Can you discuss the main challenges that banks might encounter in their efforts to drive a profitable mortgage market here in Myanmar?
AZIMUDDIN: There are structural issues and there are operational issues. On the operational side, there is no central land registry. There are also difficulties concerning inheritance and similar legal challenges relating to perfection of security and foreclosure. On the financial services side there is the problem of the inability of banks to refinance themselves. Wherever you have a developed mortgage market you also have well-developed mechanisms in place for a bank to refinance itself. For this type of environment, you need the interest rate system to be structured to allow banks to go through the separate layers of transactions that make money. In the environment we have now, all loans, irrespective of their classification, must pay 13% and all deposits must pay 8%. This means there is no incentive for banks to diversify products as there is no financial benefit. However, regulations are in place that allow for loans that are twice the capital allocation, so that incentive is there, but the interest spread remains a major challenge.
Assuming Myanmar is able to get past potential challenges, is the banking sector in a position to take on a mortgage market?
BOSHER: First of all, that’s a big assumption. If there’s one thing the financial services sector in Myanmar has done a lot of, it’s assuming. I believe expectations need to be managed.
In the end, I do not think that banks are well-positioned. In order for banks to accommodate a large number of low-value mortgages, banks need to have a system in place. Most banks are not structured to handle high volumes of mortgages. You need an efficient processing system to get the volumes necessary to make the business sustainable.
Another thing to keep in mind is that, to a large extent, all the bank’s credit books are backed by land and buildings. In other words, the banks are already large buyers of land and mortgages. By law, when banks lend, they must lend by backing it with land. You can imagine the challenges caused by this, for example when a bank buys a building but its price is positively affected by the historic value of the building rather than its commercial value. I think that this is something to think about when considering if banks are getting into property exposure. Currently banks have huge levels of property exposure already.
What impact would a Myanmar-based credit bureau have on the creation of a more transparent and open housing market?
KIM CHAWSU: Of course, one of the main reasons for the creation of a credit bureau would be to allow credit information to be shared among all the country’s banks in a clear and open way. Considering only 10% of the population of Myanmar have a bank account, sharing information is crucially important. However, there are many concerns about how the information will be kept confidential, as well as about how to verify its accuracy.
When it comes to the formation of the credit bureau, the government has a duty to legally ensure the privacy of the collected data, and we as banks have a responsibility to ensure that the collected data is indeed accurate. When you have a credit bureau, the line between receiving and not receiving a mortgage can become very thin, and when you have this high degree of information sharing, for the sake of the client it is critical that this information is accurate.
This is the same for small to medium-sized enterprise owners who are also applying for loans. Accuracy of information is critical. Therefore, as a bank,
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