Mobile banking to improve penetration rate in Myanmar's unbanked population

After several years of rapid expansion and double-digit credit growth, Myanmar’s banking sector underwent several necessary reforms in 2017 and 2018, as the Central Bank of Myanmar (CBM) moved to introduce new prudential regulations and reduce overdraft lending. Although foreign banks remain prohibited from participating in retail activities, a spate of recent directives have made promising strides towards liberalisation, with foreign entities now permitted to provide import and export financing, as well as lend to local businesses – a major step forward for the development of the sector.

Financial inclusion has benefitted from rapid mobile adoption and supportive policy-making, with the country exceeding earlier inclusion targets as its large population embraced new products such as mobile money transfer services.

However, the country’s first licensed credit bureau was not yet operational as of December 2018, and the limited availability of data regarding non-performing loans (NPLs), combined with a CBM-mandated interest rate cap, continue to constrain growth. Nevertheless, reforms are progressing and the outlook remains positive, buoyed by ongoing liberalisation, growth in microfinance, business lending and planned credit-monitoring activities.

Sector History

Although Myanmar’s banking system developed through investment and foreign involvement in the decades leading up to 1962, the beginning of socialist military rule that year saw the sector nationalised, and barriers to foreign and private sector participation put in place.

Liberalisation efforts did not begin again until 1990, with the promulgation of the Financial Institutions Law (FIL), which permitted the re-entrance of commercial, investment and development banks, as well as finance companies and credit societies. Two years later private banks were allowed to re-enter the market. The sector underwent a series of significant setbacks in the 2000s, however, which began in 2003 when a number of informal lenders and financial institutions collapsed; the effects spread to the formal sector and led to a severe liquidity crisis. Three banks were closed and other institutions had their licences revoked, with the CBM responding by imposing tough collateral requirements and strict regulations that have weighed heavily on the ability of banks to lend in the years since. The global financial crisis of 2008 also delayed plans to open up the sector and accelerate its development.

Liberalisation and reforms began in earnest in 2011, when the government allowed private banks to undertake foreign exchange transactions and operate ATMs, under the Foreign Exchange Management Law promulgated in 2012, which repealed legislation from 1947 and removed restrictions on foreign currency transactions. Political changes in 2015 came with signals that the country would further open itself up to the world, though some remain critical of the speed of progress in this direction.

Structure & Oversight

In 2013, with the passing of the CBM Law, the central bank was given a mandate to license and regulate all banking institutions in the country. In 2014 the CBM approved provisional licences for nine successful foreign bank bidders, allowing them to establish representative offices and carry out limited business activities. According to international media, the inclusion of these institutions, which came to a total of 13 after four more were added in 2016, added over MMK1.6trn ($1.1bn) of combined regulatory capital to the system, nearly tripling government revenue.

Until recently CBM-licensed foreign banks could only lend to foreign or local-foreign joint-venture firms, as well as domestic banks. They were permitted to partner with local banks to do business with local corporations, but access to most lending activities was limited. However, in November 2018 the CBM began opening certain high-potential business lines, such as trade credit, to foreign institutions.

As of December 2018 there were 13 international banks – from China, Japan, Singapore, India, Malaysia and Vietnam – operating branches in the country, as well as 49 foreign banks with representative offices and 26 private domestic banks. In May 2018 local media reported the CBM would imminently license four new private banks – Mandalay Farmer Development Bank, Sagaing Farmer Development Bank, Mineral Development Bank and Tourism Bank – although only the Mineral Development Bank had been officially approved as of November 2018.

State-owned institutions continue to exert considerable influence over the banking landscape: three private banks are owned by municipalities, while government ministries hold stakes in another three and a further two are controlled by military conglomerates. According to a 2018 report from Yangon-based consultancy FMR Research & Advisory, the three largest private banks in the country – Kanbawza Bank, Co-operative Bank and Ayeyarwady Bank – accounted for 58% of private bank assets, 64% of loans and 66% of deposits as of March 2017.

Performance

The same report cited strong recent growth in the banking sector, with the combined assets of the three largest banks rising by 34% over the course of FY 2016/17. Their combined loan portfolios, meanwhile, were up 30% and deposits increased by approximately 40%.

Lending has recorded sharp growth in the years since 2011. According to CBM data, loans to the private sector rose from MMK3.25trn ($2.3bn) in FY 2011/12 to hit MMK4.9trn ($3.5bn) in FY 2012/13, and subsequently grew to MMK7.47trn ($5.3bn), MMK10.18trn ($7.2bn) and MMK13.66trn ($9.7bn), respectively, over the following three fiscal years. This trend accelerated in the years since, with the total private sector loan portfolio jumping by around 28.25% to MMK17.52trn ($12.4bn) in 2016 and by a further 25.2% to reach some MMK21.93trn ($15.5bn) as of December 2017, the most recent month for which statistics are available.

Deposit growth among the country’s banks has been equally impressive, with total deposits nearly quadrupling between FY 2011/12 and FY 2015/16, from MMK7.01trn ($5bn) to MMK25.88trn ($18.3bn). Total deposits rose by 15.96% to MMK30.01trn ($21.2bn) at the end of 2016 and by 24.46% to reach MMK37.35trn ($26.4bn) in December 2017.

As of October 2017 agriculture, trade and service activities accounted for 59% of outstanding loans in Myanmar, against 10% for manufacturing.

Credit & Loans

Despite rapid credit accumulation in recent years, lending when measured as a percentage of total GDP remains low relative to Myanmar’s neighbours in ASEAN. World Bank data shows that total domestic credit provided by the broader financial sector rose from 20.2% of GDP in 2007 to 27.64% in 2011, and then fluctuated from 22.72% to 41.15% between 2012 and 2017.

In Vietnam, comparatively, domestic credit provided by the financial services sector rose from 88.24% of GDP in 2007 to 141.8% in 2017, while Cambodia saw domestic credit increase from 12.9% to 74.44% of GDP over the same period.

Domestic credit to the private sector by banks shows a similar trend. In Myanmar, banks’ private sector credit rose from 3.42% of GDP in 2007 to 4.77% in 2010, 6.75% in 2011, 12.84% in 2013, 18.09% in 2015 and 23.46% in 2017. Cambodian banks’ private sector credit, meanwhile, was up from 18.18% in 2007 to 86.5% in 2017, while Vietnam’s increased from 85.64% to 130.67% over the same period.

General credit access in the country therefore remains a significant impediment to broader economic growth. The World Bank’s “Doing Business 2019” report, which surveyed 190 global economies, found that Myanmar ranked 178th overall for accessing credit, largely as a result of delays in launching a planned credit bureau (see analysis).

The World Bank reports Myanmar scored 2 out of 12 on its 2017 strength of legal rights index, while the East Asia and Pacific region as a whole averaged 7.2. 0% of adults in the country were covered by either a credit registry or credit bureau, compared to regional averages of 16% and 22.3%, respectively. In the survey’s distance-to-frontier ranking – which scores countries on their credit performance, from the worst at 0 to the best at 100 – Myanmar received a score of 10 for accessing credit.

Moving Forward

As of December 2018 Myanmar was the only country in South-east Asia, apart from Laos, that did not have an operational public or private sector credit bureau; however, stakeholders are confident that the launch of this much-needed body is moving steadily forward as the necessary changes are put into place. “The delay in the implementation of the Myanmar Credit Bureau is not a matter of logistics, but about trust and customers’ security,” U Thein Zaw Tun, managing director of CB Bank, told OBG. “Once the legal framework ensuring our customers’ rights has been set up, the transfer of information will be quick and easy.”

At the policy level, CBM’s Directive No. 7 of 2017 allows banks to issue loans with a maximum maturity of three years; however, the majority of loans issued in the country are for one year, with three-year loans remaining rare despite the recent change in regulations. This is largely a result of a CBM-mandated cap on interest rates, which is set at 13% and often cited as the biggest regulatory challenge to sector growth.

The directive also encourages institutions to develop new lending products with “repayment terms that consider the business cycle and cash flow pattern of the borrower”. However, FMR Research & Advisory has noted that the 13% cap on interest rates, as well as stringent collateral requirements and limited availability of data pertaining to NPLs, makes this challenging to do.

Another major recent reform involved changes to the CBM’s policy on overdraft lending. With loan maturities capped at one year, and strict collateral requirements and interest rate ceilings in place, banks and borrowers frequently used overdrafts to circumvent lending restrictions. Instead of using traditional loans, borrowers have taken out overdrafts using collateral, with the overdraft rolled over yearly. According to FMR Research & Advisory, between 75% and 80% of the sector’s total loan portfolio is estimated to be overdrafts, raising concerns that these systems have been used to offer loans without a maturity date, allowing borrowers to avoid interest but obscuring visibility of loan delinquencies.

As part of the FIL legislation issued in July 2017, the CBM announced that as of January 2018 banks would be required to clear overdraft facilities for at least two full weeks of every year, and that any facilities that cannot be cleared be classified as an NPL.

Stakeholders responded with warnings that many borrowers would be unable to clear their overdrafts and that the new regulations, combined with other requirements, would weigh heavily on lending growth and pull significant amounts of credit from the economy. The ASEAN+3 Macroeconomic Research Office reported that credit growth slowed to 23.4% in March 2018, compared to 33.5% one year earlier.

A follow-up directive issued in November 2017 delivered the reforms in phases. Banks are now able to convert their overdraft facilities into three-year loans, with a mandate to reduce overdrafts to 50% of their loan portfolio by July 2018, 30% by July 2019 and 20% by July 2020. Banks were also given until March 2018 to submit a list of their largest overdraft facilities, as well as a restructuring plan, to the CBM.

Policy

The government has intensified its focus on banking sector reforms in recent months, with the country’s long-term economic development agenda, the Myanmar Sustainable Development Plan (MSDP) 2018-30, identifying a number of strategies aimed at boosting liberalisation and financial inclusion.

Noting that Myanmar benefits from a “latecomer advantage”, evidenced by the rapid uptake of mobile phone-based financial services catering to both the banked and unbanked populations, the MSDP targets financial stability through a system that can support the sustainable long-term development of households, farmers and businesses.

The plan also identifies banking sector reforms as an important support mechanism for its third of five broad policy goals: job creation and private sector-led growth. Among the many strategies highlighted as critical to achieving these goals, the MSDP lists financial inclusion, with a mandate to increase broad-based access to financial services and strengthen the financial system overall.

Specific action plans that make up the strategy’s goals for the banking sector focus on strengthening the capacity of domestic institutions by developing a robust network of commercial banks, including foreign-owned banks, as well as improvements to the legal and regulatory environment to support non-bank financial institutions. Importantly for foreign investors, the MSDP aims to increase the ability of foreign banks to participate in domestic banking activities through the continued liberalisation of market access, as well as by allowing them to take equity positions in domestic banks. The development strategy also aims to expand mobile and financial technology (fintech) services through domestic and foreign firms, further bolstering the sector.

Inclusion

In addition to the MSDP’s financial reform strategies, the government has launched several roadmaps to increase financial inclusion in Myanmar, focusing efforts on using rapid smartphone uptake to improve access.

In January 2013 the UN Capital Development Fund, the multi-donor Livelihoods and Food Securities Trust Fund, and the Myanmar government formed Making Access Possible, a multi-country initiative that later launched the Myanmar Financial Inclusion Roadmap (MFIR) 2014-20. Noting that just 30% of the population had formal access to a financial product, and just 6% had access to more than one product, the plan targeted boosting these rates to 40% and 15%, respectively, by 2020. Much of the plan focused on addressing market barriers as a strategy to expand formal intermediation, with an emphasis on three priority segments: agriculture, micro-, small and medium-sized enterprises (MSMEs), and low-income households. The MFIR identified 20 developments to be implemented by 2020, most focused on education, corporate reform and modernisation, as well as long-term infrastructure such as electronic payment systems and an automated credit bureau.

In light of the transformation of the economic and technological landscape in the years since 2013, when a SIM card cost $260, the MFIR was recently updated to reflect new digital realities, and in August 2018 the authorities announced the drafting of an updated MFIR running from 2018 to 2022.

In formulating the new roadmap, stakeholders surveyed 5500 households to determine shifts in financial inclusion, reporting largely positive development. According to the new MFIR, the ratio of adults with access to at least one formal financial product rose from 30% in 2013 to 48% in 2018, exceeding the previous MFIR’s target of 40%. This means an estimated 6m adults in the country are now able to access formal financial services, while 17% of the adult population has accessed more than one formal financial product. Reliance on informal financial services fell by 30%, from 10m people to 7m.

Fintech

The country’s rapid expansion in smartphone penetration has prompted a shift in focus towards mobile financial services products. Emphasising digital-driven financial inclusion, the new MFIR targets low-income farmers and individuals, women, the self-employed and small and medium-sized enterprises. It also seeks to expand financial literacy and customer protection. As part of the plan, the CBM created the Financial Regulatory Department (FRD), a digital services working group.

Speaking in August 2018, U Zaw Naing, director-general of the FRD, told local media that working group members would be sourced from the private sector, including private insurance companies, banks and microfinance institutions (MFIs). Their intention is to develop new digital finance products and a cashless financial market. U Zaw Naing noted that while 74% of the country’s working population uses a mobile phone, just 8% have accessed digital financial services via mobile devices, creating significant growth opportunities for products such as mobile money transfers and microinsurance. “Technology will play a big role in the future of Myanmar’s banking sector,” U Maung Maung Nyunt, senior executive officer of Global Treasure Bank, told OBG. “The CBM is encouraging banks to embrace technology.”

Microfinance

Under the supervision of the FRD, MFIs are an area undergoing continued development. According to a report published by the Mekong Business Initiative – a development partnership between the Asian Development Bank and Australia aimed at fostering growth in the region – 168 MFIs serving 1.45m clients were operational in Myanmar as of October 2016, with a total loan portfolio of around $200m. The sector is dominated by NGOs and commercial MFIs, as well as 75 financial cooperatives that have been re-licensed as MFIs.

“MFIs are very well run, and tend to have bilateral and multilateral support,” Hal Bosher, special advisor to the chairman and CEO at Yoma Bank, told OBG. “The CBM has capped interest rates at 13%, and because we have to lend on a secure basis, this has historically constrained retail lending. MFIs have more wiggle room because they can lend at up to 30% interest,” Bosher added.

Basel Standards

The FIL of 2016 is one of the most important pieces of regulatory legislation governing the sector. It was designed to bring Myanmar’s banking regulations in line with the international Basel Committee on Banking Supervision regulations, although the CBM’s latest prudential legal changes, issued in July 2017, are consistent with Basel I, the original legislation from 1988. Most banks around the world, including many of those in developing markets, now aim to meet Basel III standards.

Under the CBM’s regulatory framework, as of early 2019 banks must hold core capital of 4% of risk-weighted assets – Basel III guidelines require 7% – and domestic banks must maintain minimum capital of MMK20bn ($14.1m). Banks are also required to hold 5% of their deposits at the CBM as a cash reserve. According to FMR Research & Advisory, data on compliance in Myanmar is not available, but there is evidence that smaller lenders are struggling to meet these regulatory standards.

In July 2017 the CBM issued its first set of modern prudential regulations, drafted with support from the IMF. The regulatory changes replaced previous legislation from nearly 30 years earlier and set new standards: a minimum Tier-1 capital adequacy ratio (CAR) of 4%, a regulatory CAR of 8% and increased risk weights on assets, along with a 100% risk weight on fixed assets. Tier-2, or supplementary, capital may also be included in a bank’s CAR, subject to approval by the CBM and up to a maximum of 100% of Tier-1 or core capital. However, FMR Research & Advisory notes that many instruments that would normally form Tier-2 capital do not yet exist in Myanmar.

New liquidity requirements stipulate that 20% of assets must be in cash or easily convertible assets such as Treasury bonds with less than one-year maturities, current accounts held at the CBM or loans to other banks. Significantly, banks are now required to classify loans as non-performing earlier and hold more capital against various NPL classifications.

International Banks

Perhaps the most promising recent reforms have been the CBM’s moves to open new lines of business to foreign banks.

In December 2017 the CBM announced that seven foreign banks would be permitted to provide export finance. According to international media reports, this change put foreign banks on a par with local lenders, while also providing new options for local businesses to access credit at more competitive rates. This was followed by the August 2018 announcement that all 13 foreign banks would be allowed to expand their services to include import finance – a move expected to facilitate trade and contain rising import costs.

U Win Thaw, director-general of the CBM, told local media that there are also plans in the pipeline to allow importers to open accounts at foreign banks, marking another important step towards retail banking liberalisation.

A further notable change came in November 2018. The CBM issued Notification No. 6 of 2018, permitting branches of foreign banks to provide financing and other services to local businesses. Some stakeholders suggest this development is likely a response to recent currency depreciation (see Economy chapter); foreign currency inflows from foreign banks to local businesses are expected to ease demand for dollars and help stabilise the exchange rate.

Days after the announcement, U Bo Bo Nge, vice-governor of the CBM, told local media that more foreign branches would be permitted in the country in 2019, and that foreign banks would also be allowed to provide domestic business credit in both kyat and foreign currencies. Importantly, loans in foreign currencies will be free from interest rate caps.

Outlook

Although recent reforms have been extremely promising for stakeholders who have long-awaited full sector liberalisation, foreign banks have thus far been prohibited from offering savings accounts in the country, conducting local money transfers and local currency lending.

A long-planned credit bureau was licensed but still not operational as of December 2018 and the full extent of NPLs is not yet clear, leaving the sector vulnerable to a number of shocks.

Despite these challenges, however, the banking sector’s development has been broadly positive in recent years. Much-needed reforms and new prudential standards may cause short-term pain but they should ensure more sustainable long-term growth. Additionally, adoption of fintech-friendly policies at the national level has already significantly boosted financial inclusion and should drive adoption of new financial services. As such, Myanmar’s banking sector continues to hold significant potential for foreign investors, with ongoing liberalisation to support further growth in 2019 and in the years to come.