As Banking Sector Booms, Overbanking Looms

Last month, Cambodia’s nascent yet rapidly expanding banking sector saw the new arrival of Phillip Bank through the acquisition of Hwang DBS Commercial Bank by Singapore’s Philip Capital in a $40 million deal.

The number of banks in the country has more than doubled since 2005, when there were 19, according to the National Bank of Cambodia (NBC). In the NBC’s 2013 report, it says there are now 43 banks, 35 commercial and nine specialized.

The industry has seen borrowing soar 44.7 percent to $1.6 billion for dollarized loans and 36 percent to $2.3 billion for riel loans in the first six months of the year, according to NBC data. The trend appears unlikely to slow as the Credit Bureau Cambodia predicted last week that the number of customers will increase from 1.8 million this year to 3.3 million in 2020.

But experts said Tuesday the sector’s swift development should prompt the NBC to heed warnings made by the International Monetary Fund (IMF) in February that the industry has reached a critical level of saturation.

“Cambodia is overbanked compared with its developmental peers and neighbors,” the IMF said in its report titled “Cambodia Entering a New Phase of Growth.”

“Unlike other industries, in a banking system competition is related less to the number of institutions and more the quality of supervision and transparency.”

The IMF says the risk of overgrowth is a financial system prone to instability as competition heats up and excessive risk taking is encouraged, thus “overburdening the banking system’s supervisory capacity.”

Heng Vuthy, head of strategy and finance at CIMB Bank, echoed the IMF’s concerns.

“The number of banks in Cambodia is currently good for society,” he said. “But risks could occur as credit is issued with less care due to the many players competing in the industry.”

Jayant Menon, lead economist at the Asia Development Bank’s Office of Regional Economic Integration, said the number of banks in the country stands in contrast to the high proportion of the population that remains “unbanked.”

“While having low barriers to entry can be a good thing, the ease with which one can set up a bank in Cambodia raises concern,” he said.

“[T]he NBC should set more stringent requirements, instead of using its licensing authority to bolster its foreign exchange reserves, in order to prevent a meltdown.”

NBC director-general Chea Serey did not respond to requests for comment.

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