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Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 42305 April 2013

Proposed Policy-Based Loan for Subprogram 2 Kingdom of Cambodia: Third Financial Sector Program

CURRENCY EQUIVALENTS (as of 1 April 2013)

Currency unit – riel/s (KR) KR1.00 = $0.00025

$1.00 = KR3,995

ABBREVIATIONS

ADB – Asian Development Bank AML/CFT – anti-money-laundering and combating the financing of terrorism

COM – Council of Ministers FATF – Financial Action Task Force FSAP – Financial Sector Assessment Program FSDS – Financial Sector Development Strategy GDP – gross domestic product IMF – International Monetary Fund LBFI – Law on Banking and Financial Institutions MEF – Ministry of Economy and Finance MFI – microfinance institution MOC – Ministry of Commerce MOU – memorandum of understanding NBC – National Bank of Cambodia NSDP – National Strategy and Development Plan PEFA – public expenditure financial accountability SECC – Securities and Exchange Commission of Cambodia TA – technical assistance TWG – technical working group

NOTES

(i) The fiscal year (FY) of the Government of Cambodia and its agencies ends on 31 December.

(ii) In this report, "$" refers to US dollars.

Vice-President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director S. Hattori, Public Management, Financial Sector and Trade Division, SERD Team leader H. Aoki, Senior Financial Sector Specialist, SERD Team members P. Doung, Senior Economics Officer, Cambodia Resident Mission, SERD K. Hattel, Financial Sector Specialist (Rural and Microfinance), SERD

P. Rhee, Counsel, Office of the General Counsel K. M. Sanchez, Operations Assistant, SERD

S. Tukuafu, Principal Economist, SERD Peer reviewers A. Chatterjee, Senior Financial Sector Specialist (Contractual Savings),

Office of Regional Integration (OREI) Q. Zhang, Principal Financial Sector Specialist, OREI

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROJECT AT A GLANCE

I. THE PROPOSAL 1

II. THE PROGRAM 1

A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Development Financing Needs 8 E. Implementation Arrangements 8

III. DUE DILIGENCE 8

A. Economic and Financial 8 B. Governance 9 C. Poverty and Social 9 D. Safeguards 10 E. Risks and Mitigating Measures 10

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 14

3. Development Policy Letter 15

4. Policy Matrix 20

PROJECT AT A GLANCE

1. Project Name: Policy-Based Loan for Subprogram 2 of the Third Financial Sector Program

2. Project Number: 42305-023

3. Country: Cambodia 4. Department/Division: Southeast Asia Department/Public Management, Financial Sector, & Trade Division

5. Sector Classification: Sectors Primary Subsectors

Finance √ Finance sector development

6. Thematic Classification:

Themes Primary Subthemes

Economic growth Promoting economic efficiency and enabling business environment

Governance √ Economic and financial governance

6a. Climate Change Impact No Climate Change Indicator available.

6b. Gender Mainstreaming

Gender equity theme (GEN) Effective gender mainstreaming (EGM)

Some gender elements (SGE) √ No gender elements (NGE)

7. Targeting Classification:

General Intervention

Targeted Intervention Geographic

dimensions of inclusive growth

Millennium development

goals

Income poverty at household

level √

8. Location Impact: National High

9. Project Risk Categorization: Low

10. Safeguards Categorization: Environment C Involuntary resettlement C Indigenous peoples C

11. ADB Financing:

Sovereign/

Nonsovereign Modality Source Amount ($ Million)

Sovereign Program loan Asian Development Fund 15.0

Total 15.0

12. Cofinancing: No Cofinancing available.

13. Counterpart Financing: No Counterpart Financing available.

14. Aid Effectiveness: Parallel project implementation unit No Program-based approach Yes

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed policy-based loan to the Kingdom of Cambodia for subprogram 2 of the Third Financial Sector Program. 1

2. The development framework for Cambodia’s finance sector is based on the government's 10-year rolling Financial Sector Development Strategy (FSDS). The 10-year strategy was recently updated as the FSDS, 2011–2020. 2 It has incorporated the recommendations of the Financial Sector Assessment Program (FSAP), 2010 of the International Monetary Fund (IMF) and the World Bank. The Asian Development Bank (ADB) meets regularly with all development partners in the finance sector to discuss current issues and coordinate activities. Development partner coordination was further strengthened during the update of the FSDS. As per the Government of Cambodia’s request, the proposed policy-based loan for subprogram 2 is part of three subprograms to implement the first phase of the FSDS, 2011–2020. These reforms have been discussed with all relevant government agencies, industry associations, and development partners.

II. THE PROGRAM

A. Rationale

3. The export-led garment and footwear industries are still the main engines of economic growth in Cambodia, despite the government's efforts to diversify the economic base, including the services, agriculture, and manufacturing sectors. The recent uncertainty around the economic outlook for the European Union and the United States—Cambodia’s major export markets—has softened the demand for these items. Expected gross domestic product (GDP) growth has fallen to 6.5% in 2012 and 6.7% in 2013. The impact of slower growth in garment and footwear exports should be largely offset by higher than expected growth in the services sector, supported by a strong increase in value of approved construction projects. Approved investment in construction activities went up by almost 85% in the first 7 months of 2012 to $1.38 billion, from $747 million during the same period of 2011. Together with foreign direct investment in property development, a 27% increase in bank credit to construction activities to $349.3 million by the end of June 2012 also helped compensate for reduced exports. Overall growth in bank credit was about 31% in June 2012. The presence of a robust finance sector which supports efficient resource mobilization for a broad-based economy is essential for sustainable development.

4. The FSDS, 2011–2020 is aligned with Cambodia’s updated National Strategy and Development Plan (NSDP), 2009–2013, and Rectangular Strategy on Growth, Employment, Equity, and Efficiency, as well as with ADB’s country partnership strategy for Cambodia, 2011–2013. 3 The government launched the NSDP, 2009–2013 update in mid-2010, with the overarching objective of reducing poverty to 19.5% by 2015. The policy priorities of the NSDP update intersect closely with ADB’s Strategy 2020, especially in the core areas of infrastructure,

1 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic

Approach, Policy-Based Loan, and Technical Assistance Grant to the Kingdom of Cambodia for the Third Financial Sector Program Cluster (Subprogram 1). Manila (Loan 2815-CAM and TA 7934-CAM).

2 ADB provided project preparatory technical assistance (TA). ADB. 2010. Technical Assistance to the Kingdom of

Cambodia for Preparing the Third Financial Sector Program Cluster. Manila (TA 7520-CAM). 3 ADB. 2011. Country Partnership Strategy: Cambodia, 2011–2013. Manila.

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education, and finance.4 The government seeks a new development paradigm to respond to changes in the global economy, strengthen resilience to external shocks, and achieve higher-quality growth.

5. ADB’s country partnership strategy for Cambodia, 2011–2013 has identified the finance sector as one of the five priority sectors (footnote 3). The finance sector assessment in the strategy also identified the lack of public confidence in the overall financial system as a bottleneck to further finance sector development in Cambodia. The following have been identified as challenges: (i) potential systemic risk (weak financial structure meaning highly dollarized economy, concentration of activities in few banks, and asset exposure for vulnerable sector including real estate), (ii) high information costs (with limited transparency and availability in terms of financial statements and credit information), (iii) moderate to high operating costs (rural and informal nature of the economy), and (iv) weak human and technical capacity (scarcity of qualified staff for regulator and industry). As a result, access to finance to support the country’s growing economy has remained well below potential. Although the data in the sector assessment has been updated, the assessment remains relevant.

6. In designing the program, the following past lessons have been incorporated: (i) a set of long-term objectives is required to guide and shape medium-term policy design and implementation; (ii) flexibility in design is important to accommodate changes in economic, social, and political circumstances; (iii) the time lag between adoption of reforms and their effective enforcement needs to be shortened; (iv) substantial technical assistance (TA) resources are required to build technical capacity. In addition, through the updating process of the FSDS, 2011–2020, the importance of early establishment of the government coordinating body covering consultation and translation was recognized as a lesson for future updates. This is important in maintaining the major concepts between the English version and Khmer (local language) version of the FSDS, 2011-2020.

7. ADB has supported government reform efforts in the finance sector with the approval of the first financial sector program for Cambodia.5 ADB’s contributions are duly recognized in the following areas: (i) modernizing the national payment, clearance, and settlement system; (ii) improving access to domestic deposits and credit for microfinance institutions (MFIs); (iii) strengthening bank and MFI regulations and supervision; (iv) introducing higher standards of accounting, auditing, and financial reporting for financial institutions; (v) setting up a registry that records the assets that banks take as security for loans; (vi) drafting and passing the securities law; (vii) setting up a financial intelligence unit in the National Bank of Cambodia (NBC) to counter money laundering and prevent the financing of terrorism; (viii) setting up the Securities Exchange Commission of Cambodia (SECC) and the stock exchange; and (ix) launching a credit information bureau covering the banking industry and MFIs.

8. Based on successful implementation of the programs with effective and flexible ways of converting complex policy objectives into implementable policy actions, the government requested continuing ADB support to the finance sector, which led to the design and approval of the third program. Subprogram 1 for $15 million was approved in November 2011 and fully disbursed in March 2012. Implementation of subprogram 2, estimated at $15 million, commenced in December 2011. Subprogram 2 was successfully completed and significant

4 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila. 5

ADB. 2001. Report and Recommendation of the President to the Board of Directors: Proposed Program Loan to the Kingdom of Cambodia for the Financial Sector Program Cluster. Manila (Loan 1859-CAM).

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government commitment has been demonstrated with the development policy letter for subprogram 2.

B. Impact and Outcome

9. The impact will be a sound, market-oriented financial sector to enhance the mobilization of financial resources. The outcome will be a growing, resilient, and efficient financial system.

The design and monitoring framework is in Appendix 1.

C. Outputs

10. The program comprises a series of three single-tranche subprograms to be implemented from December 2010 to December 2013. Subprogram 2 originally had 22 policy triggers and 10 milestones. With changing domestic circumstances and development priorities, the government requested minor modifications to three policy triggers and three milestones. An alternative approach has been proposed for two policy triggers and deferral of two policy triggers to subprogram 3 (Appendix 4). The impact of proposed changes is within the medium-term program framework and will not have any adverse implications for the program outcome and outputs. The program has four outputs: (i) improved legal, regulatory, and institutional framework, (ii) improved financial infrastructure, (iii) strengthened finance sector governance, and (iv) enhanced finance sector efficiency. Key activities for each output are described in paras.11–24.

1. Improved Legal, Regulatory, and Institutional Framework

11. Update and enhance the legal foundation for banks and microfinance institutions. Under the Second Financial Sector Program,6 the NBC strengthened prudential supervision, updated regulations, and ensured the stability of the banking system. A comprehensive review on the Law on Banking and Financial Institutions, 1999 (LBFI) conducted with ADB TA support under the second program addressed the issues relating to consumer protection, bank secrecy provisions to support the development of a credit information-sharing system, administrative procedures for insolvent or distressed banks, and protection or immunity of bank regulators. In 2010, the FSAP proposed specific areas to be amended in the Law on the Organization and Conduct of the NBC and the LBFI. Although a draft revised LBFI reflecting the issues identified was submitted to the Council of Ministers (COM), the NBC decided to incorporate the inputs from the FSAP. With NBC oversight, legal experts fielded under support from First Initiatives (a trust fund administered by the World Bank) will undertake the consultation process with other concerned government agencies where additional changes may be identified, and the NBC plans to submit the revised laws to the COM during subprogram 3. Under subprogram 2, support for initial assessment of the two laws was provided because of the delay in fielding legal experts from the World Bank. 12. Strengthen bank supervision capacity and adopt measures to sustain financial stability. The memorandum of understanding (MOU) between the NBC, the Ministry of Economy and Finance (MEF), and the SECC is part of the 2010 FSAP recommendations and it was considered crucial because of Cambodia’s highly dollarized economy. Under subprogram 2, dialogue on the MOU which establishes procedures for practical information exchange,

6

ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Program Loan and Technical Assistance Grant to the Kingdom of Cambodia for the Second Financial Sector Program Cluster (Subprogram 1). Manila (Loan 2378-CAM and TA 4999-CAM).

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coordination and accountability among domestic supervisors for financial crisis was initiated. Because of slow progress, the IMF Article IV mission in September 2012 proposed a two-phase approach, starting with work on the MOU for information sharing. In due course, a second MOU will be signed, which sets out a time-bound process for instituting a comprehensive crisis management framework. The NBC has (i) issued instructions to banks that are performing additional non-bank-related activities to provide consolidated financial statements, (ii) signed bilateral agreements covering supervision cooperation with countries that have banks with subsidiaries licensed in Cambodia, and (iii) issued regulations to cover some of the Basel I core principles. The NBC also produced audiovisual materials to promote wider use of the riel and will continue this effort under subprogram 3, as well as the work on updating the corporate profile of each licensed bank.

13. Strengthen prudential supervision and regulations of microfinance institutions. The NBC has achieved significant progress in terms of a regulatory framework for licensing and supervising MFIs. The Economist Intelligence Unit report on microfinance in 20107 ranked Cambodia first in the category of regulatory framework together with Pakistan and the Philippines. Based on the fully implemented microfinance information system for improving the quality of off-site supervision under subprogram 1, the NBC also reorganized the supervision directorate into four departments in 2011, which helped improve its interactions with banks and MFIs. The NBC worked on improvement of the onsite supervision methodology under subprogram 2, including reporting arrangements based on the new organization and new approaches that contribute to improved supervision. Capacity development continued and NBC management provided 10 additional staff positions (against the current total of 80 staff members) before the end of 2012 for supervision of financial institutions. Under subprogram 3, the NBC will conduct an assessment of compliance with the Microfinance Activities and the Core Principles for Effective Banking Supervision.8

14. Enhance legal foundation to support financial and commercial transactions. A strong legal foundation to support Cambodia’s financial and commercial activities is essential for sound economic development. A review of potential conflicts between the Civil Code supported by Ministry of Justice and other commercial related laws by other government agencies was conducted under subprogram 1. Subprogram 2 supported upgrade of the financial legal infrastructure, including the proposed law for a commercial court, adoption of a consumer protection policy, drafting of a consumer protection law, and drafting of a comprehensive financial trust law. The council of jurists at the COM decided that, rather than establish one centralized commercial court, each existing civil court will have its own chamber-specific jurisdiction of commerce. The MEF’s priority is to (i) introduce the legal framework covering public trust, first by inserting provisions covering public trust arrangements in the 2013 Budget Law; and (ii) draft a subdecree for its implementation. The consultation process to develop a comprehensive financial trust law will continue with TA support from ADB under subprogram 3. The consultation process and the review of draft laws with the COM took much longer than anticipated and therefore caused the delay. Under subprogram 3, both a draft consumer protection law and a draft financial trust law will be submitted to the COM, as well as the new Law on Insurance to the National Assembly, which is proposed to be deferred from subprogram 2 because of the provisions on compulsory motor vehicle cover.

7

Economist Intelligence Unit. 2010. Global microscope on the microfinance business environment. 2010. London. 8

Bank for International Settlements. 2010. Microfinance Activities and the Core Principles for Effective Banking Supervision. Basel.

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2. Improved Financial Infrastructure

15. Modernize the national payments, clearance, and settlement system. The process for modernizing the national payments, clearance, and settlement system started in 2006 when the NBC established the payments policy unit. With TA support from ADB,9 the NBC developed a plan to modernize the system. Under subprogram 2, the NBC has been working on upgrading the interim solution, developed by the NBC Information Technology Division in 2009, to a centralized full-solution software system for clearance and settlement of payment instruments. The hardware has been procured and installed, and software development completed the final stage of full system tests before the market rehearsal with participating banks. The full-solution phase was commissioned in December 2012. Part of the restructuring of the NBC in 2011 was the upgrade of the payments policy unit to the Payments System Division, and the Information Technology Division to a department. The procurement arrangement for the shared switch will commence after the full solution is in operation, although the funding has been committed by the MEF. The consultation process to review the draft e-commerce law is ongoing and will be submitted to the COM under subprogram 3.

16. Enhance consumer access to credit, consumer protection, and market confidence. Under the initiative of the Small and Medium Enterprise Development Program,10 a pilot online credit information system offering negative data was developed in 2006 with cooperation between the NBC and the Association of Banks in Cambodia. The initiative was taken over by the Second Financial Sector Program and the plan to upgrade the system to include credit data covering both banks and MFIs has been implemented. Under subprogram 1, a privately owned credit information bureau—the Credit Bureau Cambodia—was established in 2011 as a joint venture involving the Association of Banks in Cambodia, Cambodia microfinance association, and an international service provider. Under subprogram 2, the Credit Bureau Cambodia commenced operation in March 2012. Both the banking industry and MFIs have given positive feedback on the benefits of online credit data of loan applicants. Under subprogram 3, the NBC will work on improving the operation of Credit Bureau Cambodia in terms of governance, including confidentiality of data and fee structures to support financial sustainability.

17. Develop interbank market and government securities markets. Under subprogram 1, the NBC introduced the negotiable certificate of deposit that can be used as collateral for an interbank market. Under subprogram 2, in cooperation with the NBC the MEF has completed the study on (i) developing capacity; (ii) considering the timing for issuance of Treasury bills in riel based on a predetermined borrowing program; and (iii) establishing a system for accrediting primary market dealers of government securities. Under subprogram 3, the MEF and NBC will develop market procedures on the Treasury bills.

18. Develop domestic securities market. The development of capital markets for equity securities will improve domestic resource mobilization and help domestic firms to directly access funds for business development. The legal framework for capital markets was developed under the Second Financial Sector Program and, under subprogram 1, the SECC issued the implementing regulations and officially launched the Cambodia Securities Exchange. Under

9 ADB. 2006. Technical Assistance to the Kingdom of Cambodia for Preparing the Financial Sector Development

Program. Manila (TA 4835-CAM). 10

ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to the Kingdom of Cambodia for the Small and Medium Enterprise Development Program.

Manila. (Loan 2129-CAM).

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subprogram 2, the SECC (i) prepared a subdecree on bankruptcy relating to market participants, (ii) formulated a capacity building program for its staff, and (iii) consulted with the NBC and MEF to undertake a self-assessment on the SECC’s compliance with the core principles of the International Organization of Securities Commissions. In April 2012, a major milestone in Cambodia’s capital market development was reached when trading at the Cambodia Securities Exchange started; the first issue involved the state-owned Phnom Penh Water Supply Authority; 15% of the total shares were offered to the market and it was fully subscribed. The SECC is taking measures raising financial literacy on capital markets to broaden the investor base and promote investor protection. In addition, the SECC initiated a study for development of a corporate bond market, with a target of starting trading in 2013–2014, while the government bond market is still under consideration. Under subprogram 3, the SECC will submit the draft subdecree on bankruptcy to the COM and initiate an evaluation of the legal framework for new markets, including collective investment schemes and securities borrowing and lending.

19. Develop insurance industry. In Cambodia, the insurance sector started with the general insurance business. Under the Second Financial Sector Program the MEF worked on developing implementing regulations on licensing, a tariff on premium rates, corporate governance, and solvency. To align with regional and international practices, a draft insurance law was submitted to the COM, including provision for (i) compulsory third-party liability automobile insurance to address the increasing traffic accidents, (ii) life insurance, and (iii) micro insurance. Under subprogram 2, the MEF issued life insurance licenses to two companies—one foreign company and one state-majority-owned joint venture. The MEF also prepared a plan for an insurance promotion campaign to increase market awareness and led various awareness workshops. The MEF will complete the actuarial study on life insurance to develop a mortality table during subprogram 3.

3. Strengthened Finance Sector Governance

20. Promote international initiatives on anti-money-laundering and combating the financing of terrorism. Cambodia has gained membership in the Asia Pacific Group on Money Laundering and is committed to complying with the Financial Action Task Force (FATF) recommendations, international conventions, and United Nations Security Council resolutions. Cambodia is currently under the FATF International Co-operation Review Group process and since July 2011 has been on a grey list of jurisdictions which have strategic anti-money-laundering and combating the financing of terrorism (AML/CFT) deficiencies but have given high-level political commitment to address the shortcomings through an action plan with the FATF. Cambodia issued a subdecree on establishment of a national coordination committee on AML/CFT in April 2012. Under subprogram 2, a national risk assessment framework and a draft national AML/CFT strategy have been prepared for committee approval. Eight AML/CFT seminars have been conducted in Cambodia during 2012. Under subprogram 3, the Cambodian Financial Intelligence Unit will adopt the national risk assessment framework and commence implementation.

21. Enhance corporate governance and transparency in the finance sector. To build consumer confidence in the sector, formal financial institutions have to be more transparent in how they conduct business and consistently implement good governance practices. Under subprogram 1, the SECC developed a framework for implementing a code of corporate governance practices for listed companies. Under subprogram 2, the NBC required banks and MFIs to disclose loan terms and conditions according to a uniform framework that will help inform and protect clients, as well as addressing a program to align accounting and prudential

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standards with international financial reporting standards. Further, the SECC introduced a code of corporate governance practices for listed companies. Under subprogram 3, the SECC will promote use of the code of corporate governance for nonlisted companies and conduct an educational campaign with emphasis on responsibilities of board directors, corporate secretaries, and management.

22. Establish commercial dispute resolution mechanism. The government adopted the law on commercial arbitration in 2006 and a subdecree was issued in July 2009. Following establishment of the legal and regulatory framework, examinations were conducted in 2011 and, upon passing those examinations, qualified arbitrators were registered as founding members. Under subprogram 2, the Ministry of Commerce (MOC) made efforts to make the national arbitration center operational, but revision to the subdecree to allow private sector representatives caused some delays. The first general assembly meeting of the national arbitration center for election of the first board of directors, including representatives from the private sector, was held in January 2013 and directors were duly appointed. Under subprogram 3, recruitment of and training for new arbitrators will continue, while the business plan for the national arbitration center to ensure its operational and financial sustainability will be finalized.

23. Improve accounting and auditing profession. Efforts to increase the national capacity for accounting and auditing (the infrastructure that supports economic development with governance) started under the Second Financial Sector Program. The scholarship program for certified public accountants was initially restricted to government officials, but results were not encouraging so it was offered to the public on merit. Since then, the results have improved. Under the program, the focus has been redirected to development of an International Financial Reporting Standards-based curriculum for universities to provide accounting degrees that are affordable to the public while maintaining financial support for ongoing scholarship holders. Under subprogram 2, the MEF revised the Accounting and Auditing Law, 2002 to reflect international developments. In addition, the MEF worked on reviewing and updating the chart of accounts for public financial management, in line with the International Public Sector Accounting Standard, along with upgrading the government accounting system. Many senior government officials have realized the importance of accounting standards for government financial management through the operation of the upgraded government accounting system. Under subprogram 3, the MEF will submit the Accounting and Auditing Law to the National Assembly while continuing the financial support for an International Financial Reporting Standards-based curriculum for universities and the existing scholarship program.

4. Enhanced Finance Sector Efficiency

24. Modernize the business registration system. The MOC corporate registry system needs to be consolidated and upgraded to improve the national database of corporate entities and make corporate information more accessible to stakeholders in the financial market including investors, lenders, and the public. This will reduce the transaction costs and improve efficiency. Following the review of current systems for improvement under subprogram 1, subprogram 2 supported the consolidation of current systems. However, limited technical capacity for system development within the MOC and insufficient available MOC budget in 2012 caused a delay in implementation. The MOC requested TA support from ADB in this regard and submitted a full budget proposal that will be reviewed by the MEF together with the 2013 budget. With ADB TA support and the approval of adequate budget funds, this work is expected to be deferred but will be completed during subprogram 3.

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D. Development Financing Needs

25. A total of $45 million equivalent from ADB’s Special Fund resources was programmed for the Third Financial Sector Program, which will comprise three subprograms. The size of the budget support program is based on (i) development financing needs for the sector as identified during country programming and strategy formulation, (ii) the importance the government attaches to the reform program, and (iii) the estimated costs of designing and implementing the medium-term reform program minus estimated financial support provided by other development partners.11 Each successive subprogram will be processed following the successful completion of the subprogram preceding it. The loan for subprogram 2 will be disbursed in a single tranche upon satisfactory completion of all subprogram triggers and following loan effectiveness. The proceeds of the loan will be disbursed in accordance with the provisions of ADB's Simplification of Disbursement Procedures and Related Requirements for Program Loans.12

26. The government has requested a loan in various currencies equivalent to SDR9,887,000 from ADB’s Special Funds resources to help finance subprogram 2. The loan will have a 24-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft loan agreement. Loan proceeds will be used to finance the full foreign exchange cost of items produced and procured in ADB member countries.13 ADB will retain the right to audit the use of the loan proceeds and to verify the accuracy of withdrawal application certification. The closing date of the loan is 31 December 2013, by which date all proceeds of the loan will have been fully disbursed.

E. Implementation Arrangements

27. The NBC will be the executing agency, and the MEF, MOC, and SECC will be the implementing agencies. The finance sector steering committee and the technical working group (TWG), as updated under regulation 393 of 21 June 2011, will oversee implementation of the FSDS, 2011–2020 and coordinate with the government ministries and agencies concerned. To ensure timely program implementation, the TWG, chaired by a senior official of the MEF and comprising senior officers of the MEF, MOC, NBC, SECC, and other government agencies concerned, will meet as needed to review progress and consider pending issues. The TWG will report to the steering committee, chaired by the governor of the NBC, and will propose concrete actions to resolve any issues that arise. A senior officer of the NBC has been appointed as program director and will assist ADB in coordinating day-to-day program implementation with the MEF, MOC, NBC, SECC, and other agencies. The program director will be required to submit quarterly progress reports and an annual report on the progress of subprogram implementation and, in particular, on progress in implementing policy actions adopted for the program. Implementation period of subprogram 2 is from December 2011 to December 2012.

II. DUE DILIGENCE

A. Economic and Financial

28. The program will generate economic gains through successful implementation of medium-term policy actions. The estimated benefits of the program far exceed the loan amount.

11

ADB. 2011. Policy-Based Lending. Operations Manual. OM D4/BP. Manila (para. 32). 12

ADB. 1998. Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila. 13

List of Ineligible Items (accessible from the list of linked documents in Appendix 2).

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Improved legal, regulatory, and institutional framework will improve the operational efficiency for banks with proper supervision as well as consumer protection. Improved financial infrastructure will support further development of access to finance and other financial services. Strengthened finance sector governance will lead to the improvement of quality of financial reporting and effective AML/CFT measures. Enhanced financial sector efficiency will reduce the information and transaction costs related to commercial activities.

B. Governance

29. An assessment of the country’s public financial management systems was carried out to better understand fiduciary risks and determine appropriate fiduciary arrangements for subprogram 2. The assessment took the sector work of ADB’s report on Cambodia’s country governance risk assessment and risk management plan into consideration.14 The government continues to emphasize strengthening the public financial management system, internal control systems, and the functions of the National Audit Authority,15 which have mitigated the fiduciary risk of the public financial management system as a whole.16 According to the 2010 public expenditure financial accountability (PEFA) report, the report indicated mixed results but improving performance since the 2002 PEFA report. Due to significant improvement with budget formulation, internal controls, treasury operations and cash management, accounting system, and internal and external auditing, Cambodia is rated by the 2010 PEFA report to be at par with other low-income countries at similar stages of development. Under subprogram 2, efforts have continued to (i) improve the management information system and reporting standards within the NBC, banks, insurance firms, and MFIs; (ii) promote transparency in the information released by banks, MFIs, insurance firms, and listed companies; (iii) support the operation of the Credit Bureau of Cambodia; and (iv) strengthen the enforcement of AML/CFT regulations.

30. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the NBC. Consistent with its commitment to good governance, accountability, and transparency, the government will institute, maintain, and comply with internal procedures and controls following international best practices for the purpose of preventing corruption, money laundering, or the financing of terrorism and covenant with ADB to refrain from engaging in such activities.

C. Poverty and Social

31. Subprogram 2 is categorized as a general intervention to support sustainable economic growth and is expected to contribute to poverty reduction in an indirect manner.17 Further, the promotion of inclusive finance facilitated by finance sector development expands the outreach of affordable formal financial services for the poor and rural micro enterprises and so has direct impacts on poverty reduction. While implementing finance sector reforms based on market principles has been gender neutral, the results show that improved access to financial services has brought more benefits to women in rural areas. During subprogram 2, the NBC reported that lending by MFIs to women increased from 21% of loans in 2002 to 83% in June 2012. Females

14

ADB. 2012. Cambodia: Country Governance Risk Assessment and Risk Management Plan. Manila. 15

ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster, Grant for Subprogram 1, and Grant Assistance to the Kingdom of Cambodia for the Public Financial Management for Rural Development Program. Manila (Grants 0132/0133-CAM).

16 Government of Cambodia, Ministry of Economy and Finance. 2010 and 2012. External Advisory Panel Report on the Public Financial Management Reform Program. Phnom Penh.

17 Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2).

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held 69% of deposits in June 2012, and 28% of employees in the MFI subsector were female. These results show that subprogram 2 has contributed to increased gender benefits.

D. Safeguards

32. In compliance with ADB’s Safeguard Policy Statement (2009), the program is classified category C for impacts on the environment, involuntary resettlement, and indigenous peoples.

E. Risks and Mitigation Measures

33. The program assumes continuing political stability and macroeconomic recovery from the global economic downturn. Major risks and mitigating measures are described in detail in the risk assessment and risk management plan.18 The main risks are external challenges to sustaining economic growth, weak governance and corruption in the sector, and weak institutional and human capacity. With the design safeguards, the integrated benefits and impacts are expected to far outweigh any costs.

IV. ASSURANCES

34. The government and the NBC have assured ADB that implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan agreement.

V. RECOMMENDATION

35. I am satisfied that the proposed policy-based loan would comply with the Articles of Agreement of the Asian Development Bank (ADB), and acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve the loan in various currencies equivalent to SDR9,887,000 to the Kingdom of Cambodia for subprogram 2 of the Third Financial Sector Program, from ADB’s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Bindu N. Lohani Ranking Vice-President

22 April 2013

18

Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and Indicators with

Baselines Data Sources and

Reporting Mechanisms Assumptions and

Risks

Impact

A sound, market-oriented finance sector to enhance the mobilization of financial resources

Total private sector credit of banks at 35% of GDP or more by 2017 (Baselines: 29% in 2010; 34.4% in June 2012). Total bank deposits at 45% of GDP or more by 2017 (Baselines: 35% in 2010; 42.3% in June 2012). Access to credit for 15% or more of the population by 2017, of which at least 60% are women (Baselines: 9% of total population in 2010, of which women are 59%; 10.1% and 83% in June 2012).

Annual reports, including audited financial reports of banks, insurance firms, and licensed MFIs Progress reports from NBC Key financial data from NBC

Assumptions

C Continuing political stability

Macroeconomic recovery from global economic downturn

Risk

Slow recovery from global financial and economic shocks

Outcome

A growing, resilient, and efficient financial system

Increase of M2 to 45% of GDP or above by 2014 (Baselines: 38% in 2010; 44% in June 2012). Solvency ratio of banks and MFIs maintained above 15% throughout the program period (Baselines 15% in 2010; 29% for Banks and 22% for MFIs in June 2010.) Ratio of NPL to total loans of banks maintained below 10% (Baselines: 3% in 2010; 3% in June 2012).

National accounts and economic reports and official statistics of the Government of Cambodia and other international development agencies Published audited reports of banks, MFIs, and insurance firms Published audited reports of banks, MFIs, and insurance firms

Assumptions

The government remains committed to reforms and implementing the FSDS, 2011–2020

Complementary support from other development partners continues

Risk

Systemic risks in the financial system are not contained or managed in a coordinated manner

Outputs

1. Improved legal, regulatory, and institutional framework

Revised law on banking and financial institutions and revised law on organization of the NBC adopted, and updated regulations to align with appropriate international standards by 2014 (In progress).

Average interest spread below 10.0% by 2013 (Baselines: 12.8% in 2010; 8.2% in June 2012). Average return on assets for banks maintained above 2.0% (Baselines:1.4% in 2010, 2.3% in June 2012). Core Basel principles adopted for effective supervision by 2013, and on-site inspection of banks undertaken once a year (In progress). Core Basel principles implemented with suitable adjustments, as elaborated in BCBS Guidelines, by 2014 (In progress).

Official copy of the approved revised laws and the approved regulations Progress reports from NBC Progress reports from NBC NBC progress report on the implementation of core Basel principles Progress reports from the NBC

12 Appendix 1




Risks

The solvency ratio of all MFIs maintained above 15% annually (Baselines: average capital adequacy ratio of 22% in 2010; 22% in June 2012). Financial trust law reviewed by the Council of Ministers and insurance law enacted by 2013 (In progress). Consumer protection law reviewed by the Council of Ministers by 2013 (In progress).

Progress reports from the NBC

Copy of the financial trust law submitted to the Council of Ministers and insurance law as approved by the National Assembly Consumer protection law submitted to the National Assembly

2. Improved financial infrastructure

“Full solution” phase for check clearance commissioned by 2012 (Commissioned in December 2012) Shared switch for electronic payment procured and installed by 2013 (In progress) Number of checks cleared daily reaching 2,250 or more by 2014 (Baselines: 2,195 in 2010; 2,643 in June 2012) Number of ATMs reaching 600 or more by 2013 (Baselines: 501 in 2010, 611 in June 2012) A working credit information bureau for banks and MFIs by 2013, and NPL of MFIs maintained below 3%

(Credit Bureau officially launched in March 2012 and 0.27% NPL in June 2012) A study of indebtedness of MFI customers, at least 50% women, completed by 2013 (Completed in December 2012) Life insurance introduced by 2012 (Two life insurance firms in 2012) Gross insurance premium reaching $28 million by 2013 (Baselines: $24 million in 2010; $29 million in June 2012)

Reports of the NBC on payment system working group with banks Progress report of consultants on implementation of the approved payments system road map Quarterly reports from the NBC on clearance and settlement developments Progress reports from the NBC Progress reports from the Credit Bureau of Cambodia Copy of report on level of indebtedness

Progress reports from the MEF on life insurance development and insurance premiums

3. Strengthened finance sector governance

CAFIU fully compliant with Financial Action Task Force 40+9 recommendations by 2013 (In progress) Banks and financial institutions implementing international financial reporting standards by 2014 (In progress) National arbitration center operating by qualified arbitrators by 2012 (Completed in

Progress reports from CAFIU Annual audited financial statements of banks and financial institutions MOC letter confirming establishment of national

Appendix 1 13




Risks

January 2013) At least 20 locally qualified certified public accountants under the government scholarship by 2013 (Baselines: 11 qualified in 2010; 20 in 2012)

arbitration center and progress report from the center Progress reports from the National Accounting Council of the MEF

4. Enhanced finance sector efficiency

Company registration systems consolidated and fully operational by 2013 (In progress)

Reports available from the registry to the public

Activities with Milestones (refer to subprogram 2 policy actions in Appendix 4) 1. Improved legal, regulatory, and institutional framework

1.1 NBC in consultations with other agencies to prepare amendments to LNBC and LBFI (December 2012)

1.2 NBC, MEF, and SECC to set a two-step approach for MOU recommended by 2010 FSAP (December 2012)

1.3 NBC to continue improvement of quality on on/off-site supervision (September 2012) 1.4 MOC to prepare a draft Consumer Protection Law (December 2012) 2. Improved financial infrastructure

2.1 NBC to commission the National Clearing System (December 2012) 2.2 NBC to assist the incorporation and registration of the Credit Bureau of Cambodia

(September 2012) 2.3 MEF to develop capacity and consider the timing of issuing treasury bills (September 2012) 2.4 SECC in consultations to draft Sub-Decree on bankruptcy (December 2012) 2.5 SECC to conduct the examinations for all securities market participants (September 2012) 3. Strengthened finance sector governance

3.1 CAFIU to undertake risk assessment of NBC-supervised institutions, and other market institutions on AML/CFT (December 2012)

3.2 NBC to develop a program for aligning financial reporting with IFRS (December 2012) 3.3 MOC to arrange the election of the Board of the National Arbitration Center (December

2012) 3.4 NAC to update the financial reporting law (December 2012) 4. Enhanced finance sector efficiency

4.1 MOC to consolidate systems of company registration (continue to subprogram 3)

Inputs

ADB loan for subprogram 2: $15 million equivalent

ADB = Asian Development Bank, AML/CFT = anti-money-laundering and combating the financing of terrorism, ATM = automated teller machine, BCBS = Basel Committee on Banking Supervision of the Bank of International Settlements, CAFIU = Cambodian Financial Intelligence Unit, CPA = certified public accountant, FSAP = Financial Sector Assessment Program, FSDS = Financial Sector Development Strategy, GDP = gross domestic product, IFRS = International Financial Reporting Standards, LBFI = Law on Banking and Financial Institutions, LNBC = Law on Organization and Conduct of the NBC, M2 = broad money supply, MEF = Ministry of Economy and Finance, MFI = microfinance institution, MOC = Ministry of Commerce, NAC = National Accounting Council, NBC = National Bank of Cambodia, NPL = non-performing loan, SECC = Securities and Exchange Commission of Cambodia. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://adb.org/Documents/RRPs/?id=42305-023-3

1. Loan Agreement

2. Sector Assessment (Summary): Finance

3. Contribution to the ADB Results Framework

4. Development Coordination

5. Country Economic Indicators

6. International Monetary Fund Assessment Letter

7. Summary Poverty Reduction and Social Strategy

8. Risk Assessment and Risk Management Plan

9. List of Ineligible Items

Supplementary Document

10. Summary Program Impact Assessment

http://adb.org/Documents/RRPs/?id=42305-023-3

Appendix 3 15

DEVELOPMENT POLICY LETTER

16 Appendix 3

Appendix 3 17

18 Appendix 3

Appendix 3 19

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4 POLICY MATRIX

Output and Milestones

Subprogram 1 Policy Actions

2011

Subprogram 2 Policy Triggers and Milestones

2012


2013

Post Program Partnership Framework

1. Improved Legal, Regulatory and Institutional Framework

1.1 Update and enhance the legal foundation for banks and MFIs

i. NBC, MEF, MOC, SECC to organize a workshop attended by members of the FSDS TWG to discuss laws that have overlapping or conflicting provisions and the need to strengthen institutional cooperation amongst national regulators

i. NBC in consultations with MEF, MOC, MOJ and SECC to prepare amendments to the Law on the Organization and Conduct of the NBC (LNBC) incorporating recommendations of the 2010 FSAP (December 2012) ii. NBC in consultations with MEF, MOC, MOJ and SECC to prepare amendments of the Law on Banking and Financial Institutions (LBFI) incorporating recommendations of the 2010 FSAP (December 2012)

i. NBC to submit the amended LNBC to the Council of Ministers (CoM) ii. NBC to submit the amended LBFI to the CoM

Updated legal and regulatory framework to support banking and microfinance activities

1.2. Strengthen bank supervision capacity and measures adopted to improve financial stability

ii. NBC supervision departments to reinforce coordination with the Cambodian Financial Intelligence Unit (CAFIU) iii. NBC to develop framework for assessing finance sector risks and issue appropriate supervisory guidelines iv. NBC to adopt roadmap for complete fulfillment of the Basel core principles for effective bank supervision

iii. (a) NBC, MEF, and SECC to set up a two-step approach recommended by the IMF in instituting a comprehensive coordination and cooperation framework under this approach, an initial Memorandum of Understanding (MOU) will be signed which identifies areas of cooperation and information sharing in order to achieve coordinated surveillance and crisis prevention. Following that, in due course, a second MOU will

iii. NBC, MEF and SECC to jointly establish clear and transparent plan of action in the event of a systemic crisis iv. NBC, MEF and SECC to develop and arrange for adoption of the strategy to promote the use of riel. v. To enhance enforcement of good corporate governance, NBC to complete a corporate profile of each licensed bank

Framework established to allow authorities to act swiftly in the event of a crisis and in dealing with problem banks

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be signed which sets out a time-bound process for instituting a comprehensive crisis management framework. (December 2012), and (b) NBC to require banks to provide consolidated financial statements (September 2012) iv. NBC to arrange for bilateral agreements covering supervision cooperation with countries of incorporation of certain foreign banks with subsidiaries licensed in Cambodia (September 2012) v. NBC to implement key actions towards fulfillment of the Basel core principles for effective bank supervision (September 2012)

1.3 Strengthen prudential supervision and regulations for MFIs

v. NBC to ensure full implementation of the Microfinance Information System (MFIS) to enhance quality of off-site reporting

vi. NBC to continue development of on-site supervision methodologies and improvement of quality of off-site supervision reports of MFIs (September 2012)

vi. NBC to arrange for an self-assessment of compliance with the Basel core principles with suitable adjustments under BCBS Guidance for Effective Supervision of Microfinance Activities

Enhanced supervision of MFIs based on Core Principles for Effective Banking Supervision as applied to Microfinance Activities

1.4 Enhance legal foundation to support financial and commercial

vii. MOC to obtain guidance from CoM on the approach for setting up commercial courts for enforcement of financial and commercial laws (October 2012)

Complete commercial legal framework and develop structures, systems, procedures and capacity to operationalize the

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2011


2012


2013


transactions commercial court

viii. MOC to prepare a draft Consumer Protection Law (December 2012)

vii. MOC to submit the draft Consumer Protection Law to the CoM

Move towards effective enforcement of Consumer Protection Law

vi. NBC, MOC, MOJ and MEF to review potential conflicts between the Civil Code, the Law on Secured Transactions, and Law on Financial Leasing, with respect to provisions on financial leasing

ix. NBC to issue regulations for implementing the financial leasing law (September 2012)

viii. NBC to strengthen supervision of leasing

Resolve legal overlaps and/or conflicts with the financial leasing law and strengthen its implementation

vii. MOC to review the operation and utilization of the on-line secured transactions registry

x. MOC to organize workshops with banks and financial institutions to help increase the use of the secured transactions registry and discuss with relevant agencies the risks and challenges on the use of the registry (November 2012)

ix. MOC to expand secured transactions registry to include leasing transactions

Facilitate usage of secured transactions registry

xi. MEF to submit the legal provisions covering public trust monies in the 2013 Budget Law to the CoM and prepare a draft sub-decree for its implementation. (December 2012)

x. MEF to submit draft Financial Trust Law to the CoM

Enactment of the Financial Trust Law to enhance resource mobilization

xi. MEF to submit the new Law on Insurance to the National Assembly

Enactment of the Insurance Law and development of life insurance market

2. Improved Financial Infrastructure

2.1 Modernize national payments, clearance, and

viii. To support the roll-out of the payment system, PPU to prepare and submit the draft Law on the National Payments

xii. NBC to commission the National Clearing System to effect early clearance and settlement nationwide, and

Continue to align payments system with Core Principles for Systemically Important

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settlement system

System to the NBC Management ix. SECC to accredit three commercial banks as cash settlement agents for securities transactions

procure the shared switch (December 2012) xiii. MOC, in coordination with NBC, undertake consultations to update the draft e-Commerce Law (October 2012)

xii. MOC to submit the draft e-Commerce Law to the CoM

Payment Systems while extending services to match market requirements for the entire country. Over the medium-term, move towards high value transactions, such as the Real-Time Gross Settlement System (RTGS).

2.2 Enhance consumer access to credit, customer protection, and market confidence

x. NBC to issue regulations covering the operations of the CBC

xiv. NBC to assist the Association of Banks in Cambodia (ABC) and the Cambodia Microfinance Association (CMA) to incorporate and register the Credit Bureau Cambodia (CBC) (September 2012) xv. NBC in coordination with CMA conduct a study on over-indebtedness covering at least 50% female participants and disseminate results to relevant stakeholders (December 2012)

xiii. NBC to make CBC operational by developing governance structure to maintain confidentiality of data and affordability of its services fees xiv. NBC to liaise with ABC and CMA to formulate and implement a financial literacy program covering at least 50% female participants

Reliable credit information readily available to creditors to prevent market abuses, improve client literacy and customer over-indebtedness, reduce credit risk and improve efficiency of financial intermediation

2.3 Develop interbank market and government securities markets

xi. NBC to encourage the operation of the interbank market using certificate of deposits (CD) as collateral

xvi. MEF to develop capacity and consider the timing of issuance of treasury bills of short duration in riel based on a predetermined borrowing program (September 2012) xvii. MEF to develop a system for accreditation of GS primary market dealers, in cooperation

xv. MEF and NBC to develop bidding procedures, and auction system for GS and procedures for awarding of winning bids xvi. MEF to establish a system for accreditation of GS primary

Develop broad-based government securities market. This will also be critical to conducting monetary policy through the use of open market operations in the future

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with NBC (September 2012) market dealers, in cooperation with NBC

2.4 Develop domestic securities market

xii. SECC to approve CSX listing rules, and ensure support infrastructure for securities market is established (underwriters, dealers, brokers, investment advisory, etc) xiii. Cambodia Securities Exchange (CSX) under SECC guidance is registered and officially launched

xviii. SECC in consultations with relevant financial regulators to draft Sub-Decree on bankruptcy related to the securities market. (December 2012) xix. SECC in consultations with NBC and MEF on conducting a self-assessment to confirm if the trading and settlement system conforms to the IOSCO core principles and the Committee on Payment and Settlement Systems/IOSCO Recommendations on Securities Settlement Systems (December 2012)

xvii. SECC to arrange for adoption of the draft Sub-Decree by the CoM xviii. SECC in coordination with NBC to undertake study on regulatory framework for credit rating agency. xix. SECC to evaluate the legal framework for corporate bond market, collective investment schemes, and securities borrowing and lending. xx. SECC to conduct a self-assessment to confirm if the trading and settlement system conforms to the IOSCO core principles and the Committee on Payment and Settlement Systems/IOSCO Recommendations on Securities Settlement Systems

Develop primary and secondary markets of the equities and long-term debts to provide long-term financing for industry, agriculture and infrastructure

xiv. SECC to, design educational materials needed, conduct investor education across the country and set up feedback mechanisms

xx. SECC to conduct licensing/approval/accreditation examinations for all securities market participants including fit and proper testing (September 2012) xxi. (a) SECC in consultations to establish customer complaint

xxi. SECC to implement capacity and education plan, and secure funding for 3 CFA scholarships for its staff xxii. SECC to establish customer complaint center within the SECC to address public complaints

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center within the SECC to address public complaints; and (b) develop capacity building and education plan, and secure funding for 3 CFA scholarships for its staff (November 2012)

2.5 Develop the insurance industry

xxii. MEF to undertake a promotional campaign to increase awareness about insurance to help increase market penetration (September 2012)

xxiii. (a) MEF to complete actuarial study on life insurance to develop a mortality table for Cambodia and determine premium rates on life insurance policies; and (b) develop accounting guidelines for life insurance

Develop new insurance products that meet varying needs of the population and diversify the insurance portfolio. Develop life funds that can be a source of long-term funds critical to the development of the domestic capital market

3. Strengthened Financial Sector Governance

3.1 Promote International initiatives on AML/CFT

xv. Based on Mutual Evaluation Report 2011, CAFIU to undertake measures to meet compliance with applicable Financial Action Task Force 40+9 recommendations xvi. CAFIU to strengthen cooperation with neighboring FIUs and related international organizations

xxiii. CAFIU to undertake risk assessment of NBC-supervised institutions, and other market institutions on AML/CFT in coordination with the SECC and develop a national risk assessment framework together with a strategic implementation plan (December 2012) xxiv. CAFIU to conduct awareness raising on AML/CFT among casinos, non-profit organizations, and realtors (October 2012)

xxiv. CAFIU Board to adopt national risk assessment framework together with a strategic implementation plan

Strengthen internal systems and capabilities for dealing with AML/CFT through constant surveillance and practice, extend coverage to both financial and non-financial organizations, and increase international cooperation network

3.2 Enhance xxv. NBC to require banks and xxv. NBC to encourage CMA to Operationalize

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corporate governance and transparency in the financial sector

MFIs to disclose loan terms and conditions according to a uniform framework, as well as other relevant matters that will help inform and protect clients (September 2012) xxvi. NBC to develop a program for aligning accounting and prudential standards with IFRS (December 2012)

implement financial literacy program to cover at least 50% female participants

disclosure requirement for the protection of MFI clients and promulgate guidelines for the protection of MFI clients until Consumer Protection Law becomes a reality and develop financial literacy among the population to promote access to and use of formal financial services

xvii. SECC to develop framework for implementing Code of Corporate Governance for listed companies

xxvii. SECC to implement Code of Corporate Governance for listed companies while strengthening the monitoring and compliance framework (September 2012)

xxvi. SECC to promote use of Code of Corporate Governance among non-listed companies and conduct educational campaign with emphasis on responsibilities of board of directors, corporate secretaries and management

Promote good corporate governance among listed and unlisted corporate entities

3.3 Establish commercial dispute resolution mechanism

xviii. MOC to arrange for registration of the qualified arbitrators and the first meeting of members

xxviii. MOC to arrange the election of the Board of Directors of the national arbitration center, officially establish and help operationalize the national arbitration center and provide support for development of local dispute resolution techniques (December 2012)

xxvii. MOC to continue recruitment and training of new arbitrators

Enhance use of dispute resolution procedures and mechanisms to speed up resolution of local commercial cases

3.4 Improve the accounting and auditing profession

xix. National Accounting Council (NAC) to provide 35 CPA and 35 CAT scholarships and maintain financial support for the on-going scholarship

xxix. NAC to update the

Accounting and Auditing Law to remove inconsistencies and reflect international developments and submit the

xxviii. NAC to submit the revised Accounting and Auditing Law to the National Assembly

Strengthen accounting and audit in the country and align with international standards, where applicable

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holders.

revised law to the CoM (December 2012) xxx. NAC to maintain financial

support for the ongoing scholarship holders, and for the training needs assessment and train the trainers for implementing the standardized IFRS curriculum at 10 universities (December 2012)

xxix. NAC to maintain financial

support for the ongoing scholarship holders, and support the implementation of the standardized IFRS curriculum at 10 universities

4. Enhanced Financial Sector Efficiency

4.1 Modernize the business registration system

xx. MOC to review current systems to register all commercial enterprises and identify areas for improvement

xxx. MOC to consolidate systems of company registration and storage of company data for regulatory and public access to information

Develop system of business registration that will help monitor company and SME financial data and disclosures and compliance with the enterprise law and regulations

ABC = Association of Banks in Cambodia; ADB = Asian Development Bank; AML/CFT = anti-money laundering and combating the financing of terrorism; BIS-BCBS = Basel Committee on Banking Supervision of the Bank of International Settlements; CAFIU = Cambodian Financial Intelligence Unit; CAT = certified accounting technician; CBC = Credit Bureau Cambodia; CMA = Cambodia Microfinance Association; CoM = Council of Ministers; CPA = certified public accountant; CSX = Cambodia Securities Exchange; GS = government securities; IFRS = International Financial Reporting Standards; IOSCO = International Organization of Securities Commissions; LBFI = Law on Banking and Financial Institutions; LNBC = Law on the Organization and Conduct of the NBC;

MEF = Ministry of Economy and Finance; MFI = microfinance institution; MFIS = Microfinance Information System; MIS = management information system;

MOC = Ministry of Commerce; MOJ = Ministry of Justice; NAC = National Accounting Council; NBC = National Bank of Cambodia; SECC = Securities and Exchange Commission Cambodia. Note: Triggers in bold. Subprogram 2 has 20 indicative triggers and 10 milestones; and subprogram 3 has 19 indicative triggers and 11 milestones.

With changing domestic circumstances and developmental priorities, the executing and implementing agencies requested minor modifications to some of the policy triggers and milestones indicated below. These minor changes were subject to the endorsement of ADB Management. ADB Management Review Meeting held in November 2012 confirmed the changes on items (xi), (xii), (xiii (a)), (xxxii) and items (i), (ii), (iii(a)), (xvii), (xix) and (xxi) were confirmed later by ADB Management and prior to loan negotiations. They were within the medium-term program framework and would not have any adverse implication on the program.

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4 Original Trigger/Milestone Revised Trigger/Milestone Reasons for the Proposed Change i. NBC in consultations with MEF, MOC, MOJ and SECC prepare amendments to the Law on the Organization and Conduct of the NBC (LNBC) incorporating recommendations of the 2010 FSAP (December 2012)

i. NBC in consultations with MEF, MOC, MOJ and SECC to prepare amendments to the Law on the Organization and Conduct of the NBC (LNBC) incorporating recommendations of the 2010 FSAP (December 2012)

Added “to” in front of “prepare” to reflect the current status of implementation for completion under subprogram 3. The amendments are still in the process of consultations because of the delay of implementation. However, the policy trigger under subprogram 3 has been maintained to achieve the original target.

ii. NBC in consultations with MEF, MOC, MOJ and SECC to prepare amendments of the Law on Banking and Financial Institutions (LBFI) incorporating recommendations of the 2010 FSAP (December 2012)

ii. NBC in consultations with MEF, MOC, MOJ and SECC to prepare amendments of the Law on Banking and Financial Institutions (LBFI) incorporating recommendations of the 2010 FSAP (December 2012)

The same as above.

iii. (a) NBC, MEF, and SECC to set up a coordination and cooperation framework under a Memorandum of Understanding (MOU), covering regulatory matters and coordinated response in the event of a financial crisis. (December 2012)

iii. (a) NBC, MEF, and SECC to set up a two-step approach recommended by the IMF in instituting a comprehensive coordination and cooperation framework under this approach, an initial Memorandum of Understanding (MOU) will be signed which identifies areas of cooperation and information sharing in order to achieve coordinated surveillance and crisis prevention. Following that, in due course, a second MOU will be signed which sets out a time-bound process for instituting a comprehensive crisis management framework. (December 2012)

This is a part of 2010 FSAP recommendation. Through the dialogue between the Government and IMF missions. It was agreed that the implementation has been modified.

xi. MEF to submit draft Financial Trust Law to the CoM

xi. MEF to submit the legal provisions covering public trust monies in the 2013 Budget Law to the CoM and prepare a draft sub-decree for its

MEF with technical assistance through the ADB TA, started the consultation process to develop a comprehensive trust law covering all aspects of the financial sector. The development of the comprehensive trust law required more time. During the consultation process, MEF identified the

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Original Trigger/Milestone Revised Trigger/Milestone Reasons for the Proposed Change implementation.

urgency to put in place appropriate regulations to regulate existing public sector transactions that cannot await the completion of the comprehensive trust law. As an interim arrangement, MEF, while committed to lead the consultation process towards the submission of the draft comprehensive trust law to the Council of Ministers (CoM) in 2013, proposed to insert the relevant provisions covering public trust into the 2013 budget law that was approved in December 2012. The legal provisions will empower MEF to issue regulations on public trust area as interim measure. The Mission agreed that the TA support from ADB will assist the MEF with the interim arrangements and also work with MEF towards completion of and the submission of the comprehensive financial trust law to the CoM in 2013.

xii. MEF to submit the new Law on Insurance to the National Assembly

Move to the subprogram 3 in 2013 and retained as xi.

The draft insurance law has been with the CoM for more than a year. MEF has made all the efforts to get it through the various Committees of the CoM. It is now with the inter-ministerial Committee of the CoM before being submitted to the plenary session. The provision covering compulsory third party liability automobile insurance to extend coverage from commercial motor vehicles to cover non-commercial vehicles has been proven very challenging. Despite the provision of data to support the increased number of road accidents and the technical support from ADB TA consultants to help MEF’s briefing that compulsory motor vehicle is generally accepted internationally, there appears to be more political reluctance because of the public concern due to the general election scheduled for July 2013. One of the options offered from those opposing the compulsory provision is for the insurance law to drop the compulsory provision. However, MEF’s view is to retain the expanded compulsory coverage in the proposed law because of the increased number of traffic accidents and it is generally considered as international practice. MEF is continuing to put pressure for clearance of the draft law without any changes by the CoM for submission to the National Assembly between now and the end of 2013.

xiii. (a) NBC to submit the draft Law on the Dropped the stand alone Law on With IFC support, a draft Law on National Payments

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4 Original Trigger/Milestone Revised Trigger/Milestone Reasons for the Proposed Change National Payments System to the CoM, and (b) commission “Full Solution” phase of National Payment System for checks to effect early clearance and settlement nationwide, and procure the shared switch

the National Payment System from the overall policy triggers and specific provisions to be included in the revised laws under policy triggers i and ii. xii. NBC to commission the National Clearing System to effect early clearance and settlement nationwide, and procure the shared switch

System (NPS) was prepared pending the outcome of the consultation process with related government agencies. NBC undertook a comparative review of the draft NPS Law with the existing Law on Negotiable Instruments and Payment Transactions (NIPT) and noted that several provisions of the draft NPS law have been covered in the Law on NIPT and there is no need for a separate NPS Law. IFC legal expert suggested revising the NIPT Law and the Law on Banking and Financial Institutions to address the remaining provisions. NBC is committed to undertake those legal updates and they have made arrangements with IFC for the legal expert to assist in preparing the specific provisions for the amendment provisions. NBC indicated that further discussion on the exact provisions covering payment system for the amendment on the existing laws with IFC expert would continue. NBC issued the letter to ADB signed by the Deputy Governor, NBC, requesting to drop the item xiii (a). As a result, this item will be consolidated to the items i and ii.

xvii. MEF to establish a system for accreditation of GS primary market dealers, in cooperation with NBC

xvii. MEF to develop a system for accreditation of GS primary market dealers, in cooperation with NBC

Replaced “establish” with “develop” to reflect the current

status of implementation for completion under subprogram

3. Establishment of accreditation of GS primary market

dealers is still in progress and to be completed under

subprogram 3. A new milestone is added under

subprogram 3.

xix. SECC to conduct a self-assessment to confirm if the trading and settlement system conforms to the IOSCO core principles and the Committee on Payment and Settlement Systems/IOSCO Recommendations on Securities Settlement Systems

xix. SECC in consultations with NBC and MEF on conducting a self-assessment to confirm if the trading and settlement system conforms to the IOSCO core principles and the Committee on Payment and Settlement Systems/IOSCO Recommendations on Securities Settlement Systems

Replaced “conduct” with “in consultations with NBC and

MEF on conducting” to reflect the current status of

implementation for completion under subprogram 3. A self-

assessment is still in consultations with NBC and MEF and

to be completed under subprogram 3. A new milestone is

added under subprogram 3.

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Original Trigger/Milestone Revised Trigger/Milestone Reasons for the Proposed Change xxi. (a) SECC to establish customer complaint center within the SECC to address public complaints

xxi. (a) SECC in consultations to establish customer complaint center within the SECC to address public complaints

Added “in consultations” to reflect the current status of

implementation for completion under subprogram 3.

Establishment of customer complaint center is still in

progress and to be completed under subprogram 3. A new

milestone is added under subprogram 3.

xxxii. MOC to consolidate systems of company registration and storage of company data for regulatory and public access to information

Move to the subprogram 3 in 2013 The MOC corporate registry system needs to be

consolidated and upgraded to improve the national data

base of corporate entities and make corporate information

more accessible to the stakeholders in the financial market

including investors, lenders, and the general public.

Limited technical capacity for system development within

MOC and insufficient budget available to MOC in 2012

caused the delay of implementation. The MOC requested

the TA support from ADB in this regard and submitted a full

budget proposal that will be approved shortly together with

the 2013 budget. With ADB TA support and the approval of

enough budget, this work is expected to be completed

during subprogram 3.