Banking sector formalisation and financial inclusion open Myanmar's market up to foreign participation

The pace of reform in Myanmar’s banking sector has been increasing in recent years, with liberalisation taking a major step forwards in November 2019 when the Central Bank of Myanmar (CBM) announced that foreign banks would be able to get a licence to engage in onshore retail through a subsidiary or joint venture from 2021. These steps follow the trajectory of reform launched in 2016 by the National League for Democracy-led government, with this administration set to continue financial sector liberalisation and boost financial inclusion in the years ahead.

Naturally, challenges remain for an industry that only recently emerged from decades of exclusion from the global financial system. Many citizens remain outside the formal network of banks and microfinance institutions (MFIs), relying instead on informal sources for their financial needs. Skilled human resources also remain a barrier, as new banking methods increasingly challenge traditional bank practices, while local professionals trained to global banking standards remain scarce. Furthermore, as reform continues, the regulatory regime remains restrictive in terms of products, interest rates, loan books and deposits.

In spite of all these challenges, Myanmar remains a great potential growth market, with strong progress in economic development and an expanding, youthful population anxious to catch up with neighbouring countries and those further afield. The result is a sector that holds great promise and many opportunities.

Legal Oversight

The CBM fulfils the role of sector regulator and supervisor, which transitioned to an ostensibly fully independent and autonomous body with the passing of the CBM Law in 2013, although it is widely considered to remain under government influence to some degree. Other significant dates include 2003, when the country experienced its first major banking crisis of modern times, and 2011, when Parliament passed the new Microfinance Business Law (see analysis). In 2012 the first debit cards and ATMs began to appear in Myanmar, along with the Foreign Exchange Management Law, while in 2014 the Anti-Money Laundering Law was introduced. In 2016 the new Financial Institutions Law was passed by the government, as well as regulations on mobile financial services. The following year saw a host of new regulations issued on capital adequacy, asset classification, reporting of large debts, liquidity ratios and loan provisioning, while in 2018 foreign banks were allowed to extend loans to local companies for the first time.

Structure

Within the central bank, the Financial Institutions Supervision Department is directly responsible for supervising local and foreign banks. As public sector institutions, the country’s four state-owned banks (SOBs) – Myanma Agricultural Development Bank, Myanma Economic Bank, Myanma Foreign Trade Bank, and Myanma Investment and Commercial Bank – also have some overlapping supervision from the Financial Regulatory Department, which is overseen by the Ministry of Planning, Finance and Industry (MPFI).

Another key body is the Myanmar Accountancy Council (MAC), which is responsible for ensuring that the banks and other financial institutions meet the Myanmar Financial Reporting Standards, issued in 2010. Since 2009 Myanmar has also adopted International Financial Reporting Standards (IFRS) for banking. The MAC issued new instructions on these in 2018, setting the deadline at 2022-23 for all public interest entities to adopt IFRS 9 (see regional analysis).

Regarding other international standards, the banking sector is in line with Basel I compliance regulations, while it has also taken steps to adopt Basel II in some areas, thanks to the reform introduced in 2017. Under the regulations, banks are required to maintain a Tier-1 capital adequacy ratio (CAR) of at least 4%, a Tier-2 CAR inferior or equal to 4% and a regulatory CAR (RCAR) equal to or greater than 8%. In 2017 the CBM outlined a required liquidity ratio of 20%, which had reportedly been met by all banks by September 2018. In addition, since 2018 the CBM has been receiving technical assistance from the IMF on moving the sector from compliance-based supervision to risk-based supervision. The current plan is for the latter approach to be adopted across the sector in 2020. The sector currently consists of 27 private local banks, in addition to the four SOBs. There are also 13 foreign bank branches – licensed to operate in a limited capacity since 2014 – 49 representative offices (ROs) of foreign banks operating in the country and two foreign non-banking institutions with ROs. In addition, there are around 180 MFIs licensed to operate in the country, with the largest of these operated by international NGOs and MFI groups (see analysis). Private banks have been rapidly increasing their market share in recent times, at the expense of the SOBs. The market share of SOBs in terms of assets fell from 60% at the end of FY 2014/15 to 34% in December 2017. The most recent statistics from the CBM – for the April-September 2018 period – show SOBs with 31.14% of total banking sector assets, local private banks with 57.67% and foreign private banks with 11.19%.

CBM statistics also show that from April to September 2018, the top-five local private banks were Kanbawza Bank, with 33.05% of total private banking assets; AYA Bank, with 16.02%; Cooperative Bank, with 11.97%; Myanma Apex Bank, with 9.31%; and Yoma Bank, with 6.56%. Among foreign banks, the top five were China’s ICBC, with 16.11% of total foreign private banking assets; Singapore’s OCBC, with 14.52%; Japan’s Sumitomo Mitsui, with 14.36% and Mizuho, with 11.89%; and Thailand’s Bangkok Bank, with 8.58%.

New Foreign Licensing

These foreign entities – and others with ROs in Myanmar – are now well placed to take advantage of the CBM’s November 2019 announcement that it has “initiated a process to open the domestic banking market to foreign banks”. Two types of licences are being offered: branch licences and subsidiary licences. With the first type, a bank can open one place of business in the country, provided it has a minimum paid-up capital of $75m and that it has made a deposit of $40m with the CBM that will remain locked for two years. Branch licence holders will be able to conduct wholesale banking in the same way as existing foreign bank branch licence holders.

Holders of the subsidiary licence, however, will also be able to conduct onshore retail banking activities, starting in January 2021. Subsidiaries can also establish a maximum of 10 places of business, either as branches or as off-site ATMs, while the minimum paid-up capital requirement is higher, at $100m. Once a foreign bank has been present in Myanmar for three years it will be able to submit a request to convert its licence into a subsidiary one, starting from June 2020. Furthermore, as of January 2020 foreign banks are allowed to own up to 35% of the capital of a domestic bank, subject to CBM approval. This development is line with the provisions of the 2017 Companies Law.

The CBM had issued requests for expressions of interest from banks with ROs in Myanmar that would be eligible to apply for the new licences. The move is a well heralded one, partly because the CBM appointed German consulting firm Roland Berger to provide advisory services on issuing foreign banks licences back in July 2019. It also comes after the move to liberalise the sector further in November 2018, when the CBM announced that foreign banks would be able to provide import financing, as well as extend loans to local firms and provide other services to local corporations. Prior to this step, foreign banks had been limited to providing services only to foreign firms operating in Myanmar.

Regulations

The CBM determines a fixed interest rate environment, setting the rates that banks may offer customers for deposits and loans. As of late 2019 the minimum deposit rate stood at 8% and the maximum borrowing interest rate stood at 13%, while the CBM’s rate itself was 10%. This means banks cannot always price risk accurately with individual loans. In response, banks have always asked for collateral before loans were issued, thus reducing financial inclusion as a large proportion of citizens lacked the required assets in land, property or gold. In order to tackle this, in February 2019 the CBM allowed loans to be advanced without collateral, mandating a 16% interest rate for such unsecured borrowing. Under CBM regulations, banks are only allowed to issue overdrafts with a oneyear maturity and loans with up to three years’ maturity.

Mortgages are also limited to 15-year terms, at 13% interest. Payments of interest must be made on a quarterly basis at least, while converting overdrafts into term loans is permissible, provided they meet certain criteria. Annual credit card interest rates were raised to 20% in May 2019. To address the issue of risk assessment and pricing, May 2018 saw the CBM license the Myanmar Credit Bureau. In this, Singapore’s Asia Credit Bureau Holding has a 40% stake, while MB Investment Limited – a vehicle set up by the Myanmar Banks Association – has the remaining 60%. The Myanmar Credit Bureau also signed an agreement with Equifax New Zealand for a credit bureau software licence, which is expected to be launched in early 2020 (see analysis).

Performance

The most recently available CBM figures show that the total assets of the banking sector stood at MMK61.2trn ($39.9bn) as of September 2018 – some 13.6% up on the MMK53.9trn ($35.1bn) recorded in September 2017. Loans and advances rose by 20.21% over the same period, while premises and other fixed assets grew by 28.89%, equity investment by 39.78% and claims on financial institutions by 7.1%.

Breaking down loans and advances by sector, agriculture and livestock dwarfed all others, receiving 68.34% of the sector’s MMK24.2trn ($15.8bn) loans and advances book. Services were in second place, with 10.4%, followed by construction, with 9.03%, and real estate, with 7.62%. Interestingly, small and medium-sized enterprises (SMEs) took just 0.15%, a low figure given the large number of SMEs in Myanmar. Although SME lending carries higher risk for lenders, expanding credit to these firms is important given that they make up the majority of businesses in the country.

The local private banking segment saw its total deposits rise from MMK26.6trn ($17.3bn) in September 2017 to MMK31.1trn ($20.3bn) a year later, a notable 17.2% growth. Over the same period loans and deposits in the private sector rose by 19.55%, while total assets increased by 18.03%. Foreign banks saw their total deposits rise by 38.68% from MMK3trn ($2bn) to MMK4.2trn ($2.7bn) over the same period, while their loans and advances grew by 63.62% to MMK697.2bn ($454.5m), and total assets by 23.1%.

According to the CBM, all domestic private banks met the CAR standard as of September 2018, yet the average RCAR stood at 7.17% – less than the statutory 8% minimum. Banks that did not meet the RCAR were therefore required to boost their capital within a specified time frame determined on a case-by-case basis. Furthermore, many banks also struggle with low profitability, with extensive branch networks, new compliance regulations and a need to invest in new technology contributing to a high cost-to-income ratio.

NPL

One of the reasons behind the low RCAR is asset quality, with provisioning and losses from non-performing loans (NPLs) and overdrafts impacting performance. A CBM ruling from 2017 requires that banks set aside 2% of total outstanding loans and advances as a general provision for loan losses. In addition, specific provisions have to be made for particular grades of NPLs, depending on the amount of days past due. This can be as much as 100% in the case of loans more than 180 days over their due date. It also required banks to reduce the number of non-performing overdrafts according to a specific timeline. Moreover, banks had to convert outperforming or underperforming overdrafts that continued to roll over without being serviced into term loans. The percentage of the overall loan portfolio taken by overdrafts was fixed, with caps of 50%, 30% and 20% set for 2018, 2019 and 2020, respectively.

The NPL issue remains controversial, with the Myanmar Business Association suggesting that about 10,000 companies were defaulting to some extent in late August 2019 but that banks foreclosing on outstanding loans would cause serious harm to the economy. Furthermore, it is likely the number of NPLs is under reported, with varying practical definitions of what constitutes an NPL. While banks have been working hard since 2017 to deleverage and find ways to tackle NPLs, the exact size of the problem remains hard to ascertain due to data limitations. The IMF, in its April 2019 Article IV Consultation, suggested that around 50% of overdrafts had been restructured into amortised loans, with substantially more NPLs than reported.

Financial Inclusion

Total population stood at 54.4m in November 2019, according to the Ministry of Labour, Immigration and Population. A 2018 report from the UN Capital Development Fund and the then-Ministry of Planning and Finance (MOPF) showed that 65% of the population lived in rural areas, which often face considerable transport and ICT challenges. At the same time, while GDP growth is strong, with the Asian Development Bank estimating it at 6.8% for 2018 and predicting 6.6% for 2019, GDP per capita remains low. According to the World Bank’s 2017 Myanmar Living Conditions Survey, 24.8% of the population lived at or below the poverty line. Meanwhile, the country has only recently begun opening its banking sector up to private finance, and memories of older banking failures remain – particularly the bank run in 2003 – have contributed to a lack of public trust in the financial services sector. Under such circumstances, banking and other formal financial services penetration remain relatively low. Aware of this issue, the CBM, MOPF and other government institutions and agencies produced the first Myanmar Financial Inclusion Roadmap, which ran from 2014-20, while the newer iteration covers the 2019-23 period. The progress driven by this blueprint has been significant for the country. In 2014 the formal financial inclusion rate stood at 30%. The roadmap outlined a target of raising this to 40% by 2020, and this figure had already reached 48% by 2018. Similarly, the goal of raising the number of adults with at least one financial product from 6% in 2014 to 15% by 2020 was also exceeded, reaching a promising 18% in 2018.

Success has come through a combination of expanding bank branch and ATM networks, growing mobile banking and licensing more MFIs (see analyses). These have squeezed traditional sources of finance, such as informal money lenders, who were used by 5.9m people in 2014, but only by 4.2m people in 2018, according to the Making Access Possible initiative of the UN Capital Development Fund. In the future further progress with mobile money and tie-ups between banks and MFIs should see this number continue to decline.

Fintech

Mobile banking has emerged as an important pillar in financial technology (fintech) as banks have sought to leverage the spread of smartphones since the telecoms sector was liberalised in 2014 (see ICT chapter). As part of the new Myanmar Financial Inclusion Roadmap 2019-23, the country’s financial institutions also intend to leverage fintech solutions to further their digital-driven financial inclusion agenda.

The CBM launched a regulatory framework for mobile financial services in 2016, allowing fintech companies to offer domestic money transfer and payment services, as well as locally denominated cash-in and cash-out services. Fintech companies can also apply for mobile banking licences, which allow domestic and international money transfers, although fintech firms can only secure these if they operate under an existing bank’s mobile licence (see analysis). Following the success of markets like Kenya in the development of mobile money, foreign telecommunications operators have moved into the Myanmar fintech space, with such projects well funded and supported by a captive market. For example, in 2015 Norway’s Telenor partnered with Yoma Bank to develop Wave Money, a platform that allows money to be transferred via mobile phone. As of June 2019 more than 11m people used the digital platform.

Cryptocurrencies, meanwhile, have been approached with a high degree of caution by the CBM, which issued a statement in May 2019 stating that banks were barred from working with them. A number of local fintech start-ups have been active in microfinance, such as Mother Finance and ZigWay, which use mobile apps to disperse micro- and nano-loans.

Outlook

As further liberalisation of the sector takes hold, the banking sector will continue to see private banks gain market share, with foreign entities now readying to enter the domestic retail sector. This should see higher competition, although largely in service provision at first, given that the CBM maintains control over rates and product types. If that control also begins to unwind, however, the sector will move towards a more market-based approach. NPLs will continue to be an area of focus, with there being little appetite among regulators to see banks fail and a need to protect the sector from external shocks. Progress in financial inclusion appears set to forge ahead, as conventional banks, MFIs, insurers and mobile, fintech outfits reach more segments of the population. While many players are anxious to move forward, the CBM is likely to take a cautious approach. Finding a balance will be essential as the government moves towards the 2020 election year.