The Kingdom of Cambodia is a democratic monarchy with multi-political parties and a population of 13.8 millions, among which 85% live in rural areas. Females represent 53% of the total population. The majority of the people are Buddhists. Recent economic development has gone through three distinct periods: emerging from scratch, Asian financial crisis and internal conflict and peace and security. During the last period Cambodia has made good progress. The Cambodia banking system started in the early 1990s when the government launched the economic reform program from a centrally planned to a free market economy. Reform program have been introduce and good progress has been achieved in regulating and supervising banks and micro finance institutions.
Most rural financial operators in Cambodia have been transformed from non-government organizations (NGOs) that were involved with humanitarian work amongst refugees in the Thai border. After Paris Peace Accord in October 1991, the refugees had returned home.
With the passage of time, NGOs have redefined their roles in terms of interventions in the microfinance development process. NGOs have been involved in virtually every sector of the economy including micro credit programs and savings. Microcredit is the most active service due to banking services of commercial banks being limited in urban areas, and rural people are unable to receive such services, especially loans from the banks. Main practical rural financial services are individual loans, group loans and savings from members.
In response to the huge need for microfinance services, many Microfinannce Institutions (MFIs) have engaged in providing these kinds of services. In 2006, Cambodian microfinance has grown remarkably. This growth significantly contributes to economic development and poverty alleviation. With its credit and savings services, MFIs help people, especially the poor to relieve their family burdens and improve their livelihood to some extent. Currently there are 17 licensed microfinance institutions, 26-registered rural credit operators and around 60 NGOs freely operating in the whole country.
The Royal Government of Cambodia has committed to the development of rural finance since it is a key ingredient for sustainable economic development, particularly rural development, and for alleviation of poverty. In addition, the government has announced 2006 as a year of microfinance of Cambodia and it always supports the development of this sector through the introduction of policies and creates a favorable environment for further growth.
The government is also considering giving priority to the agricultural sector development in order to improve people’s living standard and to reduce poverty. Today, the government is putting even more effort into building up an adequate legal framework, infrastructure, and investment incentives for the agro-industrial sector, farmers training in theory, practice, and technology transfer.
To implement law on banking and financial institutions and improve financial services in rural areas, NGO suppliers of financial services need to be license as MFIs is not to National Bank of Cambodia (NBC). The main objective of regulating MFIs is not to restrict their activities but to promote them. Licensing is required for MFI to collect savings from their members and from the public, acquire long term borrowing from foreign and local organizations and employ these funds to provide loans in rural areas.
An MFI must be registered and incorporated as a legal entity such as a company, cooperative or have a legal status according to the law. An MFI must obtain a license from NBC upon application with the required documents.
With microfinance, the NBC is confronted with conflicting targets. On the one hand, microfinance, as with all other financial activities, must be regulated to avoid incompetence, and some case dishonesty, which can undermine the system. On the other hand, if regulation is too harsh, and in particular if the capital requirement is too high, microfinance might exhibit the same behavior as banks, flee from rural areas and concentrate their activities in major cities. Therefore, the NBC has released a set of regulations according the size of MFIs.
For the first time 2000, the NBC issued regulations on the classification of MFIs, classifying all MFIs into three categories according to the level of their operation with different criteria for being licensed and registered. The obstacle preventing NGOs from being transformed into MFIs is ownership. In the beginning, it was difficult to identify the shareholder because funds used by NGOs to operate microfinance had been granted by international donors. But at the end staff association had been established as the owner of those funds, opening the way for NGOs to transform into MFIs.
The biggest of MFIs must be licensed by the NBC. The regulations to be complied with by then are very similar to those to be complied by the commercial banks, except the minimum capital required is substantially lower. The medium-sized MFIs must only be registered by the NBC and are subjected to lighter regulations and in particular reports to be sent to the NBC are simplified. The smallest MFIs can operate freely with no requirement to be regulated and supervised due to high operating costs.
The regulations issued by the NBC include criteria for licensing and registration, minimum capital requirement, solvency ratio liquidity ratio, uniform chart of accounts, reporting requirements, and interest calculation. These regulations are consistent with the scope of work of MFIs and support them in expending their activities in an appropriate manner.
In terms of supervision and regulation, the NBC is responsible for maintaining integrity and a sound banking and financial system in order to encourage public confidence, to protect depositors from fraud and encourage good governance. To do this, a compete setoff criteria have been issued such as licensing and registration procedures, minimum capital requirement, solvency ratio, liquidity ratio, uniform chart of accounts, reporting requirement etc. and furthermore, the NBC also conducts off-site and on-site supervision on a regular basis in order to ensure that all MFIs are operating in a professional and prudential manners.
The financial sector, both banking and rural finance, is a major element of the financial system of the country and sound supervision and regulation of banks and financial institution is essential. Attention must be paid not only to banks but also other components of the financial system such as rural financial institution providing funds for small and micro enterprises. In order to create a conductive rural finance policy environment, governments need to understand core financial sector stability issues and be aware of different response options.
