Myanmar government implements reforms to increase financial inclusion

As South-east Asia’s largest country and one of its richest in terms of natural resources, Myanmar’s largely unbanked population of over 53m presents vast growth opportunities. Already, rising demand for the newly emerging financial sector has led to a sizeable expansion of services and investments. In the few short years that have passed since Myanmar embarked on the path of liberalisation and democratisation, the country has attracted interest from international financial intermediaries, while the domestic sector has seen many new private lenders emerge. The government has been moving forward with updating the legislative and regulatory framework for banks, passing a new Financial Institutions Law in 2016. Since then, the Central Bank of Myanmar (CBM) has issued updated rules on risk and eased restrictions on non-collateralised loans.

Much remains to be done, however, with the key sector challenges including squeezed liquidity, low levels of capitalisation and a lack of transparency among banks and firms, while restrictions on the operations of foreign lenders are contributing to financing bottlenecks. In addition, the young age of the liberalised sector poses some notable capacity-building difficulties. The sheer size of Myanmar and the diversity of economic and political conditions across its regions make blanket policies and strategies for tackling issues difficult to implement. Despite these obstacles, the sector still presents numerous opportunities and the banking system will continue to be essential to the development of other sectors in this frontier market.

Regulation

The main supervisor and regulator of the sector is the CBM, which is headquartered in the capital, Naypyidaw. CBM governors are elected to office for five-year terms, with the current governor, U Kyaw Kyaw Maung, scheduled to end his term in 2018. In 2013 Parliament enacted a law that granted the CBM autonomous and independent status separate from the Ministry of Finance. Nevertheless, the government has retained a strong influence over the CBM, but there have been recent calls for the National League for Democracy (NLD) government to further strengthen the regulator’s independence. In order to build up the CBM’s capacity and to enhance its advisory capabilities, teams from various international institutions, such as the IMF, have set up offices at the CBM.

Structure

The CBM oversees the sector via its Financial Institutions Supervision Department, which monitors four main groups of lenders. First, there are the four state-owned banks: Myanma Foreign Trade Bank, Myanma Investment and Commercial Bank (MICB), and Myanma Economic Bank (MEB), which are all controlled by the Ministry of Finance; and Myanma Agriculture and Development Bank (MADB), which is run by the Ministry of Agriculture, Livestock and Irrigation (MALI).

Second, there are the 24 private or partly private banks, with a number of these partially owned by the government or municipalities. The latter group consists of three banks: Yangon City Bank, Yadanabon Bank and Naypyitaw Sibin Bank. The former includes A-Bank, the Construction and Housing Development Bank and the Myanmar Citizens Bank (MCB), as well as Rural Development Bank, which is partly owned by MALI and other municipal authorities. MCB is one of the two banks that are currently listed on the local stock exchange, with the other being First Private Bank, which is wholly private.

There are 16 private banks that have no government shareholding, with two of these accounting for more than half of all the assets held by private or partly private banks: Kanbawza Bank (KBZ Bank), which had a 42% share as of 2016, and AYA Bank, with 14%. Other major private players include Cooperative Bank (CB Bank), with 10%, and Myawaddy Bank, Myanma Apex Bank and Yoma Bank, with 6% each. This leaves the remaining 14 private and partly state-owned banks with just 12% of assets for this segment. As of early 2018, KBZ Bank, AYA Bank and CB Bank were also the three largest private banks in terms of their branch networks, having 392, 232 and 200 branches, respectively.

Foreign Players

The third group under CBM supervision is the foreign bank segment. Some 13 international entities hold foreign bank licences, including the Bank of Tokyo-Mitsubishi, Sumitomo Mitsui Banking Corporation and Mizuho Bank from Japan. These three have been investors in the special economic zone (SEZ) in Thilawa since 2014, when the first foreign banks were granted licences to open branches in Myanmar. Tokyo-Mitsubishi was the first foreign entity to actually begin branch banking operations in 2015. These licences are limited, however, as foreign banks are prohibited from providing retail banking services or lending directly to domestic companies or customers. Instead, they are allowed to open branches in SEZs under joint-venture partnerships. In July 2017 U Set Aung, deputy governor of the CBM, told local media that authorities were considering allowing foreign banks to offer retail services as part of the broader lifting of restrictions, though no formal plans have been announced.

Other international banks that are operating in SEZs include Bangkok Bank from Thailand; United Overseas Bank, which is based in Singapore; Malaysia’s Maybank; Industrial and Commercial Bank of China; State Bank of India; Taiwan’s E Sun Commercial Bank; the Australia and New Zealand Banking Group; and the Joint Stock Commercial Bank for Investment and Development Vietnam.

European and North American banks are notably absent from this group, however, there are some present in the fourth category overseen by the CBM: foreign banks with representative offices in Myanmar. As of early 2018 there were 49 international banks in this category, which notably included France’s BRED Banque Populaire, Qatar National Bank and London-based Standard Chartered Bank.

In Figures

In terms of overall market share, the CBM figures for March 2017 showed the four state-owned banks had 39.1% of total assets, amounting to MMK17.3trn ($13.2bn), while the private or partly private banks had a 60.9% share, totalling MMK26.9trn ($20.5bn). The total assets of the foreign banks at that time stood at MMK4.6trn ($3.5bn), or some 9.4% of the total MMK48.8trn ($37.3bn) of banking assets. In terms of branch density, West Yangon was the best served region as of mid-2016, with more than 20 branches per 100,000 people. Other areas that also had a higher-than-average density included East Yangon, Muse, Det Khi Na and Kawthuong, all of which had between five and 10 branches per 100,000 inhabitants. The least-served areas tended to be in the north-west of the country, where three provinces had no branches at all.

The sector is supported by statutory bodies, notably including the Myanma Banks Association (MBA), which was established in 1999 to be the country’s official liaison with international counterparts like the ASEAN Bankers Association. Almost all domestic banks are members of the MBA, with the exception of state-owned MEB, MICB and MADB.

Working within the MBA, the Myanmar Institute of Banking was formed in 2002 to provide sector training programmes, including part-time and full-time diplomas. Foreign banks and development organisations, such as Germany’s GIZ, have contributed to these courses, as has the Yangon University of Economics (YUE). YUE offers a master’s degree programme in banking and finance – which is often oversubscribed – and also supports other academic and training institutions in their banking courses, such as those provided by the Myanmar Institute of Finance and the Myanmar Institute of Business.

Another important sector body is the is the Myanmar Payment Union (MPU), which was formed in 2011 to act as the national electronic payments and ATM network for retail operations. The MPU became a public limited company in 2015, and is now jointly owned by 23 domestic banks.

Chequered Past

Banking in Myanmar dates back to the British colonial period, with the first lender, Indian Presidency Bank of Bengal, beginning operations in 1861. Following independence in 1948, the sector developed rapidly to become one of the most advanced in the region, accounting for around one-third of GDP by 1962. In that same year, however, the revolutionary government took over and nationalised the banks as part of its socialist overhaul of the economy. The People’s Bank of the Union of Burma became the sole, state-owned bank, with three demonetisations also occurring between 1964 and 1987. The last of these caused such political chaos that a new regime gained power and abandoned the purely socialist path in favour of a more market-oriented approach.

Following this changeover, private banks began re-emerging from 1992, but for the most part the system remained highly centralised and state-controlled. The majority of current banking officials gained much of their experience in this era, rather than in a fully market-oriented period, which has had lasting effects that can be felt today, as there are significant capacity issues hindering the transition towards a more liberalised sector.

Despite strong growth in the years that followed – with Myanmar escaping the worst effects of the 1997-98 Asian financial crisis – a major crash occurred in 2003. Trouble started when a number of trading companies, which had been acting as informal financial institutions thanks to a loophole in the law, collapsed. This caused banks to call in loans in order to maintain liquidity, which severely depressed economic growth, hurting many businesses and citizens. It also failed to save the banks, with three eventually closing. Furthermore, the crisis affected the public’s trust in the country’s banks and financial sector more generally.

After this crisis, the CBM brought in a series of restrictive measures designed to ensure such contagion would not occur again. Stricter controls on lending and capital requirements continued until 2011, when a new president, U Thein Sein, introduced a range of liberalisation measures and reforms. In this period, foreign banks began re-engaging and multiple sector expansions took place: the Yangon Stock Exchange was founded in October 2015, the state insurance monopoly was broken up, a series of new laws on banking, microfinance and exchange rates were passed, and there was an easing of the more conservative regulations. In 2016 the NLD came to power, promising further liberalisation, with the creation of a modern banking sector being a cornerstone of its economic programme. Acting on these promises, Parliament passed the new Financial Institutions Law in early 2016 (see analysis).

Boosting Inclusion

According to the IMF, Myanmar’s GDP for 2016 was $64.4bn, while GDP per capita was estimated to be $1232. Although this is still relatively low, it is roughly similar to the levels seen in countries such as Vietnam, China and Thailand, before they embarked on systematic economic reform. With this in mind, there is the potential for higher personal incomes in Myanmar, particularly given the relatively strong GDP growth trajectory, which reached 6.1% in 2016 and 7.2% in 2017, according to the IMF. Looking ahead, the IMF expects GDP growth to expand further to 7.6% in 2018 and 7.5% in 2019. While this is positive, directing income through the banking system remains a challenge. Recognising that the vast majority of the population remains unbanked, the UN Capital Development Fund, the Livelihoods and Food Securities Trust Fund and Myanmar’s government came together to form Making Access Possible (MAP) Myanmar in 2014, which subsequently launched the Financial Inclusion Roadmap 2014-20.

MAP’s researchers found that although 30% of the population had formal access to financial services, only 6% had access to more than one product. The percentage of adults with a bank account in their own name was even less at just 5%, while 2% had a debit card. The roadmap found that even though the 23 banks operating at the time had 6.7m clients between them, making them the biggest financial intermediaries in the market, there were many other players as well. These included 153 microfinance institutions (MFIs), which served 700,000 people; 7562 financial co-ops, with 900,000 clients; 13 insurance companies with 1.3m customers; and 2026 regulated pawnshops, which served 3.1m people.

At the same time, there is a large informal sector providing loans, with the study suggesting informal enterprises accounted for around 21% of all access to finance. Self-financing and friends accounted for a further 30%, and around 19% of the population was completely excluded from any source of financing.

Electronic Finance

Myanmar is still a largely cash-based economy. A 2016 study by GIZ, a sustainable development fund, showed that 100% of government transfers and utility bill payments were made in cash in Myanmar, while the same was true of almost all salary payments. This was well above ASEAN averages, which are around 90% for utilities, 45% for government transfers and 65% for salaries. Cash payments are cumbersome and more vulnerable to theft and money laundering. Boosting access to electronic banking systems therefore has important implications for transparency and accountability. Some 21 of the country’s 28 banks have joined the Society for Worldwide Interbank Financial Telecommunication network – a system that ensures reliable international electronic payments – but there is still a long way to go to moving Myanmar away from hard cash.

The roadmap has a target of increasing the percentage of people with formal access to financial services to 40% by 2020. In order to achieve this, the CBM and the other banks will have to overcome widespread negative perceptions among the population. These stem from past financial crises as well as damaging scams that are still present in the market, with Myanmar suffering from several Ponzi schemes in recent years. The new Financial Institutions Law should help make banking products more appealing, as it sets clear public disclosure obligations for banks, while also establishing some important processes that are set to enhance the usefulness of bank services to individuals and businesses.

Lending 

Allowing banks to issue non-collateralised loans has been suggested as a means of easing credit, with the proposal mooted by U Soe Thein, deputy governor of the CBM, in November 2017. Traditionally, banks have required prospective borrowers to provide collateral, usually in the form of real estate, although in the past gems and precious metals, such as jade or gold, were also commonly used. This requirement often proves difficult for the majority of individuals and businesses, leading to bank loans being concentrated in the hands of the wealthy and property owners, a relatively small group given the country’s difficult history. “The problem is that if you don’t own real estate you can’t expand your business,” Thiri Thant Mon, managing director of consultancy Sandanila, told OBG. “It also ties the banking sector too much to real estate, meaning that a depressed real estate sector also creates concerns over bad debt.”

One reason for the insistence on collateral is that there is no central credit bureau. Unable to check the past performance or other outstanding loans of a potential borrower, banks tend to seek tangible assets to offset risks. Further compounding the problem is the practice of banks issuing loans that are equivalent to a maximum of half the value of the collateral, which constricts business growth. In mid-2016 the MBA signed an agreement with Singapore’s NSP Holdings to set up a joint venture credit bureau, though this development appears to still be in its early stages. The passage of the Financial Institutions Law was a crucial first step in establishing such a bureau, as the previous Bank Secrecy Act had prevented financial institutions from sharing information with third parties. This law has amended this restriction to allow the CBM to authorise and regulate a credit bureau. In March 2017 the CBM published guidelines for the establishment of the credit bureau, with officials stating that it may begin operating in 2018. This would clearly be an important move forward, although more work would be needed to assuage concerns over its reliability and the quality of its information on borrowers.

SME Growth

Although the removal of the collateral obligation would be unlikely to lead to a major increase in loans in the short term, especially without a central credit bureau in place, it would still be a welcome move for small and medium-sized enterprises (SMEs) in particular.

There are around 100,000 SMEs in Myanmar, representing roughly 95% of all enterprises in the country. Developing SMEs and incorporating more of them into the formal sector is one of the government’s priority objectives. To achieve this, authorities are working to raise the transparency of SMEs, foster better reporting practices among non-financial businesses and increase their access to credit. The government’s SME Development Law of 2015 defined what constitutes an SME for the first time as well as set up institutional infrastructure to assist these enterprises and provide them with a support fund and an array of tax incentives. For the country’s banks, SMEs present both opportunities and challenges. For one, their size often precludes the necessary access to collateral. In addition, it is common for SMEs to lack formal accountancy methods and proper records of their finances. For SMEs, applying for a bank loan is usually a complex process, and the limited durations of smaller loans can cause problems with repayments.

As a result, most banks offer commercial loans on much the same basis as private loans, usually in the form of: bullet loans, which involve quarterly interest payments and full repayment of principal at the end of the term, generally one to three years; hire-purchase loans, often used to acquire cars, consumer goods and electronic equipment, where the wholesaler carries part of the repayment risk; and overdraft facilities, which banks have typically allowed to roll over indefinitely, though this is set to change within the next three years under new regulations that will force banks to ensure overdrafts are cleared for a period of two full weeks on an annual basis. Some banks, such as KBZ Bank, have recently introduced specific SME loans, but most SME owners still have to rely on personal connections, loan sharks, savings and re-invested profits to finance their businesses. This scenario acts as a substantial weight on both banking and business growth.

Microfinance

ne area that could fill the gap in the SME and personal banking markets is microfinance. Historically, the growth of MFIs in Myanmar has been relatively subdued compared to neighbouring countries, largely because of restrictive regulations. Until recently, MFIs were forbidden from borrowing from domestic banks, while interest rates for dollar loans were limited to 8%. The Microfinance Law of 2011 formalised the status of MFIs, but the legislation still limits the segment somewhat to a rural development role. There is a maximum loan cap of MMK5m ($3820) and at least 50% of an MFI’s portfolio must be extended in rural areas. Moreover, MFIs that take deposits must have a minimum paid-up capital of MMK300m ($229,000), while non-deposit taking ones have a minimum of MMK100m ($76,400), with a minimum solvency ratio of 12% and a minimum liquidity ratio of 25%. Interest rates are set by the Ministry of Finance, though the current rates – which enforce a 30% maximum for loans, a 15% minimum for compulsory deposits and a 10% minimum for voluntary deposits – make profitability a challenge. However, surveys have consistently shown that there is high demand for micro-loans, meaning that the segment has potential should the current regulatory restrictions be relaxed.

Setting The Rate

Interest rates pose another barrier to entry in the formal banking sector. Indeed, 32% of respondents in a 2014 survey conducted by Deloitte stated this was the top finance-related barrier for businesses in Myanmar. Rates are set by the CBM and all banks – whether state, private, domestic or foreign – must adhere to them. Moreover, the CBM enforces multiple restrictions on the autonomy of the banks to price risk and offer unique products. These limitations have far-reaching implications on the sector, with the IMF noting in its Article IV consultation that: “With bank lending rates capped at 13%, banks have little incentives to lend to MFIs given the high risks involved in microfinance.”

The range of products that banks can offer, however, is still fairly wide. Banks may issue: commercial loans, development loans and overdrafts; time, savings, demand and call deposits; savings certificates; hire purchase and/or leasing agreements; debit cards, credit cards and co-brand cards; mobile banking services; foreign banking services; and domestic and international remittances. While the CBM rate is currently set at 10%, there is a minimum bank deposit rate of 8% and a maximum of 13%, with all banks effectively offering this highest rate. The loan period is usually restricted to one year, meaning that most borrowers are obliged to roll over their loans on an annual basis. Two exceptions to this are agricultural loans from MADB, which have some variable interest rates, and two-step development loans from the Japanese International Cooperation Agency to help SMEs, which six of the private banks administer and offer at 8.5% interest.

The CBM rate went down from 12% to 10% in FY 2011/12, while deposit rates fell from 12% to 8% and lending rates decreased from 17% to 13% that same year, with the intention that eventually rates will be completely liberalised. The climbing inflation rate is also placing pressure on the CBM, as it had previously been considerably lower than the CBM deposit and lending rates, but in FY 2015/16 it jumped to 11.4% while CBM rates remained the same. Since then, inflation has fallen as the economy has slowed. The Central Statistical Organisation has forecast it will moderate to 7.9% for FY 2017/18, though the IMF expects it to fall to 6.1% over 2018.

For many businesses, the 13% lending rate is a major barrier to growth, yet the CBM is reluctant to lower the rate while inflation remains high. The latter is largely caused by money supply growth originating from a combination of loose fiscal policies in the past, CBM purchases of government securities to fund the budget deficit, depreciation of the currency pushing up the price of imports and external factors, such as recent flooding pushing up food prices. The government has been tackling some of the structural elements in this list – including cutting its expenditure and trying to boost state revenues to reduce the deficit – with some success.

The government has been working to keep the deficit under 5% of GDP. In October 2017 it was around 4.4%, down from 4.9% a year before. However, these efforts to rein in the budget have further restricted economic and credit growth, with the CBM having limited room to manoeuvre interest rates, including liberalising them. This is a challenge for the banks, which in the meantime have to offer identical products at identical rates.

International Banks 

This limitation also has some bearing on foreign banks operating in the country. These are restricted to one location each, with their branch only able to open if it has a paid-up capital of at least $75m. In addition, foreign banks may only engage in wholesale banking. They may grant loans and take deposits from foreign corporations and domestic banks operating in the country, using either Myanmar kyat or foreign currencies, and can also work with a local bank to disburse loans to local companies, via a syndicated loan extension programme. However, the main function of foreign banks in Myanmar is to participate in the local interbank market, assisting domestic banks with loans and engaging in foreign-exchange transactions, while also acting as a recognisable institution to foreign companies operating in Myanmar.

At some point foreign banks may be allowed to engage in retail business, but for the time being this is still some way off. Many businesses would welcome foreign bank participation, particularly as they may be able to leverage their international positions to provide cheaper loans, should interest rates become liberalised. The CBM and the government have signalled that a change in the rules may be on its way, but for now authorities are cautious about opening the sector due to concerns over the possible impacts on overall financial stability. Partnerships with local banks may prove to be the best way forward, as they can provide knowledge transfers and capacity-building benefits, as well as helping to boost capital within the domestic sector.

Growing Credit

For all the difficulties businesses face in obtaining loans, credit growth continues to be substantial, albeit from a relatively low base. According to CBM statistics, the sector’s total loans stood at MMK5.4trn ($4.1bn) in June 2013, split between MMK998.4bn ($762.6m) from state banks and MMK4.4trn ($3.4bn) from the private and semi-government banks. By June 2017 the total had risen to MMK19.5trn ($14.9bn), of which state banks held MMK2.8trn ($2.1bn) and private banks held MMK16.7trn ($12.8bn). This gives a compound annual growth rate of some 37.9%.

Such rapid growth poses macroeconomic risks, but the rate has slowed slightly in recent times. In March 2017 the IMF reported a year-on-year rise of 34%. The absence of prudential data and concentration risk were noted by the fund as causes for concern in its January 2017 Article IV consultation, along with “ever-greening” practices, where banks keep companies afloat by lending them enough to make their interest payments, thereby concealing bad debt. The concentration risk has mainly been caused by the large sums of bank lending that have been to extended to the trade and construction sectors, with both of these experiencing a slowdown in 2016. In addition, state-owned banks are in need of substantial reforms in their operating practices. These banks are systemically important in the economy and have large deposit bases, but they lack modern banking methods and experience.

Leapfrogging

Technology can provide a rapid means of improving services, while also promoting inclusion and transparency. The new mobile banking law means that customers are now able to access a range of financial services from their smartphones. In terms of other digital developments, banks have been investing in growing their ATM networks, debit card distribution and online services.

ATMs and point-of-sale (POS) terminals were first installed in Myanmar after the formation of the MPU in 2011. Now, all cardholders with MPU member banks can access their funds from any ATM in the network. Withdrawal limits are fixed at MMK300,000 ($229) per transaction and MMK1m ($764) per day. MPU cards can also be used at POS terminals and for purchases made online, though their main usage continues to be cash withdrawals from ATMs.

Figures for March 2016 counted some 1686 ATMs installed nationwide, along with 2839 POS machines. According to World Bank data, there were 2.7 ATMs per 100,000 adults in Myanmar in 2016, which is one of the lowest ratios in ASEAN. By comparison, Vietnam and Thailand had ratios of 24.5 ATMs and 113 ATMs per 100,000 people, respectively. As a result, ATM terminals have been targeted for development by manufacturers such as NCR and Diebold Nixdorf, which are in the process of competing for business. ATMs that have more sophisticated features – including remote video-enabled assistance, foreign-exchange conversion and cash recycling – offer the possibility of extending a bank’s network without having to provide physical branches, in turn helping to boost financial inclusion.

The next steps may include enabling machines to accept biometric recognition, which could obviate the need for debit or ATM cards altogether. Such technological improvements may also help banks compete against mobile money firms, which are partly bypassing not only bank branches, but ATMs as well. The cash-based nature of most transactions will, however, likely means that the demand for ATMs is set to remain strong for the time being.

Outlook

Although the sector has made great strides in recent years, it is still very much a young, evolving market. As such, there will need to be more coordinated reforms to overcome interlinking challenges. This will require a strategic approach by the government and the CBM, as well as the banks and other financial institutions. The pressure for more change appears set to continue in the year ahead.

In the short term banks will likely remain restricted in the services they can provide, their overall liquidity and ability to expand. Foreign banks, meanwhile, will have to wait until the domestic sector is brought onto a more level playing field before their restrictions on operations are eased. Nonetheless, the potential for growth remains strong, with banks having the opportunity to capture the sizeable unbanked population. Other Asian countries started out in a similar place, but have gone on to become some of the world’s most dynamic and lucrative banking markets. It may take some time to arrive to that point, but Myanmar is on the right course.