Independent Evaluation

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Evaluation of the First Financial Sector Program Loan Cluster in Cambodia
Completed: 2009

Background

This report evaluates the performance of the First Financial Sector Program Loan Cluster (FSPL I) in Cambodia and its related technical assistance (TA) by assessing their relevance, effectiveness, and efficiency in achieving outputs and objectives; the sustainability of outcomes; institutional development and socioeconomic impact of the sector program; and the performance of ADB and the executing agency. This report also identifies key issues and lessons for future ADB operations.

FSPL I adopted a program cluster approach with three successive program loans. The expected outcomes were (i) enhanced bank intermediation and soundness; (ii) a legal and regulatory framework for insurance; (iii) a firm foundation for the development of interbank and money markets; and (iv) developed financial infrastructure including accounting and auditing practices, a credit information sharing system, and a financial intelligence institution to track down fraudulent financial transactions.

Summary of Findings

The outputs and outcomes envisaged under FSPL I have been achieved at an uneven pace. Reforms adopted successfully include:

• banks growing in number and outreach, with several commercial banks serving the provinces and introducing new products and services
• introduction of new payment instruments, such as debit and credit cards
• improved supervision of the National Bank of Cambodia (NBC), enhancing the soundness of the banking system and public confidence in the system
• progress made under FSPL I in drafting and passing laws in financial and commercial transactions. However, a considerable amount of capacity strengthening is needed to facilitate enforcement and compliance, and to make reforms more effective. Briefly, the shortcomings are:
  • banking sector supervision is overextended, covering a large number of financial institutions and regulations
  • three compulsory insurance products have yet to be made fully operational
  • laws for commercial and financial activities have been adopted but without the proper court system
  • accounting and auditing reforms are in line with international practices, but the lack of qualified accountants and auditors hampers their effective enforcement
  • despite growing demand, the interbank and money markets have yet to be established

  Assessment

Overall, the program performance evaluation report rates FSPL I "successful" (as against the "highly successful" rating in the PCR).

Relevance. FSPL I conformed to the Government's long-term Financial Sector Blueprint, which ADB helped to develop. However, the program design did not provide for the building of sufficient capability, e.g., additional TA, to enforce the reforms effectively. Therefore, the relevance decreased to some extent as government efforts fell short in putting that capability in place. Government is taking follow-up actions to improve enforcement. FSPL I is therefore rated "relevant."

Effectiveness. Reform measures envisaged under FSPL I have been adopted, but enforcement and compliance mechanisms need to be considerably strengthened. Considering ongoing efforts (e.g., FSPL II) to strengthen the effectiveness of reforms over the medium to long term, FSPL I is rated "effective."

Efficiency. Despite some delays in introducing reform programs, which impacted on the implementation of subsequent subprograms, almost all of the reforms have been introduced. The achievement of outcomes and outputs is rated "efficient," but with room for improvement in the delayed areas of reforms.

Sustainability. This is rated "likely" given the expectation that the enforcement of reforms that are lagging behind will be addressed by the authorities under FSPL II. Government must pay close attention to the enforcement of reform measures to achieve the intended sustainability.

ADB and Borrower Performance. ADB's performance was satisfactory. At the onset, ADB took the lead in financial sector development, maintaining policy dialogue with the Government and supporting its diagnostic assessment of the sector. Better enforcement and compliance with reforms could have been achieved had the loan cluster design included an advisory technical assistance for institutional strengthening. Meanwhile, NBC's performance as borrower was also satisfactory. It took ownership of FSPL I and gave it leadership, commitment, and coordination, as required for successful reforms. However, a more timely disbursement of counterpart funds would have facilitated the establishment of enforcement and compliance mechanisms, intensive staff training, and new financial market infrastructure.

  Lessons Identifed

The evaluation identified two lessons:

• Enforcement and compliance are as important to the overall success of a reform program as the adoption of reforms. FSPL I appeared to have given more emphasis on the latter, reducing the effectiveness of the FSPL I reform program.
• Weak absorptive capacity, in terms of its institutions and staff competence, should be adequately taken into consideration when designing a reform program, particularly one that is multisector and wide-ranging, involving new initiatives and concepts and requiring new laws.

  Issues

The implementation of FSPL I brought out the following:

• Banking Sector Development. NBC supervision needs to be further strengthened to enable it to exercise more rigorous oversight and control.
• Insurance Sector Development. Workable enforcement and compliance mechanism need to be set up by the insurance division to make compulsory insurance more effective.
• Commercial Sector. The Ministry of Justice needs to set up courts for commercial cases with appropriately trained judges.
• Accounting, Auditing, and Financial Reporting Standards. Increasing the supply of trained accountants and auditors is urgently needed to meet the requirements of the Accounting Law and adopt the recommendations of the World Bank in its Report on the Observance of Standards and Codes.
• Supporting Institutions. NBC needs to set up a proper credit information system, and interbank and money markets to facilitate business transactions and reduce related costs.
• Adjustment Costs. The Ministry of Economy and Finance needs to accelerate the use of counterpart funds and government-committed funds to meet the structural adjustment costs of the various agencies involved.
• Low Savings Rate. Innovative savings schemes, particularly in the rural sector, backed by deposit mobilization, would help to increase the savings rate.
• High Interest Rate Margins and Interest Rates. The added transactions costs to investments and private sector activity would be abated with the effective enforcement of the reform measures.

  Follow-up Actions

The evaluation report recommends the following:

• Assist NBC in strengthening its capacity to accelerate financial sector development.
• Help the Government to implement and enforce the reform measures that were adopted under FSPL I but are still ineffective.
• Dialogue with the Ministry of Economy and Finance to ensure adequate and timely availability of budget to expedite the establishment of reform enforcement measures.

Team Leader: Cheolghee Kim, cmkim@adb.org
Contact: evaluation@adb.org