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Too many banks... again?

Overbanked Cambodia tries to regain momentum

The rapid growth in the number of banks in Cambodia, as demonstrated by the chart below, has some people who remember the country’s last banking boom worried. Although credit ratings agency Standard & Poor’s says that trust in the banking system has been building, it still remains low thanks to a relicensing programme in 2004 that put an end to the proliferation of zombie banks stifling the economy by forcing them into liquidation. Thirteen such institutions went into "either voluntary or compulsory liquidation", according to a report by the Economic Institute of Cambodia, bringing the total number of banks down from 31 to 18, of which 14 were commercial banks.

The trigger for that liquidation was the National Bank of Cambodia’s raising of the minimum capital requirement to its present level of $13 million. The move was an important step in the efforts to clean up the banking system by stripping it of non-performing institutions but the recent memory of the failure of a large number of under-capitalized small banks alarms observers of the present situation. Once again the number of small banks in Cambodia is rising steadily; the National Bank’s forthcoming further increase in the minimum capital requirement to $35 million appears to be an attempt to force consolidation on the industry.

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