No.16 Measuring Interregional Fund Flows in a Dollarized Economy: Evidence from Branch-level Data of Deposits and Loans in Cambodia

Partial dollarization is a prevailing phenomenon in the banking sectors of many developing countries. However, there is still a lack of evidence on how dollarization expands in a country through the banking sector, which is generally comprised of a complex network of multiple bank branches. This paper aims to empirically examine the interregional capital flows within the complex bank branch networks using branch-level deposit and loan data from Cambodia, a nation characterized by the coexistence of multiple currencies within its financial system. To quantify the interregional fund flow, we further develop an empirical approach originally proposed by Uesugi et al. (2022) to suit the specific contextual realities of the banking sector in developing countries. Using our modified approach, we describe the pattern of interregional fund flows by currencies in Cambodia, and examine the difference in the pattern of interregional fund flows between currencies. In, addition, we illustrate how the pattern has evolved from 2013 to 2017. The findings show that a significant proportion of lending in all the provincial regions was covered by excess funds collected through deposits in Phnom Penh and through wholesale funding and/or funding from parent companies; the trend is the same both for US dollars and Khmer Riel. However, while banks do not actively reallocate excess funds in Khmer Riel in comparison to US dollars, the number of deposits in Khmer Riel has increased over the years. Moreover, it is observed that the interregional fund flows between some provincial areas in Khmer Riel are opposite to those of US dollars. This means that there were regional differences in demand for loans and deposits between currencies. Overall, the study provides insights into the patterns and dynamics of interregional fund flows in Cambodia, emphasizing the importance of understanding currency-specific trends and the potential for promoting local currency and financial inclusion.

Keywords: dollarization; banking; financial intermediation; efficient credit allocation