Since the political reforms of 2011, a number of significant steps towards liberalisation have been taken in the banking sector. The Central Bank of Myanmar (CBM) has been given much needed autonomy and ATMs are now allowed in the country. Further aiding accessibility, mobile banking services have been introduced. New private banks are being set up and foreign banks have been granted licences to open branches (see analysis). After years of stop-and-go liberalisation, a critical mass of changes has been instituted that promises to improve sector performance and greatly contribute to the development of the country. Additional regulations are in the works, such as an updated banking law, and more openings are expected as the authorities get comfortable with what has been implemented so far.
Long Road To Reform
Banking in Myanmar started slowly at first, with domestic institutions not forming until very recently in the country’s history. In 1861 the Indian Presidency Banks of Bengal opened a branch in Yangon, and the government took over the right to print currency under the Paper Currency Act of 1861 and began issuing British India notes. The Indian Presidency Banks were merged into the Imperial Bank of India in 1921, which was the de facto central bank and handled cheque clearing.
The Reserve Bank of India was formed in 1935 and its Yangon branch was newly independent Myanmar’s first central bank. Foreign banks were also very active in the country from an early period. The Chartered Bank of India, Australia and China, now Standard Chartered Bank, arrived in 1862, while Hong Kong and Shanghai Banking Corporation (HSBC), founding member and now subsidiary of the HSBC Group, was in Myanmar by 1891. Other foreign banks in the country included National City Bank of New York (now Citibank), Yokohama Specie Bank (now the Bank of Tokyo-Mitsubishi), Lloyds Bank, the Overseas-Chinese Banking Corporation and the Bank of China.
Upon independence in 1948, the Indian rupee was replaced by the Burmese rupee. The Burma Currency Board was formed in 1947 and was then superseded by the Union Bank of Burma in 1952. All banks were nationalised in 1963. At the time, 24 banks were operating in the country, 14 of them foreign. They were taken over by the state and renamed People’s Bank No. 1 through People’s Bank No. 24, with military officers becoming bank managers. Chartered Bank became People’s Bank No. 2; HSBC, People’s Bank No. 9; and the State Bank of India, People’s Bank No. 8. In 1967 the People’s Bank of the Union of Burma Act combined all the existing banks into a single unified entity.
In the 1970s, a new period of reform began. The monolithic bank was dismantled and four banks emerged: Union of Burma Bank, Myanmar Economic Bank (MEB), Myanmar Foreign Trade Bank and Myanma Agriculture Bank. In the 1990s the CBM Law and the Banks and Financial Institutions of Myanmar Law were passed, along with the Financial Institutions of Myanmar Rules. A total of 20 banks were established between 1992 and 1997, and five joint venture banks were proposed. However, after the 1997 Asian financial crisis, the country closed in on itself and began to slow or reverse previous advances in liberalisation. Private banks had their foreign exchange licences revoked, and all proposed joint ventures with foreign institutions were called off.
This was followed a few years later by a domestic crisis. In 2002 and 2003 – when a number of informal financial institutions ran into trouble – rumours about re-denomination spread and accusations of money laundering were made. Three of the 20 private banks had their licences revoked. Automated payment systems were shut down, including ATMs.
Some observers argue that the ghost of 2003 haunted the banking sector for many years, and as a result people are now suspicious of financial institutions. Nevertheless, reforms are being undertaken at a quick pace and the sector is developing rapidly. The first major post-2011 reform was the licensing of private banks to conduct foreign exchange transactions in October 2011, and the licensing of foreign exchange dealers in November 2011. ATMs have also been allowed again since 2011. An interbank market for foreign exchange was established in 2013 and a mobile money directive was issued the same year. Also in 2013 the new Central Bank Law was approved, which superseded the CBM Law of 1990. The most important feature of the law is that it makes the institution autonomous under the Ministry of Finance and Revenue.
The law also allows the CBM to utilise more indirect and sophisticated tools in the management of interest rates. Significant work has also been accomplished in terms of payments systems. The CBM has made their development a priority as the country became cash dependent after numerous currency re-denominations, financial crashes and bank runs in the past. In 2011 the Myanmar Payment Union was formed as a consortium between the state and private banks to facilitate card transactions and network interoperability.
Also after liberalisation, 14 banks received permission to engage in international banking services. It is prohibited to use kyat in cross-border payments, and, for a time, fund transfers were denominated in euros due to the sanctions – although the US Treasury has lifted the restrictions on the use of the dollar. The CBM said a real-time gross settlement system will be in place by the end of 2015. Japan’s NTT Data assisted in the development of the platform.
These days Myanmar’s banking system has four state banks. MEB was formed in 1976, then re-established in 1990 under the Financial Institutions Law. MEB undertakes a significant amount of policy lending to state institutions and provides Treasury services to the government. Myanma Foreign Trade Bank was formed in 1990 and until the recent reforms had a monopoly on foreign currency transactions. Myanma Investment and Commercial Bank was spun off from MEB in 1990, while the Myanma Agricultural Development Bank provides credit to local farmers. It was formed under different legislation: the Myanma Agricultural and Rural Development Bank Law of 1990.
Of the private banks, nine are semi-governmental, according to the Asian Development Bank (ADB). Myawaddy Bank is owned by a company run by military officials. The Small and Medium Industrial Development Bank, which was founded to develop industrial zones, is run by government officials. Myanmar Citizens Bank is under the Ministry of Commerce (MoC), according to the ADB, while Cooperative Bank is under the Ministry of Cooperatives. Global Treasure Bank is run by livestock and fisheries associations. Yangon City Bank is under the Yangon City Development Committee. Innwa Bank is owned by the Myanmar Economic Corporation. The ADB lists two other government-controlled banks as well: Yadanabon Bank and Rural Development Bank.
The other 14 private banks are private enterprises. The largest private bank in the country is Kanbawza Bank (KBZ Bank). It was founded in 1994, and while it suffered a social media-fuelled bank run in 2012, it recovered quickly and is doing well, according to the ADB report. Yoma Bank was founded in 1993 and was the second largest private bank at the time of the 2003 financial crisis. Subsequently, Yoma Bank license was severely restricted to domestic remittances only, a directive many considered to be politically motivated. It received its full banking license back again only in 2012 under the present government’s reforms.. It is one of the more innovative and professional banks in the country, and is majority owned by the First Myanmar Investment Company, widely regarded as one of the best-managed companies in Myanmar. Asia Green Development Bank was formed in 2010 and is a member of the Htoo Group. Myanmar Oriental Bank focuses on the Chinese community and is considered one of the most transparent local institutions. Other private banks include Ayeyarwady Bank (AYA Bank), United Amara Bank, Myanma Apex Bank and the Asia Yangon Bank. The most recent additions to the market are Naypyitaw Sibin Bank (2013), Myanmar Microfinance Bank (2013), Construction and Housing Development Bank (2013), and Shwe Rural and Urban Development Bank (2014).
Competition & Innovation
With so many institutions and so much opportunity, banks are starting to become more competitive. Technology investment is one area of focus. In August 2015 AYA Bank created an online payment system for settlement of bills with the Yangon City Development Committee. The platform is powered by ConnectNPay. It allows customers to pay bills at branches, over the internet and via mobile devices, a first for Myanmar.
In April 2015 the bank started using an integrated ATM and point-of-sale system from CR2, an Ireland-based company. Yoma Bank has also been an active purchaser of technology solutions. It was the first to use Misys banking software in Myanmar. Banks are also starting to innovate on product offerings, as well as engage with the market more constructively.
“Our local banks by and large tend to think and act like glorified pawn shops, focusing primarily on the forced sale value of the collateral without giving consideration on the purpose of the loans they disburse,” Serge Pun, chairman of the SPA Group, which controls Yoma Bank, told OBG. “It is difficult to try to catch up by speed; we will catch up by innovation.” Yoma hopes to find better ways of developing business. Instead of focusing on collateralised loans, it is looking at cash flow and analysing the net position of a firm after the loan has been deployed, rather than before. To help it carry out this level of credit analysis, the bank invested heavily on building up its loan and credit departments, drawing on expertise from repatriate Myanmar bankers that have worked for international banks overseas and from expatriates with much experience in this area of expertise.
Existing regulations make it difficult for banks to operate effectively and profitably. Loan terms cannot be longer than one year in duration, and loans must be collateralised. Moreover, banks must work within tight interest rate guidelines, with lending rates capped at 13% and deposits required to pay at least 8%. Furthermore, banks are only allowed to lend 70-80% of deposits. When the costs of operations and reserves are added to the cost of money, lenders barely have a margin to work with. However, The Myanmar Times reported that the MoC was planning to lift limits on kyat-based loans, but CBM officials also said that little can be done until the country has a market for Treasury bills.
Liberalisation of rates is widely perceived as being good for the financial sector and the country. With increased margin rates and the ability to lend without collateral, banks will lend more to small and medium-sized enterprises. Currently, this market is dominated by informal lenders, which typically charge rates of 40% or more. If margins widen, banks can make more loans, take more risk and commit more funds to their operations. “It all comes down to the interest rate,” said Joe Barker-Bennett, consultant for Tun Foundation Bank. “If we could make more money, we could invest more in the business.”
A new Banks and Financial Institutions of Myanmar Law is in the works, having been drafted with the help of the World Bank in 2013. It is a best practices document that, if passed, would bring the sector up to par with international standards. It introduces non-bank financial institutions, e-banking and credit bureaux; sets out capital and reserve requirements; and discusses provisioning, related parties, money laundering and solvency. The Foreign Exchange Management Law (FEML) is also in the process of being amended. The new amends are expected to enforce the repatriation of exports via the banking sector. The FEML will have a serious impact on the foreign exchange structure and reserves management in Myanmar.
A new reserve requirement is also being established. Currently, banks must keep 10% of their deposits in reserves. A quarter of that can be kept on hand and 75% in bonds at the CBM. The reserve requirement will be lowered to 5%, but all of it will be required to be kept with the central bank and cannot be invested in bonds. And while related-party transactions have always required board approval, under the new law two-thirds of the board must vote in favour of making a loan to a related party, thus helping to prevent directors from using banks to support their own companies. Introduction of the law has been delayed, however.
The increase in capital is seen as potentially problematic. Minimum capital levels have been set in the past by the CBM, but they have usually been quite flexible and not always clear. The country’s newest bank, Shwe Rural and Urban Development, was approved for business in 2014 with MMK10bn ($9m) of capital. But some private banks are believed to have only about MMK2bn ($1.8m). The central bank said almost a third of private banks will have to raise their capital levels in order to meet the new MMK20bn ($18m) minimum set out in the draft financial institutions law. According to local news reports, the largest private banks are in good shape. KBZ Bank has stated it had MMK130bn ($117m) as of January 2015, while AYA Bank said it had MMK62bn ($55.8m). AYA Bank has benefitted from its reputation as one of the more innovative banks in the country due to its implementation of modern technology in its online banking system and structure.
Minimum requirements for new branches have been abolished. Overall, however, the sector does not have the capital it needs to grow. “It is an under-capitalised market; forget Basel III, it is not yet Basel II,” Azeem M Azimuddin, CFO at AYA Bank, told OBG.
There is some concern about the condition and position of state banks. Because they are government owned, they tend to be perceived as being more stable than banks in the private sector. As a result, state banks continue to attract most of the deposits. At the same time, they are exempt from many of the regulatory requirements that private banks have to meet and tend to be less efficient and loss making. MEB, for example, has always made a loss and these losses have to be covered by the government. Some possible options for improving their performance include mergers with other banks, or reform of currently existing management structures.
Unfortunately, current regulations and a newly proposed law do not allow for foreign equity nor subordinated bank loans. This has the effect of significantly limiting their access to new capital for growth and investments. Given the lack of margins this could exacerbate the already existing capital adequacy problems in the country.
The central bank has been working to keep the value of the kyat from weakening too much or too fast against the dollar. Its efforts have not been particularly successful to date, with the currency continuing to weaken and the mispricing of the kyat leading to a dollar shortage within the country. According to CNBC, local banks have even had to enter the black market in order to have enough dollars on hand to operate.
In May 2015 two directives were published. One called for government institutions to only accept payments in local currency and the other to limit withdrawals from banks in dollars to $10,000 per week. In October 2015 the central bank revoked the foreign exchange licences of a wide range of moneychangers. The list included tour operators, airlines, hotels, hospitals, freight forwarders, supermarkets, duty free shops and souvenir shops.
Since 2012, businesses had been able to buy and sell currencies, but the law was amended as the authorities fought dollarisation. Banks and authorised foreign exchange dealers will still be able to conduct transactions as in the past. The interventions have been expensive and costly and represent a step back for liberalisation.
Myanmar’s banking sector is set for further liberalisation and reform. It is likely that the new banking law will be passed soon and other regulations will be issued by the CBM, helping the sector to move further towards international standards and best practices. Some of the rules and regulations may be resisted and though liberalisation may not be as fast as some participants may want, others have been encouraging a steady approach.
“We suggested the central bank go slowly,” said Pun. The sense is that the opening should be done at a reasonable pace so as not to cause volatility and to allow local banks to become stronger and better able to compete. Achieving a balance without creating instability will be an important task for the government as it opens up the sector in the coming years.
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