Cambodia has yet to establish a deposit insurance scheme, which means if a bank has a run on deposits or goes belly up, its customers could lose all their savings.
Stephen Higgins, managing partner of Mekong Strategic Partners, says it is time the Kingdom joins the 122 countries that have instituted a mechanism to protect the deposits of bank customers from loss in the event of a bank’s insolvency.
“Cambodia is the only country in ASEAN with the exception of Myanmar that has not implemented deposit insurance,” he said in a phone interview yesterday. “Myanmar’s banking sector is 10 years behind Cambodia’s, so it is not a country we should compare it to.”
Higgins has proposed instituting a national deposit insurance scheme based on international models that imposes a nominal tax on banks and microfinance institutions (MFIs) to build an insurance fund that covers their customers’ deposits in part or in full.
Jim Antos, a banking analyst at Mizuho Securities Asia Ltd, said deposit insurance is “one of the least controversial banking sector reforms” a country can implement and bolsters public confidence in the financial system.
“The idea is that the banking system is stable enough that you aren’t having bank failures every week, but if you do have a failure, there is enough in the insurance scheme to bail out the average depositor,” he explains.
A staple of the US banking system since the 1930s, deposit insurance schemes have a proven track record of insulating bank customers from bank collapses and broader financial crises.
“If you look back to the 1997 Asian financial crisis you will see that normal folks did not lose everything, and in that case we had systemic bank failures in a number of Asian markets,” said Antos.
The National Bank of Cambodia (NBC), the Kingdom’s central bank, requires banks to permanently deposit 10 per cent of their registered capital with the NBC. But the capital guarantee was only a stop-gap measure until a proper deposit insurance scheme could be put in place.
The proposal, put forward at an NBC-organised banking conference this week, a deposit insurance fund would be administered by a legally separate entity within the central bank and limited to a paybox function that is only stepping in to pay out depositors in the event of a bank’s collapse.
Participation in the scheme would be mandatory for all licensed commercial banks and MFIs in Cambodia, but the insurance would only cover riel deposits – furthering the central bank’s campaign to promote the use of the local currency.
“A key feature of the design is that it would only cover Khmer riel deposits,” said Higgins. “This would promote the riel as a store of value, encouraging people to put their savings in riels instead of dollars.”
Reinforcing his proposal that the banks’ premium would be assessed only on US dollar deposits – which account for the majority of deposits in the Kingdom’s banking system.
This could make US dollar deposits marginally less attractive to customers, as banks would likely lower their interest rates to compensate for the fee.
“A levy of 0.1 per cent on US dollar deposits would raise about $30 million per annum and the fund would be around $110 million 120 million by 2020, representing about 5 per cent of Khmer riel deposits,” Higgins said.
He recommended setting the insurance’s maximum coverage on riel deposits at 50 million riel (about $12,500) per customer, per institution. This would be broadly in line with similar schemes in the Philippines, but well below those of Thailand or Vietnam.
In Channy, president and group managing director of Acleda Bank, welcomed the proposed deposit insurance system, which he said would encourage more people to put their savings in local banks and MFIs.
“It can increase the level of trust in the banking system,” he said. “If you look at the level of savings per GDP in Cambodia it is still low, around 59 per cent for 2014, while in other countries it is around 100 per cent. If they put a deposit insurance system in place it could raise the level of the public’s trust, and also protect consumers.”
Channy argues, however, that the scheme should protect deposits in both riel and dollar accounts.
“When we look at deposits in the local currency they are still quite low, less than 10 per cent of the total,” he said. “The government wants to encourage the use of riel . . . but to me, you should look at the needs of the market. You can [insure] both riels and dollars, as the idea is to protect the customer.”
Central bank officials declined to comment on the proposed deposit insurance scheme, but NBC director-general Chea Serey said the bank would review and consider it.