Myanmar holds interest rates steady, suggests other reforms to boost credit access

Despite easing inflation, Myanmar is likely to maintain interest rates at the current level throughout much of 2018; however, the central bank has suggested other measures to ease lending constraints and stimulate the banking sector.

In late January U Soe Thein, the deputy governor of the Central Bank of Myanmar (CBM), said the reserve would maintain its cautious monetary policy in the near term and wait for a further reduction in inflation – along with an assessment of other economic indicators – before considering cutting the benchmark rate.

“We think about other factors such as lenders, borrowers, possible impacts, and so on. We have a plan to decrease the interest rate at the suitable time,” he said.

Central bank suggests new paths to credit 

Calls for the CBM to move on rates come amid easing inflation, which stood at 5.2% in January, below the bank’s target of 5.5%, and well under rates of around 8% seen early last year.

Currently, banks have to offer credit within bands set by the CBM – no more than two percentage points below the reserve’s interest rate for deposits and three percentage points above for loans. At present, the CBM’s benchmark rate is 10%, meaning that the minimum deposit rate offered by banks is 8%, and the ceiling on lending rates is 13%.

While the CBM intends to keep monetary policy tight through most of the year, constraining borrowing opportunities for businesses, it has indicated that it is looking to utilise other options to boost credit access.

In mid-February U Soe Thein told local media the CBM was looking to broaden the range of collateral accepted by banks to underpin credit applications, with interest rates to vary depending on the form of the asset put up against the loan. In the medium term the CBM is also looking to let banks set their own rates according to prevailing market conditions.

SMEs to benefit from credit reforms

Small and medium-sized enterprises (SMEs), which have long struggled to access bank funding, are an important potential beneficiary of looser credit requirements.

While SMEs account for around 98% of all businesses in Myanmar and generate the majority of employment, difficulties meeting lending criteria are hampering their development, according to Zeyar Nyunt, CEO of the Small & Medium Industrial Development Bank.

“Among all companies in the country, SMEs in particular struggle to gain access to credit, mainly due to the existing collateralised lending system, prohibitive interest rates and their own lack of credit history, which makes it very hard to access two-step loans from foreign financial institutions and agencies,” he told OBG.

Reform to reduce risk, open doors

More broadly, there have been calls for Myanmar to adopt a more open policy for its financial sector and increase transparency, so that foreign banks in the market will have greater freedom and confidence to lend to local businesses.

The newly ratified Companies Act, expected to be implemented by August following the preparation of the necessary by-laws and company registry, should add some clarity to the business environment. The legislation, which will update the previous act, codified in 1914, improves corporate governance and brings management practices in line with international standards.

The legislation alters the definition of foreign companies within the local business environment. Previously, any domestic firm with as little as 1% foreign ownership was defined as a foreign business entity, restricting investment. Under the new law, up to 35% of a company’s shares may be held by foreign bodies while still retaining its standing as a local company.

The law also removes the requirement that foreign investors receive regulatory approval prior to purchasing shares in a Myanmar company, stipulating only that the regulator be notified if a company exceeds the new foreign ownership threshold.

This is expected to grant foreign investors greater access to previously ring-fenced sectors, potentially increasing investor interest in the banking sector.