Modernisation fuels new lending in Myanmar’s banking sector

Foreign banks may be granted greater access to Myanmar’s domestic financial market as a way of servicing local demand for trade financing.

At the end of February the Central Bank of Myanmar (CBM) announced it was considering expanding the range of services that foreign lenders in the country can offer by allowing them to provide trade-only accounts to importers and exporters, which local banks are unable to do so.

Of the 24 domestic banks, nine are involved in trade financing; however, the level of credit they can extend is often inadequate to meet demand due to a lack of capital.

International banks are currently restricted to providing financial services to foreign corporations and domestic lenders; however, giving them a mandate to support Myanmar traders could help facilitate higher levels of trade and therefore tax revenue.

The CBM is committed to opening up Myanmar’s financial sector further through a “staggered process”, U Win Thaw, director general of its foreign exchange management department, told media last month, while giving local lenders the chance to develop and keep pace with reforms.

Opening doors

Last year the government granted new licences to four overseas banks: Vietnam’s Bank for Investment and Development, E Sun Commercial Bank of Taiwan, Korea’s Shinhan Bank and State Bank of India. This took the total number of foreign lenders authorised to operate in Myanmar to 13.

The entrance of these foreign institutions increased the number of banks in the marketplace by one-third and added around MMK1.6trn ($1.2bn) in combined regulatory capital to the system, tripling the previous total.

U Kyaw Kyaw Maung, governor of the CBM, spoke of the possibility of opening up the sector further, as foreign lenders have helped advance modernisation efforts.

“The entry of foreign banks provides an unprecedented opportunity to develop a modern banking sector through the introduction of new financial products and risk management techniques,” he told OBG last year. “Lending by foreign banks could become an important source of funding for the private sector.”

According to Daniel Tan, general manager of the Yangon branch of Oversea-Chinese Banking Corporation, it is important for the banking sector to broaden the range of financial services it offers, especially with regard to lending, as currently most companies looking to borrow from local banks need to provide collateral.

“Unlike in other countries, unsecured lending is difficult, as is lending against most forms of moveable property such as stock or receivables,” he told OBG. “This greatly limits the amount of money that Myanmar companies can borrow.”

Balancing act

However, as Myanmar’s banking sector expands to meet the increased demand from local businesses, lenders could be exposed to higher levels of risk.

In its latest review of the country’s economy, conducted in February, the IMF warned that accelerating levels of credit growth, which reached 32.3% in FY 2015/16, could leave the banking sector vulnerable.

Forecasting private credit to rise by 27.7% in FY 2016/17 and by 23.6% in 2017/18, the fund supports a cautious approach to fiscal policy to cope with these rapid increases.

The World Bank also sounded a note of caution about bank lending in its “Myanmar Economic Monitor, December 2016” report, emphasising a high concentration of credit across a narrow band of sectors. According to the bank’s calculations, over the past three years, the wholesale and retail trade has soaked up 43% of all credit extended. Over the same period, lending to the agriculture, manufacturing and construction sectors accounted for 30% of the total.

The World Bank also observed a sharp rise in non-performing loans (NPLs) on the books of domestic banks. Using CBM data, the report said NPLs had more than doubled over 2016 to represent 3.6% of total loans. It added that the actual ratio might be higher still, as the current criteria for assessment are outdated and inconsistent with best practices in more developed nations.

Rising to challenges

In the face of these headwinds, the government has stepped up efforts to continue bringing domestic institutions in line with international standards of transparency and corporate governance.

Earlier this month, for example, the state started an audit of Myanmar’s four state-owned banks – the first in decades. One of the primary aims of the endeavour, which is being undertaken in partnership with the World Bank, is to identify options for the restructuring of the sector as part of the drive towards modernisation.

In another move forward, an 18-member body known as the Private Sector Development Committee was formed in October 2016 with a remit to guide and coordinate policies to improve transparency and regulation in the financial sector.

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