ADB has been the leading development partner of the finance sector in Cambodia since 1999. A comprehensive approach was required to rebuild the financial system in a devastated economy that had no finance sector. Responding to the government's needs, the approach has been broadly based so far. After successfully rebuilding the basic foundation of the banking industry under the first and second programs, the third program has begun to support the sector's expansion to cover the important subsectors of nonbanking services and capital markets, and to boost investors' and beneficiaries' confidence in the system with a stronger legal and regulatory framework, necessary infrastructure, and better quality of services, including consumer protection.
The third program has focused on creating an enabling environment for all sector stakeholders, including the various regulators. The scope has shifted from the establishment of regulatory frameworks to their effective implementation and oversight, and more transparency. Proper financial infrastructure is required to meet rising market needs for more efficient and diverse financial services, as is further development of the legal foundations to ensure smooth transactions in the sector. These reforms require coordination within the government and careful sequencing, including dialogue with the private sector. The third program has been facilitating closer coordination.
After completion of the third program, ADB will continue the policy dialogue with the government under the Post-Program Partnership Framework. Also, ADB's technical assistance (TA) for implementing subprogram 2 of the Third Financial Sector Program has been extended to June 2015 to deal with the remaining issues.6 However, for the next round of support, ADB should concentrate on its areas of comparative advantage, in consultation with other development partners and the government. A first dialogue with the government to this end has started in the process of formulating the CPS, sector assessment, and strategy and road map.
The impact will be a sound, market-oriented finance sector that supports the mobilization of financial resources. The outcome will be a growing, resilient, and efficient financial system.
|Project Rationale and Linkage to Country/Regional Strategy
Cambodia's finance sector is highly dollarized and fragmented. Under the dollarized economy, the central bank has only limited measures to implement its monetary policies and manage inflation. It also has limited ability to provide liquidity as lender of last resort. The finance sector has been growing significantly, although from a small base. The banking industry still dominates the finance sector, accounting for more than 90% of assets in the sector. Moreover, banking itself is both concentrated and fragmented between urban and rural areas. The nonbanking segment and capital markets are at an early stage of development and do not yet have significant macroeconomic impact. Cambodia is now leaving the post-conflict era and faces the dual challenge of ensuring further development of the finance sector to support sustainable economic growth while striving for monetary policy independence.
Past and ongoing efforts to build a more broad-based and resilient finance sector in Cambodia have yielded several lessons. First, as the scope of the sector expands, the need for consultation, coordination, and consensus building between government ministries and agencies, and with the private sector, increases. This will require time and strong leadership in planning and executing policy measures. Second, finance sector development should be based on a sequence of well-planned steps, where each step is supported by solid technical inputs. TA resources are essential in this regard and, given the limited availability of ADB funds, strong donor coordination is essential. The third program experienced some positive outcomes of close donor consultation, whereby completion of policy actions was made possible through timely technical inputs of other development partners. Also, some initiatives developed by ADB have now been implemented by other donor agencies. Third, a long-term engagement establishes understanding and trust, which is vital for any reform program to succeed but indispensable for the finance sector, where policy actions such as those relating to interest rates or foreign exchange may involve significant externalities. Implementation of the third program benefited from the strong relationship that ADB had built with government counterparts in over a decade of engagement in the sector, and the steps taken and progress made under subprogram 3 should be viewed as the building blocks that will need to be assessed in a long-term perspective including the Post-Program Partnership Framework.