Measuring Interregional Fund Flows in a Dollarized Economy: Evidence from Branch-Level Data of Deposits and Loans in Cambodia

In Cambodia, both the national currency, the riel, and the U.S. dollar continue to be used. The country faces significant challenges in reducing its high degree of dollarization and promoting financial inclusion, which requires a thorough understanding of capital flows. Meanwhile, partial dollarization is a significant phenomenon in the banking sectors of many developing countries, yet evidence on its spread through bank branch networks remains scarce. This paper investigates interregional capital flows within Cambodia’s banking system, characterized by the coexistence of multiple currencies. Using branch-level deposit and loan data, we developed a measure of the regional fund flows to fit the banking sector for developing countries. Our findings reveal that excess funds from deposits in Phnom Penh and wholesale funding significantly cover lending across provincial regions for both United States dollars and riels. However, banks reallocate funds in riel less actively, despite recent increases in riel deposits. Regional differences in loan and deposit demand between currencies further highlight distinct patterns. This study underscores the need to understand currency-specific trends to promote local currency usage and enhance financial inclusion in dollarized economies.