia, the rural population accounted for 80% and the majority of theinhabitants are engaged in the agricultural sector. Life expectancy rate at birthwas 63.6 and Cambodia’s human development index was 0.543, ranking at number138 as at 2013.

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The banking system of Cambodia has witnessed remarkable development.The number of banking and financial institutions has increased significantly during2013. Three commercial banks and 2 specialised banks were licensed, one ofwhich was upgraded from a microfinance institution. In addition, the NBC issued2 new licences for MFIs, and 1 for a financial leasing company. As at 2013,Cambodia’s banking system consisted of 35 commercial banks, 9 specialisedbanks, 38 MFIs, of which 7 are microfinance deposit-taking institutions (MDIs),33 registered microfinance operators, 2 financial leasing companies, and 1 creditbureau company. Total assets, customers’ loans and deposits keep growing ata remarkable pace. By the end of 2013, the total assets of the whole bankingsystem were US$12,748.11 million. Customers’ loans and deposits grew by 26%and 12%, respectively, compared to the same period of 2012. By December2013, customers’ loans and deposits reached US$7,351.78 million and US$7,560.44million, respectively. Credits have been extended to different sectors toaccommodate the development in the economy. Over the past few years, thecredit growth has increased around 30% on a yearly basis. The NBC has beenpaying close attention over this development, and measures have also been takenin response to this credit expansion in order to maintain the safe and soundperformance of the banking system.

Figure 1Real GDP Growth

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Credit facilities are extended to many key sectors of the economy, includingwholesale trade, retail trade, construction and real estate, manufacturing, othernon-financial services, and agriculture. As at December 2013, the banks’ lendingis largely concentrated on the wholesale trade sector which accounted for 18.1%of the total loan portfolio, while the agricultural sector is the dominant sector forMFIs which constituted for 38% of the total lending. The weighted averagelending rate of banks in KHR and US$ is 15.9% and 11.4%, respectively, whiledeposit rate in KHR and US$ is 5.8% and 4.3%, respectively. The number ofdepositors and borrowers within the whole banking system has also increasedto 2.6 and 1.9 million people, respectively.

Over the years, Cambodia’s banking sector has been shifting away fromtraditional or conventional banking to a modern banking system as a part of itsregional and global integration into the world market. To keep pace with theexpansion of the banking and financial market as well as market competition inCambodia, the banking and financial institutions continue to broaden their branchnetworks and products and services to capture new segments of the marketwhich also means bringing banking products and services to the people. Newbanking products and services are being developed and launched to serve theneed of the public, such as cash management, gold investment account, tradefinance, dual currency investment, swap contract, real estate brokerage, internet

Figure 2Microfinance

Credit Classified by Sectors, December 2013

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banking, mobile banking, SMS banking, debit card and credit card. Since 2006,the number of offices has been expanded gradually, especially among MFIs’offices that have been located mostly outside the city in order to reach out tothe people living in the rural areas. By December 2013, the total number ofoffices for both banks and MFIs reached 2,713. This is quite a small numberin comparison to the increasing population and demand for banking products andservices which indicates a need for more banks and MFIs’ offices. The numberof ATM terminals has been increased to facilitate cash withdrawal transactionsby the customers. Currently, the ATM terminals are still mostly located in thecity and downtown neighborhoods. In this regard, there is still a need to broadenthe number of ATM terminals, especially in the rural areas. Banking products,such as debit and credit cards are also getting popularity as reflected by theincreasing number of cards issued.

Figure 3Number of Offices & ATM Terminals

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By December 2013, credit cards grew by 34.1% compared to the sameperiod in 2012, while debit cards grew by 5.5%. Credit cards are more popularin the city that is crowded with business centers, while debit cards are morefrequently used in provinces and rural areas. The use of banking products suchas debit and credit cards are still limited owing to the factors, such as lackof financial awareness among consumers as well as lack of information abouttheir usefulness, usage, and security. Cambodia’s banking and financial markethas been expanding year by year as reflected by the increasing size of capitaland assets. Meanwhile, the number of borrowers and depositors also keepincreasing steadily. By December 2013, borrowers from banks and MFIs increasedby 8.9% and 19.1%, respectively, while banks’ and MFIs’ depositors also grewby 18.5% and 20.7%, respectively, compared to the same period in 2012. Althoughthe reach of inclusive financial system gets better over time as seen through theincreasing number of borrowers and depositors, the on-going efforts in promotingand enhancing financial inclusion are still needed as a large part of the populationstill lie beyond the ambit of the formal banking and financial system.

4. Data Presentation and Analysis

Cambodia’s banking system is in the early stage of development. Data onbanking and financial institutions as well as financial inclusion is very limited.

Figure 4Number of Debit & Credit Cards

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Data constraint has become one of the big challenges for conducting researchstudy on financial inclusion in Cambodia. In this section, the selected indicatorsand relevant data are illustrated and analysed so that an overall picture ofCambodia’s financial inclusion can be adequately captured and presented.

Overall, Cambodia is moving forward to achieve an inclusive financial systemin the long term. By the end of 2013, Cambodia’s banking system has expandedto capture more segments of the population. Total loan accounts of both banksand MFIs reached 1.9 million, while deposit accounts stood at 2.6 million. Dueto the expansion of the network of banks and MFIs, access to banking andfinancial services is broadening. As illustrated in Figure 5, from 2006 to 2013,the number of bank offices per 100,000 people increased from 1.8 to 3.4,respectively, while the number of MFI offices also grew from 5.5 to 15.0. Incomparison to banks, the MFIs have extended their services on a broader scaleand rapidly went beyond the city limits and reach out mostly to the middle classesand poor households who are in need of financial services.3

Figure 5Number of Bank Offices & ATM Terminals per 100,000 People

________________3. Data on population is calculated by taking base-year census population in 2004, extracted

from Cambodia Statistical Yearbook by National Institute of Statistics, multiplying bypopulation growth rate.

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The general public have more access to financial services offered by MFIscompared to banks as reflected by the number of loan accounts held by bankswhich is one fourth the loan account portfolio held by MFIs. In addition, thegrowth rate of deposit and loan accounts held by MFIs within the last 4 yearsis also relatively higher compared to banks. Along with the increasing numberof loan accounts, the deposit accounts have also been increasing remarkablywithin the last few years, especially among MFIs since 2007 due to theestablishment of Microfinance Deposit Taking Institutions (MDI). Toaccommodate the demand of the public, the number of ATM terminals, themajority of which are owned by commercial banks, have also increased graduallyup to 5.2 units per 100,000 people as at December 2013. The expansion ofoffices and ATM terminals has contributed largely to the increasing awarenessand access to financial services.

The growth rate of credits has also been noticeable for the last severalyears. By December 2013, the annual growth rate of credits by banks was25.8%, while MFIs’ credits grew by 48.7%. Since 2005, the growth rate ofcredits for both banks and MFIs is above two digits. It was only in 2009 thatthe growth rate for both banks and MFIs fell to its lowest point so far at 5.2%and 7.8%, respectively, under the impact of asset price bubble at the time. Asthe supervisory authority, the NBC introduced two remarkable measures, suchas the increase of reserved requirement rate on foreign currency deposits andthe adoption of credit ceiling on the real estate sector. Credits as percentageof GDP for both banks and MFIs kept growing gradually that indicated theextent of openness as well as access to banking and financial services by thepublic, especially the rural populace.

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Credit facilities were extended to many key sectors supporting the growthand development of the economy. For many years, the banks’ lending remainedconcentrated on retail and wholesale trade as well as other commercial sectors,such as manufacturing, construction, hotel and restaurant, and real estateactivities, etc. Meanwhile, the agricultural sector which is prioritised by the RoyalGovernment of Cambodia also showed an increasing trend over the years. Inparallel with the improvement of the living standard, modern technology, businesscentres, shopping malls, the demand and supply for housing, personal lending,

Figure 6Trend of Credits % of GDP

Figure 7Credit Growth of Banks & MFIs

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mortgaged and credit card loans also continued to grow. The credit expansionin these sectors may reflect increasing credit risks. On the other hand, it alsoreflects increasing access to banking and financial services by the public.

Table 1Banks’ Credit by Industry and Economic Sectors

Millions of US$

Unlike banks, MFI’s credits were largely channeled to the agricultural sector,which is one of the top prioritised sectors for the Royal Government of Cambodia,trade and commerce, and household/family. By December 2013, credits toagriculture, trade and commerce, and household accounted for 38%, 23%, and16%, respectively. As 80% of the total population are engaged in agriculturalactivities, the increasing injection of credits into this sector helps to enhance theliving standard of the rural populace as well as uplift economic welfare as awhole by extending access to financial services. Rural households have becomemore aware of formal financial products and services offered by the MFIs asindicated by the increase of borrowers and depositors.

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Gender plays a very important role in financial inclusion. Notably, the majorityof account holders at MFIs are females. By the end of 2013, female borrowersand depositors at MFIs remain at 82% and 70.2%, respectively. In themicrofinance sector, women play a very important role in accessing financialservices from the MFIs, including borrowing and making deposits. In most cases,the MFIs feel more secure in lending to female borrowers as they are the majorincome earners among the poor households and are more capable in cash-flowmanagement.

Table 2MFIs’ Credit Classified by Sectors

Millions of US$

Figure 8Numbers of MFIs’ Female Borrowers

& Depositors

Among other key indicators, the interest rate remains crucial for accessingfinancial inclusion. Due to the absence of the interbank market, the NBC has

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little influence on the fluctuation of the market’s interest rate. At the moment,each banking and financial institution is given discretion to set its own interestrate as appropriate. By December 2013, the bank’s interest rate on USD andKHR loans was 11.4% and 15.9%, respectively, while interest rate on a one-year fixed deposit for USD and KHR was 4.3% and 5.8%, respectively. Asobserved, the spread of the bank’s interest rate was relatively high in the pastand fluctuated over the course of the years. However, the increase in the numberof banks as well as intense competition among the banks pushed down thespread of interest rate over the last few years.

Figure 9Bank’s Interest Rates in USD

Figure 10Bank’s Interest Rate in KHR

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The NBC permitted the establishment of MDIs in 2007. Presently there are7 institutions, formerly MFIs, which were converted and licensed to operate asMDIs. Therefore, the majority of the MFIs still rely heavily on the contributionfrom shareholders and borrowed funds from abroad that are usually denominatedin foreign currencies and came with a high cost. In addition, the loans offeredby the MFIs are normally small in amount. As the result, the MFIs maintainrelatively high interest rate on their lending, especially on loans in KHR comparedto loans in USD. In most cases, the banks and MFIs will pass on the burdento their clients by increasing the interest rate on loans along with the increasein their cost of funds. By December 2013, MFI’s interest rate on loans in USDand KHR remained as high at 28.7% and 36%, respectively. So far, the highinterest rate on loans placed a heavy burden on rural borrowing and will eventuallyimpact on access to financial services.

Figure 11MFI’s Interest Rate in USD

Figure 12MFI’s Interest Rate in KHR

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Shadow banking remains one of the big challenges for Cambodia’s bankingsector in promoting inclusive financial system. Currently, a large part of thepopulation is accessing shadow banking instead of formal financial services offeredby the regulated institutions. For years, the shadow banking business remainslargely unregulated but popular among the city dwellers and rural populace. Dataand information regarding shadow banking is hard to come by and in most casesunavailable. As of now, it is hard to capture the risks of shadow banking andit is also unclear how to measure its impacts on the formal banking system aswell as on financial inclusion as the necessary data and information are stillmissing. However, shadow banking and its risks are now being taken intoconsideration by the regulatory authorities and soon regulations and measureswill be put in place for implementation.

5. Plan for the Next Decade

By complying with the vision and action plan for Financial SectorDevelopment 2011-2020, much has been accomplished by the banking andmicrofinance sector, and many issues and challenges have been successfullyaddressed. Cambodia is now in the next phase of achieving its medium-termtarget (2014-2017) as well as long-term target (2017-2020). In this regard, theother remaining issues and challenges will be addressed and taken into account.

5.1 Major Issues and Challenges

Cambodia faces many challenges that hinder the advancement of an inclusivefinancial system in the next decade. The constraints, issues and challenges thatneed to be addressed are lack of financial literacy, high lending rate from MFIs,collateral-based lending, shadow banking, and lack of SME accounting documents.For many years, education remains one of the top priorities for the RoyalGovernment of Cambodia, while raising financial literacy among the people isstill a challenge. Owing to the lack of understanding on the use and benefits ofbanking and financial products, a large part of the population are still reluctantto access formal banking and financial services which limits the development offinancial inclusion. Interest rate on loans from MFIs is another constraint to betaken into account. In comparison, MFIs offer much higher interest rate onloans compared to banks due to the reasons that MFIs usually lend micro-loansin local currency (KHR). Therefore, they tend to impose higher interest rate onborrowers owing to high cost of funds and credit risk. The general practice ofcollateral-based lending is just another issue that prevents many potentialborrowers from accessing formal banking services. In lending, banks and MFIs

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generally will require hard title deed of property, such as land and building, ascollaterals. In many cases, this requirement becomes a big challenge forborrowers, especially people living in the rural areas because they usually holdsoft title deed over their property which is not acceptable by many banks andMFIs. Shadow banking has spread across the country which put a threat on thesafety of the public and soundness of the formal banking system. Many ruralborrowers and even retail businessmen in the city have turned to shadow bankingfor the source of funds that comes with a very high interest rate. Shadow bankinginduced a very negative impact on financial inclusion as well as many otherrisks for Cambodia’s banking system as a whole. Another challenge for financialinclusion that is often raised by the SMEs is the lack of accounting document.Many SMEs, especially family business, do not practise proper bookkeeping thatreflects negatively on their credit standing, which is the second most importantrequirement after collaterals. This makes it difficult for many SMEs to acquireloans since banks and MFIs cannot appropriately access their repayment capacityin addition to their pledged collaterals.

5.2 Policies and Targets

Development policy and action plans for promoting the development of themicrofinance sector as well as advancing inclusive financial system have alreadybeen included in the Financial Sector Development Strategy 2011-2020 whichwas adopted by the Royal Government of Cambodia since 2011. Pursuant to thevision and action plans of the Financial Sector Development Strategy, the policiesaddressed many key areas, such as strengthening the regulatory and supervisoryframework and capacity, expanding services and outreach of MFIs, increasingconsumer protection, enhancing operational efficiency, strengthening industrysupport for MFIs, improving access to credit information, promoting markettransparency and disclosure, enhancing institution’s management informationsystems, promoting saving mobilization and, building capacity for competition aswell as expanding access to credit. The action plans covered many developmentpolicy areas, while their targets to be achieved in the next decade are categorisedunder medium-term targets (2014-2017) and long-term targets (2017-2020).

5.2.1 Permission for MFIs to Expand Direct Access to Savings

Recognising the role of MFIs in supporting economic development and inpromoting the welfare of the rural households, the NBC allowed the establishmentof MDIs in the late 2007 through its Prakas on Licensing of Microfinance DepositTaking Institutions. At the time, MFIs had a strong reliance on external borrowingfrom abroad in funding their operations. The new Prakas enabled eligible MFIs

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to become MDIs that allowed them to collect deposits from the public and alsoto reduce the cost of funds for borrowers. There are 7 MDIs operating alongsidewith another 36 MFIs and they have contributed substantially to financial inclusionthrough saving mobilisation. As a result, the volume of MFIs’ depositors hasrecorded remarkable growth. As medium- and long-term targets, the MDIs willbe given assistance to promote innovative schemes that will enhance savingsgeneration from the general public, particularly among the poor households andrural populace.

5.2.2 Deepening of Financial Services and Expansion of Access

Financial inclusion can be expanded through deepening of financial servicesand extension of access to financial products and services to the inhabitants inthe hard-to-reach-areas, particularly the poor and the most poor. Over the years,the banks and MFIs have continued expanding their branch networks across thecountry. More financial products and services, such as mobile banking and financialleasing, have been introduced into the market and are gaining popularity amongthe users. The number of ATMs keeps soaring over the years along with thenumber of issued debit and credit cards. For medium-term target, the concernedagencies such as the NBC and CMA, may consider developing programmes orprovide incentives to help the poor in the hard-to-reach areas to access financialservices. This includes developing fiscal or regulatory incentives for the MFIsto expand operations to the hard-to-reach areas, and designing and implementingprogrammes that will facilitate the poor to gain access to a range of financialservices (micro leasing, micro credit, and micro savings) to improve their welfare.Furthermore, the agencies will encourage linkage of microfinance operations ofMFIs with NGOs and local governments in a prudent manner and replicatesuccessful pilots in other hard-to-reach areas. As for the long-term target, financialservices will be expanded to the rural poor and individuals in hard-to-reach areasby tracking the progress of and scaling up services to the inhabitants in thehard-to-reach areas, who were formerly excluded from microfinance services.

5.2.3 Strong Consumer Protection and Financial Literacy

Financial education is essential in building financially competent consumersthat eventually contributes to the increase in financial inclusion. Financial literacyhas been one of the priorities in developing the banking and financial sector. Sofar, financial education programme has been designed for promoting financialliteracy not only for the present clients of banks and MFIs, but also for the most

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poor in both the urban and rural areas. In this regard, the NBC produced a shortdocumentary film titled “I Love Riel,” which was purposed to enhance theunderstanding of the general public on the roles and significance of the bankingand financial sector as well as promote the use of the local currency. Togetherwith financial literacy, a strong consumer protection framework is very importantand essential for the success of financial development. As a part of the consumerprotection framework and to promote the credit facilities of banks and financialinstitutions with transparent, fair, reasonable and responsible manner, the NBCissued Prakas on the Calculation of Interest Rate on Microfinance Loans in2001 and Prakas on Transparency in Granting Credit Facilities by Banks andFinancial Institutions in 2011. In the meantime, the NBC is working towardestablishing a guideline for consumer protection. In the medium term, theconcerned agencies will design and implement the guideline for consumerprotection as well as programme for promoting financial literacy. As for thelong-term target, the guideline for consumer protection will be improved basedon experience and best practices, while financial literacy to other sectors willbe promoted.

5.2.4 Reliable and Accurate Information

The NBC has been paying more attention and effort in the implementationof risk-based supervision ensuring that data accuracy becomes a key concernof the supervisory processes and that the reports accurately reflect the MFI’soperations and their risk profiles. The establishment of a CBC in 2012 was alsoa significant achievement contributing to the maintenance of reliable and accurateinformation of borrowers as well as to the prevention of credit risk resultingfrom the excessive lending to one single borrower by different institutions. Inthe medium term, the concerned agencies will monitor or control the process ofassessing customers’ solvency and creditworthiness for decision-making purposes.Furthermore, they should steadily promote the adoption of best accounting andfinancial disclosure practices with the aim of converging with the standardsapplicable to the banking sector. As for the long-term target, the concernedagencies will assess the progress achieved and the gap to be filled and, whereapplicable, define an appropriate action plan to enhance the reliability and accuracyof information and data disclosed and quality of supervisory reports.

5.2.5 Redress of Grievances

As a part of the consumer protection framework, market conduct supervisionis very crucial and is being taken into consideration. In the meantime, the legal

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and institutional framework regarding market conduct supervision is beingdiscussed by the relevant agencies. The mechanism for redress of grievancesand consumer protection agency will be established to receive, follow up andact on complaints. For the medium-term target, the concerned agencies willmonitor the effectiveness of and make necessary improvements to the mechanismfor addressing client grievances, while the said mechanism will continue to bestrengthened as a long-term target.

6. Conclusion

This paper aims to present all the available data related to the current situationof financial inclusion and also the action plans that will contribute to theadvancement of financial inclusion in Cambodia for the next decade. As seen,many important indicators for assessment of financial inclusion are still missingwhich do not allow for further in-depth analysis or empirical studies. However,this paper pieces together, from the available data, an overall picture of financialinclusion as well as the progress achieved thus far by Cambodia in thedevelopment of an inclusive financial system. Advancing financial inclusion isnot an easy task that can be accomplished within a short time frame. It requiressound action plans together with the cooperation from the concerned ministriesor agencies. Fortunately, the Royal Government of Cambodia has already putin place its “Financial Sector Development Strategy 2011-2020” which is animportant blueprint for the implementation of future reform nationwide. Thisstrategic plan covers largely the banking and non-banking financial sector andincludes the enhancement of inclusive financial system. Many policy areas havebeen identified and targeted for development. The concerned agencies havealso been assigned their functional responsibilities, including the NBC, MEF, CMAand SEC of Cambodia. Therefore, cooperation among the relevant agencies andeffective implementation of the action plans will assure the success of thedevelopment strategy.

So far, Cambodia’s banking system has achieved many major milestonesand is progressing toward becoming a fully-developed banking system. In thisregard, the expansion of financial inclusion is very much needed and it plays acrucial role in contributing to the future success of the banking system inCambodia. Inclusive financial system will enable the low-income Cambodiansliving in rural and hard-to-reach areas to get equal benefit from formal bankingand financial services at affordable costs. It will substantially contribute to thealleviation of poverty as well as to economic growth of the nation as a whole.

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Through the implementation of development policy areas on financial inclusionas stated in Financial Sector Development Strategy 2011-2020, Cambodia haslargely accomplished its short-term targets, while moving forward to achievingthe medium and long-term targets in the next decade. The banking system hasexpanded both in scope and scale. Meanwhile, the number of depositors andborrowers keep growing phenomenally, while public confidence toward thebanking system continues to grow over the years. However, many challengesremain that need to be addressed in advancing inclusive financial system, includingthe lack of financial literacy and high interest rate from MFIs, collateral-basedlending, shadow banking, and lack of SME accounting documents.

Cambodia is in the process of accomplishing not only the medium-termtargets, but is also moving forward to achieving the long-term targets by 2020having set the development policies and targets. From deepening of financialservices to promoting strong consumer protection, the policies and targets aimin promoting inclusive financial system that will benefit all the stakeholders.Besides, there are also initiatives to overcome the challenges by the concernedagencies. For example, “The Law on Secured Transactions” is being discussedamong the major government agencies. This initiative is crucial as it will enablethe SMEs that have no proper accounting documents to have better access toformal loan services offered by the banks and financial institutions. Cambodiais moving forward in the right direction in promoting inclusive financial system.With the continued cooperation among the various concerned agencies coupledwith the progress gained thus far, the prospects for Cambodia of advancinginclusive financial system in the next decade is bright.

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