Presentation at Sophia University November 13 th, 2017, Tokyo Monetary Policy Implementation and Banking Sector Development in Cambodia Mr. Duong Sophak, Division Chief and Mr. You Vithyea, Section Chief Department of Economic Research and International Cooperation Department The views expressed in this presentation are those of the author and do not necessarily represent the views of the NBC. 2
Table of Contents I. Contribution to Cambodian economic growth I. Monetary Policy Implementation Monetary Policy and Instruments Interbank and Foreign Exchange Market Development Promotion of the Use of Riels II. Banking Sector Development Banking Institutions National Bank of Cambodia Microfinance Institutions 3
Contribution to Economic Growth 4
Contribution to Economic Growth 14% 12% 10% 8% 6% 4% 2% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017p 2% Agriculture Garment Construction Trade, real estate and finance Hotel & Restaurants Others Real GDP Growth After hitting by global financial crisis, Cambodia can achieve the robust growth at around 7% annually, driven by Garment, Construction, Tourism and Agriculture. 5
Monetary Policy Implementation 6
What is Monetary Policy? Monetary Policy is the process by which a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. - Contractionary Monetary Policy: slows the rate of growth in the money supply or outright decreases the money supply in order to control inflation. - Expansionary Monetary Policy: increases the rate of growth in money supply to spur growth and reduce unemployment. 7
What is Monetary Policy? Conventional vs. Unconventional monetary policy - Conventional MP The policies that mainly act by setting a target for the overnight interest rate in the interbank market and adjusting the supply of central bank money to that target through Open market operation, Reserve requirement, and Standing facility (lending and deposit). - Unconventional MP The policies that directly target the cost and availability of external finance to banks, households and non-financial companies. These sources of finance can be in the form of central bank liquidity, loans, fixed income securities or equity by using Direct Quantitative Easing, Direct Credit Easing and Indirect Quantitative Easing/Credit Easing. In the US, the Fed loaded its balance sheet with trillions of dollars in Treasury notes and mortgage-backed securities between 2008 and 2013. The Bank of England, the European Central Bank and the Bank of Japan have pursued similar policies. 8
What is Monetary Policy? Monetary Policy Formulation - The Monetary Policy Committee, chaired by the Governor, a high-level policy committee at the, was established to assess the ongoing economic and financial developments of the country and to make decisions on monetary policy, with the objective of maintaining price stability. - Monetary Policy Sub Committee, chaired by Director General of Central Banking, was established to implement monetary policy determined by Monetary Policy Committee. - Monetary Policy Secretariat: composes of economists, researchers and experts, they monitor and assess macroeconomics and financial sector s context, conduct forecasting and prepare a monetary policy report for MPC. 9
What is Monetary Policy? Law on the Organization and Conduct of the NBC - Article 3: The principle mission of the Central Bank is to determine and direct the monetary policy aimed at maintaining price stability in order to facilitate economic development within the framework of the Kingdom s economic and financial policy. 10
What is Monetary Policy? In order to do so, the law allows the Central Bank to have following functions and duties: To determine monetary policy objectives, in consultation with the Royal Government and consideration of the framework of the economic and financial policy of the Kingdom To formulate, implement and monitor monetary and exchange policies aimed at the determined objectives To participate in the formulation and supervision of the money and financial markets To set the interest rate 11
Monetary Policy Instruments What are the monetary policy instruments at NBC s disposal? Because of high dollarization and under developed financial markets, the available instruments are limited: Exchange Rate Policy Reserve Requirement Rate 12
Monetary Policy Instruments Exchange rate policy The NBC adopted the stabilized exchange rate regime. What does it mean? We leave the exchange rate floating BUT intervene when the situation warrants. 13
Monetary Policy Instruments In the context of high dollarization, the NBC intervenes the market to supply local currency based on the market demand to stabilize the exchange rate. Trillion Riel 4 200% 3 150% 100% 2 50% 1 0% 0 2012 2013 2014 2015 2016-50% Sell KHR Growth (RHS) 14
Exchange Rate Movements Exchange Rate (monthly average midpoint market rate, 1998-2017H1) 4,300 4,200 4,100 4,000 3,900 3,800 3,700 3,600 3,500 4,037 NBC implements exchange rate based monetary policy Exchange rate was driven by seasonal factors of tax payment and agricultural purchase NBC intervenes in the foreign exchange market under the managed float exchange rate regime by allowing the fluctuation of 2% and +2% Exchange rate has been stable for the last two decades, with an average rate of 4,000 riel per US dollar 15
Monetary Policy Instruments The impacts of exchange rate s movement - Depreciation of KHR could penalize the KHR holders, create inflationary pressure, increase interest rate of KHR loans - Appreciation of KHR could penalize the workers whose incomes are in USD such as garment workers The NBC has strived to stabilize the exchange rate to enhance the public confidence in Riels, preserve the purchasing power especially for poor people and limit the exchange rate risks. 16
Monetary Policy Instruments NBC monitors very closely the movement of the exchange rate. NBC would decide to let it vary or to intervene in the foreign exchange market based on the economic fundamentals and monetary policy s objectives by taking into consideration the impacts of exchange rate s movement. The law provides NBC total independence in conducting monetary policy/the exchange rate policy to achieve the monetary policy objective. NBC has no obligation to intervene at all time in the market, in particular when the foreign exchange market could provide enough liquidity to the demand and/or the increase in demand is temporary or for speculative purpose. 17
% 35 30 25 20 15 10 5 0 5 Price Development Price Development CPI MoM CPI YoY Cambodia had contained inflation below 5 percent on average a remarkable feat given that high inflation typically accompanies high economic growth. 18
Price Development % 6 5 4 3 2 1 0-1 -2-3 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 2013 2014 2015 2016 Food and Non Alcoholic Beverages Housing, Water, Electricity, Gas and other Fuels Transportation Other Headline Inflation The inflation rate remains modest due to low oil prices and imported inflation. Food prices are the main factor of overall inflation. 19
Monetary Policy Instruments Reserve Requirement Rate (RRR) % 20 16 12.5 15 10 8 12 5 8 5 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 KHR(%) Fx(%) 20
Monetary Development Composition of M2 and Annual Percentage Change in M2 (1993 June 2017) in trillion of riels 70 60 50 40 30 20 10 0 FCD COB Riel Deposits M2 growth (RHS) % 70 60 50 40 30 20 10 0 US dollar inflows were flooded by UNTAC from 1991 1993 FCD/M2 stood at approximately 80% Average growth from 1997 2016: M2 : 23.6% FCD : 25.7% COB : 17.2% Riel deposit : 26.4% 21
Interbank Market Development NCD was launched in late 2013 to create a market based instrument for the interbank market transaction. The demand for NCD has significantly increased, particularly in the last 2 years. In trillion riels 90 80 Forecast billion riels 15 LPCO Number 4 70 60 50 40 10 2 12 3 8.4 8 3 9.4 3 2 30 20 5 1 1 10 2013 2014 2015 2016 2017 0 Oct 16 Nov 16 Dec 16 Jan 17 0 Total USD KHR Participants Auction Amount 22
Interbank Market Development Liquidity Providing and Absorbing Through NCDs and LPCO Liquidity in KHR/USD NCDs Interbank markets NCDs NBC Banks and Financial Institutions NCDs Liquidity in KHR
Interbank Market Development Future Monetary Policy tool: Marginal Lending Facility (MLF) - Conceptual Basis of Marginal Lending Facility Facility through which central bank lends to banks From perspective of counterparty also referred to as borrowing facility Liquidity management instrument to meet ad hoc unexpected liquidity need (which remains uncovered despite OMOs and interbank market). Provides a regular access to central bank credit at predetermined conditions 24
Foreign Exchange Market Development Proportion of KHR amounts that Banks and Money Changers bought from NBC 100% 80% 60% 40% 20% 0% 41% 57% 48% 44% 68% 72% 70% 59% 43% 52% 56% 32% 28% 30% 2014S1 2014S2 2015S1 2015S2 2016S1 2016S2 2017S1 Banks Money Changers To develop a wholesale foreign exchange market in which banks play as a market maker and To enhance the regulations on the foreign exchange market. 25
Promotion of the Use of Riels The Government and the NBC have implemented policies to promote Riels on market-driven and gradual basis. - The National policies to promote Riels have been reviewed by Economic and Financial Policy Committee before submitting to the Head of the Government. - These policies would continue to encourage the use of Riels in the economy. - Promotion of Riels is not solely NBC s tasks, but all agents in all sectors: public institutions, corporates, financial institutions, NGOs, individuals etc. take part in this process. - Banks and Financial Institutions should participate actively in this policy implementation. 26
Promotion of the Use of Riels Why promotion of the use of Riels is important, in particular to banks and financial institutions? Could obtain sustainable source of funds Lower costs of funding Reduce liquidity risks Mitigate exchange rate risks and Enhance the role of lender of last resort of the NBC to help banks and financial institutions in case of urgent liquidity need. 27
Cambodian Banking Sector 28
Banking System in Cambodia 21 NBC Branches 54 Banks 73 MFIs Others Financial Leasing 39 Commercial Banks 7 MDIs 8 Thirty Party Processors 15 Leasing 15 Specialized Banks 66 Licensed MFIs 1 CBC 7 Representatives 29
30,000 Total Assets Compared to GDP 2017 GDP revised in June 2016 140% 25,000 108% 110% 113% 118% 118% 120% In Million of USD 20,000 15,000 10,000 40% 5,000 10,284 24% 48% 10,328 20% 55% 11,608 28% 63% 12,892 24% 77% 14,188 37% 83% 15,400 17% 98% 16,478 27% 18,219 20,159 23% 23% 20,159 20,159 20,159 20% 19% 19% 100% 80% 60% 40% 20% 4,165 4,996 6,387 7,945 10,905 12,748 16,202 19,963 22,179 22,735 23,834 23,834 2008 2009 2010 2011 2012 2013 2014 Dec 15 Jun 16 Sep 16 Dec 16 Jan 17 0% Total assets GDPp Growth of total assets Total assets to GDP 30
Banks and MFIs Branches and Electronic Banking 2017 Descriptions 2011 2012 2013 2014 Dec 15 Jan 16 Dec 16 Jan 17 %(2016 Jan 17) % Y O Y 1 Number of Bank branches* 421 454 497 557 611 615 812 815 0.4% 32.5% 2 Number of MFI Network** 1,864 2,176 2,217 2,694 3,631 4,091 4,154 4,181 0.6% 2.2% 3 Number of ATM terminal*** 588 681 766 1,137 1,416 1,124 1,567 1,575 0.5% 40.1% 4 Number of Debit card 764,738 957,556 1,010,858 1,296,875 1,439,887 1,464,973 1,548,120 1,561,759 0.9% 6.6% 5 Number of Credit card 18,491 18,198 24,412 31,261 39,836 40,376 55,402 58,104 4.9% 43.9% 6 Number of POS (Banks) 9,639 11,761 11,825 1% #DIV/0! 7 Number of Serivce Posts (Banks) 1 1 1 0% #DIV/0! 8 Number of Employees*** 22,832 55,606 56,191 1% #DIV/0! *Including head office **Including head offices, Provinces & Districts Branch ***Including of Banks and MFIs 4,500 4,000 3,500 3,000 1,137 1,416 3,631 1,505 3,970 1,567 1,575 4,154 4,181 1,800 1,600 1,400 1,200 1,800,000 1,600,000 1,400,000 1,200,000 39,836 45,086 55,402 58,104 70,000 60,000 50,000 2,500 2,000 1,500 1,000 500 2,694 766 2,176 681 2,217 588 501 1,864 1,513 338 1,105 342 393 421 454 496 557 611 790 812 815 1,000 800 600 400 200 1,000,000 800,000 600,000 400,000 200,000 14,003 18,491 18,198 24,412 31,261 592,317 764,738 957,556 1,010,858 1,296,875 1,439,887 1,557,872 1,548,120 1,561,759 2010 2011 2012 2013 2014 Dec 15 Jun 16 Dec 16 Jan 17 40,000 30,000 20,000 10,000 Number of Office (Banks) Number of Office (MFIs) Number of ATM terminal Number of Debit card Number of Credit card 31
Trend of Credit & Deposit % of GDP 2017 80% 80.0% 70% 60% 59.2% 62.8% 64.4% 64.5% 64.0% 65.7% 66.5% 68.4% 68.4% 68.8% 68.8% 70.0% 60.0% 50% 47.5% 49.1% 56.7% 50.0% 40% 37.2% 40.3% 41.2% 47.7% 40.0% 30% 33.6% 30.0% 20% 27.9% 20.0% 10% 10.0% 0% 0.0% Deposit Credit National Bank 32 of Cambodia 32
Deposit with Banks and MFIs 2017 16,000 1,464 1,497 1,600 14,000 1,309 1,271 1,400 In Million USD 12,000 10,000 8,000 888 9,749 11,443 1,200 1,000 800 6,000 6,736 7,560 600 5,193 438 4,000 4,313 274 400 2,000 40 114 12,905 13,685 13,910 200 * SATHAPANA merged with Maruhan Japan Bank Plc. Banks' deposits MFIs' deposits 33
Customer Loans and Deposits 2017 16,000 120% 14,000 97.2% 95.9% 102.6% 100.7% 100.6% 98.0% 100% 12,000 83.3% 86.8% Millions of USD 10,000 8,000 75.1% 80% 60% 6,000 4,000 2,000 3,241 4,313 4,326 5,193 5,846 6,736 7,352 7,560 9,345 9,749 11,742 11,443 12,990 12,905 13,876 13,797 13,910 14,189 40% 20% 0% Loans Deposits Loans to Deposits ratio 34
Number of Depositors 2017 144,511 242,116 1,067,404 1,266,412 1,488,715 686,666 1,765,267 828,955 1,046,807 1,339,896 1,381,612 1,502,488 1,519,551 2,259,601 2,650,188 2,946,482 3,026,800 3,063,166 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 Number of Depositors 500,000 2010 2011 2012 2013 2014 Dec 15 Jun 16 Dec 16 Jan 17 SATHAPANA merged with Maruhan Japan Bank Plc. Bank's depsitors MFIs' depsitors 35
Number of Borrowers 2017 2,500,000 286,346 978,077 294,533 1,141,913 353,606 1,301,680 385,421 1,550,616 443,482 1,774,815 512,582 1,994,003 713,737 1,919,895 746,930 1,889,914 750,820 1,849,489 2,000,000 1,500,000 1,000,000 500,000 Number of Borrowers Banks Borrowers MFIs Borrowers 36
Financial Institutions Loans to Customers 2017 16,000 14,000 3,241 426 4,326 642 5,846 886 1,317 2,017 2,995 3,112 3,228 7,352 9,345 11,742 13,767 13,910 12,000 10,000 8,000 In Million USD 6,000 4,000 2,000 Banks loans (gross) MFIs Loans (gross) 37
Net Worth & Solvency Ratio 4500 35.0% 4000 3500 3000 31.4% 26.2% 25.0% 24.8% 279 279 247 21.5% 21.9% 166 21.8% 22.3% 22.6% 30.0% 25.0% In Million USD 2500 2000 1500 1000 500 23 1239 69 1,361 66 1,742 95 2,105 89 2,373 2,941 3,251 3,474 3,587.70 20.0% 15.0% 10.0% 5.0% 0 2010 2011 2012 2013 2014 Dec 15 Jun 16 Dec 16 Jan 17 Tier I Capital Tier II Capital Solvency Ratio 0.0% 38
Banks Earning Trend 2017 Return on Assets and Return on Equity (Annualized) 90% 80% 78.2% 79.1% 80.4% 79.8% 81.6% 82.0% 82.5% 82.0% 81.8% 12.9% 18% 16% 70% 60% 9.0% 9.8% 9.5% 10.4% 10.9% 11.7% 10.0% 14% 12% 50% 10% 40% 6.6% 8% 30% 20% 21.8% 20.9% 19.6% 20.2% 18.4% 18.0% 17.5% 18.0% 18.2% 6% 4% 10% 0% 1.44% 1.89% 1.92% 1.92% 1.92% 1.96% 2.05% 1.80% 2.35% 2% 0% Equity to total assets Debt to total assets Return on Assets Return on Equity 39
Banks Credits by Products Type 2017 December 16 2017 AIR 1% Overdraft 9% 25% 1% 10% Consumer Loan 25% 64% Commercial Loan 65% * Loan to customer with non resident 40
Banks Credit to Agriculture Sectors 2017 1,800 119.8 120.4 162.5 127.8 208.5 177.7 375.3 264.1 559.2 349.3 500.1 708.9 952.9 745.7 1,229.0 1,059.7 1,011.0 1,043.0 1,041.8 1,439.5 1,518.5 1,546.8 * Gross Loan included FI loan and AIR 1,600 1,400 1,200 1,000 800 In Million USD 600 400 200 Banks MFIs 41
MFIs Loans and Deposits 2017 3,500 3,000 1052% 2,995 2,768 3,136 3,228 1200% 1000% In Millions of USD 2,500 2,000 1,500 564% 1,317 2,017 1,309 1,271 1,476 1,497 800% 600% 1,000 500 642 426 114 40 886 323% 301% 438 274 888 227% 229% 218% 213% 216% 2010 2011 2012 2013 2014 2015 Jun 16 Dec 16 Jan 17 400% 200% 0% Loans Deposits Loans to Deposits ratio 42
MFIs Credit Classified by Sectors, 2017 Household 29% Others 3% Agriculture 32% Construction 3% Transportation 4% Services 10% Trade and Commerce 19% 43
MFIs Earning Trend 2017 5% Annualized ROA & ROE 25.00% 5% 4% 22.25% 21.25% 20.94% 19.91% 18.99% 19.15% 20.25% 21.69% 21.65% 20.00% 4% 18.96% 18.76% 18.98% 3% 3% 14.06% 15.10% 16.64% 16.42% 16.40% 14.64% 15.00% 2% 2% 1% 1% 0% 1.18% 1.33% 1.46% 0.22% 2.96% 0.29% 0.59% 0.59% 0.75% 1.09% 1.44% 1.58% 3.30% 3.64% 3.63% 3.35% 3.65% 3.68% 3.78% 3.47% 3.15% 2.97% 3.61% 4.34% 3.87% 3.88% 4.33% 2010 2011 2012 2013 2014 Dec 15 Jun 16 Dec 16 Jan 17 10.00% 5.00% 0.00% LRP/NW NPL ROA ROE CAR 44
Conclusion Economic growth continued to be high in 2016 in Cambodia, at 7% close to the 7.2% trend of the previous five years, Credit growth declined substantially in 2016, globally at 18.5% on a yearly basis, largely below the 29 % average over the previous five years and even the 24.2% in 2015. The population of the banking industry still increased in 2016, although the population is already quite large. There will be time for more consolidation. The solvency ratio in banks remains above 20% on average, but some large and medium banks have an individual ratio much closer to the minimum threshold of 15%. Solvency ratios in MDIs are much lower, around 18% on average, and their comparative situation is even weaker as their Tier1 capital is only 79.60 % of their total capital on average, compared to 93.80 % in commercial banks (June 2016). 45