CIMB shows sector maturity

via CAAI

Monday, 22 November 2010 15:01 Steve Finch

THE introduction of Malaysian bank CIMB is the latest sign Cambodia’s financial sector is maturing ahead of next month’s deadline requiring lenders to triple registered capital to US$37.5 million.

With Bank of China set to open in the Kingdom over the coming weeks, which would make it the 30th bank in the country, the sector is certainly becoming overpopulated but the new reserve requirement rule should guarantee that only serious, stable players survive.

This is entirely appropriate as Cambodia desperately needs to establish a banking sector with stable foundations.

When Cambodia increased minimum registered capital a decade ago from $5 million to the current $13 million, the central bank’s new requirement prompted 11 banks to close, some of which were considered to be havens for money laundering.

With the new requirement that banks raise their registered capital to $37.5 million the smaller banks will be forced to team up with foreign investors or other lenders in the sector to meet the new standard.

Or they will simply die as happened previously. And in their turn the likes of CIMB will continue to enter the market meaning that Cambodia’s banking sector will quickly evolve and mature.

In a country that has experienced low levels of saving and problems associated with malpractice in the banking sector, compared to many other countries in Asia, this trend is welcomed.

Although many analysts warn that Cambodia’s banking sector is becoming overly competitive in the same way as industries including telecommunications, this is no bad thing in the short term.

While this trend could fuel competition over savings rates in theory, in practice many banks are offering very different rates, while borrowing rates will hopefully come down.

International lenders with a good reputation are always able to generate lending capital at lower rates than smaller players because they are considered less risky by international financiers and they benefit from much larger capital resources anyway. This is all good for Cambodia.

Less positive would be a situation in which consolidation within the sector turns into a messy affair, if banks are suddenly forced to close when the sector as a whole has only recently struggled to regain confidence following liquidity concerns and high rates of non-performing loans.

The National Bank of Cambodia seems to be making the right moves in terms of killing off banks that can’t cut it and replacing them with those that have done so for many years on a global scale. But this is a fine balancing act in terms of issuing the right number of licences and setting the registered capital requirement at an appropriate level. Only time will tell if the central bank has got this right.