OBG talks to U Than Lwin, Deputy Chairman, KBZ Bank; U Kyaw Lynn, CEO, Cooperative Bank; and U Win Min Khine, Managing Director, Apex Bank

Interview: U Than Lwin, U Kyaw Lynn, U Win Min Khine

What contributions can we expect from foreign banks in developing the local banking sector over the next 12-18 months?

U THAN LWIN: Myanmar has been away from the international banking community since 1963 when it nationalised 14 foreign banks. The banking sector then was very vibrant. After the nationalisation, the banking sector lost its appeal and as a result of sanctions only conducted basic banking activities for almost 50 years. Being away from the international banking community resulted in lost opportunities, and our banking sector fell behind developments in the outside world.

Since the election of the new government, tremendous reform has taken place, resulting in a managed float of the national currency, the restoration of foreign exchange licences to most private banks, and the introduction of ATMs and auction and deposit markets in both foreign currencies and kyat. These developments will bolster the growth of Myanmar’s banking system. What we need now is capacity, and we need to upgrade technology. These challenges can be addressed by teaming up with foreign banks. Local banks can work in cooperation with foreign banks; they can leverage their expertise to develop capacity, technology and advance their operations as a financial institution. Another area that will need overhauling is our accounting system. Foreign accounting agencies will assist a great deal to get it up to international standards. A lot of changes are taking place regarding capacity development and more will follow during modernisation.

U KYAW LYNN: Myanmar is in the process of reforms and is currently overhauling its financial sector and banking system. This is the government's first priority to attract more foreign investment. Local banks have the opportunity to provide financial services to foreign companies entering the market, and foreign banks are in a great position to support the growth of the banking industry in Myanmar. Via international partnerships and joint ventures, they can facilitate customers’ needs to trade globally. They can form business partnerships to aid in international trade and can also share their knowledge and expertise with local banks to assist in the modernisation process. Knowledge sharing is essential for local banks to become more efficient and more competitive in terms of international trade. Local banks will benefit from the knowledge, technology and experience their foreign counterparts bring, and local banks can provide nation-specific business knowledge as well as a familiar face to customers.

U WIN MIN KHINE: Presently, foreign banks are restricted to only having representative offices in Myanmar and are unable to conduct any form of commercial banking business. However, until they can operate under a joint venture or commence commercial activities, they can contribute to the modernisation process by linking their customers to local companies for strategic collaborations and mergers and acquisitions. This will aid the overall modernisation of the banking sector by increasing the involvement of local banks in the international arena. As it stands, international banks play an important role by providing information about the political landscape, rules and regulations relating to investments, and establishment of companies to their customers who want to make inroads into the country. Over the coming years foreign banks will also play an important role with regards to technology and knowledge transfer by providing seminars and training in areas such as trade finance, onshore and offshore risk management, and direct advisory services.

What are the top risk management issues banks should focus on during the modernisation process?

THAN LWIN: Managing risk is part and parcel of the modernisation drive and is a key issue for Myanmar’s banks. Aside from the day-to-day operational risks, it is crucial that we establish a credit bureau and credit guarantee corporations. We learned a painful lesson in the 1990s when five banks issued credit cards without these institutions in place. Without a credit bureau in place it will be extremely difficult to manage credit risk. These are essential building blocks for the risk management process. I believe the newly restructured central bank will address these issues accordingly.

KYAW LYNN: Banks have to improve their governance, risk management and regulatory compliance models, and that requires better data management and analysis to enable informed and rapid decision making. Banks might even consider moving business operations to countries which have lighter regulations. There is a wide range of services to help banks assess risk, including risk management software for managing all areas of risk but especially credit, market, operations, liquidity, business and reputation risk; and regulatory compliance applications, which ensure that banks comply with all applicable laws and financial regulations.

WIN MIN KHINE: There are many different aspects of risk banks will face in the process of rapid change and growth during modernisation. However, I will single out two types in particular that should be of major concern. The first is human resources. The country had been closed off from the rest of the world for more than half a century, and there exists a significant lag factor in education and human resource development. Although there is no shortage of workers, with modernisation and transformation, there is a strong and growing demand for a workforce that is highly educated and well experienced, and hence there is a huge shortage of such personnel in the market. Although training can and will be provided, it will take time for people’s skills and talents to be developed. The second issue is liquidity management; banks have to keep an eye on liquidity management as the volume of business will be growing exponentially. There must be sufficient accessibility to funds to tide banks over when there is a higher than usual demand for cash.

What sectors of the economy are expected to contribute the most to banking income?

THAN LWIN: Traditionally speaking, most banks’ income has been derived from loan and credit operations, with the majority of banking activity coming from the trading sector. I expect the trading sector to continue to play a leading role in banking activity, at least during the reform process. The development of small and medium-sized enterprises (SMEs) is expected to contribute significantly over the coming years, especially now that the government is framing the SME law.

However, millions of nationals are working abroad, with the majority of them in Thailand (8m, according to the Thai government). What we are in the process of doing is formalising the remittance process for our migrant workers. In the past these funds have returned through informal mediums, and we are now putting in place measures that will see these funds come back over the border through the banking system. This will produce a significant amount of fee-based income.

These types of fee-based transactions are risk free, but it is difficult to quantify now how much potential income this could generate in the near future.

WIN MIN KHINE: Agriculture, industry, energy and tourism are the main contributors to the Myanmar economy. Agriculture, however, is the main sector as it accounts for around 60% of GDP and has high growth potential in terms of productivity. There is definite need for banking support in many segments, such as acquisition of arable land, machines and equipment, and irrigation and flood diversion-related projects. Such requirements will be both from normal corporate loans as well as micro-financing for individual farmers. In terms of manufacturing, there are already several major industrial sites identified in strategic locations. It is typical that the initial phase would be that of building the infrastructure and thereafter construction of industries as well as provisions for ancillary requirements such as housing, schools and medical facilities. These townships and the hinterland will require a broad range of banking services encompassing retail banking to trade finance. I can only conclude that it will be difficult to qualify or quantify the contributions to banking from any individual sector as they are all interdependent.