Inflows of foreign capital into the Kingdom’s banking sector nearly doubled during the first half of the year as two heavyweight players entered the local market and lending institutions responded to revised minimum capital requirements, a central bank official said yesterday.

Chea Serey, director general of the National Bank of Cambodia (NBC), said that foreign direct investment (FDI) into the banking sector amounted to $439 million during the first six months of the year, an 89 percent increase compared to the same period one year earlier.

“The establishment of the two new banks during this first semester contributed to this jump,” she said, referring to the launch of local operations by France’s BRED Bank and Japan’s Mizuho Bank.

In addition, she said, international banks and investors injected more capital into Cambodia-based lending institutions to bring them in line with the central bank’s revised minimum capital requirements.

“Banks are mandated to increase their capital by at least half of the additional required capital by March 2017 and to meet the requirement in full by March 2018,” Serey explained. “The new regulation was a prudential measure aimed at ensuring that banks operate safely while maintaining financial stability.”

NBC announced the revised capital thresholds in March 2016, doubling the minimum capital requirement for commercial banks, while increasing it more than tenfold for microfinance deposit-taking institutions (MDIs) and 24 times for microfinance institutions (MFIs). The new scheme sets the minimum capital for commercial banks at $75 million, at $30 million for MDIs, and at $1.5 million for MFIs.

According to NBC data, there were 37 commercial banks, 15 specialised banks, seven MDIs and 63 MFIs in Cambodia as of the end of 2016.

BRED Banque Populaire – part of the second-largest banking group in France – officially launched operations in Cambodia in March this year, while Mizuho Bank, one of Japan’s largest financial institutions, joined the local market in April.

Chou Ngeth, senior consultant at Emerging Markets Consulting, said the inflow of capital from the two newcomers showed international confidence in the Kingdom’s financial market. Both BRED and Mizuho have invested in Cambodia as part of a long-term regional expansion strategy, he noted.

Ngeth said the NBC’s revised minimum capital requirements had increased the inflow of foreign capital into the banking sector, but would also likely lead to more consolidation in the sector – generally seen as a positive trend that would make the sector more commercially viable and increase financial inclusion.

“Many small MFIs and banks are struggling to prepare themselves to meet the minimum capital requirements and some of them are prepared to exit from the market through acquisitions from new investors or large existing players,” he said.

He added that consolidation activity would likely pick up as the 2018 deadline to meet the minimum capital requirement approaches, adding that he expects foreign capital inflows to further increase in the second half

of the year.

Bun Mony, adviser to the Cambodia Microfinance Association, said the NBC’s decision to increase the minimum capital requirements of banks and MFIs was a sound one and better reflected current market conditions. He added that the NBC’s recent decision to cap MFI interest rates at 18 percent annually had made it increasingly difficult for small-scale lenders to break even.

“For financial operators, if we have little capital to do business in the microfinance sector we will not able to make profits in the current situation,” Mony said. “I think if operators have just $2 million or $3 million

capital they cannot make enough profit [to sustain their] business.”

Mony, who is also the chairman of Vithey Microfinance Plc, said he was aware of several MFIs struggling to meet the higher capital requirements and expected this would lead to more consolidation in the sector as the deadline approaches.

“If there is no postponement of the deadline there will be some institutions that sell shares to other bigger institutions,” he said.

This would not be a bad thing, he insisted, adding that it would “help the sector to growth sustainably toward better quality and service”.