Cambodia's banking sector enjoyed another strong performance last year as the Kingdom’s economy continued to expand, with banking credit moderating, deposits increasing and financial institutions remaining healthy as they further integrate into the global economy, the central bank said in its annual report yesterday.

Banking sector assets grew by 17.8 percent to $27.8 billion in 2016, the National Bank of Cambodia (NBC) said in its report. Private sector financial institutions had an outstanding loan portfolio of $17.6 billion, an 18.3 percent credit growth increase compared to 2015, while deposits grew by 20.7 percent to reach $15.1 billion.

Citing the strength of financial institutions, the report added that commercial and specialised banks retained high liquidity and high solvency ratios at 128 percent and 22.4 percent, respectively. For microfinance institutions liquidity and solvency ratios stood at 152 percent and 21 percent.

Meanwhile, despite continued credit growth, nonperforming loan ratios remained relatively low for both banks and MFIs last year, at 3.5 percent and 1 percent, respectively.

While international agencies have voiced concern over the rapid pace of credit growth in recent years, Hiroshi Suzuki, chief economist of the Business Research Institute for Cambodia, noted that it was hard to put a threshold for credit risk in fast-developing economies.

“There is not a clear threshold for the risk of high increase of credit,” he said. “For many developing countries including Cambodia, [you] see this kind of rapid growth of lending from commercial banks, because the demand for investment could soar at some stages of development.”

Nevertheless, he said that the rise in deposits was a good sign that can help support the demand for credit, and was supported by sound policy measures.

“At the same time, the prudential measures to keep the soundness of banks are necessary to be prepared to any shocks,” he said, applauding the more pro-active strategy the NBC has taken in recent years such as raising minimum capital requirements and setting a liquidity ratio.

The central bank said in its report that it has focused on developing financial infrastructure, including the FAST payment system that allows for instant riel-denominated fund transfers between financial institutions and their clients, as well as the development of a central shared switch mechanism that promotes interbank lending.

As of June of this year, the NBC was still testing the mechanism with a limited number of financial institutions, hoping for industry-wide adoption sometime later this year, giving customers access to all ATM and point-of-sale terminals regardless of which bank they hold an account.

“This new technology should enhance the effectiveness of payments, reduce money circulation in the economy and promote the integration of payment service with other Asean countries,” the report said.

On the external front, the central bank noted that it had improved Cambodia’s standing by increasing the balance of payments, growing from a surplus equivalent of 3.7 percent of GDP in 2015 to 5.7 percent last year “thanks to the increase in capital inflows and an improvement of the current account”, the report said.

“In turn, the current account deficit narrowed to 7.2 percent of GDP, compared to 9.2 percent in 2015, on the back of strong growth in exports and remittances by Cambodian from overseas,” the report said.

With an increase of foreign direct investment and bilateral and multilateral loans, Cambodia held $6.4 billion in international reserves capable at the end of 2016, enough to cover more than five months’ worth of imports, it added.

Suzuki said this should be sufficient to mitigate the majority of external risks.

“It is said that foreign reserves [able to cover] more than three months of import is enough to stabilise the macro economy,” he said. “Cambodia’s figure of more than five months is categorised as ‘very good’. Based on this ‘rich’ reserve, the NBC could have enough room to mitigate many kinds of external shocks.”

The NBC projected that for this year, the banking sector would remain strong with credit growth further moderating and the financial sector continuing to promote the economic development of the Kingdom by maintaining strong financial stability.