Golden opportunity: With both high risks and significant opportunities, the government is focusing on stable development

Recent reforms in the sector are beginning to take off and to address the low levels of lending and banking recorded in the country in 2011. Foreign banks are lining up at the country’s doorstep to tap into this potentially major market in the heart of South-east Asia. Since April 2011 and the shift in government policy, banks have started to engage with international technology providers, offer more modern services, regain trust and improve lending procedures. The government has highlighted the importance of reforming monetary policy and a more internationally standardised regulation of banks operating in Myanmar.

Looking Forward

But significant challenges lie ahead, and risks to the banks, depositors and borrowers are evident. A severe lack of trust in the Myanmar banking system has cemented itself in the people’s mindset, discouraging saving and holding back the growth of deposits in retail banks, which in turn has seriously limited the lending capabilities of local banks.

Access to foreign capital has also been greatly restricted by economic sanctions, and risk has remained high enough to dissuade all but the most adventurous investors from providing capital to domestic companies, or even those overseas with operations that are based within the country. Furthermore, after 50 years of economic isolation there is an acute lack of expertise in dealing with and regulating monetary policy and the banking sector, as well as building loan portfolios from within the private banks.


Myanmar’s policy rate is 10%, lending is capped at 13% and deposits floored at 8% interest, creating tight margins in a country where inflation has averaged 6.5% over the last four years. The four state banks issued 9.2% of the country’s loans in 2012 and hold 38.6% of the country’s deposits. Of the 19 private banks, the top three have 60% of the private banking market in terms of total assets, and the top 10 banks hold 90.4% of all private banking assets, or 55.4% of the combined state and private banking sector. This combined sector comprised total assets of MMK8.4trn ($9.2bn) at the end of the 2011/12 fiscal year, according to the Central Bank of Myanmar (CBM), up 37.4% from the previous year. Likewise assets have been growing at a compound annual growth rate (CAGR) of 44% for the last five years, and show no signs of slowing.

Of all the countries assessed by the World Bank, Myanmar had the lowest number of borrowers per capita, with 0.83 citizens taking out a loan per 1000 people in 2011. This ranks just below the Democratic Republic of the Congo and Ethiopia, which provide 1.48 and 1.87 people per 1000 with loans, respectively. In the region, only Laos is anywhere near Myanmar’s loan penetration rate, where 3.9 out of every 1000 citizens borrow from banks. Other ASEAN nations’ banks such as those in Thailand and Malaysia reach 251 and 282 people per 1000, or 25% and 28% of the population, and Singaporean banks lend to 1073 out of every 1000 citizens, meaning the country has 107% lending penetration. Compared to its peers, Myanmar has tremendous growth ahead, and as more individuals begin to trust the system and corporate accounts grow for increasingly complex transactions, the banking business looks set to continue its expansion.


Loans and advances accounted for nearly 38% of total assets in 2012 at MMK3.17trn ($3.49bn), having grown 64.7% in 2011 and 70% the year before that in real terms. Sluggish growth in 2009 and 2010 has given way to a new surge of lending on the back of an increase in deposits during this period. Yet cash and government securities still account for the majority of assets, at 52.6% of the total in 2012, or MMK4.4trn ($4.8bn). In recent years banks have been acquiring more and more government securities over cash: in 2008 only 8.6% of the bank assets were government bonds, as compared to the current 24.2%.

Deposits have been growing at a CAGR of 45% in the last five years, totalling MMK7trn ($7.7bn) in 2012, or 15.5% of GDP. The IMF predicts this growth will continue, reaching 24% of GDP by 2014. Yet this is compared to the world average deposits-to-GDP ratio of 58.2% and the ASEAN average of 61%. Myanmar has the second-lowest deposits-to-GDP ratio in the ASEAN region after Vietnam. People in Myanmar have long preferred to use alternative ways of storing their wealth such as gold, gems and land, which has led to hikes in the prices of these commodities. As these products are in turn also used as collateral, some banks are wary of the long-term stability of their value and have further tightened the collateral requirements for future loans, exasperating the credit squeeze.

The deposits-to-total assets ratio within the country has remained stable at around 82% during the last five years, but the loans-to-deposits ratio has climbed slightly from 40% to 45.6%, showing gradually more aggressive lending by management. Yet still, loans as a percentage of GDP remain low at 7.1% in Myanmar, and broad money supply is the lowest in the ASEAN, at 31% of GDP in 2012 compared to the regional average of 65%. Indonesia and Cambodia are next up the list in terms of broad money, with 38.8% and 39% of GDP, respectively, compared to Malaysia at the top of the group with 139% of GDP. When compared to its peers in the region, Myanmar’s macro indicators are pushing the banking sector forward.

Income & Profits

The CBM annual report provides the earnings of the 19 private banks in the country, but excludes the profits of state-owned banks, which issued 9.2% of the nation’s loans in 2012 and hold 38.6% of Myanmar’s deposits. The efficiency of private banks has remained steady since 2008, with profits before tax at 28% of total income over the last five years. Non-interest income, such as transaction fees and withdrawal, deposit and other service charges, as a share of total income has been dropping during this period, but still accounts for 19% of all revenue for the private banking sector. Non-interest expenditures exceeded income by 6%, making a loss from this unit of operations. Overall bank profits have shown strong growth, averaging 51% on a compound basis for the past four years and jumping to 71% and 61% in the 2010/11 and 2011/12 fiscal years, respectively, with the trend correlating strongly with the increases in deposits. But even with the strong deposit growth, the capital base is low compared to other nations, and it is generally agreed that only through significant structural changes can the sector truly live up to its potential.

CBM Developments

The CBM has historically been a unit of the Ministry of Finance and Revenue, and increased independence came in 2013 through new legislation along with a clearer set of responsibilities and goals. With pressure from both international cooperative development agencies and the recent reform process, the CBM is working to become a reliable regulatory body in line with international norms. U Kyaw Kyaw Maung, the new governor of the CBM, will have a strong role to play in the future of Myanmar’s banking system, but there are few other highly educated economists and bankers that have experience dealing with international expectations. So, Myanmar is taking tentative but steady steps in developing the sector.

In April 2012 Myanmar released the exchange rate from the CBM’s control and adopted a market-determined rate, taking its biggest step so far in financial sector reform. This marked the beginning of a much more detailed plan that includes the new CBM law and a Securities Exchange Law in preparation for the opening of the Yangon Stock Exchange in 2015. An independent central bank is key in addressing the trust issues surrounding the banking system in Myanmar, but in order to allow consumers to trust banks and borrow more freely, the sector must establish a solid track record and show strong leadership in the years ahead. “Myanmar needs to increase the availability of financial services in the country, but regulatory capacity needs to grow alongside the growth of financial institutions,” said Declan Magee, economic advisor at DFID in Yangon.

Monetary Policy

The reserve requirement set by the central bank is 10%, although in practice the liquid reserves-to-bank assets ratio is 45%, down from 94% in 2007. Liquid assets-to-total liabilities must not be less than 20%, and capital must comprise at least 10% of risk-weighted assets. The maximum loan size to a single entity cannot exceed 20% of the sum of capital and reserves, but the deposit limit of 10 times the paid-up capital has now been lifted. Government bonds are issued with two-, three- and five-year maturities with 8.75%, 9% and 9.5% coupon rates, respectively. MMK1.84trn ($2.02bn) worth of treasuries were also issued in 2011/12, up 40% from the previous year.

According to the IMF, broad money supply hit MMK12.6trn ($13.86bn) in 2012, or 31.7% of GDP, having risen 23.6% from the previous year. This growth is expected to continue in the coming years as lending volumes increase to 40% of GDP by 2014. The money multiplier by extension is also set to rise from its current 1.7 to 2.0 by 2014, and velocity is expected to slow down from 5.3 in 2008 to 2.5 in 2014.

Credit to government as a share of CBM’s net credit is set to decline to make way for added private sector credit in the coming years. In 2009 95% of all the central bank credit was to the government, but in 2012 this had fallen to 79% and is expected to reach 70% by 2014. However, private credit as a percentage of GDP, once at 3.3% in 2009, reached 8.2% in 2012 and is due to hit 14% in 2014. Currently the Myanmar government does not raise debt overseas, but many investors are waiting for this indicator to better price expected returns on investments in the local private sector. There has been no mention of this plan yet, however, given the more urgent need for central bank autonomy and a trusted domestic banking system.

Top Banks

Myanmar’s banks have had a turbulent history. In 1963 Myanmar’s financial system was nationalised and in 1969 all banks were grouped under the monolith People’s Bank of the Union of Burma. In 1988 liberalisation of the sector and a number of new laws initiated the emergence of today’s private banks. Most notably the Financial Institutions Law of Myanmar of 1990 laid out a three-phase plan: the first phase will allow domestic banks to run joint ventures with international banks; the second phase will allow foreign banks to establish 100% owned, locally incorporated subsidiaries; and the third phase will enable foreign banks to set up local branches. As of 2013, however, the first phase had yet to begin, as all of Myanmar’s banks are locally owned and run.

There are now four state-owned banks. The Myanma Economic Bank (MEB) is the country’s largest bank with over 300 branches nationwide, known best for lending to other state-owned enterprises and state-run financial institutions such as the Myanmar Agricultural Bank (MADB) and the Myanma Small Loans Enterprise. The MEB is widely considered the major state bank, with little independence from the government.

The Myanma Foreign Trade Bank has traditionally dealt mainly in foreign exchange-related activities and servicing expatriates, and until recently was the only bank foreigners could use in the country. The Myanma Investment and Commercial Bank and the MADB were further extensions of the state’s financial arm focusing on the sectors their names suggest, and still operate closely with the government in providing capital and managing the finances of other state enterprises.

Private Banks

In the private sector, Kambawza Bank (KBZ) is the largest bank in Myanmar with MMK1.8trn ($1.98bn) in total assets in 2012, equal to a market share of 38%. The bank was reportedly founded by U Aung Ko Win in 1994, whose KBZ Group runs two airlines and other lucrative mining and industrial enterprises, as well as a recently established KBZ insurance venture. CB Bank is considered the second-largest wholly private bank in the country, with MMK563.1bn ($619.4m) in assets, and was formed from grouping many of the previously state-run cooperatives into a single entity. It is now pushing to market to internationally focused corporates and individuals.

CB Bank was one of the first to issue ATM cards and partner with Visa and MasterCard. While competition between the top banks will be fierce, the many restrictions have limited the number of moves each player can make. “The only place we can compete is in retail, by setting up more branches,” said U Than Lwin, advisor to Ministry of Finance and Revenue and director of KBZ. “We are 50 years behind in training.”


Myanmar banks are in general very conservative with their portfolios, traditionally only lending to close associates of shareholders or the military elite rather than on a specialised credit analysis basis. While there is no set restriction on collateral requirements, banks will often lend only 30% of the collateral they require for a loan. As such non-performing loan ratios are low, often 0% for the banks interviewed by OBG. This extraordinary result is achieved by a strict scepticism on the value of collateral. Until recently, firms and individuals could only borrow on land and gold, which can be valued and re-sold relatively easily. A recent hike in the value of land in Myanmar has also led to tighter lending policies, even though the law now allows a wider range of commodities to be used as collateral.

While lending is tight, 19% of banks’ profits are still made through fees and remittance charges. Banks have to compete on a transaction basis with an unofficial remittance system known as hundi, which relies on a trust network across the globe for citizens to remit funds in and out of the country without the government or banks’ knowledge. The system is quicker and cheaper than official banks, and businesspeople have developed a preference for hundi over what the Myanmar government and banking system provide.

While much of Myanmar is considered “unbanked”, hundi representatives are widespread across the country and more accessible, reliable and trusted than conventional banks, making it a tough market to penetrate for local financial institutions, as well as foreign bank. “Hundi uses the network of 5m Myanmar nationals living outside the country,” said U Min Zar Ni Lin, research associate at the Myanmar Development Research Institute. “People who use the system do not trust or want to use the formal banking system.”

Going Slow

While the indicators in Myanmar point towards high growth and even greater potential for investors and the sector, the rush may not be as quick as international players are expecting. Myanmar savers have been burned in the past when trusting local private banks with their earnings, and may not be tempted by the new promises of a credit card or fresh faces. Also, without access to foreign capital and limited expertise, local Myanmar banks may struggle to catch up with international standards as the pressure from over 25 international banks mounts. Local financial institutions will either grow quickly, establish joint ventures or be pushed out of the market leading up to the initiation of the three-phase banking development plan. There is some speculation that the central bank law may be a pre-cursor to allowing foreign joint ventures, and U Thein Zaw, deputy director-general of Financial Institution Supervision Department at the CBM, said in May 2013 that joint ventures would begin in 2014. Yet others have said more time may be needed to bring local lenders to a competitive level before the gates are opened and the representative offices start bidding for local banks’ favour. “Myanmar’s financial system has been largely walled-off from international forces for the past 60 years, and very recently those walls have begun to be knocked down,” said Michael Madden, CEO of Ronoc, an emerging-markets financial services advisory firm operating in Myanmar. “Current managers and owners of banks have very strong experience in Myanmar, but they need to be prepared for international banking, new technologies and payment systems, expectations and regulations that will come.”


At a policy level there are still serious changes that need to be made. The flood of capital and relatively aggressive lending by international banks could well wash away weaker local lenders and leave inexperienced monetary policymakers overwhelmed. The world is still recovering from misplaced lending by some of those on Myanmar’s doorstep, and the CBM is faced with the daunting task of regulating their entry and activity. Not all local players favour partnering with a foreign institution. Myanmar has a long way to go before it deals with those institutions securely, and may wait before it allows them to operate. Internationals may have to stay for the long haul. Competition for Myanmar’s banking sector is fierce, and a wide arsenal of tools must be carefully selected over the coming years if institutions hope to succeed ahead of their peers. Legislative changes, international support, services, branch networks, technology and education must all be carefully managed. But competition is fierce for a reason, and the winners stand to benefit enormously in the sector.

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The Report: Myanmar 2014

Financial Services chapter from The Report: Myanmar 2014

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