In the wake of sweeping reforms undertaken since 2011, Myanmar’s banking sector has been advancing at a rapid pace to become safer, sounder and better regulated. The majority of banking institutions are rising to the challenge by adopting international best practices, especially in terms of accountancy, and investing in systems that promise to transform the way they operate (see analysis). “The push at the banks is for International Financial Reporting Standards (IFRS) – core banking systems and IFRS,” Neville Daw, director of financial institutions and strategy of Amara Investment Securities, told OBG.
Until recently banking in Myanmar was a highly controlled, state-centric, ledger-entry affair. However, after undergoing a process of modernisation, it has become one of great opportunity. Indeed, thanks to significant expansion into underbanked corners of the economy, growing international interest and a series of large-scale reforms, the sector may also be one of the most promising in the world.
Banking began in Myanmar with the arrival of several Indian institutions early in the 19th century. Western banks soon entered the market as well, including the Chartered Bank of India, Australia and China in 1862 and the Hongkong and Shanghai Banking Corporation (now HSBC) in 1891.
In 1935 a central bank was formed, and for years the sector flourished. By the 1960s the country had 24 banks, of which 14 were foreign.
Then, following Myanmar’s adoption of a socialist economic system in 1962 all the banks in the country were nationalised and in 1967 a single, monolithic institution was created, called the People’s Bank of the Union of Burma. Following a series of reforms in the 1970s the bank was split into four separate entities – the Union of Burma Bank, the Myanmar Economic Bank, the Myanmar Foreign Trade Bank and the Myanmar Agriculture Bank. In 1990, when Myanmar began to move towards a market-based economy, a new central bank law and a financial institutions law were passed, and private banking licences were issued. While many banks were subsequently established, the sector faced difficulties over the next two decades. The Asian financial crisis of 1997 and a local banking crisis in 2003, which led to bank runs and the collapse of some institutions, slowed progress.
Sweeping reforms began again after 2011. Banks were allowed to trade in foreign currency, ATMs and bank cards were again permitted, a payments system was developed and, most importantly, a new central bank law was passed. Through it, the Central Bank of Myanmar (CBM) was made autonomous under the Ministry of Finance. At last, in 2015 foreign banks were licensed to do business in the country, for the first time since 1963. In the span of five years, therefore, the banking sector has undergone a transition as dramatic as the country’s political one.
Reform has continued into 2016, further strengthening the sector. In January of that year, Parliament passed the Banks and Financial Institutions Law. Under the law, minimum capital is set at MMK20bn ($16.2m), while foreign institutions are required to have capital of $75m. A total of 5% of customer deposits must be kept in an account at the CBM, which is a reduction from the 10% previously required, but in the past 75% could be held in Treasury bonds. A large number of the commercial banks are well within the capital limits. For example, a report in 2015 put the capital of Kanbawza Bank (KBZ Bank) at MMK130bn ($105.6m). However, some banks are falling short of the threshold, with smaller institutions particularly affected.
Rules on risk management, Basel III compliance and anti-money laundering are also outlined in the law, as well as the duties and the powers of the CBM, the process of applying for a banking licence, permitted activities, governance, rehabilitation, electronic banking, credit information and dormant accounts.
Getting Off The Lists
Considerable progress has been made in normalising the sector’s relationship with the international community. In June 2016 Myanmar was removed from the inter-governmental Financial Action Task Force’s so-called “grey list,” which is a record of countries which have few or no protections in place to guard against money laundering and the financing of terrorism. According to the Myanmar Times, the move came after the task force conducted an on-site visit to assess Myanmar’s progress in its rollout of safeguarding reforms.
This initial assessment will be followed by a more comprehensive review in 2017, the first to be carried out since 2008. According to the Myanmar Times, ongoing reforms needed for Myanmar to be permanently removed from the list include efforts related to the criminalisation of terrorist financing, the freezing of suspected terrorist assets and the independence of the country’s financial intelligence unit.
Since 2012 financial exports to Myanmar have been permitted by the US government under Burma General License 16. However, transactions with a number of banks continued to be restricted. As a result, US banks would generally refuse to do business with any Myanmar financial institution without a US Office of Foreign Assets Control licence. However, the US authorities have now removed almost all the restrictions on Myanmar banks, with the US president’s October 7 Executive Order of 2016 completing the process. Certain restrictions imposed by the Financial Crimes Enforcement Network remain, but they have been lifted by administrative exemption.
As of early 2016 the sector had 24 private banks – 14 of which were permitted to deal in foreign exchange – nine foreign bank branches and 48 foreign representative offices.
Despite the high number of institutions, large segments of the economy are poorly served or not served at all. Very few people have bank accounts, with only an estimated 20% of the population connected to formal financial services. That number is almost 80% in Thailand. According to a study by consultancy firm Roland Berger entitled “Myanmar Banking Sector 2025: The Way Forward,” the country’s banking assets to GDP ratio was only 49% in 2014, compared with 98% in Cambodia, 128% in Thailand and 204% in Malaysia. Myanmar has far fewer banks than its regional peers. At 3.135 commercial branches per 100,000 people it is behind Thailand (12.67), Malaysia (10.71), Vietnam (3.83), Indonesia (10.98) and Mongolia (71.74), according to World Bank data. The world average is 13.46. Myanmar is ahead of just a handful of other countries around the world, including Sudan, Burundi, Uganda and Afghanistan.
Geography plays a role, as much of the country is poorly connected to the urban centres. History is relevant too. Past nationalisations and demonetisations have eroded trust in formal institutions. While it has been decades since the government has taken confiscatory actions, confidence is weak. People generally avoid banks, even making large purchases in cash.
For many locals, bank runs are still fresh in the memory. A few institutions have since started liberalisation, though quick support has restored confidence. Deposit insurance is not yet a reality, and business is similarly off the financial grid. An estimated 55% of the country’s economic activity takes place in the informal sector, while small and medium-sized enterprises account for more than 99% of all business entities in the country. Most of these enterprises are outside the banking system.
Myanmar is said to be both underbanked and overbanked. Plenty of options exist in the centre of urban areas, and the market can actually be crowded in certain areas, but for those in rural areas or with fluctuating incomes, banks are simply not a part of life. A significant opportunity therefore exists for those who can meet the needs of the people in terms of attracting their deposits and finding ways to make loans to them. “The market is so big,” Kim Chawsu, managing partner of Katalysts Investment Group, told OBG. “There are a great many opportunities.”
The market continues to attract new participants. In 2016 four additional foreign banks received licences to operate in Myanmar – namely, Vietnam’s Bank for Investment and Development, E Sun Commercial Bank of Taiwan, Korea’s Shinhan Bank and the State Bank of India, bringing the total number of foreign banks in the country up to 13. In April 2015 Tokyo-Mitsubishi UFJ became the first foreign bank in decades to open a branch in the country. Observers say that combinations are inevitable as competition heats up and regulatory pressures bear down. Capital requirements are putting many banks under stress, while the costs of upgrading systems will also compel institutions to seek partners. As yet, it is unclear what direction the sector is going in, but many analysts think the number of institutions is certain to decrease. “Many of the banks will have to merge,” Jean-Pierre Verbiest, economics and finance expert on Myanmar, of the Asian Development Bank (ADB), told OBG. “The system will consolidate.”
KBZ is by far the largest non-state bank in the country, holding MMK8.693trn ($7.1bn) in private banking assets as of April 2016, according to the latest data from German international development firm GIZ. The rest of the top 10 was made up by AYA Bank, with MMK2.913trn ($2.4bn), CB Bank (MMK2.061trn, $1.7bn), Myawaddy Bank (MMK1.305trn, $1.1bn), Myanmar Apex Bank (MMK1.194trn, $969.9m), Yoma Bank (MMK1.191trn, $967.4m), United Amara Bank (MMK662bn, $537.7m), Global Treasure Bank (MMK657bn, $533.7m), Asia Green Development Bank (MMK448bn, $363.9m) and Myanmar Oriental Bank (MMK320bn, $259.9m).
The core of the banking system has historically been the country’s state banks. Some are directly controlled by the government and its entities, and others are indirectly controlled through local governments and other official bodies. Those under direct control emerged as a result of the break-up in 1975 of the People’s Bank of the Union of Burma to create the Union of Burma Bank – which later became the CBM – Myanma Economic Bank (MEB), Myanma Foreign Trade Bank (MFTB) and Myanma Agricultural Bank – which is now known as the Myanma Agricultural Development Bank (MADB).
MEB has traditionally provided concessional lending to state-owned and related enterprises as well as banking services to the Ministry of Finance. It has also attempted to lend more to the private sector but was proven to be not very competitive. An MEB spin-off – the Myanma Investment & Commercial Bank – entered the market in 1990 and is primarily focused on the markets in Yangon and Mandalay.
MFTB, which traces its roots back to the Foreign Department of the State Commercial Bank, had the mandate for many years to provide foreign exchange services for government entities and to foreign companies doing business in the country. The bank also historically managed the country’s foreign exchange reserves, though that role has since been taken over by the CBM. MFTB’s main asset is the large number of international correspondent bank relationships it developed before liberalisation.
MADB, meanwhile, makes 5% loans to the agricultural sector. Farmers can borrow up to MMK100,000 ($81.23) per acre if they are growing sugar cane or rice. The maximum loan covers 10 acres per farmer. It is expected that in the future the cap will increase to MMK150,000 ($122) per acre. MADB, which is reported to be making slim profits, has been facing difficulties in recent years, as farmers have struggled in the face of natural disasters, particularly following the floods of 2015. The structuring of the loans is also said to be a problem, with disbursement happening too late, pushing the farmers into the informal sector for borrowing. In addition, repayment is required at harvest, when prices are at their lowest.
In addition to the pure state banks, the sector also contains a number of banks indirectly related to the government. The Myanmar Citizens Bank was the first bank to be formed following the passage of the Financial Institutions Law of 1990. While considered a private bank, it is government-owned and controlled by the Ministry of Commerce. It started trading on the new Yangon Stock Exchange (YSX) in 2016.
Another bank with state connections is Myawaddy Bank. Formed in 1993, it is controlled by the military through the Union of Myanmar Economic Holdings, which is itself directly owned by the military, retired military personnel and veterans associations. Myawaddy is one of the top 10 taxpayers in Myanmar. Other banks leading that list are KBZ, Global Treasure Bank and AYA Bank, according to press reports.
Private Institutions Arise
The first truly non-government bank to receive a banking licence was the First Private Bank, which was permitted to start operations on May 25, 1992. It has always been a unique institution, due to its large number of shareholders. No single entity or individual has control over the bank. This prevents conflicts of interest and allows for the quick raising of capital. It is also considering a public listing on the YSX.
One of the next private banks to receive a licence was Yoma Bank, founded in 1993. For much of its existence, Yoma was limited to domestic remittances as a result of failures during the banking crisis in the country in 2003. Its full banking licence was reinstated in 2012. First Myanmar Investment (FMI), which owns a 51% stake in Yoma, was the first company to list on the YSX. It is also considered one of the more transparent entities in the country and is rated number one in the “Myanmar Centre for Business Responsibility 2016” report. According to local press reports, in May 2016 FMI increased its capital contribution to Yoma Bank from MMK48bn ($39m) to MMK67bn ($54.4m).
KBZ Bank also arrived on the first wave of private institutions. Founded in Shan State in 1994, it moved its headquarters to Yangon in 2000. The bank is the leader in terms of branch numbers. In July 2016 it opened its 400th branch, up from 300 in 2014, and now has 16,000 employees in total.
KBZ is notable for its innovations and aggressive business strategy. In May 2016 it opened a representative office in Thailand, becoming the first Myanmar bank to have an overseas presence, and is also in the process of opening a representative office in Singapore. The bank believes that the office in Singapore is strategically important because so much investment is flowing through that country to Myanmar. In 2016 KBZ was chosen to handle cash settlement on the YSX. Six banks in the country competed for the contract but KBZ won out, primarily due to its capacity for digital integration and extensive network, according to local press reports.
A number of other private banks were established before the recent round of liberalisations. Myanmar Oriental Bank, founded in 1993, has strong ties to the Chinese community in the country, while the Tun Foundation Bank, which currently has 20 branches, was established in 1994, and Asia Yangon International Bank was formed in 1993.
Four banks were launched immediately following the most recent round of liberalisations, all on the same date – July 2, 2010. The first of these, AYA Bank, has also expanded rapidly over the past six years. By March 2016 it had 150 branches, and by December of that year it had 200. AYA Bank became IFRS compliant with effect from March 2015. It is also heavily focused on IT development, and has implemented a highly sophisticated core banking system. U Zaw Zaw, the bank’s chairman, also told the Myanmar Times in 2015 that the bank’s strategy would include a focus on expanding internet and electronic banking services. In August 2015 AYA Bank signed an agreement with Japan’s Mizuho Bank that involves cooperation in areas such as trade services and cash management.
The second 2010 entry is United Amara Bank (UAB). Owned by the IGE Group, UAB has 57 branches and is aiming for 100 by the end of 2017. In 2016 it signed a trade finance deal with the ADB. The international organisation will be insuring trade finance transactions conducted by the bank up to $4m apiece.
In 2014 the bank faced a run as the US Treasury placed U Aung Thaung, the father of the bank’s majority owner U Nay Aung, on its blacklist. While the bank itself was not sanctioned, the listing shook confidence and resulted in rapid withdrawals from accounts, according to the Myanmar Times. In July 2016 rumours spread on the internet that the bank was on the brink of collapse and that it would stop allowing withdrawals. Claims were also made that one party had taken out MMK7bn ($5.7m) in a single day. The bank vigorously denied the rumours In a statement issued the following November and said that it was operating normally.
The third of the banks formed in 2010 was the Asia Green Development (AGD) Bank, which currently has 53 branches in the country. The bank is owned by the Htoo Group, though reports in 2016 said that the group had sold its ownership of the bank. AGD was the first bank in the country to offer EMV chip ATM cards. It has also said that it is planning an initial public offering in order to increase its capital. In the 2014/15 fiscal year the bank saw a downturn, as its net profits fell from MMK9.6bn ($7.8m) to MMK112.6m ($91,465), according to local press reports. The bank attributed this in part to intense competition in the sector and responded by raising its deposit rates and lowering its charges for remittance. Rates for deposit accounts increased from 8% to 8.25%, while the CBM continues to cap loan rates. Remittance rates were taken down from 0.15% to 0.05%. The bank’s rapid expansion of branches and fixed assets were also identified as a cause for the drop in profits.
The fourth bank – Myanmar Apex Bank – opened its first branch in Naypyidaw. The institution has focused on differentiating itself from the competition through developing technology-related services, including an app for remittances and an e-wallet. It is also specialising in agricultural lending, providing loans backed by agricultural land as security.
There are a number of speciality banks in Myanmar. The first is the Small & Medium Industrial Development Bank, founded in 1996 by the Myanmar Industrial Development Council.
The bank is privately owned but managed by the government. In 2015 it announced that it would be opening five new branches in FY 2015/16 and three additional locations in FY 2016/17, bringing its total number of branches up to 23. The bank offers subsidised loans to small businesses.
Second is the Cooperative Bank (CB Bank), which was formed in 2004 from the merger of three existing banks – CB Bank, the Cooperative Farmers Bank and the Cooperative Promoters Bank. In late 2015 CB Bank started offering trade finance directly to exporters, a first in the country. Under the service, companies selling products overseas will be able to borrow money based on their signed trade. Letters of credit will also be offered. According to the Myanmar Times, the majority of trade to date has been conducted without financing. In the past, when extended, credit of this type required traders to deposit 100% collateral with the bank.
CB Bank’s trade finance programme is being supported by the ADB under a $12m programme signed in 2015. Under the scheme the ADB provides technical assistance and guarantees the trade finance facilities. Bank of Tokyo Mitsubishi signed an agreement to act as the technical adviser to CB Bank in 2013.
Third is the Global Treasure Bank, which started out as the Myanma Livestock & Fisheries Development Bank and was rebranded in 2013. It currently has more than 100 branches, up from 60 branches in 2013. The bank was formed in 1996. In 1999 it was transferred to the Ministry of Livestock and Fisheries from the Ministry of Trade, according to local press reports. It undertook the name change to avoid confusion, as the public may have believed that only people in the livestock and fisheries business could work with the institution. Since its rebranding, the bank has worked hard to become a private, competitive institution. It has set a target of 150 branches and is investing in technology and staff. Global Treasure Bank has faced falling margins as remittance fees have dropped and competition for deposits has heated up.
The fourth specialty bank, the Construction and Housing Development Bank (CHDB), received a licence in 2013. The bank was established to provide mortgage financing, but it has had trouble getting long-term funding, thus limiting its ability to make longer-term loans. In its first two years of operation, it was only able to make loans to larger, more secure commercial customers, with applications from individuals still being evaluated. As of late 2015 it was considering the extension of longer-term loans, with payback periods of up to 20 years. Given the interest rates and the cost of housing, most people in Myanmar do not have the capacity to service a housing loan. In 2015 CHDB had branches in Yangon, Naypyitaw and Mandalay, and has said that it plans to expand in cities where there is significant housing development. The target locations include Magway, Mandalay, Ayeyarwaddy and Sagain.
A few other new banks have been created in recent years. For example, the Naypyitaw Sibin Bank was established in 2013 and the Shwe Rural and Urban Development Bank was founded in 2014. More may be on the way. Plans have been disclosed for the Myanmar Tourism Federation to open its own bank, though the actual implementation of the project has been put on hold. As of late 2014 it had registered with the Directorate of Investment and Company Administration and was awaiting its licence to operate. A bank under the Myanmar Gems and Jewellery Entrepreneurs Association is also being considered, according to local press reports.
While the country has many institutions, which are competing heavily along existing lines, in some areas development has been slow, with many products and services essential to the market still lacking. Mortgages are for all intents and purposes non-existent, and bankers are generally of the opinion that it will be some time before this type of financing is available. Without true mortgages, the sector is missing an offering that is essential not only to its development but to the wider economy. Condominiums, for example, are difficult to sell without mortgages. Developers have been funding their projects through presales, but in many cases the buyers are unable to keep up with their payments. As a result, developers have been restructuring payments and showing leniency towards defaulting buyers.
Work has been ongoing since 2012 to develop a credit bureau, but the process has been delayed by a debate about how much foreign participation should be allowed in the entity. By 2016 a joint venture with NSP Holdings, a Singaporean firm, had been agreed upon, though the launch of the bureau was pending the introduction of the new Financial Institutions Law and the implementation of regulations governing the bureau’s operating framework by the CBM. According to local press reports, the bureau is expected to be up and running before the end of 2017.
Meanwhile, the Myanmar Rice Federation is pushing to get farmland accepted as collateral, but the process of foreclosure is a stumbling block. Under a 2013 law, farmers’ land is protected from seizure. That makes it difficult to use the property as security. Even so, MADB and Myanmar Apex Bank have started to accept farmland as collateral on a limited basis.
Most worrying for the sector is the fixing of deposit and loan rates. The minimum deposit rate is 8%, while the maximum loan rate is 13%. Because of this, it is somewhat difficult for banks to make a profit, and hard for them to take on risks beyond the lowest. “You don’t get paid to take risk,” Daw Khin Mu Mu Myint, chief business officer of Yoma Bank, told OBG.
Banks must therefore confine themselves to only the most creditworthy of customers, although some flexibility is possible when revolving credit is extended as the associated fees and the repayment structure result in higher effective rates.
Nevertheless, the rest of the market remains constrained by the tight spread limit. “Profitability is not only about what we do but also about the interest spread the regulators allow,” Azeem Azimuddin, chief financial officer and adviser to the chairman at AYA Bank, told OBG. “When deregulation happens, and we believe it is not a question of if but when, we are preparing to be ready.”
The IMF has noted other underlying issues. In a 2015 Article IV consultation it found that banks in Myanmar were generally under-capitalised and poorly provisioned against possible losses. The fund issued several recommendations for the sector, including better supervision and additional liberalisations. It also called for foreign bank branches to be permitted to buy government securities, and for the CBM to allow the use of swaps and forward contracts so that financial institutions can hedge their risks in the foreign exchange markets.
While the CBM is an autonomous institution, critics argue that it is not yet as effective as it should be because the CBM does not regulate the state banks, thus limiting its area of responsibility. Capacity at the CBM is also considered insufficient, and it is seen by some as overly restrictive for the institutions it does regulate. In addition to fixing rates, the CBM sets strict limits on how loans are extended and under what terms. The bank still lives in the shadow of the 2003 crisis, and is reluctant to let the sector operate too freely for fear that institutions are not yet up to the task. While the CBM has been praised for its achievements, including for example the reunification of the exchange rate, it remains very conservative.
State Bank Reforms
Of the greatest concern to the sector are the state banks, which are in substantial need of reform. MEB, for example, has been running a loss since 1990, according to GIZ. The bank makes subsidised loans and losses are covered by the CBM. Meanwhile, MADB reported some of its worst losses ever in 2015, blaming low rates and late payments. Occurrences such as these are not only potentially disruptive to the market but also put the whole financial system under stress.
The liberalisation of the sector in recent years has seen customers move away from the state banks in favour of the new private institutions, which are seen as more competitive. Private banks have been quickly increasing market share and now own more than 60% of total assets. As the IMF notes in its 2015 Article IV consultation, the state-owned banks have not taken advantage of the rapid growth in loans over the past few years, preferring to park their funds in government securities. The fund also expressed concern about the creation of “policy banks”.
As part of the new 100-day plan initiated by the finance ministry in 2016, the state banks have been asked to improve their services, with MFTB already taking a number of steps, including opening an information counter at its only branch, streamlining the approval process for requests, and introducing its first ATM, at Yangon International Airport.
In addition to encouraging the reform of these institutions and recommending the consolidation of the subsector into one or two major policy banks, the IMF also advocates for the creation of better governance structures. Local press reports suggest reform will be difficult, noting that the country has other, more pressing priorities, such as dealing with the illegal trade of gems and solving existing short falls in staffing, capacity and budgets. The state banks themselves have commented that privatisation would be complicated, as it would involve the rewriting of laws and the approval of several ministries.
Because of the weakness of the kyat, the authorities have been forced to take steps to restrict currency trading. This has involved intervention in the financial markets. Some of the moves made were incremental, with the bank encouraging the use of card payments to prevent individuals from avoiding the local currency. Other measures were more dramatic: in late 2015 it was reported that the non-bank money changers would be closed and that people holding dollars could be prosecuted. In response to criticism the CBM told the Myanmar Times in December 2016 that its aim behind the move was to increase the use of the local currency in the economy in line with international practices, and that the rule permitting an individual to hold $10,000 without penalty would remain unchanged.
In October 2015 the CBM revoked permissions to hold foreign currency issued before the money changer and authorised dealer licences. The list of those shut out from the market included airlines, tour companies, hotels, hospitals, freight forwarders, supermarkets and duty-free and souvenir shops, according to local press reports. These companies had been allowed to deal in foreign currencies under the Foreign Exchange Management Law of 2012. But an update of the law published in 2015 made it illegal to trade in the currency markets without a formal licence. Dealers can now hold a maximum of $50,000 and must renew their licences every five years at the cost of MMK100,000 ($81.20).
Some complaints have emerged that the state banks are not participating in the interbank market as they should, according to the local press. Competitors also say that the rule limiting foreign currency exposure to 30% of paid-up capital is not enforced when it comes to the state banks. It is hoped that the new Financial Institutions Law will ensure equal treatment for both public and private banks.
While the sector is still in the early stages of development, all the right pieces are in place for future growth. A wide range of institutions are vying for business, while the regulatory environment is solid. However, some gaps in regulation still need to be addressed, and those rules which are regarded as too restrictive require loosening. As for the institutions themselves, there is a short-term need to improve capitalisation and implement the current version of IFRS. Consolidation looks inevitable, but barring any unforeseen events, the sector has the potential to become one of the region’s most promising.
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