cam blueprint 2001

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Asian Development BankInfrastructure, Energy and Financial Sectors Department (West)

December 2001

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CURRENCY EQUIVALENTS(as of 14 November 2001)

Currency Unit – Cambodia riel (KR)KR1.00 = $0.00026

$1.00 = KR3835

ABBREVIATIONS

ADB – Asian Development BankBIS – Bank for International SettlementsBSD – Bank Supervision Department, National Bank of CambodiaCAMINCO – Cambodian National Insurance CompanyCBS – Centre for Banking StudiesDFI – development financial institutionsFDI – foreign direct investmentFTB – Foreign Trade BankFIR – financial interrelation ratioGDP – gross domestic productIAS – International Accounting StandardsIFAC – International Federation of AccountantsIFC – International Finance CorporationIMF – International Monetary FundISA – International Standards on AuditingIT – information technologyMEF – Ministry of Economy and FinanceMFI – microfinance institutionMOC – Ministry of CommerceMSD – Microfinance Supervision DepartmentNBC – National Bank of CambodiaNBFI – nonbank financial institutionsNGO – nongovernment organizationPCA – Prompt corrective actionPPTA – project preparation technical assistancePRGF – poverty Reduction and Growth FacilityRDB – Rural Development BankSEC – Securities and Exchange CommissionSEDP – Socioeconomic Development PlanSME – small- and medium-sized enterpriseT-Bill – Treasury BillTA – technical assistance

NOTE

In this report, “$” refers to US dollars.

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saving, investment and economic growth, the financialsector development must go hand in hand with privatesector development and governance reform, formingthree pillars to underpin the Government’s policy ofgenerating growth, which is seen as the major means toreduce people poverty, the ultimate goal of theGovernment’s economic policy.

The banking sector in particular needsstrengthening, given its current low level of developmentand its dominant position in the present financial system.Cambodia’s banking system was thus transformed from amono banking into a two tier banking system byseparating the central bank functions from commercialbanking activities. To support the reform, legislativeframework has been improved. The new central banklaw is promulgated in January 1996, providing betterclarification of the Bank’s status, ownership and capitalstructure, and laying a more solid foundation for itsoperations. Along with re-defining the new role of theNational Bank of Cambodia, the Government is fullyaware of the need to address the remainders of thefinancial system with a view to establish a modem andefficient financial sector. The Law on Banking andFinancial Institutions, enacted in November 1999,represents therefore a great asset for the nascent’s financialsector. This new law responds to the need to promote asound financial structure and orderly financial marketsby providing appropriate legal framework for thelicensing, organisation, operation, and supervision of abroad range of financial services companies. In addition,the Insurance Law was passed in June 2000.

To strengthen the banking system in the earlier 2000the National Bank of Cambodia introduced bank-restructuring program, requiring the existing banks toincrease their capital base and to comply with relevantlaws and regulations. As a result, in November 2000,nineteen banks were allowed to continue operations,while twelve others were de-licensed and put underliquidation procedure. With these actions, the

Since the mid 1980s, Cambodia has embarked oneconomic reforms and reached a no-U turn in 1989, whenprivate property rights were restored and price controlwas abolished. State-owned enterprises were privatizedand increased incentives were provided to local andforeign private investment. This set the stage for thesigning of the Paris Peace Accord in 1991, designed toput an end to the protracted civil wars and rehabilitatethe economy. After the 1993 general elections, the newlyformed Royal Government of Cambodia (theGovernment) began formulating a comprehensivemacroeconomic and structural reform and achieved somesignificant successes in stabilizing the economy. Theeconomy has expanded rapidly during the first half of1990s, while inflation has been dramatically reduced.

Progress was also made in implementing structuralreforms: a two-tier banking system is being put in placeand new large denominated banknotes were introducedto promote “de-dollarization”; most non-tariff barrierswere eliminated; the tariff structure was streamlined; aliberal foreign investment law was adopted; and thespread between the official and parallel market exchangerates has been substantially reduced. Since then,Cambodia has made impressive strides in re-establishingpolitical and economic stability and re-integrating itselfinto the international community. However, theGovernment is conscious that an economy will not reachits growth potential and develop at an adequate pace,without an active contribution from the financial sector.Therefore, the Government is committed to strengtheningthe financial system and, over the recent years, has beenenacting legislation, adopting policies, creating institutionsand adapting procedures as part of the financial sectorreforms in order to quicken the pace of economic growth.

Financial sector development is important to thespeed and direction of economic growth, since a strongand well-functioning financial sector can break down thelimitations of self-financing, mobilize idle financialresources for productive investment needs. To link up

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Government has in mind to bring up all existing banks toa higher standard, improving the soundness and reliabilityof the banking system, which is crucial for confidencebuilding.

While much progress has been made in recent yearsin financial sector reform, still many things remain to bedone to support increased investment and high andsustainable economic growth rate. Creating a modern andefficient financial system is not an easy task. TheGovernment needs to fully understand what it needs,which direction to go and how to get there. In this spirit,the Government has requested assistance from the AsianDevelopment Bank (ADB) to develop a financial sectordevelopment plan for Cambodia. In fully understandingthe need of Cambodia, ADB has positively responded tothe request and started its assistance with an initial sectorstudy to develop strategic objectives and identify key issuesin the financial sector. Through this study, a preliminaryfinancial sector “roadmap” was drafted in June 1999.

Based on this preliminary document, ADB launcheda project preparation technical assistance in December2000 (TA 3467-CAM: Preparing the Financial SectorDevelopment Program) to assist the Government inproducing a practical and implementable master plan forthe financial development for the next 10 years. Also forthis purpose, on the side of the Government, theCommittee on Economic and Financial Policies,established by the governmental decree dated 10 June1997 and chaired by the Minister of Economy and Finance,entrusted H.E. Chea Chanto, Governor of the NationalBank of Cambodia and Deputy Chairman of theCommittee on Economic and Financial Policies, to lead aFinancial Sector Steering Committee (FSSC), establishedin April 2000, with senior representatives from the Ministryof Economy and Finance, the National Bank of Cambodia,the Ministry of Commerce and the Council ofDevelopment of Cambodia as members, in order to ensurethe ownership of this important master plan. In addition,a Working Group (WG), which consisted of representativeof the above institutions, was set up to assist the FSSC inall technical aspects related to the matter. The NationalBank of Cambodia acted also as the executing agencyand coordinator with the ADB.

In the course of preparing the Blueprint, numerousmeetings were organized, including the consultation andconsensus-building seminars to solicit views from acrossthe interested spectrum and to build a commonunderstanding on the future prospects of the financialsector in Cambodia. The whole process has been marked,by a partnership between the Government and the privatesector in taking strong ownership of financial sectorreform in Cambodia.

Thank to the efforts of all parties involved,especially, the Cambodia Team of ADB’s Financial Sectorand Industry Division, in July 2001 a draft Blueprint called“ Vision and Financial Sector Development Plan for 2001-2010 “ has been finalized. On the 24th August 2001 duringa plenary session at the Council of Ministers, chaired bySamdech Hun Sen, the Government adopted thedocument as an official long-term plan for the financialsector development and is part of an overall Government’sreform agenda toward establishing a more market-based,open, and private-sector led economy.

With the Blueprint, each important component ofthe financial sector that is being developed or will bedeveloped by individual and separate efforts of therelevant organizations have been coordinated,streamlined in a handed and systematic manner andreflected in one document.

The Blueprint envisages the development of asound, market-based financial system in ten years thatwill enhance resource mobilization and sustainableeconomic growth. It addressed relevant sub-sectors to bedeveloped within a period from 2001 to 2010. That is, inten year from now, Cambodia will have:

(i) a competitive, integrated, and efficient bankingsystem that is properly regulated andsupervised and effectively mobilizes savingsto provide financing to support the growth ofthe private sector, a reliable payment systemand banking safety nets.

(ii) a viable, pro-poor and effective rural financesystem for providing affordable financialservices to enable the poor to enhance ruralincome and reduce poverty.

(iii) an insurance sector that protects businessesand individuals from catastrophic events anda pension system that provides a secureretirement, both of which provide capital forlong-term investment in the real sector.

(iv) diverse non-banking financial products andinstitutions that create more balanced financialstructure, increase the depth of financialmarket, and promote competition. Theseinclude leasing business, money market andcapital market intermediaries, anddevelopment finance institutions.

(v) a money market that enables an inter-bankmarket that provides banks, companies, andindividuals with the means for effectiveliquidity managing.

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(vi) an efficient and transparent capital market witha critical mass of issuers that mobilizes fundsfor long-term investment.

(vii) legal and accounting systems that promotes therule of law in commercial and financialtransactions and support good governance bypromoting transparency, accountability, andpredictability.

The Financial Sector Development Plan alsoemphasizes, in addition to the institutional and legalstrengthening of the financial sector, the need to developa reliable financial information system and to introducean efficient mechanism to build up manpower capableto face with the future challenges.

To ensure its successful implementation, theBlueprint has been structured as a step- by-step plan.Intermediate reform agenda has been formulated to helpidentify specific measures and to set the sequence andpace for the implementation of those measures. Anotherimportant feature of it is the built-in flexibility within thereform agenda, which allows the Government to makenecessary policy adjustment to reflect progress madealong with the changing conditions.

The Government of Cambodia wishes to expressits special gratitude to the Asian Development Bank forproducing this important document. Without the Bank’sinvaluable support, guidance and technical assistance, therealization of this paper would not have been possible.

Our acknowledgement also goes to the consultantteam for its contributions and preparations of thegroundwork for the document.

The “Vision and Financial Sector Development Planfor 2001-2010” reflects also the efforts of the FinancialSector Steering Committee and its Working Group. Theirinputs and responsibilities in fulfilling their mission arehighly valued.

Although the implementation of the Financial SectorDevelopment Plan represent great challenges for thepolicy makers and implementing agencies alike, theGovernment trusts that with their determinedcommitments and efforts and their ownership spirit overthe duty, combined with support from various donors andwell-wishers, Cambodia will be able to materialize thevisions set out in this document.

Phnom Penh, 2 October 2001

Keat ChhonSenior Minister

Minister of Economy and Finance

Chea ChantoGovernor

National Bank of Cambodia

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The Blueprint is to serve as the financial sectorstrategy for ADB and the Government as well as thecoordination panel for external assistance. For betterplanning, the 10-year period is divided into three phases:Phase I covers 2001-2004, which will be supported byADB’s Financial Sector Program Loan which will beconsidered by ADB’s board in November 2001; Phase IIspans from 2005 to 2007; and Phase III covers 2008-2010.

The Blueprint is based on previous efforts inCambodia by ADB, the International Monetary Fund, andthe World Bank. The development of the Blueprintbenefited from two key seminal works of ADB: FinancialManagement and Governance Issues in Cambodia:Diagnostic Study of Accounting and Auditing andCambodia: Enhancing Governance for SustainableDevelopment.

The Blueprint is a collective asset of ADB and theRoyal Government of Cambodia; it has been developedwith the full support and active participation of theGovernment and private sector stakeholders. TheGovernment, especially the Ministry of Economy andFinance, the Ministry of Commerce, and National Bankof Cambodia, has reviewed different versions of theBlueprint and provided valuable insights and comments.The draft Blueprint has also been the subject ofconsultation seminars with the private sector. Many usefulcomments and suggestions were provided both duringthe seminars and through the e-mail address set up forthe Blueprint ([email protected]). The wholeprocess has been marked by a partnership between theGovernment and the private sector in taking strongownership of financial sector reform.

We would like to extend special gratitude for theleadership and guidance of H.E. Keat Chhon, SeniorMinister of the Ministry of Economy and Finance; H.E.Chea Chanto, Governor of the National Bank ofCambodia; and H.E. Sok Siphana, Secretary of State,Ministry of Commerce. In addition, significant

Peace finally came to Cambodia in 1993 after a long periodof domestic strife and international isolation, when thecountry promulgated a new Constitution declaring liberaldemocracy and a multiparty system. Under the aegis ofthe international community, the Government has madetremendous efforts to reform the governance structuretoward a liberal democracy and a market economy. Ithas also launched a comprehensive SocieconomicDevelopment Plan assisted by the Asian DevelopmentBank (ADB). Sustained political stability and theGovernment’s commitment to multifaceted reforms haveshed light on economic prospects and opportunities forthe embryonic private sector and have given impetus towide-ranging social rehabilitation.

However, Cambodia still has a long way to go toachieve broad-based economic and social development.The Government needs to forge ahead with governancereform and to develop the enabling framework for privatesector development. In particular, the underdevelopedfinancial system, with low public confidence and limitedintermediation, has been a main impediment to privatesector development and thus to broad-based economicgrowth.

In 1999, in recognition of the strategic importanceof financial sector development, the Royal Governmentof Cambodia requested ADB for assistance in developingthe country’s nascent financial sector. ADB embarked onan initial sector study to identify key issues. Based on thisinitial study, ADB launched project preparation TA (TA3467-CAM: Preparing for the Financial SectorDevelopment Program) in December 2000 to formulatea long-term development strategy and the first financialsector development program. In March 2001, theCambodia Team of ADB’s Financial Sector and IndustryDivision (West) produced the first draft of the financialsector strategy, called the Financial Sector Blueprint for2001-2010 (the Blueprint), together with the FinancialSector Program to support the implementation of theBlueprint.

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contributions and guidance were provided by thefollowing from the Ministry of Economy and Finance: H.E.Aun Porn Moniroth (Secretary General), H.E. Ngy Tayi(Under Secretary), Mey Vann (Deputy Director), PenThirong (Deputy Director), Ken Sambath (Deputy Directorand Assistant to Senior Minister), Minh Ban Kosal(Secretary Group to the Prime Minister and Assistant toEconomic Advisor to the Prime Minister and SecretaryGeneral), Vong Bunintreavuth, and Rath Sa Rath; and bythe following from the National Bank of Cambodia: H.E.Sum Sannisith (Secretary General), Tal Nay Im (GeneralDirector), and Nguon Sokha (Deputy Director). Specialthanks also go to all private sector participants in theseminars, notably, Sok Kong (President, Phnom PenhChamber of Commerce), Ow Soon Wing (SBC Bank,Singapore Banking Corporation Ltd.), Chan Kok Choy

(General Manager, Cambodia Public Bank Ltd.), and S.Choy (First Overseas Bank).

Equally important, we would like thank ChristineWallich (Director, Infrastructure, Energy and FinancialSectors Department, West) and Thomas Crouch (Manager,Financial Sector and Industry Division, West) for theircontinuous encouragement and support. We also wish toacknowledge the essential contributions and groundworkof the consultant team led by Arun Hsu (Financial SectorSpecialist) and comprising Donald Simonson (Economist),John McCoy (Banking Expert), John Hepp (AccountingExpert), Tia Savora (Economist), and Nay Chhuon(Training Coordinator). Finally, we are grateful to ThomasRumbaugh (Deputy Division Chief, Asia and PacificDepartment, International Monetary Fund) and hismission for sharing their valuable experiences andproviding support along the way.

Byoung-Jo ChunFinancial Economist

Team Leader of Cambodia TeamFinancial Sector and Industry Division

Infrastructure, Energy andFinancial Sectors Department (West)

Xuechun ZhangEconomist

Cambodia TeamFinancial Sector and Industry Division

Infrastructure, Energy andFinancial Sectors Department (West)

Ashok SharmaProject Economist

Agriculture and Rural Development DivisionAgriculture and Social Sectors Department (West)

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Financial sector development in Cambodia,under the current socioeconomic and legalenvironment, poses a daunting challenge to

the Government as well as to the private sector.Although efforts have been made on many fronts,it is the view of the Government that Cambodianeeds to exert coherent and systematic efforts todevelop a sound market-based financial system tosupport resource mobilization and broad-basedsustainable economic growth.

With these objectives in mind, the Governmenthas formulated a long-term vision and developmentstrategy for the financial sector with ADB technicalassistance. The vision and strategy were developedbased on key lessons drawn from the experienceof other Asian economies in financial sectordevelopment, as well as from the current situationin Cambodia.

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Financial sector development cruciallydepends on governance reform. One of the criticalgovernance challenges facing Cambodia is tostrengthen the accountability of institutions in thepublic sector. The necessary reforms include, amongothers (i) legal and judiciary reform, (ii) publicadministration reform, and (iii) public financereform.

If the governance reform programs envisagedin the Socio-Economic Development Plan II and theGovernance Action Plan are fully implemented, itis expected that the Cambodian economy will be

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able to sustain an average annual economic growthrate of 6-7 percent over the medium term.

Building on such development prospect, theBlueprint anticipates that the financial sector will atleast double in terms of the ratio of financial assetsto gross domestic product in 10 years. The spreadbetween loan and deposit rates will narrow asintermediation becomes more efficient owing tomacroeconomic stability, improved legal andfinancial infrastructure, and increased competitionamong banks and other financial institutions.

The vision will be achieved by ensuring thefollowing:

(i) a competitive, safe, and sound bankingsystem that is well regulated andsupervised, and effectively mobilizessavings to provide financing to support thegrowth of the private sector;

(ii) the establishment and development ofnonbank financial institutions (NBFIs) thatwill increase the depth of the financialsector by providing a broad array ofdiversified services such as leasing andconsumer finance;

(iii) an insurance sector that protectsbusinesses and individuals fromcatastrophic events and a pension systemthat provides a secure retirement, both ofwhich provide capital for long-terminvestment in the real sector;

(iv) a safe and reliable system for the transferof funds between customers and banks,

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and for the settlement of paymentsbetween banks;

(v) money/interbank markets that providebanks, companies, and individuals withthe means for effective liquiditymanagement;

(vi) efficient and transparent capital marketswith a critical mass of issuers that mobilizefunds for long-term investment;

(vii) a legal system that promotes and enforcesthe rule of law in commercial and financialtransactions and that supports goodgovernance by promoting transparency,accountability, participation, andpredictability;

(viii) an accounting and auditing system basedon international standards that supportsgood governance by promotingtransparency, accountability,participation, and predictability; and

(ix) human resource development employingperformance-based compensation andpromotion and the availability of a broadrange of professional programs to retrainexisting staff and provide ongoingtraining.

The Government has adopted a long-termstrategy for financial sector development thatcomprises the following elements:

(i) maintaining sound fiscal and monetarypolicies to ensure macroeconomicstability;

(ii) establishing a sound legal framework toprotect property rights and enforcecontracts;

(iii) establishing the rule of law through legal/judicial reform to underpin financial andcommercial activities;

(iv) sequencing efforts to develop financialinfrastructure, particularly the payment/

clearing system, accounting and auditingsystem, credit information system, andregulatory framework;

(v) structuring the regulatory and policyframework to foster competition in thefinancial markets and to encouragefinancial institutions to realize economiesof scale and scope;

(vi) establishing a regulatory and institutionalframework to promote sound governanceprinciples and to allow market disciplineto work in the management andoperations of financial institutions;

(vii) establishing a sound framework forprivate sector development in the financialsystem by phasing out state ownershipand state intervention in the system;

(viii) developing a transparent entry frameworkto encourage efficiency and financialdeepening;

(ix) developing efficient exit mechanisms fortroubled institutions to foster continuousreorganization in the financial systemwithout incurring social costs; and

(x) developing human and institutionalcapacity in both the private and publicsectors through public-private sectorpartnerships.

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Under the guidance of the long-term strategy,the Blueprint details sector development strategyand policy reform agenda. The sector developmentplan explicitly considers the interrelationship of (i)human and institutional capacity building, (ii)developments in related financial infrastructure, (iii)establishment of a legal and regulatory framework,(iv) emergence of relevant financial markets, and(v) availability of technology. The sectordevelopment strategy is a rolling plan, which needscontinuous updating to reflect the Government’sachievements as well as the changing

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socioeconomic environment. The Government iscommitted to implementing the sector developmentplan specified in the Blueprint, as well as tocontinuously updating the sector development planto reflect the Government’s achievements and thechanging socioeconomic environment, thusmaximizing the development impact.

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The Blueprint for the banking sector consistsof three phases. The first phase aims at laying thefoundation for the banking system by establishinga basic policy and institutional framework. Thesecond phase targets enhancing intermediationthrough competition. Building on the achievementsin the first phase, the banking system should bedeveloped into a more consolidated system throughcompetition among banks and intermediation willbe expanded, while banking services will beextended to rural areas. The third phase aims topromote intermediation efficiency by facilitating theintegration of the formal and informal financialsectors as well as the reorganization of the bankingindustry. An integrated banking sector will alsoenhance the efficiency and quality of bankingservices in rural areas.

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The development of the insurance sector willalso go through three phases. To improve thecurrent weak legal infrastructure and supervisorycapacity, the first phase aims at establishing thefoundation and building capacity for the sector. Witha solid foundation in place, the insurance sector willdevelop in size and diversity. The focus of thesecond phase will be to promote the insurancemarket through private sector development, toincrease the outreach to poor and rural areas, toimplement compulsory insurance, and to enhanceproduct variety. The implementation of compulsoryinsurance will create policy-driven demand, and thegrowing income will generate demand for a greatervariety of insurance products. In response to thegrowing sophistication and volume of business inthe insurance sector, an independent insurancesupervisor will be established. As the sector further

expands, the independent insurance supervisor willfurther upgrade prudential regulations in the thirdphase.

During the first phase of pension systemdevelopment, the feasibility and design forestablishing a multi-pillar pension system will becompleted. During Phase II, the legal, regulatory,and supervisory frameworks will be established forthe pension system. In addition, a capacity-buildingmechanism will be needed to ensure properlytrained staff in the regulatory and supervisory body.During Phase III, the legal framework will beenhanced through the issuance of sub-decrees. Themandatory public pension program will belaunched and the supervisory and regulatoryframework will be further strengthened inanticipation of the implementation of the mandatoryprivately managed funded pension program that willbe implemented after Phase III.

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The development of nonbank financialinstitutions (NBFIs) begins in the second phase. Thedevelopment goal is to provide a legal andregulatory framework for NBFIs commensurate withthe development of interbank/money markets andcapital markets. Thus the goal of Phase II is toestablish the legal and regulatory foundation forNBFIs such as leasing companies, financecompanies, investment companies and moneymarket broker/dealers. The goal of Phase III is tofurther develop the NBFI, including trust companies,venture capital companies and developmentfinancial institutions (DFIs). These institutions willsupport the development of money and capitalmarkets.

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The sequencing and pacing of money marketdevelopment will match the development of thebanking and nonbanking sectors. The developmentplan for interbank/money markets targets threestrategic goals. The first phase aims to establish thefoundation for a market in short-term unsecuredinterbank lending, and to provide a base for moneymarkets (including Treasury Bills), based on a

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Negotiable Instruments Law. The second phase willstrengthen the interbank markets by establishingregulations for diverse money market instrumentssuch as negotiable certificates of deposit andrepurchase agreements, as well as by regularizingthe issuance of Treasury Bills with the developmentof a primary dealer system. The third phase is tobroaden money markets with a regulatoryframework for nonfinancial issuers of money marketinstruments such as commercial paper.

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The capital market development plan consistsof three sequenced development goals over 10years. During the first phase, necessary preparatorywork is expected to create an enabling environmentfor capital markets. In the second phase, it isenvisaged to establish the foundation for capitalmarkets by developing the necessary infrastructurerelated to securities trading, as well as by adoptingdetailed regulations and procedures. Building onthe preparatory work, it is expected that theGovernment will continue a systematic effort todevelop capital markets in the third phase.

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Legal Infrastructure. The development of thelegal infrastructure for financial markets also targetsthree reform agenda over the next 10 years. Thegoal in Phase I is to introduce key laws pertainingto commercial activities to underpin financial sectordevelopment. In Phase II, law enforcement will bestrengthened with the progress in court reforms andcapacity building. Phase III will focus on enhancinglegal infrastructure for private sector development;during the period, a legal framework for publicregistration system for movables will be established.

Accounting and Auditing System. Theaccounting and auditing system is the base forfinancial sector development and demands urgentattention. The goal in Phase I is to establishaccounting and auditing standards and a system for

their enforcement through promulgation of a Lawon Corporate Accounts, their Audit and theAccounting Profession; adoption of InternationalAccounting Standards/International Standards onAuditing; and establishment of an accountingprofessional body and an accounting standardsboard. In Phase II, the accounting association willstrengthen the enforcement of accounting andauditing standards, and promote competition in theaccounting industry to reduce the accounting andauditing compliance costs of the private sector. InPhase III, enforcement of accounting standards andexpansion of International Accounting Standards tomore firms will occur.

Financial Information Infrastructure.Development of a financial information system is crucialto cultivate a credit and repayment culture in the earlystage of financial development. In Phase I, theGovernment will create the financial market informationsystem via banker-led arrangements for sharing creditinformation. During Phase II, the Government will expandthe scope of the arrangements to nonbank institutions. InPhase III, the financial market information system will befurther diversified by introducing a credit rating industry.

Financial Sector Safety Nets. Financial safety netswill be developed to bolster public confidence in thefinancial system. As the financial system expands, so dothe systemic risks. The development of the financial safetynets includes a two-stage reform agenda starting fromPhase II. The goal of Phase II is to develop banking sectorsafety nets with the establishment of deposit insuranceand corporate governance guidelines. Phase III willexpand the deposit insurance system to the nonbankingsector participants who join the payment system.

Successful implementation of the Blueprint relieson strong leadership, firm commitment, and tremendousefforts by the Government, especially, the Ministry ofEconomy and Finance, the Ministry of Commerce, andthe National Bank of Cambodia. It also calls for the supportof the private sector and the timely assistance ofinternational aid agencies, since the active participationof the private sector and international agencies isindispensable as a source of knowledge input forsuccessful implementation of the Blueprint.

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FOREWORD iii

PREFACE vii

EXECUTIVE SUMMARY ix

INTRODUCTION 1

KEY ISSUES IN THE FINANCIAL SECTOR 4Overview 4The Banking Sector 5Rural Finance 8The Insurance Sector 9Pension System 11Nonbank Financial Institutions 12Payment System 13Interbank/Money Markets 14Capital Markets 14Legal Infrastructure 15Accounting and Auditing System 16Human Resource 17

FINANCIAL SECTOR VISION FOR 2010: “PREPARATION FOR TAKE-OFF” 19Prospect for Economic Development under Governance Reform 19Financial Sector Vision for 2010 21

FINANCIAL SECTOR BLUEPRINT 31Introduction 31The Banking Sector 34Rural Finance 39The Insurance Sector and Pension System 42Nonbank Financial Institutions 47Interbank/Money Markets 48Capital Markets 50Financial Market Infrastructure 54

CONCLUSION 57

APPENDIX 59

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After longstanding domestic turmoil andsubsequent international isolation in the1980s, Cambodia began to return to a

period of peace in 1993. Since then, the countryhas made steady efforts to recover in all aspectsof socioeconomic development and to maintainsocial, political, and macroeconomic stability;and international aid operations have resumed.

The Socioeconomic Development Plan for1996-2000 (SEDP I) marked the Government'sfirst systematic efforts toward economicdevelopment to achieve economic growth,poverty reduction, and broad participation inthe development process. Since the successfulimplementation of SEDP I, the Government hasbeen engaged in finalizing the SocioeconomicDevelopment Plan for 2001-2005 (SEDP II),which identifies poverty reduction as theprimary development goal. SEDP II targetsreducing the poverty rate from 36 percent1 in1999 to about 31 percent in 2005, as well aslessening the degree of deprivation. These rateswill be achieved by (i) promoting broad-based,sustainable economic growth at a rate of 6-7percent with equitable income distribution, (ii)facilitating social and cultural development, and(iii) ensuring the sustainable management anduse of natural resources and the environment.

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The Government's strategy to accomplishthe poverty reduction target is to promotegrowth in all sectors but especially in theagriculture sector, because about 90 percentof the poor live in the rural areas. Moreover,mobilization and efficient allocation ofresources are at the core of the economicdevelopment strategy. Specifically, theGovernment has targeted the following areas:

(i) implementing fiscal reforms andmaintaining a stable macroeconomicenvironment;

(ii) improving the efficiency andeffectiveness of the public sectorthrough reforms in civil service,judiciary, and public enterprises;

(iii) enhancing private sectordevelopment while protecting publicinterests by (a) improving physicalinfrastructure, (b) developing thelegal and regulatory frameworkswithin which business enterprisesoperate, (c) liberalizing trade andinvestment policies, and (d)supporting banking system reformand financial sector development;

(iv) promoting agricultural developmentand off-farm employment creation inboth rural and urban areas; and ��

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(v) empowering the poor to participatein, and thus benefit from, the growthprocess by improving their access tonatural assets, health and educationservices, appropriate technology andcredit, and by removing any antipoordistortions in product and factormarkets.

A sound and efficient financial system isessential for achieving broad-based economicgrowth and socioeconomic objectives,including poverty reduction. A well-functioning financial system is the key toensuring macroeconomic stability, mobilizingsavings, allocating resources for productivepurposes, promoting private sectordevelopment, and in turn generatingemployment opportunities and reducingpoverty. In a developing country likeCambodia, financial sector development willalso contribute to promoting foreign directinvestment (FDI) and safeguarding theeconomy from external shocks.

Sustainable Economic Growth andPoverty Reduction. The Royal Governmentof Cambodia (the Government) has identifiedpoverty reduction as its priority. In its InterimPoverty Reduction Strategy paper, theGovernment outlined a broader approachbased on a multidimensional assessment ofpoverty. Furthermore, it emphasizedmacroeconomic stability to foster sustainablegrowth that will create employment and havea long-term impact on reducing poverty.

Deficiencies in Cambodia's financialsystem undermine macroeconomic prospectsand economic growth. The development of asound, efficient, and well-regulated market-based financial system is crucial to achievinghigher and sustainable economic growth andachieving the country's social and economicdevelopment objectives - poverty reduction,in particular.

Enabling Macroeconomic Policy. Animportant component for achieving andsustaining macroeconomic stability is a soundmonetary policy to support growth, controlinflation, and promote the strengthening anddeepening of the financial sector to increasethe mobilization of savings that supports privatesector growth. With the development of asound financial system, the Government canbe better equipped with monetary policy tools.

Safeguarding the Economy fromExternal Shocks. Developing a robustfinancial sector will protect the economy fromor minimize the impact of external shocks,which are becoming more common withglobalized financial markets. As the recentfinancial crisis attested, those Asian countrieswith the stronger legal and banking supervisoryframeworks were more capable of minimizingthe negative effects of the massive disruptionin the regional market than the countries withweaker frameworks.

Promoting Foreign Direct Investment.A transparent financial system is also essentialfor attracting FDI, which have been the drivingforces for economic growth in Cambodia.Because the availability of reliable means forconducting financial transactions is essential forthe viability of the investments, a sound andefficient financial system is the fundamentalcondition to attract FDI. Foreign investors tendto invest in countries with sound governancethat fosters transparency, accountability, andpredictability, and promotes wide participationof the private sector by establishing the rule oflaw and a sound and efficient financial sector.

In recognition of the strategic value offinancial sector development, the Governmentrequested the Asian Development Bank (ADB)for assistance in formulating a long-term visionand a financial sector development plan for the10-year period, 2001-2010. In response to theGovernment's request, ADB conducted a

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comprehensive diagnostic review of thefinancial system from 2000 and formulated afinancial sector development plan, or theFinancial Sector Blueprint (the Blueprint) for2001-2010.

The Blueprint outlines a long-term visionand strategy for sequencing policy reforms todevelop the financial system over three phasesduring 10 years. The Blueprint addresses keypolicy issues in the banking and nonbankingsectors, contractual savings, and interbank/money and capital markets, as well as the basicinfrastructure to underpin the development ofthe financial sector. It proposes reform agendaand illustrative policy actions over the three-phase, 10-year period.

The Blueprint is a multi-purpose plan fordeveloping the financial sector and intends toserve as:

(i) the Government's planning tool forfinancial sector development,

(ii) the basis for formulating ADB'sFinancial Sector Program Loan, and

(iii) the coordination panel for externalassistance to the financial sector.

Aid coordination is a key componentunderpinning the Blueprint strategy. Given theextent of issues that need to be addressed infinancial sector development, suchcoordination will be critical to the effectiveallocation of resources. Funding agencies willbe able to use the Blueprint to plan andcoordinate technical assistance (TA) to thefinancial sector. In addition, duplication willbe minimized through better planning andcommunication, which will be facilitated by theBlueprint.

The remainder of this document isorganized as follows. Chapter II reviews thebackground of and analyzes the key issues inCambodia's financial sector. Chapter III presentsa long-term vision for financial sectordevelopment, and Chapter IV provides thelong-term strategy and sector development planto achieve the vision. A summary table of theBlueprint is in the Appendix.

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Cambodia's financial sector is at arudimentary stage, with limited financialintermediation and low public

confidence. Cambodia still has one of thelowest rates of banking intermediation in theworld: bank loans and deposits account forapproximately 8 percent and 12 percent of grossdomestic product (GDP), respectively.

Cambodia had a monobanking systemwhen the National Bank of Cambodia (NBC)operated through its provincial branches.Structural reforms were initiated in 1989through a Government decree to establish atwo-tier banking system by separating thefunction of commercial banks from NBC. Thisdecree allowed the formation of privatecommercial banks as limited liabilitycompanies. In 1990, treasury operations weretransferred to the Ministry of Economy andFinance (MEF), and NBC was designated as aministry and largely used to finance budgetdeficits. In 1991, the first private commercialbank was established as a joint venture betweenNBC and the Siam Commercial Bank ofThailand. Commercial banks operated underthe framework of a law on the supervision offinancial institutions, which was enacted inAugust 1992, and the subdecree on thesupervision of commercial banks approved inNovember 1992. In 1996, NBC was established

as the central bank as the result of thepromulgation of the Law on the Organizationand Conduct of the National Bank of Cambodia(the Central Banking Law).

The period of political stability has allowedsteady progress in the Government's effortstoward financial sector development. Followingthe reestablishment of NBC in 1996, theGovernment adopted the Law on Banking andFinancial Institutions (the Banking Law) in 1999and a new Insurance Law in 2000. The BankingLaw introduced more appropriate definitionsfor banking activities and a refined legalframework for banks. It also allowedmicrofinance institutions (MFIs) to undertakefinancial operations under the supervision ofNBC. Furthermore, in 2000 the Governmentembarked on a comprehensive bankrestructuring program with the assistance of theInternational Monetary Fund (IMF) to enhancepublic confidence in the banking system.

Currently, Cambodia has just 20 commercialbanks as a result of NBC's relicensing program,which revoked the licenses of 12 nonviablebanks. Other financial institutions operating inCambodia include insurance companies,currency exchange bureaus, and MFIs. In therural areas, banking activities are even scarcer;the microfinance operations of nongovernmentorganizations (NGOs) are the main and de factoproviders of credit there. The insurance sectorcomprises a Government-owned insurance

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entity, the Cambodia National InsuranceCompany (CAMINCO), which acted as theregulator, underwriter, and broker; and fournongovernment insurance companies that areagents for CAMINCO and risk underwritersthrough fronting agreements. There are norecognized interbank/money markets or capitalmarkets. Development of these markets willdepend on proper legal and accountinginfrastructure, necessary regulatory andinstitutional structures, and human resourcecapacity.

Weak financial infrastructure hampers thefurther development of the financial sector.Cambodia has yet to develop or strengthen lawspertaining to accounting, insurance, negotiableinstruments, secured transactions, commercialenterprises, bankruptcy, contracts, commercialcredit, and the like. In addition, publicconfidence in the judicial system is very low.The lack of the rule of law prevents thedevelopment of a formal, contract-based creditculture and has thus been a primaryimpediment to private sector development.Cambodia has yet to adopt common accountingand auditing standards. Few companiesproduce financial statements, and those that douse different standards. Lack of commonaccounting standards and an enforcementsystem has not only increased the risk and costof banking operations but has also deterred thedevelopment of financial markets.

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To strengthen the banking system, NBCrecently conducted a bank relicensing programbased on increased capital requirements andthe CAMELS rating system. In November 2000,just before the first phase of NBC's bank

relicensing program, the commercial bankingsystem consisted of 31 banks, including twoGovernment-owned banks, 22 locallyincorporated banks, and 7 foreign bankbranches. In December 2000, NBC revoked thelicenses of 12 banks classified as nonviable, andplaced 16 banks under conditional licenses,entering into memoranda of understanding thatrequired compliance with restructuringmeasures and prudential regulations (forexample, minimum capital requirements) bythe end of 2001.

The five largest commercial banks, includingthe Government-owned Foreign Trade Bank(FTB), hold more than 50 percent of totalbanking assets and deposits. Deposits in foreigncurrencies, predominantly US dollars, make up93 percent of total banking deposits. The USdollar is the primary medium of exchange, withthe Cambodia riel (KR) used primarily in ruralareas. The formal banking sector is concentratedin Phnom Penh, although 90 percent of thepopulation resides in rural areas.

As of December 2000, the total assets of thebanking system stood at KR2,517 billion - theequivalent of $644 million, or 20 percent ofGDP. This represented an increase of 20 percentsince the end of 1999. During the same period,loans increased 31 percent to an equivalent of$249 million, while deposits increased 40percent to an equivalent of $382 million. Loangrowth occurred predominantly in themanufacturing and service sectors.

Despite the low level of lending, assetquality in the banking system is poor.According to NBC, the volume ofnonperforming loans in the banking system isreported to be substantial and growing. Thelack of both accounting standards and auniform chart of bank accounts compoundsconcern about the accuracy of the reportednonperforming loans.

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Figure 1. Bank Loan by Sector (KR Billion)

Source: National Bank of Cambodia.

-

100

200

300

400

500

600

700

800

900

1995 1996 1997 1998 1999 2000

Agriculture

Non-Agricutlure

Table 1: Loans and Deposits in the Banking Sectoras of December 2000

Amount/Equivalent As Percentage

Item KR million $ million of GDP

Loans 972,747 249 7.60%Deposits in KR 103,969 27 0.8%Deposits in Foreign Currency 1,386,985 355 10.9%Total Deposits 1,490,954 382 11.7%

Source: National Bank of Cambodia.

In addition, the banking sector maintainsexcess liquidity with the percentage of cash tototal assets at about 19 percent. Roughly 33percent of total assets are non-earning. Thebanking system provides a narrow range offinancial products, usually limited to demand,savings, and time deposits on the liability side.Loan portfolios tend to be confined to better-known firms.

The high risk and operating costsassociated with bank lending are reflected in a

high interest rate spread and the prevalence ofshort-term lending. The spread between loanand deposit interest rates is estimated at around13 percentage points, as loan interest rates arearound 20 percent per annum or more. Typicalloan maturity is 3-6 months, because banks arereluctant to provide loans with longer terms.Term finance is unavailable, and the usualpractice is to continue rolling over short-termloans. This practice generates maturitymismatches and increases overall risk in thebanking system.

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A number of factors contributing to the lowlevel of intermediation, poor asset quality, andhigh operating costs for banks all lead to lowpublic confidence and limited depositmobilization. As a result, the bulk of money inthe economy is held outside of the bankingsystem.

Uncertainties regarding the enforceabilityof security interests impede bank lending andcontribute to poor asset quality. The presentcollateral registration system is unreliablebecause of the absence of a legal basis forsecured transactions and an inadequate publicregistration system that specifies lenders'positions and priority rankings in securedproperty. The current collateral registrationsystem is cumbersome and requires banks togo through several steps to identify, confirm,and register a secured interest. In addition, lackof a proper collateral valuation system alsoinhibits sound lending.

Lack of reliable borrower informationimpedes bank lending and leads to poor assetquality. Cambodia lacks a credit bureau orarrangements for sharing information amongfinancial institutions that can be accessed byall banks. Further, few firms produce financialstatements, and no common accountingstandards are enforced. Thus, banks are unableto lend based on cash-flow analysis, as they lackclients' financial information. Consequently,banks are compelled to lend against collateralas the primary source of repayment, which isfurther compromised by a lack of infrastructurefor secured transactions.

The lack of liquidity managementmechanisms resulting from underdevelopedfinancial markets incurs substantial opportunitycosts to banks. The banking sector maintainsan abnormally high level of liquidity becauseof the lack of interbank markets to effectively

manage liquidity. In addition, although theCentral Banking Law provides the legal basisfor rediscount facilities,2 NBC is unable toprovide liquidity service to commercial banksto meet temporary liquidity shortages, becauseall eligible negotiable instruments (bills ofexchange, promissory notes, etc.) areunavailable because of the lack of necessarylegal infrastructure (i.e., a negotiableinstruments law).

The weak supervisory capacity andregulatory framework impede earlyidentification of problem banks and their timelyand orderly resolution. The basic frameworkand the capacity for on-site inspection and off-site surveillance, as well as a prompt correctiveaction system, are not yet in place. Weakcapacity and shortcomings in the legal andregulatory framework for bank liquidation havehampered and delayed early and orderlyliquidation of delicensed banks. Bankregulations and the capacity of the BankSupervision Department of NBC both needstrengthening. In addition, lack of a uniformchart of bank accounts and disclosure ruleshampers effective bank supervision andprudential regulations. Like their borrowers,commercial banks adopt varying accountingstandards. Furthermore, a review of samplefinancial statements of commercial banksrevealed that the quality of the audits performedby international firms is inconsistent, partiallyas a result of the lack of common accountingand auditing standards within Cambodia.

Finally, the banking system suffers from a

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lack of human resource capacity. The earlymarket opening policy has enabled Cambodiato attract many experienced foreign commercialbankers into the banking sector. As a result,most senior managers are experienced andcompetent bankers. However, most banks havedifficulty finding qualified working-level staffbecause of the country's legacy of long-standingdomestic turmoil and international isolation.Thus, most working-level staff need substantialprofessional training in basic bankingoperations such as credit analysis, loanmonitoring, and problem loan management.

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The rudimentary banking system cannotaddress the nature of demand from the poorfor microfinance to smoothen consumption,build assets, and develop microenterprises.Furthermore, it is not structured to meet thedemand from the middle and upper segmentsof the rural markets for financing commercialcultivation, agricultural trading, and rural andagriculture-related enterprises such as ricemilling and dairy.

Nearly 40 percent of the people have noaccess to formal bank branches. Only 6 percentof total banking sector advances is foragriculture or related activities, primarily short-term dollar-denominated loans. The estimatedrural finance demand of $120-$130 million perannum, of which one third is for microcreditranging from $50 to $300, is only fractionallymet from institutional sources. Reliable savingsfacilities are generally not available in ruralareas or to the poor.

Currently, about 90 NGOs supported byfunding agencies such as Kreditanstalt furWiederaufbau, Gesellschaft fur Technische

Zusammenarbeit of Germany, United NationsChildren's Fund, International Fund forAgricultural Development, United StatesAgency for International Development providemicrofinance to nearly 420,000 poorhouseholds, or 15 percent of the total, with mostof the borrowers being women. In 2000, theestimated aggregate outstanding microcreditwas $30 million, and savings mobilized was $1.4million. Service delivery is through "villagebanks" consisting of 100-200 members andmanaged by a village credit committee. Membersare organized into groups and are provided withsome basic training; they are given individualcredit with group liability. Loans varying from$20 to $300 are provided for 3-12 months withequated installments and incentives for timelyrepayment. Interest rates on loans range from 3to 5 percent per month. Repayment rates are 80-95 percent. The balance of microfinance issupplied by informal sources, either based onreciprocity and social obligations or frommoneylenders and input suppliers.

Cognizant of the issues, the Governmenthas adopted the Rural Credit Policy to developan effective rural financial system, and hasinitiated the Rural Credit and Savings Project3

and TA for Capacity Building for Rural FinancialServices,4 the policy measures under whichinclude (i) introducing an enabling provisionin the Banking Law for eligible NGOs and otherrural finance service providers to becomeregulated licensed MFIs; (ii) creating aMicrofinance Supervision Department (MSD)within NBC to undertake off-site and on-siteinspection of licensed MFIs, and specialized tomonitor the financial activities of NGOs; (iii)establishing the Rural Development Bank(RDB) as an apex institution to providefinancing for MFIs and commercial banks andto extend technical support and training to

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MFIs; and (iv) enhancing collaboration amongthe Government, NBC, and NGOs for thepromotion of sustainable rural finance. TheGovernment intends to actively encourage theentry of commercial banks into rural finance,strengthen NBC's capacity to ensure orderlydevelopment of the sector, and make RDB asustainable apex institution. Agent Francais deDevelopment also provided technical andfinancial assistance to build up the supervisorycapacity of NBC with regard to the supervisionof MFIs with a view to ensure their sustainabledevelopment.

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Although many factors contribute topoverty, its most obvious manifestations areinsufficient household income, lack ofproductive assets, and inaccessibility ofaffordable financial services. In response, theGovernment has prioritized the developmentof a policy and institutional framework for ruralfinance. Nevertheless, rural finance faces anumber of constraints in expanding outreachand attaining sustainability.

The demand-supply gap for institutionalrural finance, even at the current level ofeconomic activities, is significant. The majorityof rural households, including the poor, haveno access to institutional finance at affordableterms. Although the collective outreach of theinformal sector (that is, friends, relatives, moneylenders, input suppliers, etc.) is large, the termsand conditions limit the ability of ruralhouseholds to participate actively in and benefitfrom the development process.

The demand for savings, although notquantified, is significant and largely unmetbecause of (i) the absence of secure and reliablesavings facilities, (ii) the lack of appropriateproducts, (iii) the high cost of service delivery,(iv) inaccessibility, and (v) the relativeinexperience of NGOs in managing savings.

The supply side is dominated by microcreditcharacterized by short-term loans. The supplyof term credit for the agriculture and rural sectoris seriously constrained by the lack ofinstitutions capable of delivering and managingterm credit and by the lack of long-term funds.This undermines efforts to diversify agricultureand promote exports. Weak contractenforcement also deters term financing. Thenetwork, orientation, institutional capability,and financial health of commercial bankscombine to make them only marginal suppliersof short-term rural finance.

The majority of NGOs, the sole as well asde facto suppliers of microfinance in rural areas,exhibit (i) weak systems and procedures, (ii)reliance on Government or external assistance,(iii) lack of commitment to sustainability, and(iv) inadequate realization of the need tospecialize for efficient delivery of financialservices.

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The insurance sector consists of aGovernment-owned insurance entity,CAMINCO, which acted as both regulator andunderwriter, and four private insurancecompanies that are performing as agents forCAMINCO. As part of the current restructuringand corporatization program, CAMINCO willbe transformed into a private company througha joint venture with a private insurancecompany. The Government is expected to signa joint venture agreement with the candidatecompany soon, in which the company will have49 percent of the shares and MEF will hold 51percent.

Most of the policy purchasers in Cambodiaare foreign investors and international

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organizations, and the main sources of businessinclude property, health, marine cargo, andmotor vehicles. CAMINCO has also madearrangements for reinsurance facilities withmarkets in the region and European countries.Other products expected in the future includelivestock, crop, and life insurance.

In 1992, the Law on the Establishment ofthe Insurance Business in Cambodia wasadopted. During 1992-1996, subdecrees,circulars, and declarations were issued toaddress the management of the insurancebusiness, the scope of business, and theestablishment of private insurance companies.

The year 2000 was a watershed period inthe development of the insurance sector. TheNational Assembly adopted the Insurance Law,and the Government moved forward with theprivatization of the state-owned insurancecompany. The new Insurance Law coversproperty insurance, life, and personal insurance;compulsory third party liability motor vehicleinsurance; construction insurance and insurancefor passenger transport; insurance company andstate control; insurance agents and brokers; andlegal penalties. The Government is drafting asubdecree to implement the new law. The firstdraft has been submitted to the Council ofMinisters for approval and is expected to beeffective this year.

In anticipation of the privatization ofCAMINCO, its regulatory responsibility wastransferred to the Insurance Office that wasestablished under the Financial IndustryDepartment of MEF in January 2001. Key staffin the Insurance Office came from CAMINCO.On 4 January 2001, the Government alsonominated the former President of CAMINCOas the Insurance Commissioner.

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First, the insurance sector has beenconstrained by a weak supervisory andregulatory framework and capacity, low levelsof income in the country, and lack of publicawareness of the sector. Although theGovernment adopted the new Insurance Lawin 2000, it has yet to adopt implementingsubdecrees and basic prudential regulations,such as uniform chart of accounts and solvencyrequirements.

Second, an effective enforcement andmonitoring mechanism to implementcompulsory insurance needs to be established.Although the new Insurance Law is aframework law for the insurance business,compulsory insurance cannot be fullyimplemented by such a framework law alonebut needs supporting legislation to establish anenforcement and monitoring system. This inturn requires significant interministerial effortand coordination.

Third, the framework for private sectordevelopment in the insurance sector needs tobe strengthened. The introduction ofcompulsory insurance would create a policy-driven demand for insurance. Without acompetitive framework for the privateinsurance business, it would be difficult toimplement and develop compulsory insurance.The Government has already taken animportant initiative toward private sectordevelopment by adopting a privatization policyfor CAMINCO. However, two issues still needto be addressed to facilitate private sectordevelopment: The Government should makean effort to divest its ownership in the insurancesector. Although MEF is now responsible forinsurance supervision, the Government's sharein the largest insurance company poses a

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conflict of interests in supervision and will affectcompetition in the insurance market. Thus, thepartial privatization of CAMINCO through ajoint venture should ultimately lead todivestiture of the Government shares in the jointventure over the medium term. In addition, theGovernment needs to develop a transparententry mechanism to foster competition bycreating a level playing field for both state-owned and private companies.

Finally, the new insurance supervisorneeds substantial capacity building. MEF hassuccessfully retained experienced regulatorsfrom CAMINCO, but additional staffing andsubstantial capacity building are still needed tohelp CAMINCO to discharge its responsibilitiesanticipated under the new Insurance Law aswell as to undertake a development role for theinsurance sector. In the initial stage of insurancedevelopment, the insurance supervisor isexpected to play the role of facilitator as wellas regulator of the sector. Recently, authoritieshave been seeking cooperation with institutionssuch as the Malaysia Insurance Institute to traincurrent supervisory staff and to establish aninsurance training institution in Cambodia overthe medium term. Capacity building must targetthe key staff in the Insurance Office of MEF, aswell as those in the line ministries who will beinvolved in the enforcement and monitoring ofcompulsory insurance.

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Cambodia's pension system consists of twopublic programs. A pension program formilitary personnel was established by law in1994, and provides basic retirement anddisability benefits based on years of service and

other special criteria including hazardous duty.A civil servant pension program was establishedby sub-decree in 1997 and provides basicretirement and disability benefits based on yearsof service. Currently, there is no mandatorypension program for the private sector. Eachprivate company or organization determines itsown pension scheme, if any. The governmenthas already submitted to the legislative bodiesa draft Law on Social Security, which also coverspublic pension scheme.

Under the civil servant pension program,civil servants receive a retirement pensionequivalent to 80 percent of their net salary, afterthey have accomplished at least 30 serviceyears. Eligible civil servants with at least 20years of service receive a retirement pensionequal to 60 percent of their respective net salary.Those who have more than 20 years of servicealso receive a proportional annualsupplementary pension of 2 percent of their netsalary.

According to MEF, the benefits paid underthe current civil servant pension system arefinanced from the budget. Under the civilservant pension sub-decree, all ministries andinstitutions submit an annual budget andstatistics of civil servants about to reachretirement and those about to be placed ondisability to the Ministry of Social Affairs, LaborVocational Training and Youth Rehabilitationand MEF. Based on these data, part of thebudget is reserved to cover the retirement anddisability benefits. The Ministry of Social Affairs,Labor Vocational Training and YouthRehabilitation is also responsible for themanagement and monthly payment ofretirement and disability benefits. A scheme forthe establishment of a pension fund for the civilservant has been under discussion in MEF.

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The current pension system in Cambodiacovers only civil servants and militarypersonnel. Because pension benefits are basedon a large percentage of the retirees' previouswages, the civil servant pension system suffersfrom a weak financial base because little ornothing is withheld from wages to coverpension benefit payments. Therefore, transfersfrom the Government budget are used to meetthe current pension obligations.

Income security for retirees and oldpersons represents an important component ofoverall poverty reduction in Cambodia.Cambodia faces a number of challenges increating a system that will ensure incomesecurity for retirees and old persons. Accordingto the estimate of the Ministry of Planning,roughly 4 percent of Cambodia's population isover 60 years old. This figure is expected to be6.6 percent by 2021, when the populationgrows from 11.4 million to more than 20 million.This increase will create increasing demand forresources to provide income security for retireesand old persons.

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Nonbank financial institutions (NBFIs)offering lease financing, consumer credit, andhousing finance have yet to be developed inCambodia. Some commercial banks conductlimited credit card transactions and services,and hotels and some restaurants accept creditcards. However, the general public does nothave access to credit cards or consumerfinancing from banks.

Under the Banking Law, banks are allowedto conduct universal banking, including leasefinancing. However, the law has yet to definethe basic nature and scope of leasing, and theauthorities have to develop detailed proceduresand prudential norms to conduct the leasingbusiness. Housing finance is unavailablebecause of the underdeveloped legalframework and uncertainties regarding title toland and buildings. The current title system isneither adequately organized nor reliable.

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Most impediments in the banking sectorapply to the nonbanking sector. To create anenabling environment for the development ofNBFIs, the Government first needs to establisha legal and regulatory framework. Since thecurrent Banking Law adopts a universalbanking orientation, the Government shouldstart developing the nonbanking sector in thecontext of banking sector development. Thus,the Government may start with establishing aregulatory framework for banks to undertakenonbanking business either in the form of in-house operations or through subsidiaries.

Special consideration must be given tolinking the development of the nonbankingsector with small and medium-sized enterprise(SME) development. Lease financing could bean attractive alternative product for banks inan environment with inefficient infrastructurefor protecting credit providers. Leasing wouldreadily provide the functional equivalent ofloans for capital equipment to SMEs. Thus, theGovernment may consider the leasing businessas a priority in developing the nonbankingsector.

Other than peripheral businesses in thebanking sector, development of thenonbanking sector relies critically on relevantfinancial markets and infrastructure. Thus, the

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Government needs to carefully sequence andsynchronize its efforts with the developmentof financial markets and infrastructure.

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In the mid-1990s, NBC established a riel-based settlement system based on an earlyversion of the Central Banking Law (1992). Thelatest Central Banking Law (1996) charges NBCwith overseeing the payment system, clearing,and interbank markets.5

Annual clearings have increased from 692checks valued at KR88,577 million in 1997 to1,234 checks valued at KR163,284 million in2000. To date, the clearinghouse operatesclearing sessions that extend into the next day.Efforts are under way to achieve same-dayclearing despite concerns over banks' ability toconform to it.

With IMF TA, NBC has improved the rulesfor clearinghouse operations and has madesubstantial progress toward creating andregulating clearings in US dollar-denominatedchecks.6 Considering the dominant use of USdollars in the economy, banks are expected toactively participate in US dollar-denominatedclearings. This change will facilitate paymentoperations and shorten availability time.However, the effectiveness of the newregulations will depend on the compliancecapacity of commercial banks and theestablishment of safeguard measures foraddressing emergency cases. A recent Prakas

establishes a working group for addressingclearing, settlement, and payment systemissues.

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Despite recent improvements, thepayment system still needs further refinementto safeguard it against settlement failure. ThePrakas absolves NBC from responsibility orliability for payment failures.7 The mechanismshave not been implemented to enable NBC toextend emergency liquidity to a bank that isexperiencing a temporary delay in the receiptof large payments. This should warrant afurther review of how, in the event of a largepayment failure, the banking system could beassured there will not be an interruption in bankoperations and solvency, and that preventivemeasures will be in place to avert a liquiditycrisis.

The current payment system is built onweak legal underpinnings. There is no penaltyfor dishonored checks, and existing laws do notaddress criminal charges for check fraud. Thereshould be a minimum legal basis for thepayment system through drafting a paymentlaw that will formalize current regulations.8 Thepresent situation creates payment uncertaintiesat the bank level, particularly in terms ofdetermining the legality of checking depositsignatures, endorsements, and assignments.Moreover, promulgation of a negotiableinstruments law should receive priority thatgoes beyond checks and covers bills ofexchange, promissory notes, and other moneymarket-type instruments.

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There is no recognized interbank/moneymarket operating in Cambodia other than anoccasional exchange of deposits among a fewbanks that trust one another. The lack of aninterbank market hampers banking operationsand increases operating costs. Since there is noway to manage liquidity, most banks are forcedto maintain high levels of non-earning assets,incurring opportunity costs. The percentage ofcash to total assets amounts to roughly 19percent, and 33 percent of total assets are non-earning.

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Two factors hinder the establishment ofinterbank/money markets in Cambodia. First,the lack of mutual confidence amongcommercial banks hinders interbank marketservices. There must be a forum to build mutualconfidence among banks and to discusscommon policy agenda. Thus, the commercialbanks first need to work together to establishan inclusive bankers association and obtainofficial recognition from the authorities. Second,the lack of a legal basis for money marketinstruments hinders the development ofinterbank markets. To improve the currentsituation, establishment of the legal basis fornegotiable instruments must be a primeconsideration in legislation.

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Under the Prime Minister's initiative, theGovernment has made considerable effortstoward capital market development. TheGovernment drafted a Capital Market Law in1995; unfortunately, this initiative wasinterrupted as a result of the politicaldisturbance in 1997. Even after 1997, onlylimited progress has been made because ofdelays in the development of related financialand legal infrastructure.

With the progress in governance reformassisted by ADB and the World Bank, theGovernment is now renewing its efforts towardcapital market development. For instance, it hasestablished a capital market unit in MEF. TheGovernment is also drafting a subdecree tocreate an independent securities supervisorybody responsible for attending to all of thefunctions of capital markets and bringing aboutits full operation. The main functions of thesupervisory body would include (i)implementing relevant regulations, includingthe making of administrative rulings; (ii)supervising and safeguarding securitiesoperations in settling and trading; and (iii)licensing and registering all entities (broker-dealers, registrars, investment companies,management companies, depositories,custodians) engaged in securities marketsactivities.

However, the Central Banking Law (1996)assigns NBC the responsibility for establishingand overseeing financial markets. According tothis law, NBC has duties and functions toparticipate in the formation and supervision ofthe money and financial markets. In addition,the Central Banking Law empowers NBC toconduct securities operations to facilitate the

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registration, distribution, and trade of securitiesissued by the Government (Title VI, Article 23).These powers would have to be delegated byNBC to a securities and exchange commission(SEC) once it is created.

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Capital markets cannot be established andoperational until accounting, legal, and otherfinancial infrastructure is in place and the legaland accounting professions are organized andoperational. Not only is it necessary to draft andpass key laws, but the implementing institutionsmust also be formed and developed.Furthermore, potential listing companies mustbe willing to accept higher standards ofcorporate governance and be capable ofproducing audited financial statements. Thus,the Government needs to conduct a feasibilitystudy to assess a critical mass of issuers in linewith the promulgation of the Law onCommercial Enterprises.

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Financial sector development depends onan adequate body of laws that covers contracts,bankruptcy, collateral, and loan recovery. Toenforce these laws, a body of ethical andprofessional lawyers and judges and a reliableand efficient court system whose decisions areenforceable must be in place.

The civil code and procedures are beingdrafted with assistance from the JapanInternational Cooperation Agency. These lawswill provide a legal basis from whichstakeholders in the financial sector will obtaintheir rights and liabilities and their causes ofaction. The civil code should be drafted to

ensure certainty in basic contract law principles,including rights attached to securities and therules governing the transfer of those rights.Because these laws are yet to be put in place inCambodia, specific legislation can supplementthis deficiency.

The Ministry of Commerce (MOC) hassubmitted a draft Law on CommercialEnterprises to the Council of Ministers which isbeing debated and is expected to be adoptedby the National Assembly by mid-2002. In May2000, Cambodia ratified adherence to the NewYork Convention on commercial arbitration andis now drafting a Commercial ArbitrationProcedure. MOC is also drafting a BankruptcyLaw and a Secured Transactions Law with IMFassistance.

The Government is moving forward withjudiciary reform as an integral part ofgovernance reform. It has adopted theGovernance Action Plan, which underscoresthe importance of human resourcedevelopment, court inspection, andinfrastructure. Moreover, the Ministry of Justicehas drafted a Law on the Organization andFunction of Court System that includesestablishment of a commercial chamber andfour other chambers in the district court. Thedraft is under review by the Council of Ministers.

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Although adoption of a legal frameworkis a key step toward development of the privatesector and the financial sector, there must beconcerted efforts to prioritize adoption of thenecessary laws, and by doing so, theGovernment can expedite the legislationprocess. With regard to the financial sectordevelopment, laws pertaining to commercialtransactions, including accounting, negotiableinstruments, secured transactions, commercialenterprises, bankruptcy, and contracts, must be

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given the first priority. The Accounting andAuditing Law and the Law on CommercialEnterprises must be promulgated to enablecapital market development. Afterwards, theGovernment may proceed to adopt a securitiesand exchange law (or redraft the Capital MarketLaw).9 In line with the adoption of the Law onCommercial Enterprises, the Bankruptcy Lawmust be adopted, to bolster the liquidation ofdelicensed banks on 8 December 2000. And inline with the adoption of the civil code andprocedures, a secured transactions law andnegotiable instruments law must be establishedto underpin commercial activities and financialtransactions.

The establishment of a law enforcementmechanism also needs to be addressed in asystematic way. Most important, theGovernment should move forward with thejudicial reform addressed in the GovernanceAction Plan. With regard to financial sectordevelopment, the Government also shoulddraft a plan to establish a public registrationsystem for secured transactions and makeefforts to maintain the public confidence in suchan enforcement mechanism.

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Cambodia has yet to adopt commonaccounting and auditing standards and toestablish an enforcement mechanism. MEF's

Commission for Accounting Reform hasendorsed the adoption of the InternationalAccounting Standards (IAS) and InternationalStandards on Auditing (ISA) as core principlesof accounting and has submitted a draftAccounting and Auditing Law to the Council ofMinisters for reconsideration.

Currently, the local offices of twointernational accounting firms, and several localfirms, undertake most of the auditing servicesin Cambodia. The international firms togetheremploy approximately 125 staff and serve about400 clients, of which 30-40 percent are privatecompanies. Many of the private companies arethe local affiliates of international companies,and the audited information is sent to the homeoffice for inclusion in the consolidatedaccounts.

At present, most senior accountants andall of the managers are expatriates. Bothinternational firms have looked into certificationof Cambodian staff using programs from theAssociation of Chartered Certified Accountants.Although the inspections may be taken locally,this program is very expensive because thetraining courses are located in Viet Nam. Thedemand for trained auditors is expandingrapidly and will increase dramatically once anAccounting and Auditing Law and commonstandards are established.

NBC has a broad legal mandate to regulatenearly all issues related to the accounting andauditing of banks. This goes beyond the usualprudential regulations to include establishmentof the rules for measurement, recognition, anddisclosure in the financial statements, andconsolidation of accounts. The Central BankingLaw also permits NBC to establish accountingstandards for the banking sector that areseparate from the tax regulations. NBC hasdrafted a uniform chart of accounts for banks.Most of the accounting policies are takenverbatim from the "Framework for the

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Preparation and Development of FinancialStatements," published in July 1989. However,there are some substantive changes, so theresulting financial statements will not be inaccordance with IAS.

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Given the importance of the accountingand auditing system in Cambodia, theGovernment needs to expedite thepromulgation of the Accounting and AuditingLaw and the adoption of common accountingand auditing standards.10 Although theGovernment has already committed to adoptingIAS/ISA in their entirety, it should carefullywork out an implementation plan to phase inIAS/ISA, considering the limited capacity of andcompliance cost to the private sector.

The Government should play a pivotal rolein establishing an enforcement system foraccounting and auditing standards. Uponadopting the Accounting and Auditing Law, theGovernment should establish an accountingstandards authority and a professionalassociation of accountants and auditors. Anassociation serves important regulatoryfunctions in the public interest. In the earlystages of development, an association canprovide a forum for practitioners tocommunicate with the Government andeducational institutions. An association also cancommunicate best practices to members andthus help to reduce the cost of providingtraining to staff members by combining theresources of member firms. A more matureassociation can assume regulatory functions,including certification of new auditors andenforcement of a code of ethics, and may offer

continuing education programs. The draftAccounting and Auditing Law includesprovisions for creating the National AccountingCouncil and an Institute of Khmer Auditors andAccountants under the aegis of MEF. Theinternational best practice for suchorganizations is that they be private sectorentities. However, regardless of how thedivision of responsibilities is determined, thereis an urgent need for the establishment of suchan association.

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Lack of human resource capacity is a majorimpediment to financial sector development inCambodia. There is great need for formaltraining in core skills (such as banking,accounting, statistical analysis, and generalmanagement) and in the specializedcompetencies necessary for the effectiveoperation of a market-driven economy in boththe public and private sectors.

A number of institutions and organizationsplay a role in the development of humanresources for the financial sector in Cambodia.These include universities and businessschools, commercial banks, the BankersAssociation, the Centre for Banking Studies(CBS) of NBC, and MEF.

Each commercial bank operating inCambodia assumes individual responsibility forits internal training program. The commitmentof resources to training differs by bank. Foreigncommercial banks normally send theiremployees for training overseas.

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Although CBS has contributed to filling theinitial capacity gap in the early stage of bankingdevelopment, the scope and quality of trainingservices are insufficient to meet the needs ofthe private sector, and so CBS remains as atraining school for entry-level NBC employees.At this time, all CBS instructors are part-time,and salary payments still based largely onacademic degrees rather than teaching ability.CBS instructors receive considerably less thanthose paid by the business universities.Therefore, CBS has been unable to attract asufficient number of qualified instructors.

Commercial banks will continue to sendtheir employees outside of Cambodia at highcost until adequate training is available insidethe country. Many commercial banks haveindicated the need for a professional training

program in Phnom Penh. However, thecommercial banks will send their employeesto training only if it is practical and relevant andtaught by experienced bankers. One reason forthe absence of professional training is thedifficulty in hiring qualified instructors with thepractical commercial banking experiencenecessary to teach courses such as creditanalysis, letters of credit, foreign exchange,bank operations, and asset/liabilitymanagement.

A bankers association is the logical homefor a professional training program for bankers.By pooling resources and using experiencedcommercial bankers to teach training programs,a bankers association can be an effective meansfor providing training to the commercialbanking sector. Upon creation of an inclusivebankers association, it should first establish sucha professional training program. The trainingprogram should also be open to staff of MFIs.

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The development of both the financialsector and the private sector depends ongovernance reform. Good governance is

emerging as a key element to sustain social andeconomic development. Governance is definedas the manner in which power is exercised inthe management of a country's economic andsocial resources for development. One criticalchallenge facing Cambodia in the area ofgovernance is to strengthen the accountabilityof institutions in the public sector. Thenecessary reforms include (i) judiciary and legalreform, (ii) public administration reform, and(iii) public finance reform.

An ADB study11 on the development impactof comprehensive governance reform suggeststhat the Cambodian economy will be able tosustain an average annual economic growth rateof 7 percent over the medium term if thegovernance reform programs are fullyimplemented. The reform scenario in the studyassumes that the Government will implement fullgovernance reform. Specifically, the reform

scenario assumes the implementation of the threereforms mentioned above and a continuous flowof official development assistance.

Judiciary/Legal Reform and theDevelopment of Private SectorFramework. Judicial/legal reforms provide anenvironment favorable to long-term and large-scale investment and create a level playing fieldfor domestic and foreign investors. They alsoensure the protection of creditors and investorsand generate confidence in the future prospectsof Cambodia's economy and public policy. Thisenables the Government to develop financialmarkets and help to integrate the country withthe regional and world economies to improveits prospects as an industrial base for exportstargeting the region and the rest of the world.

Public Administration Reform. Publicadministration reform consists of threecomponents: (i) the demobilization of soldiersand security officers, (ii) the rationalization ofcivil administration, and (iii) an increase in theaverage monthly salaries of public officials.

Public Finance Reform. In publicfinance reform, revenue-enhancing measuresincrease the efficiency of tax collection. Thisenables the Government to increase revenuesfrom direct taxes, indirect taxes, and customsduties. Forestry sector reform increases theGovernment's managerial capacity to controlthe volume of logging. This enables the forestry

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Figure 2. Expansion of the Economy

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Figure 3. Per Capita GDP

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Figure 4. Exports

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Figure 5. Total Savings

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sector to be sustainable and to contribute long-term revenues to the National Treasury.

Continuous Flow of Official DevelopmentAssistance. The Government's strongcommitment to reforms sends positive signalsto aid agencies. This enables Cambodia to haveaccess to grants and loans, which are necessaryto carry out various reforms and developmentprograms.

The "reform scenario" in the ADB studyoptimistically predicts that if the governancereforms are implemented on a full scale, a highlevel of sustainable economic growth will beachievable in the coming two decades. Majorpredictions under the "reform scenario" aresummarized as follows:

(i) The real GDP growth rate willaccelerate from 5 percent in 2000 to7.7 percent in 2005, and will bemaintained around the average annual

rate of 7-8 percent from 2005 to 2020.

(ii) The GDP will triple from $3,302million in 2000 to $10,263 million in2010, and per capita income willincrease by about two times in 10years, from $274 in 2000 to between$500 to $650 in 2010.

(iii) Total savings and exports aspercentages of GDP will increase byabout 10 percentage points.

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With successful progress in governancereform, especially in the judicial/legal system,and the development of the private sector

Figure 6: Financial Sector Vision for 2010

Enhanced Intermediation

•Public Confidence

•Investor Confidence

IncreasedResource

Mobilization

•Economic Development

•Poverty Reduction

Sound, Market-based Financial System

Competitive

Integrated

Efficient

• Facilitate the development offinancial structure

• Integrate informal and formalsectors

• Increase benefits to the poor

• Increase resource mobilization

• Facilitate investments

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framework, a sound, market-oriented financialsystem will be in place in 10 years. A sound,market-oriented financial system ischaracterized as a competitive, integrated, andefficient system. Competitiveness, supportedby a transparent regulatory system and thefinancial policy, will be the primary drivingforce for the development of financial systemin Cambodia. An integrated financial systemoffers a breadth of savings and credit productsthat will extend economic benefits toCambodians in lower economic strata. In turn,a competitive and integrated financial systemwill facilitate domestic resource mobilizationand growth-oriented investments.

The empirical relationship betweenfinancial asset growth and economic growthshows that financial assets grow faster than percapita GDP. Moreover, the speed of financialassets growth is much faster when per capitaGDP is below $1,000 (Box 1). The ratio offinancial assets to GDP in Cambodia should atleast triple as GDP triples and per capita GDPdoubles over the next 10 years.

The spread between loan and deposit rateswill narrow as intermediation becomes moreefficient. Similar to the experience of othereconomies (Box 2), several factors willcontribute to this trend in Cambodia anddetermine the speed of reduction in spread.The major contributing factors include (i)sustained macroeconomic stability, (ii) reduceduncertainties resulting from improved legal andfinancial infrastructure, and (iii) increasedcompetition among banks.

The banking sector will be the prime areaof growth in financial assets, followed by theinsurance sector. This projection is based onfactors such as (i) the current structure in whichbanks are predominant, (ii) enhancedintermediation capacity following acomprehensive bank restructuring under theIMF Poverty Reduction and Growth Facility

program, and (iii) improved financialinfrastructure. Universal banking orientationunder the Banking Law will further strengthenthe leading role of banks over the medium term.In fact, the banking sector has demonstratedits capacity to increase the loan portfolio bymore than 30 percent over the last two yearswith the increased demand from the real sector.With the successful restructuring assisted byIMF, the banking sector will step up its capitalbase. Further, the banking sector will increaseintermediation capacity once relatedinfrastructure is developed.

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Expansion of the Banking Sector.Competition between banks will facilitatereorganization of the banking industry,resulting in economies of scale and scope assome of the best performing banks acquire ormerge with other banks. Some weaker andperhaps smaller banks may voluntarily decideto sell to or merge with stronger performingbanks. The strategy of being acquired ormerging with stronger banks will improve theefficiency of the banking system through betterutilization of bank capital and human resources,as well as sharing common resources across abroader product line.

As competition among commercial banksincreases, banks will become less dominant, asa more balanced and integrated financialstructure with diverse nonbank financialactivities gradually emerges. Competition maydrive banks to adopt different strategies forexpanding into the nonbank financial business.Given a universal banking system, some of thebest performing banks will expand the scopeof their businesses into nonbank areas as theyincrease their capital bases and assets throughmergers and acquisitions. Others will decideto specialize in either commercial banking or

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0

1

2

3

4

5

1965 1970 1975 1980 1985 1990

FIR

Republic of Korea

Taipei,China

0

1

2

3

4

5

0 500 1000 1500 2000

GDP Per Capita

FIR

Republic of KoreaTaipei,China

Box 1: Financial Interrelation Ratio

The financial interrelation ratio (FIR) is the ratio of the total value ofall financial assets to the national wealth, which can be approximated bygross domestic product (GDP). Low FIR normally characterizes an earlystage of financial development.

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The figures show that financial assets grow faster than per capitaGDP in the course of economic development. Furthermore, the speed ofgrowth of financial assets is much faster when per capita GDP is below$1,000. Once the economy attains a certain stage of development, the FIRratio tends to level off.

In the case of the Republic of Korea, when GDP tripled from $3 billionto $9.73 billion and per capita GDP tripled from $105 to $296 during 1965-1971, FIR jumped from 0.78 to 2.66, meaning that the total financial assetsbecome more than 11 times those at the beginning of the period. Thenumber for Taipei,China is less dramatic but still very significant. During1966 and 1973, its GDP also tripled from $3.13 billion to $10.77 billionand the per capita GDP doubled from $242 to $700, with financial assetsincreasing more than fivefold as FIR increased from 1.8 to 2.66.

Figure B1.1. FIR: 1965-90 Figure B1.2. FIR vs. GDP Per Capita

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Box 2: Interest Rate Spread

The historical data of the four Asian Tigers illustrate the relationship between interestrate spreads and depth of financial system.

Spreads consist of operating costs and a risk premium. Operating costs include treasurycosts, salaries, and other administrative expenses of the banks, while risk premiums coverlegal, regulatory, and other uncertainties.

The right environment is the key for developing the financial system and for reducinginterest rate spreads. With the deepening of the financial system, the competition amongfinancial institutions will increase the financial intermediation efficiency and in turn bringdown spreads.

The data show that interest spreads tightened over the observed period, reflectingincreased intermediation efficiency. Taipei,China's case differs in the early years, when thegovernment controlled the interest rates. After relaxation of interest rate control, the spreadalso followed the generally declining trend. The Republic of Korea's spread was above 13percent during the Korean War period, and a speedy reduction in spread followed thereafter.With the liberalization of interest rates, strong competition among banks resulted in negativespreads for about three years during the mid-1960s.

The current interest rate spread in Cambodia is above 13 percent per annum, reflectingthe lack of liquidity management instruments, lack of law and contract enforcementmechanisms, and heavy adverse selection on the borrowers' side. Once these issues areresolved, Cambodia can expect a decline in interest rate spreads. First, efficient interbankmarkets will substantially reduce the operating costs of banks. Second, with introduction ofthe rule of law and a contract enforcement mechanism, the costs related to legal uncertaintieswill decline. Third, with the development of accounting and auditing standards andmonitoring systems, the uncertainty with regard to borrowers will be minimized and thusreduce adverse selection.

Figure B2.1. Spread of Loan and Deposit Interest Rates

-1

1

3

5

7

9

11

13

1950 1955 1960 1965 1970 1975 1980 1985 1990

Hong Kong Republic of KoreaSingapore Taipei,China

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non-bank finance, which will separate bankingand nonbanking activities. As the number ofbanks that adopt specialized financial servicesincreases, so will the diversity of nonbankfinancial institutions.

As banking efficiency improves, the scopeof bank products will expand to include diversematurity profiles and interest rate structures. Inthe short term, reduced uncertainties in the legalenvironment will enable banks to increase theaverage maturity of loan products and to reduceloan-deposit interest rate spreads. Furthermore,the improvement in the payment system andthe availability of diverse negotiableinstruments will permit the banking sector tofurther expand payment services. Competitionbetween banks will lead to increasedinvestments in information technology (IT) andattract new customers. An improved ITenvironment will expedite the development ofcredit cards and other consumer financeservices.

With the Government’s proactiveprivatization efforts and market-orientedreform, the banking sector will be dominatedby privately owned banks. The universalbanking orientation in the Banking Law willlimit state ownership in the banking systembecause the private banking system is expectedto undertake the major role of developmentfinancing.

The non-agriculture sector will remain thedominant borrower in the banking system. Theservice and manufacturing industries will leadthe growth of bank loan portfolios. The bankingsector will become a major financing source forthe working capital of SMEs andmicroenterprises. With improvement intransparency, a growing number of banks willlend based on cash flow analysis rather thanon the availability of collateral, which willthereby improve the quality of loan portfolios.

Regional deposit bases will expand asbanks compete to establish branch networksoutside urban areas. Improvement in thebanking sector will create competitive pressuresin the informal financial sector. This will leadto a reduction in loan margins and overheadcosts for financial products and services for therural areas and therefore facilitate integrationof the formal and informal financial sectors.

With the promotion of the financial serviceoutreach as well as the development of financialinfrastructure, a variety of community-basedsavings institutions such as cooperatives, creditunions, and postal savings offices will emerge.These second-layer savings institutions willsupplement the banking system because theywill provide additional rural lending anddiversify channels for banking and paymentservices among the lower income classes andthe rural areas.

Rural Finance. The development andreorganization of the banking industry willenable expansion of the banking network inrural areas. This will enhance the access offarmers and rural businesses to financialservices and serve to integrate the rural andurban financial markets. The agriculture sector,in particular, will be able to access long-termresources. With the policy, legal, andinstitutional measures initiated for microfinancedevelopment, an array of MFIs is likely toemerge to provide a range of financial servicesto the poor. NGOs with substantive long-terminterest in microfinance will graduate tolicensed MFIs. Strengthening of regulatory andsupervisory systems, information systems, andaccounting and auditing standards will improvethe capacity of MFIs and enable them toleverage funds in the market and providecompetition.

Emergence of NBFIs. Given the currentbank-dominant structure, it is probable thatNBFIs will emerge as subsidiaries of banks.

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Leasing companies and consumer financecompanies will be the first possible candidatesfor NBFIs in the form of subsidiaries ofcommercial banks. In the initial stage, thesecurities trading business also will beundertaken by the commercial banks directlyor on behalf of clients. As business expands inthe securities market, risk managementconcerns will facilitate the separation of thebanking and securities businesses.

The improved legal framework and thedevelopment of money markets will facilitatethe emergence of money market intermediariessuch as finance and investment companies. Thedevelopment of capital markets will also bringdiverse capital market intermediaries andinstitutional investors such as securitiescompanies, investment and trust companies,and venture capital companies.

Development of the Insurance Sectorand Pension System. With the strengthenedefforts to privatization, the insurance sector willbe soon transformed into a market-orientedsystem where the private sector dominates.Given the weak demand, the currentoligopolistic structure will be sustained over themedium term. In the initial stage, nonlifeinsurance companies will dominate theinsurance market to meet the increasingdemand from the business sector.Implementation of compulsory insurancepolicies will give impetus to the developmentof the nonlife insurance business by creatingpolicy-driven demand. Further, with thepromulgation of supporting laws and thedevelopment of enforcement/monitoringmechanisms, compulsory insurance will createa broader demand base for the insurancebusiness. Third-party liability motor insurancewill first emerge after the appropriate legislationand enforcement. With the expansion ofcommercial activities and the increasedawareness of insurance in the business sector,the insurance sector will further diversify its

products to include, for example, creditinsurance, livestock insurance, and cropinsurance. As per capita income grows, thedemand for life insurance will graduallyemerge. However, life insurance will bedeveloped on a limited scale because of therelatively low level of per capita income overthe next 10 years.

An enabling environment will be createdfor developing a multi-pillar pension systemwith the expansion of financial services, thestrengthening of banking and insurance sectors,and the development of sound supervisory andregulatory frameworks. The current civil servantand military pension systems will be sustainedover the next ten years as the foundation isestablished for a mandatory public pensionprogram. At the same time, the legal andregulatory frameworks will be developed for amandatory privately managed funded pensionprogram and voluntary retirement savingsprograms.

With the expansion of the industry baseand the diversity of products, the insurancesector will be a major contributor to domesticresource mobilization, and the domesticinsurance sector will reverse the flow ofpremiums from overseas to the local market.

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With the enhancement of publicconfidence and competition, financialinstitutions will diversify financial instrumentsto meet the diverse needs of savers andinvestors. In the initial stage, the averagematurity of bank assets will increase and depositproducts will be further diversified.Contributing factors include (i) development ofthe legal and financial infrastructure, (ii)enhanced efficiency of the payment system, (iii)strengthening of law and contract enforcement,

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(iv) enhanced public confidence in the bankingsystem, (v) enhanced mutual confidencebetween financial institutions, (vi) availabilityof an efficient interbank markets, and (vii)competition between financial institutions.

Interbank/Money Markets. Develop-ment of interbank markets will enable financialinstitutions to manage liquidity more efficientlyand reduce operating costs. With a gradualbuild-up of confidence among commercialbanks, unsecured overnight interbankborrowing among a small number of largebanks will emerge first. With the availability ofTreasury Bills (T-Bills) and other governmentsecurities, repurchase agreements will furtherexpand the scope of interbank markets. Underthe guidance of the central bank, the BankersAssociation will play a catalytic role indeveloping and deepening interbank markets’architecture and services.

With the increased sophistication of fiscalmanagement, the Government will issue T-Billsand further diversify the maturity structure of itssecurities. Interest rates on government securitieswill play a key role in setting benchmark interestrates for pricing marketable financial instruments.Thus, the development and deepening ofgovernment securities market will create a positiveenvironment for diverse money marketinstruments as well as a market-based monetarypolicy through open market operations.

In the early stages of money marketdevelopment, commercial banks will take thelead in issuing money market products such asnegotiable certificates of deposits and will playthe role of intermediary as well. With thedevelopment of the export-import industry,trade bills will also emerge. The introductionof commercial papers and corporate bonds maycome at a much later stage.

With the strengthening of the legalinfrastructure, especially the adoption of a

negotiable instruments law, basic negotiableinstruments such as commercial bills, bills ofexchange, and promissory notes will emerge.Increased commercial activities and enhancedfinancial intermediation will facilitate the useof negotiable instruments issued by financialinstitutions, which in turn will reducetransaction costs in the economy as a whole.

Capital Markets. The foundation forcapital markets will be in place within the next10 years. Public confidence in the financial andcorporate sectors will improve substantially.Successful reform in the judiciary system andenforcement of key laws such as the companylaw, contract law, and bankruptcy procedurewill enhance the rule of law. The promulgationof the Accounting and Auditing Law and theimplementation of IAS/ISA as commonaccounting and auditing standards willstrengthen public confidence in the corporatesector. Continued macroeconomic stability andthe Government’s de-dollarization policy willboost public confidence in riel-denominatedassets. Together with improved transparencyin the corporate sector, these measures willbuild a solid demand base for corporatesecurities. A critical mass of issuers will emergeas economic growth gains momentum underimproved transparency.

Until an SEC is established and the relatedsecurities market infrastructure is in place,corporate securities will be initially traded onthe over-the-counter market. With thedevelopment of government securities, fixedincome securities of large public corporationsmay emerge on the over-the-counter market.As the number of qualified issuers increases, asecurities exchange will be established.

The commercial banks will play the roleof intermediary in the early stage of capitalmarket development. When the securitiesexchange market is formally operating,securities companies will emerge as subsidiaries

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of larger and more active commercial banks.Foreign securities companies may also showinterest and open branches in Cambodia.

Some contributing factors include (i)macroeconomic stability, (ii) the Government’sde-dollarization policy, (iii) a gradual recoveryof public confidence, (iv) development of thelegal and financial infrastructure (such aspromulgation of a company law and abankruptcy law), (v) emergence of a criticalmass of issuers, (vi) buildup of an investor baseand income level, (vii) institutional capacity ofa regulatory body, and (viii) availability ofhuman resources.

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The regulatory and supervisory system willbe developed to encourage competition amongthe financial institutions while safeguarding theintegrity of the financial system. Continuousmodernization of prudential regulations basedon international best practices will improvetransparency and predictability and thus reducethe compliance cost of financial institutionswhile instilling market discipline.

NBC will pursue a medium-termreorganization plan to establish itself as anindependent regulator with full-fledgedsupervisory capacity. It will be able to allocateadequate resources for staffing, training, andcompensation to attract and retain qualifiedstaff. Its supervisory functions will improve withthe development of prudential norms,improvement in the accounting infrastructure,and enhancement of human capacity. Asbanking activities increase and diversify, NBCwill continue to increase supervisory resources

and improve supervision skills, so BSD will bea major functional body in the central bank overthe next 10 years.

NBC will also maintain its functionalindependence when conducting monetarypolicy. With the development of moneymarkets and the availability of diverse financialinstruments, monetary policy function will beenhanced, thus strengthening NBC’s role as thelender of last resort.

MEF will become a key policy initiator ofthe financial system as it will establish theregulatory system in nonbanking areas,including insurance. MEF also will beresponsible for the laws related to the financialinfrastructure. In the first phase, insurancesupervision will be strengthened throughfurther enhancement of the capacity of theInsurance Office of MEF. As the insurancesector expands in respect of institutions andproducts, an independent insurancesupervisory authority will be established.

With the promulgation of a securities andexchange law, an SEC will be established asthe primary supervisor of capital marketactivities. In the initial stage of capital marketdevelopment, NBC will oversee the securitiesbusiness of commercial banks, which will bemajor players in securities trading on the OTCmarket.

With the establishment of sector-specificsupervisors, coordination among supervisorswill become critical to maintain consistency andto avoid conflicts. Therefore, the coordinationrole of MEF will become more significant. TheGovernment may decide to establish acoordination committee to maintain theintegrity and consistency of supervisory policieswhile honoring the independent activities ofsupervisors.

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As each supervisory authority puts in placea prompt corrective mechanism for each sectorbased on international best practices, thefinancial market safety nets will improve. Asfinancial activities expand, explicit financialmarket safety nets will also be established inthe form of a sector-wide deposit insurancesystem. A deposit insurance system will be firstintroduced in the banking sector. The safetynets will be designed to avoid the moral hazardproblem and will target especially theprotection of small depositors. Equallyimportant is the financial sustainability of thesafety nets, which will be achieved partlythrough an equitable share of burdens amongparticipants.

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The basic legal infrastructure that willunderpin the financial system and commercialactivities will be in place. The ultimate goal oflegal/judiciary reform will target (i) well-definedproperty rights; (ii) enforceable contracts; (iii)ability to pledge and seize collateral; and (iv)fiduciary responsibilities and liabilities offinancial agents, stakeholders, and managers offinancial institutions. For this, a comprehensivecivil code, following commercial contract lawand procedures, will be in place. In addition, acomplete commercial code will beimplemented after the adoption of the Law onCommercial Enterprises, a bankruptcy law, etc.

With successful judiciary reform, lawenforcement will be strengthened. In particular,a commercial chamber of the court will play akey role in reestablishing public confidence inthe judiciary and law enforcement systems.

A secured transactions law and a publicregistry system will be in place, which willreduce transaction costs by alleviatinguncertainties about secured transactions andcollateral registration. With the promulgationof the supporting laws, a public registry formovables will be in place.

The development of the legalinfrastructure and improved public confidencewill reduce uncertainties regarding contractenforcement, which will facilitate private sectordevelopment by revitalizing commercialactivities and financial transactions. Moreimportant, reduced uncertainties of contractenforcement will substantially reduce thetransaction and operating costs of the financialinstitutions and thus facilitate intermediation.

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With the Government’s proactive policy,the accounting and auditing system will bedeveloped based on international standards.Financial and nonfinancial public corporationswill take the lead in adopting IAS/ISA, whichwill be followed by private companies.

The establishment of an association ofaccountants and auditors will improve theenforcement of accounting and auditingstandards. The association will play a key rolein developing the accounting industry, as wellas in capacity building, by providingprofessional training in accounting andauditing.

Improved transparency resulting fromstrengthened enforcement of auditing anddisclosure standards will enhance publicconfidence in financial institutions. Thebanking sector will be the first group ofbeneficiaries when improved transparency inthe corporate sector will reduce informationcosts. Improved transparency will also facilitate

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the development of the nonbanking sector andcapital markets.

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An efficient and reliable credit bureau orarrangements for sharing credit information willallow financial institutions to timely access tocredit information. This will be complementedby improved transparency in the corporatesector because of strengthened enforcement ofaccounting and auditing standards.Furthermore, a credit rating agency will emergeas the issuance of corporate securities andcommercial papers increases. Improved qualityof the financial information infrastructure willreduce the information costs of financialinstitutions.

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An efficient payment system will beestablished to settle funds between customersand banks, and among financial institutions. Anincreased investment in IT by both the privateand public sectors will enhance the efficiency

and quality of the payment system. Integrationof computer networks and adoption of on-linebanking systems will further improve thepayment system; diversify payment instrumentsfor prompt noncash fund transfers; and facilitateintegration of the formal and informal sectors,thus increasing the viability of financialinstitutions in the rural area.

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The capacity-building institutions, in boththe private and public sectors, will be in placeto meet the multifaceted demands of thefinancial system. The Bankers Association willtake the lead in major capacity-buildingactivities in the private sector. The collectiveefforts of commercial bankers under theBankers Association will provide professionaltraining through international cooperation andthe establishment of a bankers’ training institute.Capacity building in the public sector will beaccomplished through the establishment of self-funded training institutions and the continuousreorganization of key regulatory institutions.

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The Blueprint comprises a long-termdevelopment strategy and a sectordevelopment plan. The long-term

strategy is based on key lessons drawn fromthe experiences of financial sector developmentand reform in other countries, and it guides thesector development plan.

Each sector development plan consists ofa development goal, intermediate reformagenda, and illustrative policy measures in eachphase. The development goal describes thesector strategy to achieve visions in each sectorover three phases: 2001-2004, 2005-2007, and2008-2010.

The intermediate reform agenda is selectedto help (i) identify specific policy measures toachieve the goals that have been set, and (ii)sequence and pace these policy measures. Inother words, the intermediate reform agendain a specific phase describes tactics to achievethe set goals. At the same time, a series ofreforms over three phases suggest sequencingtactics for development efforts in a specificsubsector. The reform agenda, however,includes built-in flexibility because it enablespolicymakers to add or refine the agenda toreflect the progress made in each sector and

each phase along with changing financialmarket conditions. This is inevitable becauseeach intermediate reform agenda is interwoven,vertically and/or horizontally, with those in theother sectors. In case some actions are notimplemented, the actions that would havefollowed them become infeasible. Policymeasures under each intermediate reformagenda are illustrative and indicative. Thus,when implementing the sector developmentplan, policymakers may need to further refinepolicy actions.

The sector development plan is a thinkpanel to assist policy makers and stakeholdersin sequencing and coordinating developmentefforts. The panel considers the interrelation of(i) human and institutional capacity building,(ii) the development of related infrastructure,(iii) the establishment of a legal and regulatoryframework, (iv) the emergence of relevantfinancial markets, and (v) the availability oftechnology.

The sector development plan addressesnecessary standards, laws, and regulations aswell as the preparation of necessary humanresources and the institutional capacity forimplementation. Because the mereestablishment of laws and standards does notmean that financial sector development goalshave been met, the Blueprint also focuses onthe institutional and human capacity buildingneeded to implement measures that addressfinancial sector weaknesses.

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The sector development strategy is arolling plan that needs continuous updating toreflect the Government’s achievements and thechanging socioeconomic environment. If theGovernment accomplishes a certaindevelopment goal set in the plan earlier thanplanned, the policies that follow need to beadjusted accordingly.

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A long-term development strategy isdeveloped to implement the financial sectorvision, which has been derived from thefollowing factors: (i) key lessons drawn fromother economies’ experiences with financialsector development, (ii) the current situationin Cambodian financial markets, and (iii) theprogress in governance reforms underimplementation.

The experiences in financial sector reformin Asian and other economies in recent decadeshave been well documented by numerousstudies. Sound financial sector developmentrequires that emphasis be put on (i) a soundand sustainable macroeconomic environment;(ii) sound governance, including legal andaccounting infrastructure; (iii) effective marketdiscipline; (iv) adequate institutional andhuman resource capacity; and (v) the ability totake advantage of modern technology.

In particular, the development of thebanking system builds on an adequate body oflaws that underpin the financial system andtransactions, covering contracts, bankruptcy,collateral, and loan recovery. Supporting thebody of laws must be ethical and professionallawyers and judges and an efficient court systemwhose decisions are enforceable. In addition,financial reporting must be based on commonaccounting and auditing standards so that

investors and supervisors can assess thefinancial condition of the banks, and banks canmonitor the health of the institutions to whichthey lend. Accurate financial data require aprofessional body of accountants and auditors.

The initial stages of the Blueprint focus onbuilding sound governance throughdeveloping the legal and accountinginfrastructure, and building institutional andhuman capacity. An early focus is given tobanking sector development, as this has provento be the fastest means of mobilizing financingfor private sector growth in developingeconomies. Next, to lay the foundation forcapital market development and contractualsavings, the Government must develop properlegal and supervisory frameworks.

Experiences from financial sectordevelopment and reforms in Asian economiesand other transition economies offer manylessons for consideration in financial sectordevelopment in Cambodia. In drawing a long-term strategy for the Blueprint, the following10 key lessons are noteworthy:

(i) A sound fiscal policy and price stabilityare the preconditions for a well-functioning financial system.

(ii) The financial sector will not developwithout public confidence in theprotection and security of propertyrights and contract enforcement.

(iii) A sound financial sector cannot becreated without establishing the ruleof law, supported by an appropriatelegal/judiciary system and lawenforcement.

(iv) For efficient financial intermediation,it is necessary to develop the financialmarket infrastructure, particularly an

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accounting and auditing system, creditinformation system, and regulatoryframework.

(v) Sound competition in financialmarkets is a key driving force thatleads to financial deepening byencouraging financial institutions toachieve economies of scale and scope.

(vi) A sound financial system builds onsound governance principles andstrong market discipline, whichsupports a strong credit culture.

(vii) State ownership of financialinstitutions and state intervention inthe allocation of financial resourceshinder the development of a market-based financial sector.

(viii) Strict entry regulation in financialindustries is one factor that adverselyaffects financial development and theallocational efficiency of investmentfunds.

(ix) Lax entry requirements under a weaksupervisory system results in anexcessive number of poorly managedbanks.

(x) For sustainable financial sectordevelopment, it is crucial to build upmarket-oriented management, asound system of operations, andimprovements in technicalcompetence, commensurate with thedesired change in the financialstructure.

Based on the above lessons, the keyelements of a long-term strategy for financialsector development are as follows:

(i) maintaining sound fiscal and monetarypolicies to ensure macroeconomicstability;

(ii) systematically establishing a soundlegal framework to protect propertyrights and enforce contracts;

(iii) establishing the rule of law throughlegal/judicial reform and lawenforcement to underpin financial andcommercial activities;

(iv) sequencing efforts to develop financialinfrastructure, particularly thepayment/clearing system, accountingand auditing system, creditinformation system, and regulatoryframework;

(v) structuring the regulatory and policyframework to foster competition in thefinancial markets and to encouragefinancial institutions to realizeeconomies of scale and scope;

(vi) establishing a regulatory andinstitutional framework to promotesound governance principles and toallow market discipline to work in themanagement and operations offinancial institutions;

(vii) establishing a sound framework forprivate sector development in thefinancial system by phasing out stateownership and state intervention inthe system;

(viii) developing a transparent entryframework to encourage allocationalefficiency and financial deepening;

(ix) developing an efficient exitmechanism for troubled institutions to

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foster continuous reorganization in thefinancial system without incurringsocial costs; and

(x) systematically developing human andinstitutional capacity in both theprivate and public sectors through apublic-private sector partnership.

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The Blueprint for the banking sectorconsists of three phases. The first phase aimsat laying the foundation for the banking systemby establishing basic policy and an institutionalframework. The second phase aims to enhanceintermediation through competition. Buildingon the achievements in the first phase, thebanking system should be developed into amore consolidated system through competitionamong banks, intermediation will be expanded,and banking services will be extended to therural areas. The third phase aims to promoteintermediation efficiency by facilitating theintegration of the formal and informal financialsectors as well as the reorganization of thebanking industry. An integrated banking sectorwill enhance the efficiency and quality ofbanking services in the rural areas.

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To achieve the goal in Phase I, fiveintermediate reform agendas are set:

(i) establishing a basic framework formonetary policy,

(ii) establishing a framework forsupervision,

(iii) restructuring the banking sector,

(iv) establishing a framework for thepayment system, and

(v) establishing a capacity-buildingmechanism.

Establishing a Basic Framework forMonetary Policy. It is imperative thatmonetary policy be normalized to safeguardmacroeconomic stability. Considering therampant dollarization in the economy, a full-fledged monetary policy is not expected to bein place until Phase III. However, the basicpreparatory work to establish monetary policyframework should be initiated in Phase I. Thefollowing steps should be considered: (i)streamlining reserve requirements to reduceidle bank reserves and reduce commercialbanks’ operating costs, (ii) phasing out theguarantee deposit or capital reserve requiredfor bank licensing, and (iii) consideringreducing the reserve requirement ratio on riel-denominated deposits. A lower reserverequirement for riel-denominated depositswould help increase the attractiveness of rieldeposits and encourage riel-based operationsamong commercial banks.12 Second, theGovernment should consider issuinggovernment securities, notably T-Bills. Theprovision of riel-denominated securities willstimulate demand for the riel and developbanking activity in the local currency.Furthermore, the auction of T-Bills will providebenchmark interest rates on riel-denominatedfinancial instruments. This measure will be thefirst step in developing an instrument to controlriel liquidity.13 Finally, the Government shouldadopt a plan to implement rediscount/refinancefacilities.

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Establishing a Framework forSupervision. In continuation of the currentefforts, NBC needs to establish the frameworkfor effective bank supervision. Key policyactions considered include:

(i) establishing a complete body ofprudential regulations by reconcilingold regulations with new regulationsand issuing clarifying guidance tocommercial banks;

(ii) adopting surveillance and inspectionprocedures, including standardizationof the reports submitted bycommercial banks;

(iii) improving the application of theCAMEL system for evaluating bankperformance;

(iv) adopting new prudential regulationson lending to connected or relatedparties, risk management, and internalcontrol;

(v) establishing a fully staffed on-siteinspection unit;

(vi) adopting a uniform chart of bankaccounts and disclosure rulesconsistent with IAS/ISA;

(vii) adopting a prompt corrective action(PCA) system; and

(viii) adopting an antimoney-launderingregulation.

Restructuring the Banking Sector.NBC needs to complete the bank relicensingprogram under the IMF program. To this end,the following actions need to be taken: First,NBC needs to establish procedures to ensurethe orderly resolution and liquidation ofproblem banks. Second, NBC needs to make

an effort to appoint liquidators for all delicensedbanks as soon as possible. Third, NBC musthave a contingency plan to addresscircumstances wherein some conditionallylicensed banks are unable to achieve theconditions imposed in their memoranda ofunderstanding to increase capital to theminimum level required under the regulationsby the end of 2001. NBC should also completerestructuring and privatization of FTB in the firstphase. FTB restructuring/privatization calls formany challenging tasks. First, FTB needs toadopt and implement a privatization plan.Second, the FTB board needs to adopt abusiness plan for the medium term toreorganize FTB as a commercial bank. Third,FTB needs to adopt a comprehensive trainingprogram to instill commercial orientation,including accounting, risk management, asset/liability management, and managementinformation systems.

Establishing a Framework for thePayment System. Despite NBC’s activeefforts, the current payment system calls forfurther refinements. The following actionsshould be taken: (i) improve operationalprocedures for both the riel and dollar clearingsystems, considering the compliance capabilityof commercial banks; (ii) adopt a payment lawto underpin the payment system; and (iii)improve the backup system for smoothoperation of the payment system. In addition,NBC and the Bankers Association should adopta protocol for an on-line banking system tofacilitate the integration of individual banks’systems in the future. Some commercial bankshave already adopted different systems in theirautomated teller machines and other services;this may incur unnecessary costs to the bankingsector in establishing an integrated interbankon-line system in the near future.

Establishing a Capacity-BuildingMechanism. The first step in capacity buildingis to establish and strengthen training

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institutions for both the private and the publicsectors. Important activities in the private sectorinclude (i) creation of an inclusive bankersassociation recognized by NBC, and (ii)establishment of a banking institute for theprofessional training of commercial bankers.NBC needs to strengthen its capacity-buildingmechanism through the following actions:

(i) appointing full-time CBS instructorsunder a competitive compensationscheme;

(ii) establishing a central banking coursefor NBC professional staff in CBS;

(iii) adopting a comprehensive retrainingprogram for NBC staff withnoncollege-level education in the formof a NBC personnel regulation;

(iv) adopting a mandatory trainingprogram for entry-level professionalstaff in CBS; and

(v) adopting a competitive, merit-basedcompensation scheme.

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The second phase of banking sectordevelopment aims at enhancing intermediationthrough competition. Competition will increasethe diversification of banking services as wellas the expansion of service areas, leading toincreased outreach to the poor and to ruralareas. This development goal in the secondphase can be achieved through the followingintermediate reform agenda:

(i) improving monetary policyinstruments,

(ii) improving the enforcement ofprudential regulations,

(iii) enhancing banking services throughdiversification,

(iv) improving the efficiency of thepayment system through investmentsin IT,

(v) promoting outreach to rural areas byencouraging the establishment ofbranches, and

(vi) strengthening NBC organizationalstructure.

Improving Monetary PolicyInstruments. Building on the achievementsof the first phase, NBC needs to further improvethe monetary policy framework. NBC mayneed to adopt a phased plan for furtherreduction of the reserve requirements. NBCalso needs to prepare a detailed plan toimplement rediscount/refinance facilities,because the Government is expected toregularize the issuance of T-Bills and to improvethe trading system by developing primarydealerships in Phase II.

Improving the Enforcement ofPrudential Regulations. Following the effortsto set up a basic supervision framework, NBCneeds to improve the enforcement of prudentialregulations and to continue updatingregulations to reflect changes in bankingbusinesses. The main emphasis should be onthe following areas: First, NBC needs tostrengthen the implementation of PCA toencourage sound management and operations.Second, NBC needs to begin full on-siteinspection with NBC staff. Third, in line withstrengthening PCA, NBC needs to establish atransparent exit mechanism and streamline exitprocedures to allow the swift and orderly exit

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of nonviable banks. To do this, NBC shouldpursue the following:

(i) revising laws that cover insolvencyand liquidation of banks to eliminateinconsistencies, and

(ii) establishing procedures for mergersand acquisitions and purchase andassumption for problem banks.

Finally, NBC should establish legalprotection for supervisors against lawsuits foractions taken in fulfilling their official duties.Such legal protection will be the basis forproactive supervisory activities.

Enhancing Banking Services throughDiversification. The Government shouldfurther enhance intermediation through thediversification of banking services. This will beachieved, in part, by allowing banks to expandtheir scope of business into nonbanking areas.Meanwhile, the Government needs to allowbanks to set up nonbanking subsidiaries byestablishing proper regulatory guidelines. Todo this, NBC needs to establish a regulatoryframework for credit card services, housing/mortgage finance, installment finance, etc.

Improving the Efficiency of thePayment System through Investments inIT. As financial transactions increase andbecome more diverse, the banking systemneeds increased investment in IT to improvethe efficiency of the payment system. Key areasto be addressed include (i) establishment of acentral bank wire system, (ii) automation of theclearinghouse, and (iii) establishment of an on-line banking system in individual banks. NBCand the Bankers Association should makeconcerted efforts toward the success of thesetasks.

Promoting Outreach to Rural Areas byEncouraging the Establishment of

Branches. This can be done through expansionof the formal banking sector to rural areas. Thisprocess will be facilitated by the Government’sproactive effort, such as the introduction of anexplicit incentive system for banks that are activein branching out to rural areas.

Strengthening NBC OrganizationalStructure. Although the key capacity-buildingactivities for the central bank identified in PhaseI will continue in the second phase, NBC muststrengthen its organizational structure toundertake its increasing role andresponsibilities in the financial sector. Thereorganization of NBC must address a properdivision of responsibilities among departmentsto carry out central bank functions with theevolution of the financial sector. This includes(i) defining the necessary skill mix, (ii) refiningjob descriptions for senior officials andprofessional staff, and (iii) identifying additionalcapacity-building requirements. The task willbe initiated by a diagnostic review of the currentorganization and by drafting a reorganizationplan. The reorganization plan should alsoaddress (i) the establishment of an effectiverecruitment system to attract competent staffinto the central bank, and (ii) the introductionof a performance-based compensation andpromotion system to retain and developqualified staff. Reorganization requires thestrong commitment and support of executivemanagement and consensus among staff.

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Phase III aims to promote efficiency withinthe banking system through the reorganizationof the banking industry and further integrationof the banking system. Such a goal will beachieved through six areas of intermediatereform:

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(i) developing a market-based monetarypolicy framework,

(ii) upgrading prudential regulations,

(iii) facilitating bank reorganizationthrough incentives and a reinforcedsupervision system,

(iv) establishing an integrated on-lineinterbank system,

(v) strengthening outreach to rural areasthrough competition, and

(vi) enhancing central bankindependence.

Developing a Market-Based MonetaryPolicy Framework. In Phase III, theenvironment for monetary policy will improvewith the deepening of the money markets andthe increased efficiency of the payment system.NBC can consider introducing an open-marketoperation system based on availablegovernment securities. To accomplish this,NBC must develop a detailed framework foropen-market operations. NBC and MEF willalso need to further deepen governmentsecurities market.

Upgrading Prudential Regulations. Thesupervisory role of NBC must be upgraded inline with the diversification of the bankingindustry. For this, NBC needs to upgrade theprudential norms in accordance with the Bankfor International Settlement (BIS) guidelines.Special emphasis must be placed onstrengthening risk management regulationscovering banks engaged in diverse nonbankingbusinesses.

Facilitating Bank Reorganizationthrough Incentives and a ReinforcedSupervision System. The main task of banksupervision in Phase III is to promote the

reorganization of the banking sector. To thisend, NBC first needs to strengthen theenforcement of PCA. Second, NBC shouldstrengthen the incentive system by expandingthe scope of nonbanking business forcommercial banks that initiate voluntarymergers and acquisitions. Third, NBC needs tofurther refine the minimum capital requirementreflecting the increased size and scope ofbusiness. NBC might consider adopting multi-tier minimum capital requirements, dependingon the business scope of the commercial banks.

Establishing an Integrated On-LineInterbank System. Automation of bankingoperations will continue in the third phase. Thetarget of the third phase is to establish an on-line interbank system that integrates the centralbank wire system and individual banks’ on-linebanking networks. With the establishment ofintrabank and interbank on-line systems, thescope of banking services will be furtherexpanded.

Strengthening Outreach Rural AreasThrough Competition. The Governmentshould promote the expansion of the formalbanking sector by promoting the establishmentof community-based savings institutions suchas credit unions and cooperatives. To do this,the Government must establish legal andregulatory frameworks for credit unions andcooperatives with appropriate incentivesystems. Together with the integrated on-linebanking and interbank system, community-based savings institutions will createcompetition in the rural banking sector, thusleading to further integration of the bankingsystem, and will improve the quality of bankingservices in rural areas.

Enhancing Central BankIndependence. Building on the reform effortsin the second phase, NBC will be ready toundertake the modernization of its function asan independent central bank. The Central

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Banking Law and the Banking Law need to berevised to step up NBC’s responsibilities inmonetary policy and financial sectordevelopment. The independence of the centralbank is essential in Cambodia, as anindependent central bank will be able tosafeguard the stability of the banking systemand continue banking sector development inthe changing sociopolitical conditions.

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The need for institutional development inthe nascent and fragile financial sector ispervasive, and the magnitude of requiredsupport is enormous. A defined focus on thepoor, especially women, the disabled, and otherexcluded sections is critical for creating financialand social capital in Cambodia. Access tofinancial services, limited as it is, has enabledthe poor to participate in economic activities atthe community/village levels. The Rural CreditPolicy, accordingly, aims to enhance theoutreach of sustainable finance through privatesector participation, community-basedapproaches, and linkages among institutionsbased on competitive advantages.

The aim of the long-term developmentstrategy is to enhance outreach to the poor, tolow-income households, and to theirmicroenterprises through appropriatelymanaged institutions. Measures in Phase I aimprimarily to implement the ADB-funded RuralSavings and Credit Project and TA for RuralFinancial Services to provide the foundation fora sustainable rural financial system. DuringPhases II and III, the emphasis will be onenhancing the impact and outreach of povertyreduction. These interventions should also besequenced with other reform agenda in theBlueprint.

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To achieve the goal of Phase I, the ongoingADB-funded Rural Savings and Credit Projectand the TA will continue its support to (i)implementing the policy actions specified in theRural Credit Policy; (ii) strengtheningsupervision and regulation; (iii) facilitatinginstitutional transformation, linkages, andservice delivery; and (iv) building sustainableinstitutions. In addition, the agenda will includecapacity building for optimal utilization offinancial services.

Implementing Policy Actions in theRural Credit Policy. The Government andNBC have already initiated actions pursuant tothe adoption of the Rural Credit Policy. Theapplication of the Banking Law with specificreference to licensing of MFIs needs to bebroadened, as the establishment of the policyforum to facilitate stakeholder consultationneeds to be expedited.

Strengthening Supervision andRegulation. The key variable in the orderly andsystematic development of rural finance iseffective supervision and regulation. Consistentwith efforts in this regard for the banking sector,MSD of NBC needs to enhance its supervisoryand regulatory capacity, ideally ahead of thelicensing of NGOs as licensed MFIs. In itssupervisory and regulatory role, NBC needs toprovide flexibility and room for innovation forlicensed MFIs.

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Facilitating InstitutionalTransformation, Linkages, and ServiceDelivery. Transformation of the six identifiedNGOs14 into licensed MFIs will enable them toprovide a range of services and access refinanceassistance from RDB. The framework ofdelivery of microfinance services in Cambodiais through community groups. Fundingagencies and the Government need to assistthese groups to become effective intermediariesand be able to establish linkages with MFIs.Promotion of savings through MFIs will be afirst step to address the demand from the poorfor saving services.

Building Sustainable Institutions. Tostart, there is need to strengthen RDB to enableit to effectively function as a sustainable apexinstitution. Building the institutional capacity ofthe NGOs that have become licensed MFIs iscritical for their sustainability. Although NBCneeds capacity on many fronts, its supervisoryand regulatory capacity with reference to therural financial system is a priority. Theimmediate capacity-building need will beaccommodated by the existing facilities of CBS,but there may be a need to set up specializedrural and microfinance training institutions andresource centers. Possibilities for these will beexplored during Phase I.

Capacity Building for OptimalUtilization of Financial Services. Demandfor microfinance services for the poor isaccompanied by the need for socialmobilization and capacity building. Theseneeds are more acute for those in resource-poorareas because they remain unserved orunderserved due to risk-return considerations,although the social returns to reaching theseclients may be high. Support is therefore

required to meet the intermediation andcapacity-building costs of the poor in order tobuild social capital. The Government will haveto coordinate with planned aid initiatives andcontinue directing resources towards the socialsector to enhance the effectiveness ofmicrofinance.

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To reach the goal, the agenda for Phase IIincludes (i) policy coordination, (ii) improvingin the application of prudential regulations, (iii)establishing a range of service providers, (iv)expanding the institutional network, (v)enhancing effective intermediation, (vi)promoting innovative microfinance pilotprojects, and (vii) introducing safety nets toreduce vulnerability.

Policy Coordination. It would beworthwhile to review the Rural Credit Policy toprovide improved synergy with the basicfinancial sector building blocks that have takenshape during Phase I. To enhance thedevelopmental impact, the Rural Credit Policywill have to be closely coordinated withinvestments in agriculture and ruraldevelopment such as rural infrastructure,irrigation, agricultural research, and extension.The Government will need to maintain publicinvestment priorities in the rural sector andcontinue nondiscriminatory agricultural pricingpolicies.

Improving Application of PrudentialRegulations. Measures taken in this regardduring Phase I will have to be effectivelyapplied with the increase in the number oflicensed MFIs. NBC will need to strengthenMSD.� /��.��-=�; 2;>5��#��!�� !� *��1��?��@��5�-�.(�-�

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Establishing a Range of ServiceProviders. Commercial agriculture andagriculture-related enterprises, includingleasing services, will be introduced in the ruralsector. Legal provisions for these will be createdto support the establishment of venture capitalfunds and equity funds, which could facilitatethe emergence of sustainable institutions byassisting NGOs to become licensed MFIs andenable restructured commercial banks to raiseresources for possible incorporation as licensedMFIs.

Expanding the Institutional Network.The involvement of commercial banks in ruralfinance is essential to expand outreach andestablish an integrated financial system. In theircurrent financial situation, commercial bankscannot become active players in rural finance.Subsequent to their relicensing, restructuring,and possible relocation, selected commercialbanks could be either designated as licensedMFIs or assisted to provide rural financialservices, particularly term loans for agricultureand agriculture-related enterprises. Consideringthe narrow institutional base, it would benecessary to take the initiative to intervene. Thiscould be done through the creation of newlicensed MFIs, primarily in the private sectorwith active aid agency participation, to meetthe demand for rural financial services in remoteareas. During Phase II, the capacity ofcommunity groups and linkages with licensedMFIs and commercial banks will continue.

Enhancing Effective Intermediation.Building the capacity of restructuredcommercial banks to downscale theiroperations for banking with the poor andextending agricultural credit is required if theseare to become active and effective participants.Similarly, intensive capacity-building supportwill be required for licensed MFIs forinstitutional and financial sustainability.Specialized training institutions and/or

programs therefore will have to be establishedto provide affordable capacity-building servicesfor (i) social organization, (ii) cost-effectivetargeting, (iii) products and servicesdevelopment, (iv) management informationand accounting systems, (v) governance, (vi)cost-reduction technologies, and (vii) appraisaland management of term financing foragriculture.

Promoting Innovative PilotMicrofinance Projects. The Government willconsider initiating innovative programs anddeveloping financial technology and servicesthat contribute to breaking the barriers toaccessibility through pilot projects fordisadvantaged groups and those living in theresource-poor areas.

Introducing Safety Nets to ReduceRisks and Vulnerability. The disadvantagesof poor households include lack of access tofinancial services, unfair terms of participationin the local economy, and vulnerability toeconomic and physical downturns. As a result,poor households forgo potentially viable newtechnologies, production choices, and incomeopportunities because of risk aversion. A risk-mitigation facility that effectively targets thepoor is not available. Insurance services willbe extended to the poor during Phase II tomitigate some of the risks.

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The agenda for Phase III includes (i)reviewing and coordinating policy; (ii)introducing self-regulating mechanisms; (iii)updating and upgrading skills; (iv) establishinga comprehensive institutional network; and (v)enhancing outreach to special microfinancegroups.

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Reviewing and Coordinating Policy.Phase II activities will continue.

Introducing Self-RegulatingMechanisms. It is neither feasible nor costeffective for NBC to monitor the performanceof a multitude of NGOs as their number grow.Self-regulation accompanied by performancestandards is better suited for monitoring smallNGOs that would neither qualify immediatelynor choose to become licensed MFIs. Thisfunction can be undertaken by a coalition ofNGOs, by RDB, or by rating agencies as thesector grows in size and sophistication. Self-regulation could be based on historicalperformance standards, disclosures, andtransparency. NBC should eventually confineitself to licensed institutions.

Updating and Upgrading Skills. Thespecialized training/resource centersestablished during Phase II will need to developlinkages with regional institutions andcontinually update their capacities and thequality of their courses. In addition, activitiesinitiated during Phase II will continue.

Establishing a ComprehensiveInstitutional Network. To extend theinstitutional network, small farmer orcommunity-owned institutions will be providedwith a legal framework to enable them tointegrate with the financial sector and upscaletheir operations. Depending on the size of theinstitutional network, NBC will review theequity threshold and other criteria for licensingMFIs.

Enhancing Outreach to SpecialMicrofinance Groups. Successful pilots inPhase II will be replicated during Phase III tocover those disabled during conflict or by landmines. Correspondingly, the coverage of safetynets will be enlarged.

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The development of the insurance sectorwill also go through three phases. To tackle theweak legal infrastructure and supervisorycapacity, the first phase aims at establishing thefoundation of the insurance business andbuilding capacity for the sector. With a solidfoundation in place, the insurance sector willdevelop in size and diversity. The focus of thesecond phase will be to promote the insurancemarket through private sector development, toincrease outreach to the poor and to rural areas,to implement compulsory insurance, and toenhance product variety. The implementationof compulsory insurance will create policy-driven demand, and the growing income willgenerate demand for diverse insuranceproducts. In response to the growingsophistication and volume of insurancebusiness, an independent insurance supervisorwill be needed. As the insurance sector furtherexpands, the independent insurance supervisorwill also upgrade prudential regulations in thethird phase.

During the first phase of pension systemdevelopment, the feasibility and design forestablishing a multi-pillar pension system willbe completed. In Phase II, the legal, regulatory,and supervisory frameworks will be establishedfor the pension system. In addition, capacity-building mechanisms will be needed to ensurethat staff of the regulatory and supervisory bodyare properly trained. During Phase III, the legalframework will be implemented through theissuance of sub-decrees. The mandatory publicpension program will be launched, and thesupervisory and regulatory framework will befurther strengthened in anticipation of theimplementation of the mandatory privatelymanaged funded pension program that will beimplemented after Phase III.

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Five intermediate agendas are identifiedto establish the foundation for the insurancesector and determine the feasibility of a multi-pillar pension system:

(i) establishing a regulatory andsupervisory framework for insurance,

(ii) establishing a framework forcompulsory insurance,

(iii) establishing a basis for private sectordevelopment,

(iv) building the capacity of insuranceregulators and supervisors, and

(v) conducting a feasibility study toestablish a multi-pillar pension system.

Establishing a Regulatory andSupervisory Framework for Insurance.With the promulgation of the new insurancelaw, the Government needs to establish aframework for insurance regulation andsupervision. The following policy actions needto be done:

(i) establishing an insurance supervisoryunit within MEF;

(ii) adopting a subdecree to implementthe insurance law; and

(iii) establishing a complete body ofprudential regulations, including auniform chart of accounts consistentwith IAS and PCA system.

Establishing a Framework forCompulsory Insurance. The Governmenthas introduced compulsory insurance in thenew Insurance Law and has committed todevelop compulsory insurance framework. Toestablish an efficient enforcement andmonitoring mechanism, coordination andcooperation among concerned ministries arecrucial. Thus, the Government needs toestablish an interministerial working group toset up an enforcement and monitoringframework for compulsory insurance. Inaddition, an official plan should be adopted tocoordinate the efforts of related ministriestoward formulating a legal framework andenforcement mechanisms for compulsoryinsurance. The preparatory works may alsoinclude promulgation or revision of the relatedsupporting laws.

Establishing a Basis for Private SectorDevelopment. The market orientation of theinsurance sector will be enhanced by theprivatization of CAMINCO through a jointventure with a private company. Although it isexpected that an increased minimum capitalrequirement will lead to the consolidation ofthe industry, it is also necessary to keep theinsurance sector exposed to sound competitiveforces. In fact, given the relatively high level ofminimum capital requirement with regard tothe market size, the oligopolisitic structureremain intact in the medium term. Thus, theGovernment must create a transparent entrymechanism to encourage private sectorparticipation in the market. Furthermore, theGovernment should consider adoptingregulations to encourage the use of domesticinsurance companies.

Building the Capacity of InsuranceRegulators and Supervisors. To ensureeffective supervision and regulation, intensivecapacity building must be conducted forsupervisors and regulators. Initial capacity-building efforts require assistance from aid

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agencies and foreign insurance traininginstitutes. The Government must actively seektechnical and financial assistance from aidagencies. To do this, the Insurance Office ofMEF must develop a training plan whichidentifies training needs and resourcerequirements. The plan should include atraining program for related Governmentagencies that will be involved in theenforcement and monitoring of compulsoryinsurance. The capacity-building mechanismfor compulsory insurance must be addressedin the official plan for compulsory insurancedevelopment.

Conducting a Feasibility Study toEstablish a Multi-pillar Pension System. Afeasibility study must be conducted todetermine the appropriate design and timingfor a multi-pillar pension system, consisting ofa mandatory public pension program, amandatory privately managed funded pensionprogram, and voluntary retirement savingsprograms. The feasibility study should includedemographic projections, determination of themost appropriate institutions to administer andmanage the different components of thepension system, appropriate legal framework,supervisory and regulatory arrangements, andfunding mechanisms.

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The key policy goal in the second phaseis to enlarge and expand the insurance sectorthrough private sector development, and toestablish a foundation for the pension system.To achieve this goal, nine intermediate reformactions are needed:

(i) strengthening the insurance regulationand supervisory framework,

(ii) implementing compulsory insurance,

(iii) promoting a competitive private sectorinsurance market,

(iv) increasing outreach to rural areas,

(v) establishing a training institution forthe insurance sector,

(vi) developing an actuarial professionalbody,

(vii) establishing a legal framework forpension system;

(viii) establishing a regulatory andsupervisory framework for pensionsystem, and

(ix) building the capacity of pensionregulators and supervisors.

Strengthening the InsuranceRegulation and Supervisory Framework.As the insurance sector expands, the insuranceregulatory and supervisory framework willneed to be strengthened by refining existingregulations and adopting new regulations toaddress the increased diversity of insuranceproducts. In addition, the Government shouldallocate more resources to reinforce theregulatory and supervisory body and theenforcement mechanism. The insurancedivision needs to attract additional qualifiedstaff.

Implementing CompulsoryInsurance. With the establishment of theenforcement/ monitoring framework and otherpreparatory work accomplished during PhaseI, the Government will be ready to implementcompulsory insurance. It is essential at this

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stage that the Government make continuedefforts to further refine and improve theenforcement/ monitoring mechanism to buildpolicyholder confidence in the compulsoryinsurance system.

Promoting a Competitive PrivateSector Insurance Market. To develop aprivate competitive insurance sector, theGovernment must institute policies that willencourage additional private insurancecompanies to enter the market. To this end,the following areas need to be addressed: (i)the Government should further streamlineprocedures to encourage foreign insurancecompanies to participate in the Cambodianinsurance market; (ii) the Government needsto develop reinsurance institutions throughpublic-private partnership; and (iii) theGovernment must take lead in promotingprivate sector development by divesting itsshareholdings in insurance companies to avoidconflicts of interest.

Increasing Outreach to Rural Areas.Increased outreach of the insurance sector willhave a direct poverty-reduction impact on therural areas. Competition among privateinsurance companies will eventually drive themto expand their business into rural areas.Although improvement in the payment systemand other banking services will also create asynergic impact on the capacity of the insurancesector, the Government may need to adopt anincentive system to further encourage thevoluntary expansion of private companies’business into rural areas. Such an incentivesystem should encourage the insurance sectorto develop products and distribution channelsfor providing insurance services in rural areas.New products could include crop insurance andother types of natural disaster insurance.

Establishing a Training Institution forthe Insurance Sector. The Government

needs to establish a comprehensive insurancetraining institution in the second phase. As thesector size increases and products diversify, sowill the demand for a comprehensive traininginstitution grow. Private and public sectorpartnerships will be essential in poolingresources to create an effective and financiallysustainable institution that will play an essentialrole in capacity building in the sector byattracting international assistance and bestpractices to Cambodia.

Developing an Actuarial ProfessionalBody. As the insurance sector grows, theGovernment should develop an actuarialprofessional body and adopt a relevant legaland regulatory framework, including a code ofethics and professional standards. The actuarialprofessional body will also be a center forcapacity building for actuaries.

Establishing a Legal Framework forPension System. The pension system designformulated during Phase I will determine thenecessary laws that need to be adopted. Thepension law(s) must cover the three pillars ofthe pension system: a mandatory publicpension program, a mandatory privatelymanaged funded pension program, and avoluntary retirement savings program. TheGovernment also needs to identify theappropriate implementing, administration,regulatory, and supervisory body for eachcomponent.

Establishing a Regulatory andSupervisory Framework for PensionSystem. Given the development stage ofCambodia, a comprehensive regulatory andsupervisory regime must be established basedon the specific components of the pensionsystem as well as the sequence of theirimplementation. The regulatory andsupervisory regime for the mandatory publicpension program should receive first priority.

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Rules concerning eligibility, calculation ofbenefits, and funding mechanisms must beconsidered.

Building the Capacity of PensionRegulators and Supervisors. To ensureeffective supervision and regulation, intensivecapacity building must be provided forsupervisors and regulators. Initial capacity-building efforts will need assistance from donoragencies and foreign training institutes.

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In this phase, further strengthening of theinsurance sector and development of a pensionsystem are accomplished through the followingfive intermediate reform agendas:

(i) upgrading prudential regulations forthe insurance sector;

(ii) implementing a legal framework forpension system;

(iii) implementing a mandatory publicpension program;

(iv) strengthening the regulatory andsupervisory capacity for the pensionsystem; and

(v) establishing a capacity-buildinginstitution for pension sector.

Upgrading Prudential Regulations forthe Insurance Sector. With the expansion ofthe sector, the Government may decide toestablish an independent insurance supervisorybody. An independent supervisor willundertake two fundamental functions toward

the development of the insurance sector: (i)attract qualified insurance specialists througha competitive compensation scheme, and (ii)enhance supervisory capacity and theprudential regulations in accordance with theCore Principles of the International Associationof Insurance Supervisors. Enhancedsupervisory capacity would bolster publicconfidence and thus facilitate the developmentof the insurance sector.

Implementing a Legal Framework forthe Pension System. To become operational,the pension law needs implementing sub-decrees. Therefore, the Government mustadopt sub-decrees that provide operationalguidance to the appropriate ministries toimplement the pension law. The sub-decreepertaining to the mandatory public pensionprogram should receive first priority.

Implementing a Mandatory PublicPension Program. The mandatory publicpension program should be implementedbased on the adoption and establishment of thelaw and sub-decrees and the institutionaldevelopment accomplished during Phases IIand the early part of Phase III.

Strengthening the Regulatory andSupervisory Capacity for the PensionSystem. As the mandatory public pensionprogram is launched, the relevant prudentialregulations should be refined and enhanced inpreparation for the implementation of the nextpillar of the pension system – the mandatoryprivately managed funded pension program.In addition, the pension supervisory body mustbe strengthened by enlarging the staff withqualified personnel.

Establishing a Capacity-BuildingInstitution for the Pension System. TheGovernment needs to establish acomprehensive pension-training institutionduring Phase III. In anticipation of the

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introduction of the mandatory privatelymanaged funded pension program, a traininginstitution must be established as a cost-effective and efficient means of preparing stafffor both private sector and public sector needs.The establishment of private and public sectorpartnerships that can pool resources will beessential in creating an effective and financiallysustainable pension- training institution. Thetraining institute will play a key role in capacitybuilding for the pension system by attractinginternational assistance and best practices toCambodia.

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The development of NBFIs begins in thesecond phase. The goal is to provide a legaland regulatory framework for the NBFIscommensurate with the development ofinterbank/money markets and capital markets.Thus, the goal of Phase II is to establish thelegal and regulatory foundation for NBFIs suchas leasing companies, finance companies,investment companies, and money marketbroker/dealers. The goal of Phase III is set tofurther develop the NBFI sector including trustcompanies, venture capital companies, andlonger term development finance institutions(DFIs). These institutions will support thedevelopment of money and capital markets.

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To achieve the goal in Phase II, threeintermediate development actions are set:

(i) developing the leasing business,

(ii) developing money marketintermediaries, and

(iii) developing capital marketintermediaries.

Developing the Leasing Business.Lease financing is an attractive alternativefinancial product for banks in an environmentwith an inefficient infrastructure to offer termfinance on capital equipment. Leasing readilyprovides the equivalent of term loans for capitalequipment to SMEs. Therefore, the Governmentmust address the development of the leasingbusiness geared to NBFIs. This should includeadoption of specific leasing laws andregulations. Under the current Banking Law,banks are allowed to undertake leasingbusiness, but due to the lack of implementingregulations, no banks are actually initiatingleasing. Thus, NBC should first establish basicprocedures for banks to undertake leasingbusiness. The Government must also considerthe framework for encouraging FDI in leasingcompanies with an appropriate fiscal andfinancial incentive system.

Developing Money MarketIntermediaries. With the expansion of moneymarkets, the Government needs to establish alegal and regulatory framework for financecompanies, investment companies, and moneymarket broker/dealers. Finance companies andother NBFIs will begin to emerge as competitionamong commercial banks increases. From thesecond phase, the banking sector will undergoreorganization as a result of competition amongbanks. Some banks may decide to establish afinance company subsidiary, whereas othersmight want to convert themselves into financecompanies and specialize in a relatively narrowbusiness.

Developing Capital MarketIntermediaries. While the Government ispreparing all the legal, regulatory, andinstitutional groundwork for capital markets, itmust consider the development of capitalmarket intermediaries. First, the Government

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needs to establish regulations on securitiesbrokers/dealers, targeting the first candidategroup of financial institutions. Since theBanking Law also allows commercial banks toundertake a wide range of securities businesses,they will likely become the first securitiesbrokers/dealers. Thus, along with theestablishment of the securities exchange, theGovernment should also establish a legal andregulatory framework for (i) securitiescompanies/subsidiaries, investment advisorycompanies, and securities finance companies;and (ii) banks to establish securitiessubsidiaries. If commercial banks becomesecurities brokers/dealers, the capital marketsupervisor must coordinate with NBC regardingthe division of supervision responsibilities.

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In the third phase, the Government needsto make an effort to establish a balancedfinancial system. To achieve this goal, thefollowing intermediate reforms are proposed:

(i) developing institutional investors forcapital markets, and

(ii) establishing DFIs to promote mediumand long-term lending.

Developing Institutional Investors forCapital Markets. For sound development ofcapital markets, diverse institutional investorsneed to be developed such as the trust businessin banks, investment/management trustcompanies, mutual funds, venture capitalcompanies, and the like. Thus, the Governmentneeds to establish a proper legal and regulatoryframework for these institutional investors.

Establishing DFIs to Promote Mediumand Long-term Lending. The Governmentalso needs to establish DFIs to supplement the

capital markets by intermediating long-termcapital at home and abroad and thereforefacilitating growth-oriented investments. Thus,in the third phase, the Government shouldprovide a legal and regulatory framework formedium- and long-term export-import creditinstitutions (such as the US Export-ImportBank) and other DFIs.

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The sequencing and pacing in moneymarket development need to be aligned withdevelopment of the banking and nonbankingsectors. The development plan targets threestrategic goals. The first phase aims to establishthe foundation for short term unsecuredinterbank markets and to provide a base forinterbank/money markets through the issuanceof T-Bills and the promulgation of a negotiableinstruments law. The second phase willstrengthen interbank markets, establishregulations for diversified money marketinstruments such as negotiable certificates ofdeposit and repurchase agreements, anddevelop a primary dealer system and regularizethe issuance of T-Bills. The third phase aims tobroaden the interbank/ money markets with aregulatory framework for nonfinancial issuersof money market instruments such ascommercial paper.

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To achieve the goal of the first phase, threeintermediate reforms are desired:

(i) establishing interbank marketarrangements for the banking sector,

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(ii) creating an enabling environment formoney market development, and

(iii) creating an enabling environment forT-Bills.

Establishing Interbank MarketArrangements for the Banking Sector. Thefirst step in establishing interbank marketsshould be initiated by commercial banks. Theestablishment of an inclusive bankersassociation, acting on behalf of all bankmembers, will allow it to play a catalytic role inthe formation of the interbank markets. Thearrangement must be self-regulated by bankswith the endorsement of NBC. The firstinterbank service can be short-term unsecuredinterbank lending (overnight call loan andmoney).

Creating an Enabling Environment forMoney Market Development. In the firstphase, the Government must put in place legaland regulatory frameworks for thedevelopment of money markets. The first taskis to adopt a negotiable instruments law. Thescope of the law should be comprehensiveenough to include all types of instruments fromsimple payment instruments to creditinstruments. Second, NBC should set up aregulatory framework for the interbank marketactivities of commercial banks. The focus ofthe framework, however, must be as a centralbank supervisor and a monitor of the liquiditypositions of the banks, as well as the overalldecision-making authority for monetary policy.Third, NBC should provide detailed proceduresfor issuing interbank/money marketinstruments.

Creating an Enabling Environment forT-Bills. A key element for money marketdevelopment is government securities. Thus,the Government should proactively considerthe issuance of T-Bills through competitiveauction. To this end, the Government needs to

further scrutinize the legal/regulatoryframework for the issuance of T-Bills.Furthermore, the Government also needs toadopt a medium-term plan to develop a T-Billmarket, which must be geared to rationalizationof fiscal management. The development of aT-Bills market should go hand in hand withnecessary capacity-building activities for keystaff of the National Treasury and NBC who areinvolved in T-Bill issuance and management.

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From the second phase, the moneymarkets will develop to the fullest extent withstrengthening of market microstructure,introduction of diverse instruments, andincreased participation of financial institutions,including NBFIs. Phase II targets threeintermediate reforms:

(i) expanding the scope of interbankmarkets,

(ii) establishing regulations governingfinancial institutions’ instruments, and

(iii) developing T-Bill markets.

Expanding the Scope of InterbankMarkets. With the availability of T-Bills andother government securities from the secondphase, the money markets will be able toaccommodate small banks and NBFIs byproviding an interbank repurchasearrangement based on T-Bills and othergovernment securities. To facilitate theexpansion of the scope of the interbank market,NBC and the Bankers Association need to worktogether to develop a standardized contract forrepurchase agreements and supportingregulations, based on international bestpractices.

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Establishing Regulations GoverningFinancial Institutions’ Instruments. NBCneeds to establish detailed regulations to enablethe development of key money marketinstruments such as negotiable certificates ofdeposit (CDs) and repurchase agreements(RPs). However, the role of the central bankmust be minimized in the regulation of theseinstruments in the context of monetary policyand consumer protection. To expedite thedevelopment of money markets and monetarypolicy instruments, NBC may also considerissuing central bank securities (for example,central bank certificates of deposit) in line withthe development of government securities.

Developing T-Bill Markets. Thedevelopment of T-Bill markets will play aninstrumental role in developing money marketsbecause the market interest rate of T-Bills willset the benchmark for other money marketinstruments, and the T-Bills themselves will beused as key money market instruments. Tofurther develop the T-Bill market, building onthe preparatory work in the first phase, theGovernment needs to undertake two key policyactions. First, it must introduce a primary dealersystem for government securities. Second, itmust regularize the issuance of T-Bills. Thismeasure should be carefully coordinated withrationalization of the function of the NationalTreasury.

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The reform efforts in the second phase willcontinue in the third phase with the expansionof the scope of both participants andinstruments, thereby deepening the moneymarkets. The reform agenda in the third phaseincludes:

(i) establishing integrated interbankmarkets, and

(ii) establishing regulations governingnonfinancial institutions’ instruments.

Establishing Integrated InterbankMarkets. The emergence of diverse financialinstitutions and an increase in financialtransactions call for an even wider scope ofinterbank markets than before. Thus, theGovernment should aim to develop integratedinterbank/money markets in the third phase.Since the lack of mutual confidence amongvarious types of financial institutions – inparticular, between seasoned institutions (suchas commercial banks) and new institutions –might hamper the expansion of the interbankmarkets outside of seasoned institutions, theGovernment needs to scrutinize the regulatoryframework to enhance confidence in theinterbank/money markets.

Establishing Regulations GoverningNonfinancial Institutions’ Instruments.The Government will also need to establish aregulatory framework for money marketinstruments issued by nonfinancial institutionssuch as commercial papers and trade bills. Theintroduction of money market instrumentsneeds to be synchronized with thedevelopment of private bond markets as wellas the emergence of diverse money marketintermediaries such as investment companiesand finance companies.

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The capital market development planconsists of three sequenced development goals.During Phase I, the Government is expected toaccomplish the necessary preparatory work tocreate an enabling environment for capitalmarkets. In the second phase, it is envisagedto establish the foundation for capital marketsby establishing a securities exchange and thenecessary infrastructure related to securitiestrading, as well as by adopting detailed

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regulations and procedures. Building on thepreparatory work up to the second phase, it isexpected that the Government will makesystematic efforts to develop capital markets inPhase III.

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Capital market development cannot takeplace without a specific legal and institutionalenvironment. To achieve this goal, threeintermediate reforms are desired:

(i) establishing a key legal/regulatoryframework,

(ii) creating an enabling environment forpublic bond markets, and

(iii) building capacity for future capitalmarket participants.

Establishing a Key Legal/RegulatoryFramework. In line with the establishment ofthe legal infrastructure envisaged in Phase I (seeSection H. Financial Market Infrastructure), theGovernment needs to establish a legal/regulatory framework to underpin the capitalmarkets. In the first phase of capital marketdevelopment, the following actions need to betaken. First, the Government needs tostrengthen the capital market development unitwith full-time staff to undertake the preparatorywork for capital market development. Theenlarged staff of the unit will be the basis forthe future capital market supervisor, as well asan institutional basis to retain the knowledgetransferred from externally funded TA. Second,the Government should develop a master planfor creating a functional capital marketframework. Policy actions in the master planneeds to be synchronized with the progress in

key legal and accounting reform. Third, theGovernment must conduct a feasibility studyto assess the existence of a critical mass ofpotential securities issuers. The feasibility studyshould be a realistic assessment of the numberof public companies (defined in theforthcoming Law on Commercial Enterprises)that would be willingly subjected to higherstandards of corporate governance inaccordance with new IAS/ISA. Fourth, theGovernment needs to draft a securities andexchange law, reflecting recent progress in legalreform. Finally, in line with drafting thesecurities and exchange law, and based on thefeasibility study, the Government shoulddetermine the basic structure of exchangeregulations such as listing requirements, auctionrules for trading, corporate disclosure, andexchange membership.

Creating an Enabling Environment forPublic Bond Markets. Along with theissuance of T-Bills, the Government shouldexert effort to develop diverse public bondsmarkets. The development of public bondsmarkets will be of strategic importance in thecontext of Cambodian economic and financialdevelopment. First, the issuance of diverse riel-denominated public bonds will contribute tode-dollarization along with macroeconomicstability. Second, the issuance of public bondswill contribute to the development of monetarypolicy and money markets by providingnecessary instruments to establish therefinance/rediscount facility of NBC. Third, theissuance of public bonds will expedite thedevelopment of financial institutions byproviding diverse investment assets. Thebenefit would be most pronounced in theinsurance sector. In the initial stage of thedevelopment of fixed-income securitiesmarkets, priority should be given togovernment and other public entity bonds.Government bonds should include bothmarketable types (such as Treasury notes and

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bonds) and nonmarketable types (for example,like US Savings Bonds). The Governmentshould also encourage public entities such aslarge state-owned infrastructure enterprises toissue bonds.

Building Capacity for Future CapitalMarket Participants. Since the notion ofcapital markets is new in Cambodia, it isnecessary to conduct capacity-buildingactivities for a wider group of stakeholders ofcapital markets. The first and urgent group totrain through international cooperation is thefuture regulators and players in capital markets.In addition, the Government needs to conductcomprehensive public awareness activities forcapital markets.

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Building on the preparatory work andachievements in the first phase, theGovernment can establish a securities marketin the second phase. To facilitate theestablishment of a securities exchange, theGovernment should address the followingreform agenda:

(i) establishing a capital marketsurveillance framework,

(ii) establishing a securities exchange,

(iii) promoting the issuance of publicbonds, and

(iv) strengthening capacity building for thepublic.

Establishing a Capital MarketSurveillance Framework. With the adoptionof the securities and exchange law and itsimplementing regulations, the Governmentshould establish a securities market supervision

and surveillance body. The decision on theinstitutional modality of the capital marketsurveillance body must consider the availabilityof a critical mass of issuers, that will enable afinancially independent capital marketsupervisor. In the initial stage of capital marketdevelopment, the Government can considertwo options for the supervisor: (i) a capitalmarket surveillance unit under the related lineministry, or (ii) a full-fledged SEC. Without asufficient number of listed companies, it wouldbe academic to set up a full-fledgedindependent SEC because it could not financeits own budget. Without fiscal autonomy, theindependence of a SEC can be notional. In thiscase, a capital market surveillance unit underthe related line ministry is a realistic option inthe initial stage of capital market developmentas the unit can benefit from full budget andadministrative support.

Establishing a Securities Exchange.The Government must develop a detailedaction plan to establish a securities exchange.The plan should include the design of themanagement structure of the securitiesexchange, membership and board of directors,trading system, and surveillance mechanism.Cambodia needs to establish a computerizedexchange trading system, taking advantage ofnew technology as a latecomer. In addition,the ownership of the securities exchange is acritical issue to be decided in this phase. TheGovernment must also develop a plan toestablish a trading infrastructure such as asecurities depository system and a clearingsystem. Since the capital market infrastructurerequires substantial fiscal and technicalresources, the capital market supervisor needsto secure international cooperation.

Promoting the Issuance of PublicBonds. To facilitate the issuance of diversepublic bonds, the Government needs toestablish or refine the related legal andregulatory frameworks. Creating a proper

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demand base for the public bonds market isalso crucial in the early stages. Thus, theGovernment must consider an incentive systemto create a demand for public bonds.

Strengthening Capacity Building forthe Public. The Government should continueto conduct comprehensive public awarenessactivities. In this phase, the Government mayneed to publish a detailed master plan to createa securities exchange and provide generalguidelines for listing requirements.

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With the opening of the securitiesexchange, one of the most critical issues in thethird phase is to promote participation of bothissuers and investors. To accomplish this goal,four intermediate actions are needed:

(i) strengthening capital marketsupervision and surveillance,

(ii) promoting capital marketparticipation,

(iii) developing private bonds markets,and

(iv) strengthening capacity buildingactivities for capital marketparticipants.

Strengthening Capital MarketSupervision and Surveillance. Capitalmarket supervision and surveillance calls forextensive technical capability on the part of thesupervisor. In the third phase, the Governmentmay establish a long-term plan to build thecapacity of supervisory staff. With theestablishment of a securities exchange and thedevelopment of the capital market industry, thecapital market supervisor will soon have to face

competition from the private sector in attractingcompetent staff. Unless the capital marketsupervisor provides strong pecuniary andnonpecuniary incentives to potential staff, it willbe difficult to attract competent new recruits.With the strengthening of the capital marketsupervisor, the Government will need to beginupgrading prudential regulations in accordancewith IOSCO principles.

Promoting Capital MarketParticipation. A critical challenge in the initialstage of capital market development is to attracta sufficient number of listing companies. TheGovernment needs to adopt carefully designedincentives to encourage firms to go public,while bearing in mind the potential adverseselection problem. The Government shouldalso promote sound governance principles forlisting companies to promote investorconfidence. Thus, with the expansion of listingfirms, the capital market supervisor shoulddesign a policy framework to promote soundcorporate governance. This can be done byadopting corporate governance principles andenforce them through listing requirements.

Developing Private Bonds Markets. Toaccommodate the diverse financing needs offirms, the Government needs to adopt acomprehensive plan to develop corporate debtmarkets. The Government should provide alegal and regulatory framework for the largecommercial banks and DFIs to issue bonds. Inaddition, The Government also needs tosupport the development of a trading systemfor fixed-income securities.

Strengthening Capacity BuildingActivities for Capital Market Participants.In the third phase, the Government shouldfurther strengthen capacity building activitiesfor capital market participants. Thus, it mayconsider establishing a capital market traininginstitution. In addition, it should promote theestablishment of a securities brokers and

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dealers association as a capital market self-regulatory organization. The association canalso assume the role of professional capacity-building institution.

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The development of legal infrastructuretargets three reform agendas as follows:

(i) Phase I: creating the legalinfrastructure to underpin financialsector development,

(ii) Phase II: strengthening lawenforcement, and

(iii) Phase III: enhancing the legalinfrastructure for private sectordevelopment.

Creating the Legal Infrastructure toSupport Financial Sector Development. Inthe first phase, the Government is expected toestablish key laws underpinning financial sectorand private sector development. These includecivil code, company law, bankruptcy law,secured transactions law, commercial contractlaw, and commercial arbitration procedure.The Government should also initiatecomprehensive judicial reform supported byADB and World Bank. First, the Governmentneeds to adopt and implement a master planfor judicial reform. Second, it should adopt theLaw on the Organization and Function of theCourt. The draft should include theestablishment of a commercial chamber toundertake commercial cases.

Strengthening Law Enforcement.Building on the reform efforts in the first phase,the Government should make an effort tostrengthen law enforcement in the secondphase. This includes (i) continuing judiciaryreform, (ii) establishing a commercial chamberin the court system, (iii) developing andadequate compensation scheme and capacityfor commercial court jurists, and (iv)establishing a public registry for securedtransactions.

Enhancing the Legal Infrastructure forPrivate Sector Development. TheGovernment’s effort to reform the judiciarysystem to support private sector developmentwill be completed in the third phase, duringwhich the Government needs to allocate moreresources to improve and enlarge the legalinfrastructure to underpin commercial activities.For example, following the establishment of apublic registry for real estate in the secondphase, the Government needs to adopt a legal/regulatory framework for a public registry formovables. Since the registration system formovables may require the participation andcooperation of multiple line ministries, theGovernment may need to establish aninterministerial committee.

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Development of accounting and auditingsystem consists of a three-phase reform agendaover 10 years as follows:

(i) Phase I: establishing accounting andauditing standards and anenforcement system,

(ii) Phase II: strengthening enforcementof accounting and auditing standards,and

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(iii) Phase III: enhancing the enforcementof accounting standards.

Establishing Accounting and AuditingStandards and an Enforcement System. Inthe first phase, the Government will completethe establishment of a basic accounting andauditing system. This includes (i) promulgationof the Law on Corporate Accounts, their Audit,and the Accounting Profession; (ii) applicationof IAS/ISA to all companies incorporated inCambodia; (iii) establishment of a nationalaccounting council; (iv) adoption of a code ofethics; and (v) establishment of an associationof accountants and auditors.

Strengthening Enforcement ofAccounting and Auditing Standards. In thesecond phase, the Government will strengthenthe enforcement of accounting and auditingstandards. This will be accomplished bypromoting competition in the local accountingindustry to encourage new entries in order toreduce the accounting and auditing andcompliance costs of the private sector.

Enhancing the Enforcement ofAccounting and Auditing Standards. In thesecond phase, the Government will furtherexpand the scope of application of IAS/ISA intoprivate companies. Efforts toward improvementin the enforcement of accounting and auditingstandards will continue in the third phase.

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Developing a financial information systemis crucial to cultivate the credit and repaymentculture from the early stage of financialdevelopment. These efforts include threestrategic reform agendas over the next 10 yearsas follows:

(i) Phase I: creating a financial marketinformation system,

(ii) Phase II: expanding the scope of thearrangements for sharing informationamong members of the BankersAssociation, and

(iii) Phase III: diversifying and upgradingthe market information system.

Creating a Financial MarketInformation System. The Government needsto establish arrangements for sharinginformation among members of the BankersAssociation to support the banks’ creditoperations. Establishment of such arrangementsrequires the collaboration of NBC and theBankers Association. NBC must provide aregulatory framework governing integration ofcredit information from commercial banks. TheBankers Association must establish a detailedprocedure to establish and maintain the creditreference database with the lowest compliancecosts of member banks. The BankersAssociation needs to mobilize the necessaryresources to set up the hardware/softwaresystem for these arrangements.

Expanding the Scope of theArrangements for Sharing CreditInformation. In the second phase, thearrangements for sharing credit informationshould allow the participation of other financialinstitutions upon their emergence and thediversification of financial services. Theexpanding scope of participating institutionswill require an amendment of the regulationsand the establishment of a cost-sharingmechanism.

Diversifying and Upgrading theMarket Information System. TheGovernment needs to further develop financialinformation systems by introducing diverse

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information infrastructure. This includes thedevelopment of a financial sector databaseindustry and a credit rating agency to supportdebt markets. In addition, the BankersAssociation will need to upgrade the capacityand accessibility of the arrangements for sharingcredit information through increasedinvestment in IT.

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Financial safety is required to enhancepublic confidence in the financial system. Inthe early stage of financial sector development,the systemic risk may be minimal because ofunderdevelopment. However, as the financialsystem expands, so does the systemic risk.Therefore, the Government needs to addressfinancial safety nets with the development ofthe financial system. This includes a two-stagereform agenda:

(i) Phase II: enhancing the banking sectorsafety nets; and

(ii) Phase III: expanding the financialsector safety nets.

Enhancing the Banking Sector SafetyNet. The Government first needs to establishthe banking sector safety nets, which includes(i) introduction of a deposit insurance systemfor the banking sector, and (ii) adoption ofcorporate governance guidelines for banks.Establishment of a deposit insurance system

needs to be coordinated with the reform inreserve requirements for commercial banks. Forexample, NBC might amend the regulationsregarding capital reserves, or guaranteedeposits, and allow those funds to be investedas seed money for the deposit insurance system.This can be done in two ways. First, NBC canseparate the capital reserve from the NBCaccount and, with the endorsement ofcommercial banks, invest those funds in thedeposit insurance system. The second optionis to maintain the capital reserve but to allowthe banks to fund the deposit insurance scheme.At the early stage of development of a depositinsurance system, the central bank can takeresponsibility for this system.

Expanding the Scope of the DepositInsurance System into the NonbankingSector. As the nonbanking sector develops, itwill also provide deposit-type debts, whichneed to be included under the depositinsurance system. Thus, the Government mayneed to adopt a revised legal framework for anexpanded deposit insurance system toaccommodate other credit institutions. Inaddition, the Government may need to changethe governance structure of the depositinsurance system. That is, the Government mayneed to establish a separate deposit insurancecorporation, independent from the centralbank, to avoid conflict of interest. With theexpansion of the scope in the deposit insurancesystem, it will be necessary to adopt corporategovernance guidelines for nonbankinginstitutions.

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Financial sector development in Cambodia,under the current socioeconomic andlegal environment, poses a daunting

challenge to the Government as well as to theprivate sector, as it requires tremendousprerequisites and concerted efforts in relatedsectors. Financial sector development is also atime-consuming process that requires well-coordinated sequencing of development effortsthat in turn calls for continuous strengtheningof the capacity and governance of keyinstitutions in both the public and privatesectors. Moreover, this process is a resource-intensive undertaking in terms of technical andfinancial resources.

The Blueprint attempts to provide acoherent strategy to help sequence andcoordinate the efforts of policy makers and allstakeholders based on the sector developmentvision. The Blueprint will serve as the planningtool for related Government ministries todetermine their short- and medium-term policyactions, to identify requirements for capacitybuilding and technical resources, and tocoordinate in accomplishing the sector-specificand cross-sector goals. It will also be acoordination panel for aid agencies to plan theirassistance to the financial sector and thusminimize duplication.

The Blueprint envisages the developmentof a sound, market-oriented financial systemin 10 years. The system is characterized as

competitive, integrated, and efficient, whichwill facilitate domestic resource mobilizationand growth-oriented investments. By 2010,Cambodia will have a banking sector, insurancesector, pension system, and nonbanking sectorthat together will provide a wide range ofservices at lower costs in both urban and ruralareas. Cambodia will also develop interbank/money markets and the base for capital marketsthat offer various means of financial instrumentsto meet the demands of both savers andinvestors. To enable and achieve these goals,the basic legal infrastructure, a commonaccounting and auditing system based oninternational standards, a reliable financialinformation system, and capacity-buildinginstitutions in both the private and publicsectors will be developed. Continuousimprovement in financial infrastructure willnurture an enabling environment for furtherdevelopment of the financial sector.

Financial sector development, as seen inthe vision, critically depends on full-scalegovernance reform in public administration,public finance, and the judiciary and legalsystems. These reforms will strengthen theaccountability of institutions in the public sectorand will in turn enable Cambodia’s access to acontinuous flow of official developmentassistance. With successful governance reformsin progress, Cambodia is expected to achievean average annual economic growth rate of 7percent from 2005 to 2020, which implies that

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its GDP will triple from about $3 billion in 2000to more than $10 billion in 2010, and per capitaincome will more than double during theperiod.

To materialize its vision for the financialsector, the Blueprint includes long-termdevelopment strategies and sector developmentplans for seven critical areas. The sectordevelopment plans address necessarystandards, laws, and regulations as well as thepreparation of necessary human resources andthe institutional capacity for implementation.These plans have been developed taking intoconsideration of the interrelation of (i) humanand institutional capacity building, (ii) thedevelopment of related infrastructure, (iii) theestablishment of legal and regulatoryframeworks, (iv) the emergence of relevantfinancial markets, and (v) the availability oftechnology. Each sector development planconsists of a development goal, intermediatereform agenda, and illustrative policy measuresin each phase. The development goal describesthe sector strategy to achieve visions in each

sector over three phases: 2001-2004, 2005-2007,and 2008-2010. The intermediate reformagenda in a specific phase describes tactics toattain the set goals. And the illustrative andindicative policy measures are designed toaccomplish the intermediate reform agenda.

Successful implementation of the Blueprintrelies on strong leadership, firm commitment,and tremendous efforts of the Government,especially MEF, MOC, and NBC. It also calls forthe support of the private sector and the timelyassistance of international aid agencies, as theactive participation of the private sector andinternational agencies is indispensable as asource of technical and financial resources forsuccessful implementation of the Blueprint.

Continuous refinement and updating ofthe Blueprint based on the progress made andthe changing socioeconomic environment willenable the Government to maintain momentumin its development efforts, as well as facilitatingcoordination of development efforts amonginternational aid agencies.

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VISION: A competitive, integrated, and efficientbanking system that is properly regulated andsupervised and effectively mobilizes savings toprovide financing to support the growth of theprivate sector

Monetary Policy

Supervision and Prudential Regulations

Bank Restructuring and Competition

Phase I(2001-2004)

Lay the Foundation for the Banking SectorDevelopment

Establish a basic framework for monetary policy

• Streamline reserve requirements• Phase out the guarantee deposit or capital reserve

required for bank licensing• Reduce the reserve requirement ratio on riel-

denominated deposits• Implement rediscount and refinance facilities

Establish a framework for supervision

• Establish a complete body of prudential regulations• Adopt surveillance and inspection procedures• Establish a fully staffed banking supervision

department• Establish a uniform chart of bank accounts and

disclosure rules consistent with InternationalAccounting Standards (IAS)

• Establish a prompt corrective action (PCA) system• Establish an anti-money-laundering regulation

Restructure the banking industry

• Complete bank relicensing and liquidation of problembanks

• Establish a contingency plan for banks that do notcomply with conditions in their restructuringmemoranda of understanding

• Restructure/privatize the Foreign Trade Bank

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I. The Banking Sector

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Phase II(2005-2007)

Enhance Intermediation through Competition

Improve monetary policy instruments

• Phase out reserve requirements• Commence the operation of refinance/rediscount

facilities

Improve the enforcement of prudential regulations

• Strengthen PCA implementation• Commence full on-site inspection with the National

Bank of Cambodia (NBC) staff• Establish a transparent exit mechanism and streamline

exit procedures- Revise laws covering insolvency and liquidation of bank

to eliminate inconsistencies- Establish legal and regulatory frameworks and

procedures for bank merger and acquisition (M&A) andpurchase and acquisition (P&A)

• Establish legal protection for supervisors againstlawsuits for actions taken in fulfilling official duties

Enhance banking services through diversifying thescope of banking business

• Diversify the scope of business by allowing banks toexpand their business into nonbanking areas

• Allow banks to set up nonbank financial institution(NBFI) subsidiaries

• Establish legal and regulatory frameworks for creditcard services, housing/mortgage finance, installmentfinance, etc.

Phase III(2008-2010)

Promote Efficiency through Integration andReorganization

Develop a market-based monetary policyframework

• Introduce an open market operation system with thedevelopment of money markets

Upgrade prudential regulations

• Upgrade prudential norms in accordance with the Bankfor International Settlement guidelines

• Strengthen risk management regulations with theexpansion of nonbanking business by banks

Facilitate bank reorganization through incentivesand a reinforced supervision system

• Strengthen the enforcement of PCA to facilitate earlyand orderly exit of nonviable banks

• Strengthen the incentive system for promotingvoluntary bank M&A and P&A

• Refine the minimum capital requirement for banksinvolved in diverse nonbanking businesses

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Enhance Intermediation through Competition

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Phase I(2001-2004)

Establish a framework for the payment system

• Improve operational procedures for both the riel anddollar clearing systems, considering the compliancecapability of commercial banks

• Adopt a payment law to underpin the payment system• Improve the backup system for smooth operation of

the payment system• NBC and the Bankers Association should adopt a

protocol for an on-line banking system to facilitatefuture integration of an on-line banking network

Establish a capacity building mechanism

• Appoint full-time Centre for Banking Studies (CBS)instructors under a competitive salary scheme

• Establish a central banking course for NBC professionalstaff in CBS

• Adopt a comprehensive re-training program for NBCstaff with non-college-level education

• Adopt a mandatory training program for entry-levelprofessional staff in CBS

• Adopting a competitive, merit-based compensationscheme in NBC

• Establish an inclusive bankers association• Establish a banking institute for professional training

of commercial bankers

Payment System

Outreach to the Rural Areas

Capacity Building

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Phase II(2005-2007)


Improve the efficiency of the payment systemthrough investments in information technology(IT)

• Establish a central bank wire system• Automate the clearinghouse• Establish an on-line banking system in individual banks

Promote outreach to rural areas by encouragingthe establishment of branches

• Adopt an incentive system to encourage banks toexpand branches into rural areas

Strengthen NBC organizational structure

• Redesign the division of responsibilities amongdepartments with new job descriptions

• Establish an effective recruitment system to attractcompetent staff to NBC

• Introduce a performance-based compensation andpromotion system to retain and develop qualified staff

Establish an integrated on-line interbank system

• Integrate individual bank on-line networks includingthe central bank wire system

Strengthen outreach to rural areas throughcompetition

• Establish legal and regulatory frameworks forcommunity-based savings institutions (e.g., creditunions, cooperatives) with appropriate incentivesystems

Enhance central bank independence

• Revise the Central Banking Law and the Banking Lawto step up the independence of NBC

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VISION: Establish viable, pro-poor andeffective rural finance system for providingaffordable financial services to enable the poor toenhance rural income and reduce poverty

Implement and Enhance RuralCredit Policy

Strengthen Supervision and Regulation

Building Rural Financial Infrastructure

Create Institutional Capacity

Phase I(2001-2004)

Implement a Policy and Institutional Frameworkfor Rural Finance Sector

Implement policy actions in Rural Credit Policy(RCP)

• Make applicable the provisions of the Banking Law todevelop the rural finance sector

• Create forum for policy coordination

Strengthen supervision and regulation

• Establish supervision system for licensed microfinanceinstitutions (MFIs) consistent with the overallframework for the banking industry

• Introduce appropriate prudential norms for licensedMFIs

Facilitate institutional transformation linkages,and services delivery

• Facilitate transformation of identified NGOs intolicensed MFIs

• Enhance access to resources of community-basedgroups through licensed MFIs

• Promote deposit and microcredit through licensed MFIs

Build sustainable institutions

• Strengthen the Rural Development Bank• Comprehensive capacity building support for licensed

MFIs• Strengthen NBC's capacity with reference to the rural

financial system

II. Rural Finance

VISION: Establish viable, pro-poor andeffective rural finance system for providingaffordable financial services to enable the poor toenhance rural income and reduce poverty

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Phase II(2005-2007)

Increase Poverty Reduction Impact

Policy coordination

• Review and, if required, amend RCP in the context ofthe ongoing financial sector development measures

• Coordinate rural finance sector development withinvestments in poverty reduction, agriculture, ruralinfrastructure, irrigation, and agricultural research andextension

Improve application of prudential regulations

• Strengthen MSD of NBC in its supervisory andregulatory capability

Establish a range of service providers

• Introduce leasing and crop insurance• Establish venture capital and equity funds for licensed

MFIs

Expand institutional network

• Enhance flow of term finance for agriculture throughresource support and enhanced presence of banks inrural areas

• Adopt incentive systems for commercial banks toexpand in rural areas

• Provide support for establishment of licensed MFIs• Deepen and broaden linkages between community

groups, licensed MFIs, and banks

Enhance effective intermediation

• Develop specialized training centers• Introduce rural finance specialization in restructured /

reorganized banks• Facilitate downscaling of operations for banks

intending to enhance microfinance operations


Enhance Outreach

Review and coordinate policies

• Policy review and coordination to continue as in PhaseII

Introduce self-regulating mechanisms

• Enable the multisectoral nongovernment organizations(NGOs) to develop a self-regulatory mechanism forminimum service standards

• Encourage emergence of rating agency for licensedMFIs

Establish a comprehensive institutional network

• Establish a legal framework for small farmer- orcommunity-owned institutions to integrate with theformal financial sector

• Review equity threshold for licensed MFIs

Update and upgrade skills

• Establish linkages with regional training centers andupdate their capacities and the quality of their courses

Increase Poverty Reduction Impact Enhance Outreach

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Phase I(2001-2004)

Ensure Pro-Poor Orientation Build capacity for optimal utilization of financialservices

• Organize the poor into community groups for financialservices

• Enhance capacity of community groups to establishlinkages with licensed MFIs

• Support capacity building of the poor for managementof income-generating activities

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Phase II(2005-2007)


Promote innovative microfinance pilot projects

• Establish pilot projects in resource-poor areas• Bring innovations to address specific clients groups

(e.g., the disabled)

Introduce safety nets to reduce vulnerability

• Introduce risk mitigation tailored to the needs of thepoor, including insurance services

• Extend protection to the savings of the poor

Enhance outreach to special microfinance groups

• Replicate successful pilots•Enlarge coverage of safety nets

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VISION: An insurance sector that protectsbusinesses and individuals from catastrophicevents and the pension system that provides secureretirement, both of which provide capital for long-term investment in the real sector

Insurance Sector

Supervision and Regulations

Compulsory Insurance

Insurance Industry Organization

Outreach to the Rural Areas

Capacity Building

Phase I(2001-2004)

Establish a Foundation for Insurance Sector andDetermine Feasibility for Pension System

Establish a regulatory and supervisory frameworkfor insurance

• Establish an insurance supervisory unit within Ministryof Economy and Finance (MEF)

• Adopt a subdecree to implement the insurance law• Establish prudential regulations including uniform chart

of accounts and disclosure rules consistent with IAS/ISA and a PCA system

Establish a framework for compulsory insurance

• Adopt a plan and establish legal frameworks andenforcement mechanisms to implement compulsoryinsurance

• Establish an interministerial working group to developenforcement and monitoring system for compulsoryinsurance

Establish a basis for private sector development

•Establish a joint venture between the state-ownedinsurance company and a private company

•Develop a transparent entry mechanism• Adopt regulations to encourage the use of domestic

insurance companies

Build capacity of insurance regulators andsupervisors

• Conduct intensive capacity-building activities forinsurance regulators and supervisors

• Establish a training program to build the enforcementand monitoring capacity in the related governmentagencies

III. Insurance and Pension System

VISION: An insurance sector that protectsbusinesses and individuals from catastrophicevents and the pension system that provides secureretirement, both of which provide capital for long-term investment in the real sector

Establish a Foundation for Insurance Sector and DetermineFeasibility for Pension System

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Phase II(2005-2007)

Promote Insurance Market through PrivateSector Development and Establish Foundation

for Pension System

Strengthen the insurance regulation andsupervisory framework

• Strengthen the regulatory framework for insurance byrefining prudential regulations to cover diverseinsurance products

• Reinforce the insurance supervisory unit by enlargingstaff with qualified personnel

Implement compulsory insurance

• Establish insurance monitoring and enforcementsystem

Promote a competitive private sector insurancemarket

• Facilitate private insurance companies' entry intounderwriting business

• Encourage foreign companies' participation• Establish reinsurance institutions• Divest MEF shares in joint venture

Increase outreach to rural areas

• Introduce crop insurance, weather insurance, etc.

Establish a training institution for the insurancesector

• Establish a comprehensive insurance training institutionthrough international cooperation


Strengthen Insurance Sector and InitiateEstablishment of Pension System

Upgrade prudential regulations for insurancesector

• Establish an independent insurance supervisor• Upgrade prudential regulations in accordance with the

Insurance Core Principles of the InternationalAssociation of Insurance Supervisors

Strengthen Insurance Sector and InitiateEstablishment of Pension System

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Phase I(2001-2004)

Insurance Infrastructure

Pension System

Legal Framework

Supervision and Regulation

Capacity Building

Conduct feasibility study to establish a multipillarpension system

• Conduct feasibility study to determine appropriatedesign and timing for a mandatory public pensionprogram, mandatory privately managed fundedpension program, and voluntary retirement savingsprograms

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Phase II(2005-2007)


Develop an actuarial professional body

• Adopt a legal and regulatory framework for a publicactuarial system

• Create an actuarial profession

Establish legal framework for pension system

• Adopt legal framework for mandatory public pensionprogram

• Adopt legal framework for mandatory privatelymanaged funded pension program

• Adopt legal framework for voluntary retirement savingsprograms

Establish regulatory and supervisory frameworkfor pension system

• Establish supervisory and regulatory body for pensions• Establish basic prudential regulations

Build capacity of pension regulators andsupervisors

• Conduct intensive capacity building activities forpension regulators and supervisors

Implement legal framework for pension system

• Adopt subdecree to implement legal framework formandatory public pension program

• Adopt subdecree to implement legal framework formandatory privately managed funded pension program

• Adopt subdecree to implement legal framework forvoluntary retirement savings programs

Implement mandatory public pension program

• Introduce mandatory public pension program

Strengthen regulatory and supervisory capacityfor pension system

• Refine and complete corpus of prudential regulationsto cover expanded pension system

• Reinforce pension supervisory body by enlarging staffwith qualified personnel

Establish capacity building institution for pensionsystem

• Establish comprehensive pension industry traininginstitutions through international cooperation

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VISION: The establishment of diversenonbanking financial products and institutionsthat create more balanced financial structure,increase the depth of the financial market, andpromote competition

Leasing Business

Money Market Intermediary

Capital Market Intermediary and InstitutionalInvestors

Development Finance Institutions

Phase I(2001-2004)

IV. Nonbank Financial Institutions

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Phase II(2005-2007)

Establish the Foundation of NBFIs

Develop the leasing business

• Adopt a leasing law• Adopt a leasing regulation for commercial banks to

conduct leasing business and/or to establish leasingcompany subsidiaries

• Adopt a policy framework for promoting joint ventureleasing companies

Develop money market intermediaries

• Establish a legal and regulatory framework for financecompanies, investment companies, nonfinancialcorporations, individuals, and money market broker/dealers

Develop capital market intermediaries

• Establish a legal and regulatory framework for securitiescompanies/subsidiaries, investment advisorycompanies, and securities finance companies

• Establish a regulatory framework for banks to establishsecurities subsidiaries


Promote Diversification of NBFIs

Develop institutional investors for capital markets

• Establish a legal and regulatory framework for trustbusiness in banks, investment/management trustcompanies, mutual funds, venture capital companies,and the like

Establish development finance institutions topromote medium- and long-term lending

• Establish legal and regulatory framework for medium-and long-term export-import credit institutions (e. g.,EXIM Bank) and other development finance institutions(e.g., leveraged leasing companies/subsidiaries)

Establish the Foundation of NBFIs Promote Diversification of NBFIs

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VISION: Money markets that enable aninterbank market that provides banks, companies,and individuals with the means for effectiveliquidity management

Interbank Market Arrangements and Scope

Money Market Instruments

Treasury Bills

Phase I(2001-2004)

Establish a Foundation for Interbank Markets

Establish interbank market arrangements

• Establish interbank market arrangements/proceduresfor commercial banks

Create an enabling environment for money marketdevelopment

• Adopt a negotiable instruments law• Set up a regulatory framework for interbank/money

market activities

Create an enabling environment for Treasury Bills

• Adopt a regulatory framework for the issuance ofTreasury Bills

• Adopt a medium-term plan to develop Treasury Billmarkets

• Capacity building for staff in National Treasury and NBCwho are involved in Treasury Bill issuance

V. Interbank/Money Markets

VISION: Money markets that enable aninterbank market that provides banks, companies,and individuals with the means for effectiveliquidity management

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Phase II(2005-2007)

Strengthen the Interbank Markets

Expand the scope of the interbank markets

• Establish a framework for interbank markets to allowthe participation of NBFIs

• Develop a standardized interbank repurchase (RP)contract and supporting regulations

Establish regulations governing financialinstitutions' instruments

• Adopt procedures and regulations for negotiablecertificates of deposit (CDs), RP agreement, banker'sacceptance, etc.

• Issue central bank securities (e.g., central bank CDs)

Develop Treasury Bills markets

• Introduce a primary dealer system for governmentsecurities

• Regularize the issuance of Treasury Bills


Increase the Depth of Money Markets

Establish integrated interbank markets

• Allow all financial institutions to participate ininterbank/money markets

Establish regulations governing non-financialinstitutions' instruments

• Adopt regulations for trade bills, and commercialpapers

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VISION: Efficient and transparent capitalmarkets with a critical mass of issuers thatmobilizes funds for long-term investment

Legal and Regulatory Framework

Securities Exchange

Fixed-income Securities

Capacity Building

Phase I(2001-2004)

Create an Enabling Environment for CapitalMarkets

Establish a key legal/regulatory framework

• Strengthen the capital market development unit• Develop a master plan for creating a functional capital

market framework• Conduct a feasibility study to assess a critical mass of

potential securities issuers• Draft a securities and exchange law• Determine the basic structure of exchange regulations

(e.g., listing requirements auction rules for trading,corporate disclosure, membership)

Create an enabling environment for public bondmarkets

• Establish regulatory framework for medium- and long-term government bond, and issue Treasury Bond andgovernment savings bond

• Establish legal and regulatory framework for localgovernment, public instrumentality, and small andmedium enterprises to issue bonds and notes

Build capacity for future capital marketparticipants

• Conduct intensive capacity building for capital marketregulators through international cooperation

• Adopt a training program for capital market participants

VI. Capital Markets

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Phase II(2005-2007)

Establish the Foundation for Capital Markets

Establish a capital market surveillance framework

• Establish an independent securities and exchangecommission

Establish a securities exchange

• Create a securities exchange board• Set up a computerized trading system• Establish a trading infrastructure (e.g., a securities

depository system, and a clearing system)

Promote the issuance of public bonds

• Establish or refine related legal and regulatoryframeworks

• Establish an incentive system to create demand forgovernment bonds

Strengthen capacity building for the public

• Develop a comprehensive program for publicawareness activities

• Publish a master plan to create a securities exchangeto provide general guidelines for listing requirements


Develop Capital Markets

Strengthen capital market supervision andsurveillance

• Upgrade prudential regulations in accordance withIOSCO principles

Promote capital market participation

• Adopt an incentive system to encourage firms to gopublic

• Adopt corporate governance principles

Develop private bond markets

• Adopt a plan to develop corporate debt markets• Establish a legal and regulatory framework for the

issuance of bonds of large banks and developmentfinance institutions

• Develop a trading system for fixed income securities

Strengthen capacity building for capital marketparticipants

• Create an association of securities brokers and dealers• Establish a capital market training institution

Establish the Foundation for Capital Markets Develop Capital Markets

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VISION: Legal and accounting systems thatpromote the rule of law in commercial andfinancial transactions and support goodgovernance by promoting transparency,accountability, and predictability

Legal Framework for Commercial and FinancialTransactions

Accounting and Auditing Standards

Financial Market Information Infrastructure

Financial Market Safety Net

Phase I(2001-2004)

Develop Key Legal, Accounting, and InformationInfrastructure

Create key legal infrastructure to underpinfinancial sector development

• Adopt a company law, a bankruptcy law, a securedtransactions law, etc.

• Adopt a civil code and procedure• Implement the Governance Action Plan• Adopt a law on Organization and Function of the Court

including establishment of a commercial chamber

Establish accounting/auditing standards andenforcement system

• Adopt a law on corporate accounts, their audit, andthe accounting profession

• Apply IAS/ISA to all companies in Cambodia• Establish an accounting standards board• Establish an association of accountants and auditors

including committees on education and ethics• Adopt a code of ethics for auditors

Create financial market information system

• Establish arrangements for sharing credit informationamong members of the bankers association

VII. Financial Market Infrastructure

VISION: Legal and accounting systems thatpromote the rule of law in commercial andfinancial transactions and support goodgovernance by promoting transparency,accountability, and predictability

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Phase II(2005-2007)

Strengthen Enforcement and Establish Safety Net

Strengthen law enforcement

• Continue judicial reform• Establish a commercial chamber in the court system• Develop an adequate compensation scheme for

commercial jurist• Establish a public registry for secured transactions

Strengthen enforcement of accounting/auditingstandards

• Promote competition in the local accounting industryto encourage new entries to reduce accounting andauditing compliance costs of the private sector

Expand the scope of arrangements for creditinformation sharing

• Formalize the membership of the arrangements forsharing credit information to include other creditinstitutions

• Allow the participation of other financial institutionsin the credit information sharing arrangements

Enhance the banking sector safety net

• Introduce a deposit insurance system for the bankingsector

• Adopt corporate governance guidelines for banks


Enhance Financial Market Infrastructure andSafety Net

Enhance the legal infrastructure for private sectordevelopment

• Establish la egal framework for a public registrationsystem for movables

Enhance the enforcement of accounting standards

• Apply IAS/ISA to private companies• Improve the enforcement of accounting and auditing

standards

Diversify and upgrade the market informationsystem

• Introduce a credit rating database industry• Upgrade the capacity and accessibility of the

arrangements for sharing credit information throughincreased investment in IT

Enhance financial sector safety net

• Expand deposit insurance system into other creditinstitutions that participated in the payment system

• Adopt corporate governance guidelines fornonbanking institutions

Strengthen Enforcement and Establish Safety Net

cam blueprint 2001

Documents