National Bank of Canada Mandatory Reserves Coverage

Project description 

On January 31, 2025, The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group signed a contract issuing guarantee totaling USD 300 million to National Bank of Canada (NBC) for their equity investments (including retained earnings). The MIGA guarantee will cover Expropriation of Funds for mandatory reserves in its subsidiary in Cambodia, Advanced Bank of Asia Limited (ABA) for a period of 3 years.  

NBC, based in Canada, is one of the largest and systemically important Canadian financial institutions with total assets equivalent of USD 328 billion as of 2024. Its subsidiary bank, ABA, outside of Canada is required to maintain reserves at the central bank of Cambodia, based on its volume of customer deposits. Mandatory reserves contribute to NBC’s overall risk-weighted assets (RWA) at the consolidated level, resulting in less headroom for other assets at a given level of capital.  

Environmental Categorization 

This project is categorized as FI-2 under MIGA’s Policy on Environmental and Social Sustainability (2013). ABA provides financial products and services to retail and corporate clients in Cambodia. The sectors supported by ABA are considered to have limited environmental and social (E&S) risks and impacts that are generally site-specific, reversible and can be addressed by mitigation measures. The MIGA guarantee supports the bank’s general lending activities.  

The main E&S risks of this project relate to ABA’s ability to identify, assess, and manage the E&S risks and impacts associated with its lending activities and the management of labor matters at the bank.  The applicable E&S requirements for this project are: (i) MIGA Exclusion List; (ii) applicable E&S laws and regulations in Cambodia; and (iii) MIGA Performance Standards (for eligible corporate transactions). ABA is required to implement E&S risk management procedures in line with the requirements of Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts (PS1) and implement labor practices that are in line with the requirements of Performance Standard 2: Labor and Working Conditions (PS2).  

ABA provides financing mainly to small and medium enterprises, with some limited lending to small corporates. The sectors financed include wholesale and retail trade, real estate, services, hospitality, transportation and storage, construction, and manufacturing. These sectors are mostly medium-risk sectors, with limited E&S risks and impacts. ABA has no exposure to activities on the MIGA Exclusion List.   

ABA has an E&S team, and the bank implements an E&S management system (ESMS). The ESMS includes a detailed procedure for identifying, assessing, and managing E&S risks and impacts associated with clients’ activities. Core elements of the process include screening against ABA’s exclusion list (which incorporates MIGA’s exclusion list), categorization, assessment of compliance with applicable E&S laws and regulations and screening against the Performance Standards (where applicable). Where required, corrective action plans are developed to address E&S gaps and E&S covenants are also included in facility agreements with clients. ABA has an external communication mechanism for receiving and addressing E&S concerns and requests for information from third parties, in line with the requirements of PS1. The bank’s E&S team includes officers who are responsible for the day-to-day implementation as well as the overall implementation of the ESMS and officers responsible for credit analysis.  E&S risk management is provided to the E&S team and other officers of the bank involved in the implementation of the ESMS as required. 

ABA’s emergency response procedures are in line with the requirements of PS1. ABA’s labor policies and procedures are also in line with the requirements of PS2. Amongst other aspects, ABA has labor policies and procedures that address terms of employment, recruitment, renumeration and benefits, grievance management, training, and disciplinary measures. 

ABA will report periodically to MIGA on the implementation of the ESMS and labor practices.  

Development Impact 

The Project reflects continued partnership between ABA and MIGA, as well as ABA’s continuing effort to support lending to women and women-led/owned businesses in Cambodia. The Project will contribute to closing the very large SME financing gap in Cambodia, which is estimated at around US$5.2 billion equivalent to 22% of GDP. Lack of financing was reported to be the top challenge for SMEs, including for WSMEs, when starting a business. Commercial banks have prioritized lending to large corporates at the expense of SMEs which are perceived as being riskier due to lack of immovable collateral, informality of smaller enterprises and lack of reliable financial information. Women-led/owned enterprises continue to face significant obstacles such as the high cost of starting a business, heavy licensing requirements, a weak insolvency framework, non-transparent practices, and lack of competition. The Project is expected to support ABA to grow its WSMEs and women retail banking portfolios, thus increasing access to finance to these segments, with 100% of the MIGA enabled loans targeted towards women.   

The Project is aligned with the Country Partnership Framework (CPF) FY25-FY29 for Cambodia, in which MIGA’s financial sector guarantees supporting access to finance for WSMEs is highlighted. The CPF mentions that WSMEs face barriers in accessing financial resources, which Objective 4 on improving financial stability and inclusion seeks to address. Variations in access to finance also exist across urban and rural populations, income groups, and education attainment levels. MIGA will seek additional opportunities to support this Objective through targeted use of guarantees for loans to WSMEs.