It is perhaps no understatement to say that Cambodia’s financial sector has been in an extended malaise. Banks and microfinance institutions (MFIs) have long been able to operate in an environment of minimum capital requirements, with little capacity building and a general reluctance to offer more than basic loan products. With ASEAN integration drawing ever closer (albeit slowly), alarm bells should be ringing for many of the smaller banks and MFIs.
Under the ASEAN Banking Integration Framework signed earlier this year, ASEAN members are able to enter into bilateral agreements with other members, facilitating access to their respective financial services sectors. This will offer a great opportunity for banks in the region to establish their operations in Cambodia and roll out much needed products, particularly in the context of trade finance, hedging and liquidity.
Some banks have been actively strategising for ASEAN and expanding their footprint in the region for a number of years. Such banks are likely to prosper from ASEAN integration. However, many banks have continued their “business as usual” strategy. This will no longer be sufficient and it is likely that many such banks will lose relevance in the new era of ASEAN integration unless they merge or are acquired.
For financial services companies looking to acquire banks or MFIs in Cambodia, the legal risks are relatively low but there are a few matters to keep in mind:
The National Bank of Cambodia (NBC): Any acquisition of a stake of 10% or more of the shares in a bank or MFI requires approval from the NBC. This requirement is lessened to a “notification” requirement in the case of an acquisition of 5% to less than 10% (though it is still advisable to seek approval in the form of a no-objection letter). The key is to enter into discussions with the NBC at a very early stage. This will help identify any issues before they scupper a deal.
Due Diligence: In many cases, a due diligence exercise on a bank or MFI in Cambodia will reveal a number of instances where the target has failed to comply with obligations under applicable laws. Typically, the non-compliance will involve a failure to obtain/ maintain documents such as work permits or to make filings with government authorities. Sometimes, the non-compliance can, however, extend to more critical matters such as licensing. This is particularly so in the case of branches which, by law, are all required to be licensed but which are, in practice, licensed only on a provincial basis. Targets will often say that the non-compliance is either accepted as a matter of practice by the relevant government authority or will be remedied. For banks looking to enter the Cambodian market by way of acquisition, such assurances can be difficult to accept, leading to lengthy negotiations of conditions in the share purchase agreement or, worse still, walking away from the deal. The message to local banks? Get your compliance in order.
Management Interviews: Banks and, to a greater extent, MFIs have relied quite heavily on consultations from financial services specialists in structuring their respective operations. It is, therefore, not unusual to be provided with information by a target regarding its policies concerning certain critical operational issues (e.g. anti-corruption/ anti-money laundering). However, what appears on paper may not reflect the reality. Management interviews offer the perfect opportunity to (a) test the knowledge of key executives regarding their legal obligations reflected in relevant policies and (b) to determine whether such policies are being properly implemented.
Share Purchase Agreement (SPA): Under Cambodian law, the process of becoming
a shareholder can be relatively long and arduous. Any SPA needs to take account of this and should provide a mechanism for adjustments required to the price per share to reflect changes in value over time.
Nationality: A final consideration is the nationality of the target. In Cambodia, only a Cambodian person (which in the case of a company means a company in which 51% of the shares are held by a Cambodian person) may hold land. Any acquisition that causes the Cambodian shareholding to fall below 51% will therefore require careful restructuring of any land holdings.
Patrick Smith is the Managing Partner of Sciaroni & Associates, a professional services and investment advisory firm based in Cambodia since 1993 with offices in Laos and Myanmar. He is also the head of the firm’s Banking & Finance practice group with extensive experience in the UK, Japan, Australia and Cambodia.
Contribution by Patrick Smith | Sciaroni & Associates.