NBC acts on interbank loans

[PHNOM PENH POST]

A financial instrument that will help to formalise interbank lending in Cambodia is set to launch “very soon”, the central bank has said.

Interbank markets, where institutions borrow and lend to each other largely to either maintain required reserves or profit from an excess of them, are common in most developed economies.

But Cambodia has no official market in place.

Nguon Sokha, director general and spokeswoman at the National Bank of Cambodia, told The Post that a tradable security is in the works that banks could use as collateral when lending to each other.

The NBC will issue the securities with a fixed interest rate to subscribers, namely commercial banks, who should first open securities accounts with the central bank.

The NBC will then act as custodian and handle registration and ownership transfer at the holder’s request.

She was unwilling to go into more detail as that instrument was still being developed, but the NBC expects it to launch in the next few months.

“It will help banks even more in terms of liquidity management,” she said.

Some framework is already in place to facilitate interbank lending, after a regulation on repo master agreements issued in October 2009.

These agreements involve one party selling securities to another with the understanding that the seller will later buy back the securities at a higher price.

In effect, the seller is borrowing money from the buyer with interest. With that in place, the NBC is taking next steps to make the interbank market a reality.

“NBC is now working on operational issues for effective implementation,” Nguon Sokha said, “especially [information technology] support, bookkeeping and registry. This will take a few months.”

Reaction from banks that operate in Cambodia has been extremely positive.

“It is the single most important step in getting an interbank lending market started,” said Stephen Higgins, chief executive officer of ANZ Royal Bank, of creating negotiable securities.

“If that’s in place, I’ll give cash to almost any bank in the market because my security then is central bank paper.”

ACLEDA Bank CEO and President In Channy agreed.

“It’s a good move if the NBC can have that,” he said.

An interbank market would give the NBC a lot more control over the country’s monetary policy, said ANZ’s Higgins.

Banks would publish on a daily basis the rates at which they’re willing to borrow and lend, he said, and the central bank could observe and work to change those rates to the betterment of the economy as a whole.

“And generally make the market more sophisticated,” he said.

The absence of a formal system has not been the only thing preventing Cambodian banks from lending to one another.

A Lack of trust among them has also played a key part, ACLEDA’s In Channy said.

Lending banks couldn’t assume that they would be repaid.

But with the central bank backing up these loans, that should no longer be a problem.

“It’s much more than trust because the [security] is a guarantee,” he said.