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University of Barcelona
MASTER IN INTERNATIONAL ECONOMIC LAW AND POLICY
2008-2009
FINAL RESEARCH PAPER
Title: “Trade Liberalization in Financial Sector: Experience from Cambodia”
Author: Vutha HING
Supervisor: Prof. Pierre Sauve
Barcelona, 01 November 2009

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Table of Contents
SUMMARY............................................................................................................................................................4
CHAPTER ONE: INTRODUCTION..................................................................................................................5
1.1. BACKGROUND ..............................................................................................................................................5
1.2. RESEARCH OBJECTIVES AND APPROACH ......................................................................................................7
1.3. ORGANIZATION OF REPORT ..........................................................................................................................7
CHAPTER TWO: LITERATURE REVIEW--CONCEPT AND BENEFITS OF TRADE
LIBERALIZATION IN FINANCIAL SERVICES............................................................................................8
2.1. THE CONCEPT OF TRADE LIBERALIZATION IN FINANCIAL SERVICES ..............................................................8
2.2. GAINS FROM TRADE LIBERALIZATION IN FINANCIAL SERVICES................................................................... 10
2.2.1. Trade liberalization in financial services and economic growth ....................................................... 10
2.2.2. Trade liberalization in financial services and financial sector development..................................... 11
2.3. INDICATORS USED FOR ASSESSMENT OF FINANCIAL SECTOR PERFORMANCE IN CAMBODIA ...................... 13
CHAPTER THREE: FINANCIAL SERVICES LIBERALIZATION IN GATS--EXPERIENCE FROM
CAMBODIA ........................................................................................................................................................ 14
3.1. OVERVIEW OF GENERAL AGREEMENT ON TRADE IN SERVICES .................................................................. 14
3.2. FINANCIAL SERVICES LIBERALIZATION IN GATS....................................................................................... 17
3.2.1. Historical Development of Financial Service Negotiations............................................................... 17
3.2.2. The Status of Current Commitment in Financial Services ................................................................. 18
3.3. OVERVIEW OF FINANCIAL SECTOR LIBERALIZATION IN CAMBODIA........................................................... 19
3.4. CAMBODIA’S FINANCIAL SERVICE SCHEDULE IN GATS ............................................................................ 21
CHAPTER FOUR: ASSESSMENT OF FINANCIAL SECTOR PERFORMANCE IN CAMBODIA ...... 23
4.1. DEPTH AND OUTREACH OF FINANCIAL SYSTEM ......................................................................................... 23
4.2. COMPETITION IN FINANCIAL SECTOR ......................................................................................................... 25
4.3. EFFICIENCY IN FINANCIAL SECTOR............................................................................................................. 27
CHAPTER FIVE: CONCLUSION.................................................................................................................... 30
BIBLIOGRAPHY: .............................................................................................................................................. 33
ANNEXES: .......................................................................................................................................................... 36

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Abbreviations and Acronyms
ASEAN Association of South East Asian Nations
ATM Automated Telling Machine
GATS General Agreement on Trade in Services
GATT General Agreement on Trade and Tariff
GDP Gross Domestic Product
HI Herfindahl Index
MFN Most Favored Nation
NAFTA North American Free Trade Agreement
NT National Treatment
OECD Organization for Economic Cooperation and Development
ROAA Return on Average Assets
ROAE Return on Average Equity
ROE Return on Equity
TRI Trade Restrictiveness Index
USD United States Dollar
WTO World Trade Organization

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Summary
This study examines the degree of liberalization in Cambodia’s financial services and its
contribution to overall sector performance. It uses literature review and secondary data
analysis to evaluate financial development focusing on three broad indicators of sector-wide
performance: breadth and outreach of the financial system, competition and efficiency.
A great deal of literatures provide empirical evidences supporting theoretical prediction that
financial service opening can help build more robust and efficient financial systems through
various channels: by facilitating capital inflows, improving quality, innovation and efficiency,
increasing competition, introducing international practices, and intensifying pressure on
government to enhance the legal, regulatory and supervisory systems. This resulted in
increasing number of countries adopted more liberal financial trade policy, unilaterally and
multilaterally, as a tool to achieve financial sector development and to stimulate economic
growth.
Cambodia witnesses similar experience like many countries cited in international literatures.
Quantitative indicator measuring trade restrictiveness in financial services suggests that
Cambodia’s financial sector has extremely low restrictions in aspects of market access and
national treatment. The process of its financial sector openness is driven in large extent by
liberal outward-looking economic policy and financial sector reforms that were undertaken
since 1990s. Cambodia’s economic policy is on the verge of deeper economic integration
within various frameworks, bilateral, regional and multilateral, and such tendency is likely to
hasten the process of financial sector opening.
Analysis also suggests hat trade liberalization of financial services especially under GATS
framework has played some role in strengthening Cambodia’s financial system. Not only do
depth and outreach of financial system widen, but also competition and efficiency improve
significantly. Number of banks and their branch offices boomed over the last few years along
with substantial increase in competition and efficiency. The challenges for Cambodia is to
implement domestic financial reforms especially in the areas of regulatory frameworks,
institutional and supervisory capacity and financial infrastructure in order to create sufficient
prerequisite conditions for further financial sector market opening. If these two policies are
mutually reinforcing, Cambodia’s financial sector liberalization would contribute even greater
to financial sector development.

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Chapter One: Introduction
1.1. Background
Cambodia’s financial sector has witnessed gradual transformation toward a more liberal to
international financial transaction and foreign competition over the last decade. Quantitative
indicators show that there is extremely low restriction against foreign participation in both
banking and insurance; while there is no discrimination among foreign and domestic financial
service suppliers. In the mean time, enormous regulations have been introduced in accompany
of sector opening process. These developments are in large part driven by changes in trade
policy from protectionism under central-planning economic system to liberal and outward-
looking policy under the frameworks of regional and global economic integration.
Cambodia’s financial trade policy at present is bound by its obligation under the General
Agreement on Trade in Services (GATS) of the World Trade organization (WTO). According
to specific commitment schedule, Cambodia has made substantial commitments in GATS in
terms of market access and national treatment and this will shed light on the development of
financial sector.
The progressive financial sector opening has been accompanied by notable development in
financial services. The sector used to have very low demands and low public confidence,
limited financial intermediation, and weak financial infrastructure. These shortcomings have
experienced significant improvement in recent years. During the period of 2005-2007, for
example, the total assets in banking sector grew from US$1.4 billion in 2005 to US$3.5
billion in 2007, while the volume of loans and deposits rose at rapid pace at 75 per cent and
77 per cent, respectively. Loan to deposit ratio gradually improved to reach 69 per cent in
2007. The insurance sector also has similar pattern of growth. In 2007, gross premiums
increased by 44 per cent compared to 12 per cent in 2006. The number of insurers rose from
four in 2006 to seven in 2007 with 29,124 total policies.
A great deal of literatures on financial service liberalization draw similar conclusion that
financial service opening help build more robust and efficient financial systems. Opening to
foreign financial suppliers induces more pro-market competition, stimulate innovation though
the dissemination of new technologies, know-how and skills, and improve quality, efficiency

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and breadth of financial services. Financial sector opening also allow more stable sources of
funds and promote the use of international practices in areas such as accounting, risk
management, and disclosure of financial information. Whether these arguments still hold in
the context of Cambodia’s financial trade policy is the key question for this research. No
study to date, however, has illustrated clearly the status and nature of financial sector
liberalization and its potential benefits for Cambodia’s financial sector. This study is designed
to fill this gap by answering several key questions: (1) What do broad literatures say about
concept and benefits of trade liberalization in financial services? (2) What is the level of trade
restrictiveness Cambodia imposes in financial services? (3) To what extent that the financial
sector opening contribute to the improvement in overall financial performance in the country?
Key findings of this study can be summarized as followings:
Liberalization of trade in financial services refers to the process of opening the financial
services to competition. Most literatures support theoretical prediction that trade liberalization
of financial services can help countries build more robust and efficient financial systems by
facilitating capital inflows, improving quality, innovation and efficiency, increasing
competition, introducing international practices, and intensifying pressure on government to
enhance the legal, regulatory and supervisory systems.
Cambodia is no exception along this international literature. Analysis suggests hat trade
liberalization of financial services especially under GATS framework has played some role in
strengthening Cambodia’s financial system. Not only do depth and outreach of financial
system widen, but also competition and efficiency improve significantly. Number of banks
and their branch offices boomed over the last few years along with substantial increase in
competition and efficiency. In the same vein, we also observe gradual introduction of new
technology, innovative financial products and services, and good practices by financial
service providers in particular foreign firms.
Although significant progress has been made in financial sector reforms, major constraints in
financial system still exist. Lack of financial infrastructure, weak regulatory and policy
framework, lack of market information, lack of human resources and supervisory capacity
have been identified in financial sector development strategy as priority issues for immediate
actions. If Cambodia could effectively address these problems hand in hand with financial
service market opening, they both would mutually reinforcing. Financial regulatory reforms
will create sufficient prerequisite conditions for conducive to financial sector opening; while
the later helps accelerate reforms; encourage a more transparent regulatory and supervisory

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framework; increases the incentive for better macroeconomic policies and regulations; and
enhances credibility of rules. If this is the case, Cambodia’s financial sector liberalization
would contribute even greater to financial sector development.0
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1.2. Research Objectives and Approach
This study had three specific objectives: (1) to understand theoretical and empirical studies on
trade liberalization in financial services and its impacts on sectoral development and
economic growth; (2) to examines the degree of financial sector liberalization in Cambodia
with emphasis on GATS frameworks and assess the extent to which liberalization can help
strengthen overall financial sector performance; and (3) to suggest further study concerning
financial service reforms and liberalization from Cambodia’s experience.
To achieve above objectives, this research uses qualitative assessment method by examining
evolution of indicators in financial services in Cambodia during pre and post periods of
liberalization. The key indicators used to measure overall performance of financial sector are
depth and outreach of financial system, competition and efficiency. Two financial sub-
sectors-- banking and insurance—are selected as units of analysis. The methods of data
collection are primarily based on literature review and secondary data analysis.
005 2006 2007
1.3. Organization of Report
This report is structured as follows: Chapter 2 looks at literature review on trade liberalization
in financial services with emphasis on the concept and benefits of trade liberalization in
financial services. It then draw analytical framework for Cambodia case study. Chapter 3
provides an overview of financial services liberalization in GATS from Cambodia’s
experience. It examines the overview of GATS, historical development of financial services
negotiation, and current commitments of financial services. It then reviews the development
of financial service liberalization in Cambodia drawing from Cambodia’s services schedule of
financial sector. Chapter 4 assesses the performance of Cambodia’s financial sector by closely
looking at three major measurements: breath and outreach of financial system, competition,
and efficiency. The report concludes with a summary of the key points and some ideas for
further research in Chapter 5.

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Chapter Two: Literature Review--Concept and Benefits of Trade
Liberalization in Financial Services
This chapter looks at literature review on trade liberalization in financial services. It starts by
reviewing the concept and benefits of trade liberalization in financial services. It then draw
analytical framework for Cambodia case study.
2.1. The concept of trade liberalization in financial services
The financial services sector is one of the most heavily regulated sectors in an advanced
economy, and trade in financial services tends to be regulated primarily through restrictions
on entry and operations of foreign providers and on cross border exports and imports of
financial services. More specific types of barriers to entry and trade in financial services exist
in the form of limits on the availability of new banking licenses, limits on the availability of
new banking licenses, limits on establishment by foreign banks or on equity participation by
foreign financial institutions in domestic banks, eligibility criteria/government approval
required for establishment, constraints on operational activities of foreign banks, residency
requirements for board membership, constraints on lending or the imposition of directed
lending, and constraints on access to offshore financial instruments (Claessens and Glaessener,
1998). These restrictions discriminate between domestic and foreign financial service
providers and thus hamper level competition in domestic financial market.
Trade liberalization in financial services has been advocated by the multilateral trading
system which provides a framework for multilateral negotiations on rules and regulations
governing services trade. Liberalization of trade in financial services is widely understood as
the process of opening the financial services to competition. It involves the liberalization of
restrictions on entry and operation of foreign providers and on exports and imports of
financial services i.e market access. It also involves redesigning regulations in accordance
with the principles of national treatment (NT) and most-favored nation (MFN) as well as
enhancing transparency of financial regulations essential for creating equal competitive
opportunities for domestic and foreign providers (Tamirisa et al., 2000). Restriction on trade
in services is more complex than on trade in goods. Restrictions on goods trade usually take
the form of tariffs. In contrast, restrictions on trade in financial services usually take the form
of government regulations. Juan (2008) classified protective measures in the provision of

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financial services into three categories: measures related to establishment, measures related to
cross-border supply, and operating requirements.
Measures related to establishment regulate the ability of foreign financial service suppliers to
enter into domestic financial market. These might include, but not limit to, licensing policies,
restriction on direct branching, joint venture requirements, and limitation on the total value of
assets. Cross-border supply is generally more restricted than establishment trade. These
restrictions are usually motivated by capital controls, supervisory concerns, or a lack of
resources to supervise these transactions. In the case of banking, cross border supply
restrictions could be the requirement of service provision through commercial presence or
such cross border service supply is permitted but subject to host-country prudential regulation.
In the case of insurance sector, the host regulatory authority may impose specific
requirements, such as registration/notification and collateralization for the insurance of large
risks or tax on reinsurance premiums paid to overseas insurers/reinsurers. Operating
requirements are more stringent in the financial sector than in any other. The measures could
be capital requirements, limitations on the scope of business, different taxation, restrictions on
the number of operations, or requirement on the membership of nationals in boards of director.
Because restrictions in financial services usually concerns regulations, measuring
impediments to trade in financial services is very difficult. A couple of studies tried to
measure restrictions in trade in services. In a collaborative project, the Productivity
Commission and the Australian National University1
have been measuring the restrictions on
trade in services for a number of economies in Europe, Asia, North and South America. The
study constructed Trade Restrictiveness Index (TRI) using qualitative information about
regulations, which are classified according to whether the restrictions are imposed on
establishment or ongoing operations, and non-discriminatory or discriminatory between
domestic and foreign services suppliers. TRI score is calculated using a methodology of
scores and weights, which ranges from 0 to 1 (the more stringent the restriction, the higher the
score). An index score is calculated separately for domestic and foreign services suppliers. A
foreign index measures all the restrictions that hinder firms from entering and operating in an
economy. It covers both discriminatory and non-discriminatory restrictions. A domestic index
represents restrictions that are applied to domestic firms and it generally only covers non-
discriminatory restrictions. The difference between foreign and domestic index scores is a
measure of discrimination against foreigners.
1
http://www.pc.gov.au/research/researchmemorandum/servicesrestriction

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McGuire and Schuele (2000) also conducted similar study by constructing TRI for banking
sector for 38 economies in Asia Pacific, America and Europe. Index score was calculated for
domestic and foreign banks to separately quantify the extent to which regulation restricts
domestic and international competition. The foreign index covers restrictions relevant to
foreign banks, and the domestic index covers those applying to all banks. Measurable
variables used for index scoring for banking sector include licensing of banks, direct
investment, foreign equity participation, restriction on certain types of services by foreign,
joint venture arrangement, permanent movement of people, raising and lending funds by
foreign banks, and other restrictions. The study found that restrictions on banking services
vary significantly among economies. Common restrictions are limitations on the number of
bank licenses available, restricting foreign entry to only joint ventures with new domestic
banks, limiting foreign equity participation in domestic banks, and restricting operations.
2.2. Gains from trade liberalization in financial services
Literatures on trade liberalization in financial services centre on two major issues. First is on
the extent to which financial sector opening could foster economic growth, and second is on
economic fundamentals and benefits of financial sector opening.
2.2.1. Trade liberalization in financial services and economic growth
Literatures on finance and growth widely recognize the significant contribution of financial
sector in the whole economy. It not only contributes directly to output and employment, but
also provides an essential infrastructure for the functioning of the entire economy. Financial
system serve as a channel through which savings can be mobilized and used to finance
investment and at the same time facilitate transactions necessary for internal and external
trade. It also helps to manage risks and reduce information asymmetries between providers
and users of fund. More specifically from theoretical argument, financial sector can affect
savings and capital accumulation, promoting technical innovation, enhancing productivity and
hence economic growth through five broad functions: (i) facilitating transactions, (ii) risk
management, (iii) mobilizing saving, (iv) allocating funds, and (v) monitoring firm managers
(Levine, 1993). The basic theoretical prediction is that financial sector opening would foster
financial sector development. Countries with better developed financial systems should enjoy
faster rates of economic growth than countries with less well developed financial system.
Several key empirical studies, viz. Francois et al. (1999), Matto el al. (2001), Levine (1996
and 1997), King and Levine (1993), and Bercuson (1995) support this theorem. Francois et al.

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(1999) found strong positive relationship between financial sector competition and financial
sector openness, and between growth and financial sector competition. The results suggest
that moving from a closed to a relatively open financial services regime is correlated with
significant pro-competitive pressures, and ultimately with large differences in growth rate.
Mattoo et al. (2001) found that countries that were open to trade in financial services achieved
growth rates up to 1.2 percentage points higher than rates in other countries over the period
1990-1999. Levine (1996 and 1997) and King and Levine (1993) show that both developed
and developing countries with open financial sectors have typically grown faster than those
with closed one. Bercuson (1995) who observes rapid development of Singapore suggested
that economic success of this country has been facilitated by internationally-oriented financial
service sector.
2.2.2. Trade liberalization in financial services and financial sector development
Another important issue emerged from literatures on financial services opening is its impacts
on financial sector development. Most literatures widely agreed that trade liberalization of
financial services can help countries build more robust and efficient financial systems; and the
channels through which liberalization affects financial development exist at least five ways:
(i) it facilitates capital inflows, (ii) it spurs domestic financial institutions improve quality,
innovation and efficiency, (iii) it enhances competition, (iv) it introduces international
practices and upgrades financial standards i.e. accounting and auditing, and (v) it intensifies
pressure on government to enhance the legal, regulatory and supervisory systems.
Several studies attempted to empirically identify ways in which liberalization in financial
services affect financial system. Bhattacharaya (1993) reports that foreign banks in Korea
have provided the economy with greater access to international financial markets than what
their own domestic banks could; while McFadden (1994) stresses that the policy objectives of
opening to foreign banks in Australia was to enhance contacts with the international financial
community and thereby increase capital inflows.
On efficiency benefits, foreign banks tend to be more efficient than their domestic
counterparts (Barajas et al., 2000, Bhattacharya et al., 1997, Clarke et al., 2000, Demirguc-
Kunt and Huizinga, 2000, and Kiraly et al., 2000). Entry of foreign banks also tends to
facilitate the dissemination of new technology, managerial knowledge and financial expertise
throughout the financial sector (Levnie, 1996), and to increase the efficiency of domestic
banking sector by reducing costs and profitability of domestic banks (Claessens and Glaessner,
1998, and Terrel, 1986). Specific country case studies are observed by Bhattacharaya (1993).

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Foreign banks have introduced new and better services and have led the boom in credit cards
and automated machines (ATM) in Spain. Similarly, in the case of Turkey, foreign banks
computerized most of their banking operations, used modern budgeting and planning
techniques, and quickly tied themselves to the SWIFT payment system network. Similar
findings are also found among group of OECD countries (Hoj et al., 1995). There were
significant positive effects on financial sector efficiency associated with liberalization among
OECD countries. Financial reform in OECD countries’ banking sector has resulted in
improvement in most indicators of operational efficiency i.e. net interest margin, gross
income to capital, staff cost to gross income and average commission. In sum, evidence
suggests that foreign banks directly improve the range and quality of financial services in
countries that are open to foreign banks and indirectly promote financial development by
inducing domestic banks to improve their operations.
Openness to foreign financial service providers is also expected to stimulate competition in
the sector, resulted in greater efficiency, dynamism and innovation. In more competitive
industry, financial firms tends to provide more services at lower costs and prices (Tamirisa et
al., 2000, and Levine, 1996). Foreign competition encourages domestic providers to improve
variety and quality of their financial services and products (Bonin and Abel, 2000). Using
Hungary as case study, the study found that competition from new foreign entrants in
Hungary stimulated the main domestic banks to develop new products and better services
such as bank cards and ATM. In addition, the increased competition could also encourage
domestic providers to modernize their management practices including internal control and
risk management (Kono et al., 1998, Levine, 1996, Nicholl, 1997, and Armendariz, 1997).
Finally, financial service opening tends to discipline policies and encourages policy makers to
improve clarity, consistency and transparency of financial regulation and supervision (Levine,
1996, Nicholl, 1997, Armendariz, 1997, and Glodstein and Turner, 1998). Better bank
regulation will reduce the chances for systemic failure, and improve the sustained provision of
growth-enhancing financial services—risk diversification, transaction facilitation, resource
mobilization, resource allocation, and corporate governance. These improvements would
contribute to financial development and economic growth. Furthermore, financial service
opening put pressure on the governments especially in developing countries to harmonize
regulatory and supervisory procedures and standards with those of developed countries.
Glaessner and Oks (1994) demonstrates that Mexico is under pressure to harmonize
prudential regulations in areas such as capital adequacy, valuation and accounting principles,
related-party transactions, and conflict-of-interest provisions following its commitment to
open financial services under North American Free Trade Agreement (NAFTA). They even

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predict an important improvement in Mexico’s laws and regulations regarding corporate and
bankruptcy law, laws regarding negotiable instruments, and laws relating to secured
transaction.
2.3. Indicators used for Assessment of Financial Sector Performance in Cambodia
From the above literatures, financial service opening can help build more robust and efficient
financial systems by facilitating capital inflows, improving quality, innovation and efficiency,
increasing competition, introducing international practices, and intensifying pressure on
government to enhance the legal, regulatory and supervisory systems. Providing that sectoral-
wide indicators in Cambodia are limited, evaluation of financial development covers breadth
and outreach of the financial system, competition and efficiency.
Data on the financial breadth or penetration often serve as proxies for access of the
population to different segment of the financial sector. Well-functioning financial systems
should offer a wide range of financial services and products from a diversified set of financial
intermediaries and market. Sectoral indicators of financial development in banking may
include total number of banks, number of branch and outlets, bank deposit to GDP ratio, bank
assets to financial assets ratio, and bank asset to GDP ratio. For insurance sector, indicators
are number of insurance companies, gross premiums to GDP ratio, and gross life premiums to
GDP ratio
Competition in the financial system can be defined as the extent to which financial markets
are contestable and the extent to which consumers can choose a wide range of financial
services from a variety of providers (WB and IMF, 2005). Indicators that can measure
competition include total number of financial institutions, change in market share, ease of
entry, interest rate spreads and price of services. Quantitative measures of efficiency are
intermediation costs and interest rate spreads.

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Chapter Three: Financial Services Liberalization in GATS--
Experience from Cambodia
This chapter looks at financial services liberalization in GATS from Cambodia’s experience.
It first examines the overview of GATS and then discusses historical development of financial
services negotiation as well as current commitments of financial services offered by WTO
members. The last session reviews the development of financial service liberalization in
Cambodia, and summarize Cambodia’s services schedule of financial sector.
3.1. Overview of General Agreement on Trade in Services
General Agreement on Trade in Services (GATS) was concluded along with other major
agreements in the Uruguay Round negotiations in 1995. It provides a framework of
commonly accepted rules and disciplines governing WTO Members' trade in services with a
view to achieve progressively higher levels of liberalization of trade in services through
periodic rounds of multilateral negotiations. The GATS has four main components: (i)
definition and scope; (ii) a framework agreement defining general obligations; (iii) a schedule
of specific commitment; and (iii) annex.
Scope and Definition: GATS classifies all trade in services in four ways (or modes). Mode 1-
-cross-border trade refers to services provided from the territory of one Member into the
territory of any other Member. Mode 2 or consumption abroad is defined as services provided
in the territory of one Member to the service consumer of any other Member. Mode 3--
commercial presence refers to service supplied by a service supplier of one Member, through
commercial presence, in the territory of any other Member. Mode 4--presence of natural
persons is defined as services provided by a service supplier of one Member, through
presence of natural persons of a Member in the territory of any other Member. In terms of
scope, this Agreement applies to measures by Members affecting trade in services (Article
I:1). It does not matter in this context whether a measure is taken at central, regional or local
government level, or by non-governmental bodies exercising delegated powers. The measures
can be in the form of a law, regulation, rule, procedure, decision, administrative action, or any
other form.

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General Obligations: like in GATT, MFN principle is the most important general obligations
that bind members to treat service providers no less favorable than that accorded to like
services and service suppliers of any other countries (Article II). The MFN obligation is
applicable to any measure that affects trade in services, whether specific commitments have
been made or not. Yet, this obligation can be exempted in many means. In addition to
‘traditional’ exemptions such as for regional integration schemes (Article V), GATS contain a
sweeping exemption for all MFN-inconsistent measures that Members listed at the end of the
Uruguay Round or, if later, the date of accession in the Annex. The measures, however, are
subject to time limitation (in principle not exceed 10 years), to review (usually after 5 years),
and to be negotiated in any subsequent trade rounds. The other general obligations stipulated
in GATS relate to requirements such as transparency and disclosure of information, economic
integration, domestic regulation, recognition of standards, monopolies, emergency safeguard
measures, and other general issues.
Transparency provision (Article III) requires all members to publish all relevant measures of
general application that affect the establishment and operation of services providers of other
members. Moreover, it requires members to inform the Council for Trade in Services at least
annually of all legal or regulatory changes that significantly affect trade in sectors where
specific commitments have been made. Members are also required to establish enquiry points
which provide specific information to other Members upon request (Article IIIbis).
Transparency requirement is intended to promote disclosure of information and to enhance
better accessibility to relevant regulations that affect trade in services. The provisions
covering economic integration (Article V) are analogous to those in Article XXIV of GATT,
allowing members to enter into an agreement liberalizing trade in services among the parties
to such agreement. Yet, it requires arrangements to have “substantial sectoral coverage” and
to “provide for the absence or elimination of substantially all discrimination” between the
parties.
Provisions on domestic regulations (Article VI) spell out that all measures of general
application affecting trade in services should be administered in a reasonable, objective and
impartial manner. Provisions on recognition (Article VII) spell out obligations that members
should recognize the education or experience obtained, requirements met, or licenses or
certifications granted in other member territories as standards or criteria for securing the
authorization, licensing or certification in the services area. It encourages recognition
requirements achieved through harmonization and internationally-agreed criteria. Provisions
on monopolies (Article VIII) state that parties are required to ensure that monopolies and
exclusive service providers to neither abuse its monopoly position nor act in a manner

16. 16
inconsistent with its MFN obligations and specific commitments. On safeguard provisions,
while parties are normally obliged not to restrict international transfers and payments for
current transactions, they are allowed to limited restrictions in the event of balance-of-
payments difficulties. However, such restrictions would be subject to conditions; including
that they are non-discriminatory, that they avoid unnecessary commercial damage to other
parties and that they are of a temporary nature.
Specific Commitments: GATS contains specific commitments in service schedule relating to
market access (Article XVI) and national treatment (Article XVII) for the service activities on
the terms and conditions specified in the schedule. When making a commitment a government
therefore binds the specified level of market access and national treatment and undertakes not
to impose any new measures that would restrict entry into the market or the operation of the
service. The commitments guarantee to economic operators in other countries that the
conditions of entry and operation in the market will not be changed to their disadvantage.
Market access provisions (Article XVI) require all members to accord services and service
suppliers of any other Member treatment no less favorable than that provided for under the
terms, limitations and conditions agreed and specified in its schedule. The intention of the
market-access provision is to progressively eliminate the four major types of measures:
limitations on numbers of service providers, on the total value of service transactions or on
the total number of service operations or people employed. Equally, restrictions on the kind of
legal entity or joint venture or any foreign capital limitations relating to maximum levels of
foreign participation are to be progressively eliminated.
The national-treatment provision (Article XVII) requires members to accord to services and
service suppliers of any other member, in respect of all measures affecting the supply of
services, treatment no less favourable than that it accords to its own like services and service
suppliers. However, it does provide the possibility of different treatment being accorded the
service providers of other parties to that accorded to domestic service providers as long as the
conditions of competition are not modified in favour of the domestic service providers.
Annexes: Attaches to GATS are seven annexes that form an integral part of this Agreement.
They outline horizontal issues and sector-specific issues, including MFN exemption,
movement of natural persons, air transport services, financial services, maritime transport
services, and telecommunications.

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3.2. Financial Services Liberalization in GATS
3.2.1. Historical Development of Financial Service Negotiations
Liberalization of financial services sector is governed by GATS. Financial service is defined
in this Agreement as ‘any service of a financial nature offered by a financial service supplier
of a Member’. Financial services include two broad categories of services: insurance and
insurance-related services, and banking and other financial services. Financial services
liberalization was a major challenge during the Uruguay Round. Negotiation on financial
services remained unfinished at the end of the Uruguay Round negotiations largely due to the
fact that broad exemptions on MFN and national treatment remain prevailed and that specific
commitments on market access and national treatment provided by many major WTO
members were widely regarded as not essential and enough. Under the mandate of Article
XIX of GATS requiring members to progressively liberalize trade in services through
successive rounds of negotiations, further negotiations were planned during a six-month
period following the entry into force of the GATS. Two additional rounds of negotiations on
financial service were held, one in 1995 and the
other in 1997.
The 1995 financial service negotiation resulted in
interim agreement that members made notable
improvement in specific commitments and in the
scope of MFN exception. Yet, the overall results
of negotiation were not satisfactory and not
widely accepted. Negotiation was reopened in
April 1997 reaching an agreement on a new and
improved set of schedules of commitments in all
of the three major financial service sectors—
banking, securities and insurance were agreed
and adopted. The new agreement contains
significant improvements, viz. by allowing
commercial presence of foreign financial service
suppliers, and eliminating or relaxing limitations
on foreign ownership of local financial
institutions, limitations on the juridical form of
TIMELINE
June 1995: Negotiations continue after no
agreement on financial services in the
Uruguay Round negotiations
April 1997: Negotiations reopen following
unsatisfactory agreement in 1995
negotiations
January 2000: Negotiations begin
March 2001: Guidelines and the Procedures
for the Negotiations on Trade in Services are
adopted
November 2001: Doha Development
Agenda is adopted
March 2003: Deadline for receiving “initial
offers”
July 2004: “July Package” resuscitates
negotiations and establishes deadline of May
2005 for submission of revised offers
December 2005: Hong Kong Ministerial
Conference reaffirms key principles of
services negotiations
July 2006: Doha negotiations suspended
January 2007: Resumption of Doha
negotiations
July 2008: Services Signaling Conference
held as part of “July 2008” package
Source: WTO

18. 18
commercial presence, and limitations on the expansion of existing operations. Important
progress was also made in “grandfathering” existing branches and subsidiaries of foreign
institutions that are wholly sector or majority-owned by foreigners.
Another new round of service negotiation was launched in January 2000, during which
negotiations proceeded on an almost purely multilateral basis, with several negotiating
proposals being submitted. A year later in November 2001, the services negotiations were
incorporated into the Doha Development Agenda, which gave more emphasis to bilateral —
request and offer — negotiations. The negotiations on financial services, as on other services
sectors, have been disappointed especially in the areas of number and quality of offers. No
significant improvements from the previous commitments have been offered, while in most
cases no new business or access opportunities have been granted. As of today, 71 offers
(initial and revised) have been submitted, representing 95 members. Almost half of them
contain improvements to financial services commitments. However, improvements are not
significant, and in many cases, fall behind the current — more open — regulatory framework2
.
3.2.2. The Status of Current Commitment in Financial Services
Financial service is the second sector behind tourism that WTO members have more GATS
commitments containing 105 schedules (Juan, 2008). The coverage and extent of
liberalization are found more comprehensive in developed countries than in developing
countries, and more opened in banking sector than insurance and securities sectors. It is also
found higher number of limitations maintained on market access and national treatment; while
level of commitment is relatively low compared to some other sectors, probably reflecting the
common concerns over financial sector instability that market opening could bring about.
In terms of mode of supply, full opening of cross-border supply is rare, except in such sector
as MAT insurance, reinsurance, auxiliary services to insurance, insurance intermediation, and
the provision and transfer of financial information. Market access limitations on the supply of
financial services through commercial presence are also common. According to Juan (2008),
limitations on the type of legal entity i.e. branch versus subsidiaries predominate, followed by
limitations on foreign equity participation, limitations on the number of suppliers, and
limitation on the value of transactions or assets. Developed and transition economies are more
opened in participation of foreign capital, but more restrictive in type of legal entity.
Limitations on the number of suppliers are equally frequent for developed and developing
2
http://www.wto.org/english/tratop_e/serv_e/finance_e/finance_e.htm#nego

19. 19
economies. Juan (2008) also observes that commitments made by acceding countries are
generally broader and more liberal than commitments made by other WTO members at
similar stages of development. All twenty-three countries that acceded to the WTO between
1995 and end-2007 have covered a wider range of financial services.
3.3. Overview of Financial Sector Liberalization in Cambodia
Financial sector in Cambodia has undergone substantial changes since early 1990s including
structural reforms and financial market opening. The latter is at nascent stage and it is
influenced by both more liberal economic policy and sectoral development strategy. At
economy-wide level, Cambodia’s economic policy has shifted toward more liberal and
outward-looking with principal goal of expanding and strengthening economic ties and
international cooperation through the integration of its economy into the regional and world
economy. Cambodia’s membership in the Association of Southeast Asian Nation (ASEAN)
in 1999 and later in the World Trade Organization (WTO) in 2004 indicates higher degree of
its economic integration and to most extent suggests the progressive development of country’s
economic liberalization. Under regional economic cooperation schemes, Cambodia is obliged
to reduce and eliminate trade barriers in order to assure freer movement of goods and services.
Under multilateral framework, it is required to ensure compliance with WTO rules and
principles by adopting a series of regulations that would strengthen the judicial system
regarding commercial activities, respect trade-related intellectual property rights, facilitate a
smooth functioning of external trade and promote financial intermediation. To achieve these
aims, Cambodia has made numerous commitments to make its trade policy and practices fair
and non-discriminatory, transparent and predictable and those relate to state ownership and
privatization, pricing policies, tariff rates, quotas and tariff exemptions, quantitative import
restrictions, export restrictions, export subsidies, anti-dumping measures, countervailing
duties and safeguard regimes, customs valuation, pre-shipment inspection, rules of origin,
industrial policies, agricultural policies, standards and certifications and textiles regime.
The gradual and ongoing reforms have improved Cambodia’s economic landscape with trade
and investment regime becoming not only less restrictive but also more conducive to
investment and private sector. Several studies support positive development of Cambodia’s
economic openness. The Index of Economic Freedom compiled annually by the Heritage
Foundation in the United States, for example, ranked Cambodia at the top of the LDCs it
covers in 2003 and ranked 106th
among 179 countries in 2009 and 21st
out of 41 countries in

20. 20
the Asia-Pacific region3
. Trade freedom score is very much improved, while openness index
achieve higher score reaching 140 per cent in 2006 as compared to 45 per cent in 1996 (CDRI,
2008). In terms of investment, Cambodia officially welcomes foreign direct investment.
Cambodia’s 1994 Law on Investment established an open and liberal foreign investment
regime. All sectors of the economy are open to foreign investment and 100 percent foreign
ownership, except of land ownership, is permitted in most sectors. Aside from this, there is
little or no discrimination against foreign investors either at the time of initial investment or
after investment.
At sectoral level, financial system had undergone important changes in terms of structural
reforms and financial market opening. Structural reforms were initiated in 1989 through a
government decree to establish a two-tier banking system by separating the function of
commercial banks from national bank of Cambodia. Foreign banks have been authorised since
1991 and competition in banking sector had been encouraged through prudent liberalization
and the opening of an appropriate competition environment between local and foreign banks.
Foreign banks are allowed to open subsidiaries, branches, and representative offices. Law on
Banking and Financial Institutions was adopted in 1999 to govern all financial operations.
This law together with subsequent regulations guaranteed foreign banks rights and obligations
equal to local banks; while it provides no restriction regarding foreign ownership of banks. In
addition, there is no restriction on participation of foreign executives in the board of directors
and on the work permit and movement of such natural persons as foreign executives, senior
managers or specialists.
The process of financial service openness in Cambodia is also stimulated by financial sector
development strategy 2006-2015. With principal objective to support the development of a
sound market-based financial system, resource mobilization, effective financial resource
allocation, and broad-based sustainable economic growth, this sectoral plan encompasses
several aspects of financial system, one of which is the financial services openness in order to
create more balanced financial structure, increases the depth of the financial sector, and
promotes competition in the context of financial stability. International trade agreements on
services, viz. general agreement on trade in services (GATS) also play a role in fostering
financial service opening process in Cambodia. More details about Cambodia’s service
schedule will be provided in later session.
3
http://www.heritage.org/Index/Ranking.aspx

21. 21
The status of financial services liberalization in Cambodia has been assessed by Saing (2008).
He borrows framework designed by McGuire and Schuele (2000) and uses Trade
Restrictiveness Index (TRI) to estimates the extent and level of openness or restriction of an
economy’s trading regime for finance services. Similar to McGuire and Schuele (2000),
indicators used for calculating TRI for banking services are licensing of banks, form of
commercial presence, foreign equity participation permitted, restriction on certain types of
services by foreign, joint venture arrangement, permanent movement of foreign executives,
raising & lending funds by foreign banks, and other restrictions; while indicators for
insurance services include licensing of insurance companies, form of commercial presence,
foreign equity participation permitted, restriction on certain types of services by foreign,
joint venture arrangement, cross border supply by insurance companies, limitation on foreign
suppliers, scope of raising fund by domestic & foreign, and expanding the number of
insurance outlets. Furthermore, Saing (2008) constructs foreign index, which covers
restrictions relevant to foreign financial service suppliers, and domestic index, which covers
restrictions applied to all suppliers.
The result suggests that restriction
against foreign participation in both
banking and insurance is extremely low.
Discrimination in insurance industry is
slightly higher than that of the banking
sector. Saing (2008) even argues that
significant improvement in degree of
openness of financial sector reflects the
changes of existing rules, introduction
of several new outward-oriented
regulations and practices of free market
economy.
3.4. Cambodia’s Financial Service Schedule in GATS
Cambodia’s financial services liberalization represents a bold commitment it has made during
WTO accession in October 2004. According the country services schedule, financial services
is much less restrictive to foreign competition and investment in nondiscriminatory
environment. There is no MFN exception on financial sector; while there are two measures /
Source: Saing (2008)
Table 3.1: Trade Restrictiveness Index

22. 22
restrictions specified in horizontal commitments applicable to financial sector. First is
restriction on land ownership applicable to mode 3. It clearly states that non-Cambodian
natural and juridical persons may lease but not own land. Second measure applies to
movement of natural persons (mode 4). The number of foreign nationals to be employed in a
particular establishment or services sector was limited to 10 per cent of the workforce and
only available to residents of Cambodia. The Ministry of Labour could, however, authorize a
higher percentage of foreign employment where specific skills were not available in the
domestic market. Such restriction does not apply to natural persons that are responsible for
setting up of a commercial establishment; and intra-corporate transferees, which include
executives, manager who possess knowledge at an advanced level of expertise or proprietary
knowledge, and specialists.
On specific commitments in financial services, no limitations on market access and national
treatment applied to mode 2 in all sub-sectors. Some financial services such as life insurance
services, non-life insurance services, and services auxiliary to insurance, are completely open
to foreign investments and national treatment. While some sectors are also open to foreign
investment but subject to conditions set by relevant laws. For example, companies in
reinsurance and retrocession must reinsure 20 per cent of their risk in Cambodia; while all
commercial banks must obtain licenses from the National Bank of Cambodia (NBC) before
fully operate in banking services. During the time of its accession, Cambodia’s financial
sector is at a nascent stage of development at which some financial services such as financial
leasing, stock exchange and transferable securities have not yet functioned; while laws and
regulations governing these financial activities have not yet established. Lack of regulatory
infrastructures made the country more cautious to opening up to foreign competition. As a
result, it is found limitations on market access in mode 3 in such sectors as financial leasing,
guarantees and commitments, foreign exchange, derivative products, exchange rate and
interest rate instruments, transferable securities, money broking, and asset management are
unbound and subject to related laws and regulations to be adopted. Details about Cambodia’s
Financial Service Commitments are provided in the Annex.
In general, Cambodia is at the stage of development that is in need of and opened to foreign
direct investment. Financial services are no exception and foreign direct investments in this
sector are strongly encouraged though they are subject to certain conditions obliged by
relevant rules and regulations. Most restrictions are prudential in nature, which are primarily
intended to ensure the soundness and stability of financial system. Furthermore, except in
areas of land ownership and labor requirement, no other measures applicable in financial
services discriminate between domestic and foreign financial service suppliers.

23. 23
Chapter Four: Assessment of Financial Sector Performance in
Cambodia
This chapter assesses the performance of Cambodia’s financial sector by closely looking at
three major measurements: breath and outreach of financial system, competition, and
efficiency. The unit of analysis is broken down into two separate sub-sectors of financial
sector: banking and insurance sub-sectors performance. Since most financial indicators are
not available before 2004, the time of observation is 2005 onward.
4.1. Depth and Outreach of Financial System
Banking Sector
The Cambodian banking sector has grown dramatically in recent years with the total number
of banks increasing from 19 in 2005 to 30 in 2008. As of 2008, the banking sectors consist of
20 private local banks, 3 foreign banks and 1 state-owned bank. Interestingly, the branches
have increased even more rapidly from 49 in 2004 to 105 in 2008. The increasing number of
banks stimulates wider physical access to banking services as reflected introduction of
electronic banking services, ATMs and POS by all major banks since 2005. As of 2007, banks
have issued 150, 546 debit/ATM cards, 4, 953 credit cads and installed 177 ATM. The
number of ATM machine doubled just in a year amounting to 338 machines throughout the
country.
The overall size of banking sector has also expanded quickly in recent years; ratio of broad
money to GDP (M2 to GDP) and ratio of bank asset to GDP increased at average rate of 36
per cent and 46 per cent, respectively, during 2005-08. As of 2008, broad money accounts for
41 per cent of GDP rising from 22.8 percent in 2005; while bank asset represents 58 per cent
of GDP, an increase from 25 per cent in 2005. Loans and deposits also expanded significantly
at average rate of 53 per cent and 35 per cent, respectively during 2005-08. In 2008, total
loans grew 4 times from 2005 reaching USD 2, 401 million or 34 per cent of GDP; while total
deposit rose to USD 2534.9 million from USD 958.6 million in 2005.

24. 24
Table 4.1: Financial Depth and Outreach 2005-08
2005 2006 2007 2008 % change 2005-08
Number of Banks 19 20 24 30 17%
Private local banks 15 16 20 26 17%
Foreign banks 3 3 3 3 0
State-owned banks 1 1 1 1 0
Number of branches 49 53 84 105 31%
Total loans (USD mil.) 572.9 871.5 1559.2 2401.1 62%
Loan growth (%) 27% 52.1% 78.9% 54% 53%
Loan as % of GDP 10.7% 14.7% 23.6% 34% -
Total deposits (USD mil.) 958.6 1384.7 2442.3 2534.9 -
Deposit growth (%) 15.8% 44.5% 76.4% 3.8% 35%
Deposits as % of GDP 17.8% 23.3% 36.9% 35.9% -
M2/GDP (%) 22.8% 28.5% 42.1% 41.4% -
Total bank asset (USD mil.) 1359.4 1878.8 3309.4 4107.3 46%
Bank asset as % of GDP 25.3% 31.6% 50.0% 58.1% -
Source: National Bank of Cambodia
The strong growth of the banking sector was driven in part by the economic growth that
stimulate more demands from both corporations and households on banking services, and
partly by the continuing improvement of the regulatory and supervisory body, which leads to
increased public confidence in the banking sector. Meanwhile, it is observed that the pattern
of banking sector development has coincided with different degree of economic and sectoral
openness to competition. For example, low performance of banking sector happened during
the period that Cambodia undertook massive economic and sectoral restructuring toward more
opened and outward looking policy. During that period, Cambodia’s economy was at a
nascent stage of reforms and integration and thus it saw private sector including banking
sector progressed gradually and rather slowly. Once Cambodia has taken further step to
deepening its economic integration and fastening economic and trade liberalization,
investment in and performance of financial sector performance blossomed. Therefore, it is fair
to argue that trade liberalization in services plays a role in strengthening the depth and
outreach of banking sector.
Insurance Sector
The history of Cambodia insurance industry is very recent. The industry began operation in
1992 after the adoption of the law on the Establishment of Insurance Business in Cambodia.

25. 25
A state-owned insurance company known as CAMINCO was established as regulator,
operator and reinsurer, followed by three private insurers as its agents, namely Indochine
Insurance4
(1994), Asia Insurance (1995) and Forte Insurance (1999)in the developing stage
governed by Law on Insurance, which was passed in 2000. Given its recent development and
poor public awareness of the necessity and significance of non-live and life insurance, the
sector remains very small with slow progress in the performance. As of 2007, five companies
involve in insurance business with total asset at USD 49.6 million and total net premium at
USD 6.25 million. The number of
policy holders doubled over the
last three years from 18, 407 in
2005 to 29, 124 in 2007. Yet, the
market size is still small as
reflected by minimal share of
gross premium to GDP at 0.3 per
cent in 2007.
At its embryonic stage, insurance services are unsophisticated and narrow. The main products
are motor vehicle, commercial fire and insurance that makes up about 80 per cent of the total
industry. There is no life insurance, but there is a plan to create such insurance services
through a joint venture of private insurance companies and government. From the above
observation, it is evident that Cambodia’s insurance sector is still at infant stage of
development with limited legal framework, low public awareness and usage of insurance
services, and unsophisticated insurance products. Opening up the sector to foreign
competition via more liberal service trade policy could only play minimal role in boosting the
development in this sector. Market demands, sound regulatory framework and effective
supervisory institutions are more essential at this early stage to insurance sector development.
4.2. Competition in Financial Sector
Banking Sector
The Competition in banking services in Cambodia becomes stronger in recent years especially
after entry of few international banks. Higher degree of competition is reflected by increasing
number of banks and rapid expansion of branch offices. As of 2008, total numbers of bank
operating in Cambodia reached 30 banks with 105 branches throughout the country. Not only
4
It was closed in 2004 due to financial difficulties during the transformation of being licensed.
Table 4.2: Depth and Outreach of Insurance Sector
2005 2006 2007
Number of insurance
companies
4 3 5
Policy holders 18, 407 - 29, 124
Total assets (in USD mil.) 31.9 - 49.6
Gross premiums as % of GDP 0.2% 0.2% 0.3%
Source: Ministry of Economy and Finance (MEF)

26. 26
do bank outlets flourish throughout the main towns and provinces, but also banking services
are introduced and offered to consumers at more convenient and competitive packages.
Before 2005, for example, there were limited ATM machines and they were installed at the
bank head offices. Furthermore, consumers were charged a monthly fee for the use of debit
card. Since ANZ Royal entered the market in 2005 with aggressive market penetration
strategy, competition landscape in banking sector changed dramatically especially in aspects
of facilities, banking products and services and corporate strategy. From this observation,
foreign banks bring about superior technology, good business practices and innovative
banking products and services and these driving forces pressure incumbent local firms to
improve their banking products and services in order to stay in the market. As a result,
banking market becomes more competitive.
Another approach to assess competition status is to look at market structure. Table 4.3
suggests that market structure in bank deposit services is concentrating in five major banks,
which all together represent two thirds of total deposit. Yet, none of these banks has dominant
power in the market. This argument can be proved by Herfindahl Index (HI), which is
calculated as the sum of the squared market share of each firm in the industry. HI in deposit
market is fairly low at 0.13 in 2007. As a general rule, this indicates moderate concentration
and deposit market is fairly competitive with no dominant players. On loan market, the
market structure is very similar to deposit market, which is dominated by few major banks.
However, it has higher concentration as reflected by higher HI at 0.18. At this level of
concentration, there is no any bank that has dominant power in loan market.
Table 4.3: Market Structure of Banking Sector in Cambodia
2005 2006 2007
Deposit market
Canadia Bank Plc. 24.9% 21.1% 18.4%
Foreign Trade Bank of Cambodia 15.0% 13.9% 7.4%
Cambodian Public Bank 13.1% 13.7% 12.5%
Cambodian Commercial Bank Ltd. 9.6% - 7.4%
ANZ Royal Bank (Cambodia) Ltd. 7.8% 13.3% 21.0%
Herfindahl Index (HI) 0.13 0.12 0.13
Loan market
Canadia Bank Plc. 26.8% 24.9% 21.9%
Acleda Bank Plc. 17.0% 18.2% 20.1%
Cambodian Public Bank 13.9% 17.9% 22.9%
Union Commercial Bank Plc. 7.8% 5.7% -
ANZ Royal Bank (Cambodia) Ltd. - - 9.1%
Herfindahl Index (HI) 0.17 - 0.18
Source: National Bank of Cambodia

27. 27
In sum, the dominance of a few major banks in deposit and loan markets largely reflect their
superiority and strong business performance as compared to the rest of the banks, but it does
not necessary reduce competition. In contrast, bank deposits and loans are highly competitive
as suggested by low HI.
Insurance Sector
Insurance market in Cambodia is still very small and competition is not as strong as that in
banking sector. The numbers of insurance companies are very few with only four insurers in
2005 and increase to five in 2007, one of which is public insurance enterprise. HI calculated
for this sector score very high and this suggests that the insurance industry with that few
competitors has a high level of concentration. The market share by gross premium is
dominated by two major insurance companies, one of which took half of the market share. It
can be argued from this market structure that the dominant companies might have certain
power in the market and if this is the case it could curb competition among incumbent firms
as well as prevent new comer from entering into the market. In fact, foreign competition in
insurance sector is not as acute as in the banking sector and that’s why the market is less
competitive. Therefore, it is fair to argue here that the degree of competition in financial
market is to some extent subject to level of participation by foreign firms in the domestic
financial market. The more the foreign firms are in the market, the more competitive is the
industry.
Table 4.4: Market Structure of Insurance Sector in Cambodia
2005 2006 2007
Market share by gross premium
Forte 46.50% 51.70% 50.30%
ASIA 42.70% 37.80% 34.80%
CAMINCO 10.70% 10.50% 9.70%
CAMPUBANK LONPAC - - 3%
Infinity - - 2.20%
Herfindahl Index 0.41 0.42 0.38
Source: Ministry of Economy and Finance
4.3. Efficiency in Financial Sector
Banking Sector
Although competition in banking sector is significantly increasing in recent years, banking
products and services are not yet provided at the lowest cost. Cost of borrowing, for example,

28. 28
remains high in spite of gradual decline over the last decade. Twelve-month cost of borrowing
was approximated at 16.5 percent for US dollar loan and 20 percent for Riel5
loan between
years 2001 and 2007, while interest rates for twelve-month deposit for riel and dollar
currencies were around 4 percent and 7 percent, respectively. On the twelve-month loan-
deposit spread during the last five years, US dollar spreads declined steadily, but slow at
about 0.5 percent a year. On the whole, long-term cost of borrowing remains high despite
gradual falls reflecting banks’ reluctance to cut back lending cost as most commercial banks
seek fund from abroad which is costly.
Figure 4.1: Twelve-month loan-deposit spreads
14%
13.3% 12.9% 12.7%
12% 11.5%
13%
13.8% 14.1%
12.1% 11.9%
14.6%
16.9%
11.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2001 2002 2003 2004 2005 2006 2007
USD spreads KHR spreads
Source: National Bank of Cambodia, 2007
Most banks now are profitable. Average return on equity (ROAE) increased to 16 per cent in
2007. The return on equity is uneven among different sizes of banks, in which major banks
have higher ratio between 25 per cent and 35 per cent; while small and newly established
banks with operations less than two years have very low or even negative ROE. Average
return on asset or ROAE stood at 3 per cent in 2008, an increase from 1.8 per cent in 2005
and 2.8 per cent in 2007, while the number of non-performing loans improved significantly to
3.4 per cent in 2007, down from 9 per cent in 2006.
Overall performance and profitability of Cambodian banks vary greatly. A few major banks
have outperformed other banks on all indicators (assets, loans, deposits and profitability);
many newly established banks have performed very well with the fastest growth. With a large
investment in infrastructure and their international reputation, these banks would be able to
catch up the top major banks soon. Some other banks, which mostly are specialized banks and
newcomers, have very poor performance and are struggling to survive and gain a position in
5
Riel is the currency of Cambodia. As of October 2009, 1 USD = 4170 Riel.

29. 29
the market (See more statistics about assets, equity and profit in Annex). Such high degree of
variation in overall performance cause overall efficiency in banking sector still low.
Table 4.5: Return on Average Asset and Equity
Loan Loss Reserve/
Gross Loan (%)
ROAA (%) ROAE (%)
2007 2006 2007 2006 2007 2006
Canadia Bank 4.60% 4.00% 5.40% 2.70% 34% 25%
Cambodia Public Bank 0.00% 0.70% 4.70% 5.80% 29% 26%
Acleda Bank Plc. 0.50% 0.60% 2.90% 3.30% 18% 13%
Foreign Trade Bank 9.50% 8.80% 4.30% 1.00% 35% 19%
Cambodian Commercial
Bank 0.00% 0.00% 4.10% 3.10% 26% 0%
Vattanac Bank 0.00% 0.00% 5.60% 5.00% 25% 18%
Union Commercial Bank 0.20% 0.30% 4.60% 2.60% 24% 14%
May Bank 0.00% 0.00% 3.70% 3.10% 17% 11%
Singapore Banking Corp 0.00% 0.10% 7.40% -0.70% 22% -3%
First Commercial Bank 0.00% 0.00% 5.10% 5.60% 15% 16%
Krung Thai Bank 0.00% 0.00% 2.70% 7.30% 8% 20%
Cambodia Mekong Bank 0.10% 0.00% 2.70% -6.60% 7% -16%
ANZ Royal Bank 0.60% 0.50% 0.10% -1.50% 2% -1%
Cambodia Asia Bank 3.10% 4.40% 1.80% 0.60% 3% 1%
Advanced Bank of Asia 3.40% 0.00% 0.40% 5.80% 1% 12%
Shinhan Khmer Bank 0.00% 0.00% -2.50% n.a. -8% n.a.
Camko Bank 0.00% 0.00% -6.40% n.a. -13% n.a.
Peng Heng S.M.E 0.60% 0.60% 9.50% 8.90% 11% 4%
Source: cited from IFC (2008)
Insurance Sector
Most indicators about efficiency in insurance sector in Cambodia are not available for our
analysis here. However, since efficiency and competition are related to large extent, the
degree of efficiency can be drawn from the magnitude of competition. As discussed in earlier
session, competition in insurance sector in Cambodia remains very weak within very small
market. Such conditions do not allow firms to exploit scale of economy and thus result in
higher cost of operation and lower profitability.

30. 30
Chapter Five: Conclusion
Trade policy affecting financial sector has increasingly become an integral part of national
economic policy and international trade negotiation. Since financial sector market opening
can help countries build more robust and efficient financial systems, increasing number of
countries have adopted more liberal financial trade policy, unilaterally and multilaterally, as a
tool to achieve financial sector development and to stimulate economic growth. That’s why it
is found financial services become less restrictive than many other services in both regional
and multilateral trade frameworks.
Cambodia is no exception along this international trend and it imposes low restriction on both
domestic and foreign financial services suppliers. Quantitative indicator measuring trade
restrictiveness in financial services suggests that Cambodia’s financial sector is less restrictive
in both market access and national treatment. A few major prohibitive measures apply to all
service sectors. One is restriction on land ownership applicable to mode 3 and two is
limitation on the number of foreign nationals at 10 per cent of the workforce. Its financial
sector openness is driven in large extent by liberal outward-looking economic policy and
financial sector reforms that were undertaken since 1990s. Cambodia’s economic policy is on
the verge of deeper economic integration within various frameworks, bilateral, regional and
multilateral, and such tendency is likely to hasten the process of financial sector opening.
Since data on financial sector in Cambodia is limited, this study could not quantitatively
assess the casual relationship between trade liberalization and financial sector development.
Yet, having traced the development pattern of financial sector and stage of financial sector
opening, it found that trade liberalization of financial services especially under GATS
framework has played some role in strengthening Cambodia’s financial system. Not only do
depth and outreach of financial system widen, but also competition and efficiency improve
significantly. Gains from liberalization vary across sub-sectors, where it is found banking
sector grew much faster than other financial services sub-sectors including insurance. Number
of banks and their branch offices boomed over the last few years along with substantial
increase in competition and efficiency. In the same vein, we also observe gradual introduction
of new technology, innovative financial products and services, and good practices by financial
service providers in particular foreign firms. This allows us to argue that rapid progress of

31. 31
banking sector in Cambodia is attributive to presence of foreign banks operating in more
enabling environment and less restrictive economic and financial regime.
Market-driven financial sector growth happens at the pace that regulatory frameworks and
supervisory institutions could not catch up. Although significant improvement has been
achieved in domestic reforms, supervisory capacity and regulatory frameworks are still weak.
The basic framework and the capacity for on-site inspection and offsite surveillance, as well
as a prompt corrective action system, are not yet in place; while enforcement of prudential
regulation is not yet at the desired level. Furthermore, Cambodia’s financial sector is facing
problem of lacking financial infrastructure. There is no national payment system nor proper
credit information sharing and interbank/money market for liquidity management.
Since domestic regulatory reforms and external liberalization are to high extent
complementary and mutually reinforcing, financial sector in Cambodia would benefits even
greater from right sequencing arrangements. Financial regulatory reforms, on one side, put in
place pro-market financial institutions, pro-competition regulatory frameworks, and
macroeconomic and monitory stability prior to opening up financial sectors. Financial service
liberalization, on the other side, helps accelerate reforms; encourage a more transparent
regulatory and supervisory framework; increases the incentive for better macroeconomic
policies and regulations; and enhances credibility of rules. Cambodia is on the right track in
sequencing financial sector reforms and liberalization as clearly articulated in its financial
sector development strategy 2006-2015. This strategy sets out a long-term vision and
development plans for the financial sector in order to achieve a sound market-based financial
system. The financial sector development strategy consists of key elements that basically
address major shortcomings and challenges in aspects of legal framework, financial
infrastructure, institutional capacity, and governance principles. It is expected along the
course of implementing financial sector development plan; Cambodia’s financial sector would
greatly benefits from trade liberalization in financial services.
Experiences in conducting this research suggest that there is severe shortage of in-depth study
and analysis related to financial sector in Cambodia. Financial sector policy would greatly
benefits from further research in the following areas:
 Constructing time series system-wide indicators concerning breath of the financial
system, scope and coverage of financial services, competition and efficiency,
financial soundness, financial stability, financial sector supervision, and financial
system integrity.

32. 32
 Quantifying the significance and contribution of financial sector in economic
growth and development in Cambodia.
 Monitoring progress of implantation of financial sector development strategy and
assessing to what extent the development plan achieve its stated objectives and
long-terms vision.

33. 33
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36. 36
Annexes:
Table A.1: Total Assets, Equity and Profit
Total Assets ($ mil.) Total Equity ($ mil.)
Total Net Profit
($ mil.)
2007 2006 2007 2006 2007 2006
Tier one
Canadia Bank 552.78 380.64 84.56 64.11 25.21 15.8
Cambodia Public Bank 557.23 245.99 87.19 44.82 18.92 11.81
Acleda Bank Plc. 468.19 225.14 62.65 47.7 10.19 6.05
Tier Two
Foreign Trade Bank 217.44 224.12 30.03 23.45 9.47 4.35
Cambodian Commercial
Bank 160.67 129.89 26.3 19.91 5.94 4.47
Vattanac Bank 129.44 71.85 25.14 20.08 5.61 3.59
Union Commercial Bank 119.38 105.9 23.04 19.23 5.14 2.71
May Bank 142.75 84.93 26.41 23.11 4.2 2.61
Singapore Banking Corp 48.27 37.7 20.61 8.58 3.18 -0.25
First Commercial Bank 59.03 52.73 20.36 18.61 2.84 2.93
Krung Thai Bank 70.75 50.86 19.88 18.77 1.62 3.7
Tier three
Cambodia Mekong Bank 61.3 27.33 24.76 11.33 1.21 -1.8
ANZ Royal Bank 552.69 207.58 33.1 15.23 0.53 -3.08
Cambodia Asia Bank 31.81 22.47 13.9 13.84 0.48 0.12
Advanced Bank of Asia 40.22 27.94 17.76 13.19 0.14 1.61
Shinhan Khmer Bank 36.04 n.a. 11.91 n.a. -0.92 n.a.
Camko Bank 23.37 n.a. 11.34 n.a. -1.49 n.a.
Peng Heng S.M.E 5.05 4.23 4.26 3.93 0.44 0.17
Note: Banks falls into three different levels or tiers based on profitability and overall performance. Tier 1 is
the best performance, while tier 3 is the lowest performing banks.
Source: cited from IFC (2008)

37. 37
Table A.2: Cambodia’s Service Schedule for Financial Sector
Modes of supply: 1) Cross-Border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons
Sector or sub-sector Limitations on market access Limitations on national treatment Additional commitments
A. HORIZONTAL COMMITMENTS APPLICABLE TO SECTORS LISTED IN THE SECTORAL PART OF THE SCHEDULE
Subsidies (3), (4) Unbound for subsidies, including
for research and development.
Tax measures (1), (2), (3) None with respect to taxes
Land (3) Non-Cambodian natural and
juridical persons may lease but not
own land.
Acquired rights The conditions of ownership, management, operation,
juridical form and scope of activities as set out in a
license or other form of approval establishing or
authorizing the operation or supply of services by an
existing foreign service supplier, will not be made more
restrictive than those in existence as of the date of
Cambodia’s accession to the WTO.
Investment incentives (3) Investors, seeking incentives under the provisions of
the Law on Investment, shall have the obligation to
provide adequate and consistent training to
Cambodian staff, including for promotion to senior
positions.
(3) None

38. 38
Presence of natural persons (4) Unbound except for measures concerning the entry
and temporary stay of a natural person who falls in
one of the following categories:
Business visitors
A natural person who:
- enters Cambodia for the purposes of participating in
business meetings, establishing business contacts
including negotiations for the sale of services and/or
other similar activities;
- stays in Cambodia without receiving income from
within Cambodian sources;
- does not engage in making direct sales to the general
public or supplying services.
Entry visa for business visitors shall be valid for a period
of 90 days for an initial stay of 30 days, which may be
extended.
(4) Unbound, except for measures
affecting the categories referred to
under market access.

39. 39
Persons responsible for setting up of a commercial
establishment:
Persons working in an executive or managerial position,
receiving remuneration from an entity as defined below,
who are responsible for the setting up, in Cambodia, of a
commercial presence of a service provider of a Member,
that will support employment of persons described in a, b,
and c below. The subject persons are not subject to a
maximum duration of stay.
Intra-Corporate Transferees
Natural persons who have been employed by a juridical
person of another member for a period of not less than 1
year and who seek temporary entry to provide services
through a branch, subsidiary and affiliate in Cambodia
and who are:
a) Executives: without requiring compliance with labour
market tests, persons within an organization who
primarily direct the management of the organization,
exercise wide latitude in decision-making, and receive
only general supervision or direction from higher-level
executives, the board of directors, or shareholders of the
business. Executives would not directly perform tasks
related to the actual supply of a service or services of the
organization.

40. 40
b) Managers: without requiring compliance with labour
market tests, natural persons employed by a juridical
entity and who possess knowledge at an advanced level
of expertise or proprietary knowledge of a juridical entity
product, service, research, equipment, techniques, or
management, and who primarily direct the organization
or a department of the organization; supervise and control
the work of other supervisory, professional or managerial
employees; have the authority to hire and fire or
recommend hiring, firing or other personnel actions; and
exercise discretionary authority over day-to-day
operations. They do not include first-line supervisors,
unless the employees supervised are professionals, nor do
they include employees who primarily perform tasks
necessary for the supply of the service.
c) Specialists: Natural persons, within an organization
who possess knowledge at an advanced level of
continued expertise and who possess proprietary
knowledge of the organization's services, research
equipment, techniques, or management.
Temporary residency and work permit is required for the
natural persons in the categories defined under intra-
corporate transferees. Such permits are issued for two
years and may be renewed annually up to maximum of
total five years.
Modes of supply: 1) Cross-Border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons

41. 41
Sector or sub-sector Limitations on market access Limitations on national treatment Additional commitments
B. SPECIFIC COMMITMENTS--FINANCIAL SERVICES
1. All insurance and insurance-related services
(a) Life insurance services
(CPC 81211)
(1) Natural or juridical person can enter into
contract only with the insurance companies
licensed to carry out insurance business in the
Kingdom of Cambodia
(2) None
(3) None
(4) Unbound, except as indicated in the horizontal
section
(1) None
(2) None
(3) None
(4) Unbound, except as indicated in the
horizontal section
(b) Non-life insurance services (CPC
8129)
(1) None for marine, aviation, and transport
insurance from 1 January 2009, or once a law
has been passed, the appropriate regulations in
place and a local firm authorized, whichever
comes first.
Until the conditions above are met, marine,
aviation and transport insurance services may
be supplied by insurance companies licensed
to carry out insurance business in the
Kingdom of Cambodia.
For all other non-life insurance services,
natural or juridical persons can enter into
contract only with the insurance companies
licensed to carry out insurance business in the
Kingdom of Cambodia.
(2) None
(3) None
(4) Unbound, except as indicated in the horizontal
section
(1) None
(2) None
(3) None
(4) Unbound, except as indicated in the
horizontal section

42. 42
Modes of supply: 1) Cross-Border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons
Sector or sub-sector Limitations on market access Limitations on national treatment Additional commitments
(c) Reinsurance and retrocession (CPC
81299)
(1) None, except companies must reinsure 20% of
their risk in Cambodia Re until 31 December
2008. Insurance contracts of total sum
insured of less than or equal to USD 500,000
must be reinsured locally until 31 December
2008. Thereafter, None
(2) None
(3) None, except companies must reinsure 20% of
their risk in Cambodia Re until 1 January
2008. Thereafter, None.
(4) Unbound, except as indicated in the horizontal
section.
(1) None
(2) None
(3) None
(4) Unbound, except as indicated in the
horizontal section.
(d) Services auxiliary to insurance
(including broking and agency
services)
(CPC 8140)
(1) None
(2) None
(3) None
(4) Unbound, except as indicated in the horizontal
section.
(1) None
(2) None
(3) None
(4) Unbound, except as indicated in the
horizontal section.

43. 43
Modes of supply: 1) Cross-Border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons
Sector or sub-sector Limitations on market access Limitations on national treatment Additional commitments
2. Banking and other financial services
The commitments for subsectors (a), (b)
and (d) refer to commercial banking
only.
(a) Acceptance of deposits and other
repayable funds from the public
(CPC 81115 – 81119)
(b) Lending of all types, including,
inter alia, consumer credit,
mortgage credit, factoring and
financing of commercial transaction
(CPC 8113);
(d) All payment and money
transmission service, including
credit, charge and debit cards,
traveller cheques and bankers drafts
(CPC 813396
)
(1) None, except deposits from the public must be
reinvested in Cambodia
(2) None
(3) None, except only permitted through
authorized financial institutions as banks
(4) Unbound, except as indicated in the horizontal
section.
(1) None
(2) None
(3) None
(4) Unbound, except as indicated in the
horizontal section.
The commitments for subsectors (c) and
(e) refer to commercial banking only.
(c) Financial leasing
(e) Guarantees and commitments
(1) Unbound
(2) None
(3) Unbound until related laws and regulations
are established
(4) Unbound, except as indicated in the horizontal
section.
(1) None
(2) None
(3) None
(4) Unbound, except as indicated in the
horizontal section.
6
According to Services sectoral classification list, this refers to only part of the total range of activities covered by the CPC concordance.

44. 44
Modes of supply: 1) Cross-Border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons
Sector or sub-sector Limitations on market access Limitations on national treatment Additional commitments
(f) Trading for own account or for
account of customers, whether on
an exchange, in an over-the-counter
market or otherwise, the following
(A) money market instruments
(including cheques, bills, certificates
of deposits);
(B) foreign exchange
(C) derivative products including,
but not limited to, futures and
options;
(D) exchange rate and interest rate
instruments, including products such
as swaps, forward rate agreements;
(E) transferable securities;
(F) other negotiable instruments
and financial assets, including
bullion
(g) Participation in issues of all kinds
of securities, including underwriting
and placement as agency (whether
publicly or privately) and provision
of services related to such issues;
(h) Money broking;
(i) Asset management, such as cash or
portfolio management, all forms of
collective investment management,
pension fund management,
custodial, depository and trust
services;
(j) Settlement and clearing services for
(1) Unbound
(2) None
(3) Unbound for subsectors (f) – (l), until the
Government of Cambodia determines what
types of entities can conduct these services,
the related laws and regulation are established,
and such business is authorized by the
government or other relevant designated
authority.
(4) Unbound, except as indicated in the horizontal
section.
(1) None
(2) None
(3) None
(4) Unbound, except as indicated in the
horizontal section

45. 45
Modes of supply: 1) Cross-Border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons
Sector or sub-sector Limitations on market access Limitations on national treatment Additional commitments
financial assets, including
securities, derivative products, and
other negotiable instruments;
(k) Provision of financial information,
and financial data processing and
related software by suppliers of
other financial services
(l) Advisory, intermediation and other
auxiliary financial services on all
the activities listed in subparagraphs
(v) through (xv), including credit
reference and analysis, investment
and portfolio research and advice,
advice on acquisitions and on
corporate restructuring and strategy.