A microfinance customer in Cambodia holds a loan denominated in the local currency, the riel. Photononstop via AFP / Philippe Lissac
A microfinance customer in Cambodia holds a loan denominated in the local currency, the riel. Cambodia's new Bakong system is expected to reduce the volume of cash transactions in the country. Photo: AFP

When the Kazakhstan investment bank Visor Capital bought Cambodia’s Advanced Bank Asia Limited (ABA Bank) in 2007 it was a one-branch operation owned by South Korean entrepreneurs in a cowboy economy.

A decade later, ABA is Cambodia’s fifth largest commercial bank in terms of assets, boasting the country’s fastest growing loan portfolio through a network of branches. In May, it also became Cambodia’s first majority-owned North American bank when the National Bank of Canada increased its equity stake to 90%.

“We are the most aggressively growing bank in Cambodia,” claims ABA chief executive officer Askhat Azhikhanov, a Kazakhstan national who has been with the bank for seven years, in an interview.

In 2016, ABA’s loan portfolio grew 63% to reach US$789 million, while deposits jumped 30.6% to US$856 million. Total assets touched US$1.1 billion, up 36.2% year on year, and turned a net profit of US$28 million, 76% higher than in 2015.

Cambodia’s fledgling financial sector, comprised of 37 commercial banks and over 200 microfinance institutions, has seen explosive growth over the past two decades, a period where gross domestic product (GDP) growth has averaged 7% per annum. The World Bank forecasts economic growth will exceed 7.1% this year.

Cambodian workers walk past a construction site in Phnom Penh. Photo: AFP / TANG CHHIN SOTHY
Cambodia’s fast growth has been fueled by a building boom. AFP/Tang Chhin Sothy

At the same time, credit growth has exceeded GDP growth by between two-to-three times over the past decade, leading some to worry about a possible build-up of problem loans, especially as recent growth has been fueled in part by lending into property and construction booms.

ABA, on the other hand, was recognized this year by Global Finance magazine as Cambodia’s top trade finance bank, indication of its gearing towards export-oriented firms.

While overexposure to the property market might worry some market watchers, ABA’s management says bad loans are not a concern in their portfolio. Since 2007, ABA has leveraged a lending policy of targeting small business loans of between US$5,000 to US$50,000, with 36% of all lending last year going to trade and 30% to services. A much lower 14% went to real estate, according to Azhikhanov.

Trade-geared: ABA chief executive officer Askhat Azhikhanov. Photo: Peter Janssen
Trade-geared: ABA chief executive officer Askhat Azhikhanov. Photo: Peter Janssen

“Our strategy at ABA Bank is to provide productive loans to the real economy of Cambodia,” Azhikhanov said. “It’s been successful because we identified at the beginning what we wanted, and the reason we focused on the SME sector was because it is a huge market in Cambodia – 99% of Cambodian businesses are identified as small and medium sized businesses.”

ABA’s strategy for growing deposits, meanwhile, has concentrated on online platforms, innovations other banks have been slower to uptake. For instance, ABA was the first to offer a smartphone app for banking which allows customers to transfer funds and pay bills on mobile devices, making it popular among the Phnom Penh-based expatriate community.

It has also expanded its branch network into the underbanked provinces, making ABA a pioneer in offering mobile phone and e banking outside of the capital. “It’s quite difficult to move to the provinces with digital services, but the positive thing is the population is very young – 75% are younger than 35 years old – and they are very quick to catch on to new technologies,” said Azhikhanov.

A Cambodian man uses the touch screen of his mobile phone as his children look on in Phnom Penh on May 8, 2010. AFP PHOTO/TANG CHHIN SOTHY / AFP PHOTO / TANG CHHIN SOTHY
New generation: ABA is a pioneer in provincial digital banking. AFP/Tang Chhin Sothy

Cambodia’s banking sector is split mainly into local and international categories. Local banks like ACLEDA Bank Pcl, which basically started as nongovernmental organizations involved in making small individual loans to aspiring entrepreneurs, have evolved since into full commercial banks, as they have grown with their successful microfinance clients.

Foreign-owned banks, on the other hand, are involved mainly in corporate and retail banking for the upper and middle classes. They include the Cambodian Public Bank (100% owned by Malaysia’s Public Bank), ANZ Royal (a joint venture between ANZ and the local Royal Group,) CIMB and Maybank of Malaysia, and several other Chinese, Korean and Taiwanese-owned banks.

France’s BRED Bank, one of the largest regional banks in Europe, opened BRED Bank (Cambodia) Plc on March 13, making it the latest entry on the scene. BRED Bank launched an operation in neighboring Laos seven years ago, where it has targeted lending to SMEs.

“They’ve rolled out branches [in Laos] and they have taken a SME approach,” said John McKinley, managing partner of Mekong Strategic Partners, a private investor and financial consultant. “So they are lending to the [Lao] economy and its been phenomenally successful.”

McKinley sees ABA and BRED as shining examples of western banks that have shown a greater risk appetite in emerging markets like Cambodia and Laos – and are now reaping the rewards.

A woman working at a money exchange shows 500 Cambodian riel notes to photographer in central Phnom Penh March 12, 2011. The much delayed stock exchange regulator Securities and Exchange Commission of Cambodia (SECC) said that all prices of securities will be quoted in local currency riel. Cambodia is highly dollarized and that many foreign investors want to see US dollars quoted in the upcoming bourse. REUTERS/Samrang Pring (CAMBODIA - Tags: POLITICS) - RTR2JSDU
Risk, reward: ABA has focused largely on real economy loans. Reuters/Samrang Pring

“If you are banking [just] the top of the economic pyramid…you are not getting the benefit of a high-growth economy like Cambodia because you are not banking the economy,” said McKinley, who was head of strategy for the Mekong sub-region for ANZ. ABA has come down to the SME sector from the foreign banking sector and its reaping the rewards of its strategy.”

That winning strategy convinced the National Bank of Canada (NBC) to up its investment in ABA. NBC, Canada’s sixth largest commercial bank by assets, first acquired 10% of ABA in July 2014, and then sat back to observe its management before increasing its stake to 30% in September that same year.

In July 2015, NBC boosted its stake to 42% and then up to 90% in May 2016. “The fact that we brought a North American bank into the system – for the first time in Cambodia – shows the growing trust in the banking system here,” ABA’s Azhikhanov said.

The National Bank of Cambodia has allowed 100% foreign owned banks with almost no restrictions in a bid to improve the investment climate in the post-conflict and still largely impoverished country.

It also shows how open Cambodia’s central bank has been to issuing banking licenses to majority foreign owned institutions, a liberal policy that most other Southeast Asian nations haven’t followed for reasons of nationalism.

In Myanmar, another underbanked regional frontier market, the central bank has imposed strict restrictions on the few foreign banks allowed to operate in the country, confining their lending to foreign corporations and limiting the number of branches they may open.

The National Bank of Cambodia has allowed 100% foreign owned banks with almost no restrictions in a liberal bid to improve the investment climate in the post-conflict and still largely impoverished country. “I think it’s sent a good signal because banks are the second most regulated industry [in the world] after nuclear power,” said Chea Serey, the central bank’s director-general.

It’s an openness ABA, for one, has leveraged into fast growth and tidy profits.