Cambodia’s Banking Sector Faces Challenges Amid Decelerating Credit Growth
Weakening Demand and Cautious Lending Practices Contribute to Sharp Decline in Credit Growth
The Cambodian banking sector has been grappling with significant vulnerabilities, marked by a sharp deceleration in credit growth. According to the National Bank of Cambodia’s Fiscal Stability Report 2023, weakening demand and cautious lending practices have contributed to this trend.
Structure of the Banking System in Cambodia
- Commercial Banks: With 58 commercial banks dominating the market share, accounting for 91% of total assets.
- Microfinance Deposit-taking Institutions (MDIs): Account for 5.4% of total assets.
- Microfinance Institutions (MFIs): Account for 2.2% of total assets.
Pressing Need for Adaptation and Innovation
The growth in deposits, assets, and loans has seen a downward trend over the past few years, indicating a pressing need for the sector to adapt and innovate.
Positive Signs Amidst Challenges
- Despite the high level of dollarization, there has been a slight increase in the share of local currency within the banking system.
- The National Bank of Cambodia sees this as a positive sign, advocating for greater use of the local currency to enhance monetary policy effectiveness.
Concerns About Concentration and Risks
- Private Sector Credit: Corporate entities receive approximately three-quarters of the total credit.
- Risks Associated with Specific Sectors: Retail trade, mortgages, and personal loans raise concerns about risks associated with these areas.
Non-Performing Loans (NPLs) and Provisions
The rise in NPLs is a pressing concern, but the corresponding increase in specific provisions indicates that banks are taking necessary measures to mitigate risks.
Impact on Banks’ Bottom Line
- Sharp Decline in Profitability Metrics: Largely due to higher interest expenses and increased provisions.
- Significant Impact on Banks’ Bottom Line.
Continuous Monitoring and Supervision Crucial for Stability
While liquidity within the banking system has generally improved, and capital adequacy ratios have inched up, providing a buffer for banks to withstand economic shocks, the sector remains vulnerable to potential risks. Continuous monitoring and vigilant supervision are crucial to ensure the stability of the banking sector, with timely actions necessary to address any emerging risks.
National Bank of Cambodia Emphasizes Proactive Measures
The National Bank of Cambodia emphasizes the importance of proactive measures to address potential vulnerabilities, highlighting the need for the banking sector to work closely with regulatory bodies to maintain stability and growth in a rapidly changing economic landscape.