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WorldJuly 1 2014

Is Myanmar primed for a banking revolution?

After decades of underperformance while under military rule, Myanmar is heading for a period of rapid growth, but much work still needs to be done to address the country’s infrastructure deficits, poverty and its underdeveloped banking sector.  
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Is Myanmar primed for a banking revolution?

Myanmar, once south-east Asia’s most troubled economy, has come a long way in the past three years. Since assuming power in March 2011, the nominally civilian government of president Thein Sein has not only pushed through impressive political reforms, but has also done much to liberalise the economy, opening it up to foreign investment.

The EU and the US essentially lifted economic sanctions on the once-pariah state in 2012, although the US State Department still prohibits US citizens and firms from doing business with Myanmar nationals on its blacklist – a lengthy and confusing compilation of military generals and their alleged cronies.

After five decades of underperforming under military rule, Myanmar is unquestionably heading for a period of rapid growth. In fiscal year 2012/13 ending March 31, 2013, gross domestic product (GDP) grew 6.5%, according to the Asian Development Bank, and was expected to hit 6.75% in fiscal year 2013/14.

Fledgling growth

But there are serious constraints to take-off, including poor infrastructure (only 25% of the population has access to electricity), an impoverished population (with GDP per capita in purchasing power parity terms at $1144 in 2012, the lowest in south-east Asia, according to figures from the International Monetary Fund) and a banking system best described as ‘fledgling’.

It may have gone unnoticed by the global financial community, but Myanmar suffered its own bank crisis between 2003 and 2004, resulting in a period of bank over-regulation by the Central Bank of Myanmar. This goes some way towards explaining the sector’s recent cautious growth. The country has one of the least developed banking networks in the Asia-Pacific region, with only 5% of the adult population holding bank accounts, according to a survey conducted by the UN Capital Development Fund.

The same survey found that only 19% of the adult population borrow from regulated institutions, mostly government-run banks, and some 9.3 million Myanmar nationals have an estimated outstanding debt worth $5.7bn to unregulated financial service providers. The Finmark Trust has estimated that there are 400,000 moneylenders in Myanmar, accounting for about 1% of the population.

The Burmese Way

The lack of public access to formal banking is a direct result of past governments’ policies. General Ne Win ended Myanmar’s (then Burma’s) brief post-independence fling with parliamentary democracy with his 1962 coup, after which he launched the once prosperous British colony along the disastrous Burmese Way to Socialism.

Myanmar’s banks were nationalised in 1963 and private banking did not raise its head again until the early 1990s, after the ditching of socialism in 1988 and the re-establishment in 1990 of the Central Bank of Myanmar. In 2003, the country had a banking crisis although the origins of this were in the informal credit sector causing contagion among some banks.

“The crisis was not caused by the banks,” says Than Lwin, a former deputy governor of the central bank who is now vice-chairman of Kanbawza Bank (KBZ), Myanmar’s largest private bank, with 213 branches. “It was really because of a miscalculation by the government [in terms of regulation],” he says of the crash. When some informal financial institutions stopped payments on interest and then on capital, the panic shifted to the banks. “They thought all the banks couldn’t pay, so there was a run on the banks,” Than Lwin recalls.

Lasting impact

The crisis led to the closure of Myanmar’s then three largest banks – Asia Wealth Bank, Mayflower Bank and Myanmar Universal Bank – and a 70% plunge in demand for deposits in 2004. The central bank’s inability to guarantee the public’s deposits had a lasting impact on public confidence in the banking sector that has only recently been partly restored.

Survivors of the crisis, such as KBZ and CB Bank, are now among Myanmar’s fastest growing institutions. “At that time, our capital was quite small and the chairman of [KBZ], Aung Ko Win, was quite wealthy,” says Than Lwin. Aung Ko Win, who made his fortune in the gem and jewellery business, personally guaranteed his banks’ deposits, preventing a run on KBZ.

CB Bank also survived the crash and has moved on to become Myanmar’s third largest bank today in terms of branches with 84. “At the time of the crisis, our deposits were very low,” says Kyaw Lynn, chief executive of CB Bank. “We were ranked sixth. That’s why I could handle it easily because we had a good liquidity ratio and I had invested in government treasury bonds.”

Liberalisation phase

The central bank heavily regulated bank activity between 2004 and 2010. “After the crisis, the central bank stopped almost every service at the banks,” says Ye Min Oo, managing director of Asia Green Development Bank (AGD), whose founder is tycoon Tay Za, owner of Yangon-based holding company the Htoo Group and airline Air Bagan. “They could only accept deposits, give loans and make remittances… No services, no ATMs and no internet banking.”

Things started to change in 2010 when the then ruling junta organised a general election and started to take the country’s development more seriously. Before the election, the junta suddenly granted banking licences to four of the country’s largest business groups: AGD, Ayeyarwady Bank (Aya Bank), United Amara Bank and Myanma Apex Bank.

“They were all shocked because they didn’t know what to do and were given only a month to set up their banks,” says Ye Min Oo, who was heading Tay Za’s IT business at the time the banking licences were granted, but was swiftly switched over to work on AGD. “I am not a banker and had no knowledge about banking but I had to do it. At that time people had such power, we could not refuse. If the government told you to do something, you did it.” 

Easing restrictions

Since 2010, the central bank has eased up restrictions on local banks, allowing them to engage in foreign exchange transactions, previously a monopoly of the state-owned Myanma Foreign Trade Bank. Local banks are also allowed to open ATMs nationwide, offer debit cards such as Visa, MasterCard and China UnionPay, and operate foreign money courier services through Western Union and MoneyGram.

The central bank has also allowed foreign banks to set up 35 representative offices in the country, most of which are hoping to win a licence to run a full branch. Although the details on the modality of foreign bank operations in Myanmar have yet to be revealed, the central bank seems committed to allowing their participation in the economy with an announcement expected before the end of the year.

"We are expecting to have a minimum of five [foreign banks] and a maximum of 10," says Set Aung, vice-chairman of the central bank. "Our purpose is to create a win-win solution. The first win is for the country's banking and financial sector. We would like for the foreign banks’ entry to contribute positively towards our banking and financial sector development."

The second win is for the foreign banks, which are admittedly going to play a crucial role in raising the mountain of finance Myanmar will need in the near future to build up its sadly lacking infrastructure. "Even though we plan to place some restrictions on [foreign banks], we are very careful not to impose unreasonable restrictions and we carefully consider regionally acceptable conditions for them," says Set Aung.

And the third winner will be the local banks. Besides benefiting from a more dynamic economy, fuelled by foreign funding, the central bank also hopes to assure some technology transfer for local banks. "We are developing a model according to which foreign banks will contribute not only towards the banking and finance sector’s development but also towards the development of the local banks," says Set Aung.

Greater autonomy

The Central Bank of Myanmar, previously a money-printing machine for the finance ministry to fund the state deficit, was granted greater autonomy under the Central Bank Law of 2013. The bank now has ministerial status in the cabinet.

Although most Myanmar banks insist they will welcome foreign bank participation in the financial system, there is likely to be resistance to too much participation. After five decades of economic isolation, first voluntarily under Ne Win’s xenophobic brand of socialism and then imposed by Western sanctions, there is a natural aversion to foreigners reaping the benefits of the reform process.

"We were under a different style of government for 52 years, so why are we in such a hurry now?" asks Thein Tun, chairman of the Myanmar Bank Association and founder and chairman of the Tun Foundation Bank, a medium-sized bank with 17 branches. “After 52 years, Myanmar is the last frontier, and many countries are interested to come in to invest, but if all the opportunities go to the foreign citizens and not our citizens, it is not fair." Thein Tun, whose business conglomerate includes soft drink distributorships and media investments, would prefer to see the central bank limit foreign banks to just joint ventures with local partners.

Other local bankers would be happier if foreign banks were limited to setting up subsidiaries instead of full branches. "I personally prefer the subsidiary system because if the foreign banks set up a subsidiary here, it will be under our jurisdiction," says KBZ's Than Lwin. Instead of an international rating, subsidiaries depend on a local rating, which would not provide multinational clients with the same sense of security that a full branch would.

Full praise

So far, the central bank has won praise from all sides for its open-minded approach to the sensitive issue of foreign bank participation. "[The central bank is a] very open regulator," says Rajesh Ahuja, chief representative of ANZ's Myanmar representative office. "It is very constructive in its decision-making and it is open to hearing the views of local banks, foreign banks, agencies such as the International Monetary Fund, the World Bank, etc... and regulators in other Asian countries," he says.

Banks’ representative offices may well be encouraged by the central bank's recent decision to take on Roland Berger as a consultant for the selection process. The same consultant was used in setting up the selection process for Myanmar's mobile telecommunications network, won last year by Telenor of Norway and Ooredoo of Qatar. The two mobile service providers, who will offer 3G networks in Myanmar later this year, will have a direct impact on mobile banking and other electronic banking innovations.

Also, given Myanmar's needs to address its infrastructural shortcomings, from power stations to paved roads and telecom towers, foreign banks, with their deep pockets, definitely have a role to play. "We are willing to invite foreign banks to provide the loans to foreign investors," says Thein Tun. But local banks tend not to want a level playing field with foreign banks in the few services where they have only just started to generate fee income, such as hire purchase. "If a Japanese bank operates hire purchase with its own branch all the market will go to the Japanese bank," says Thein Tun. Myanmar imported about 50,000 cars last year, most of them from Japan. "It's like a 60-pound weakling fighting a 180-pound sumo wrestler," he adds.

Electronic banking

Other than a comfortable spread between deposit rates and lending rates (the minimum deposit has been set by the central bank at 8% and the maximum lending rate at 13%) and hire purchase, the favoured form of credit for buying cars, electrical appliances, agricultural machinery and other purchases, the local banks are heavily dependent on fees from remittances and electronic banking.

Remittances are huge business. "We estimate that there are something like 5 million migrant workers sending back their money [to Myanmar]," says KBZ's Than Lwin. "There are about 3 million migrant workers in Thailand alone, so the amount of remittances is estimated at $5bn a year," he adds. The bank uses Western Union, but has also set up correspondent banking relations with all the major Thai banks – Siam Commercial, Bangkok Bank, Kasikorn and Krung Thai – and with other banks in Australia and Europe; wherever the Myanmar diaspora has settled.

CB Bank has carved out an early niche for itself in the debit card market. "In April 2012, we got the first MasterCard licence in Myanmar, followed by Visa some time in December," says Rone Rakhit, head of CB's business development department. "We were the first to pioneer international cards, so we got that advantage," he adds, claiming the bank holds 80% of the locally issued MasterCards and Visas, and 65% of the market share in transactions.

CB Bank, which started in 1992 with an emphasis on serving Myanmar's co-operatives sector, has also claimed a lead in electronic banking. The bank's branch network has expanded swiftly from 25 branches in 2011 to 84 now, using its co-operative connections nationwide to set up a mobile banking agent network to reach townships and villages, "so our non-branch users can also access our banking services," says CB chief executive Kyaw Lynn. Although Myanmar's internet services are notoriously poor outside the main urban centres, CB management claims it is sufficient to do some quick internet banking.

Different offerings

Just about every other Myanmar bank is pursuing an online banking strategy, either via the internet, ATMs or mobile phones. Traffic can only increase when Telenor and Ooredoo's 3G services become available in coming months. "If you look at the banking industry in Myanmar, every bank offers the same service, and most of these are regulated," says Phyo Aung, managing director of Aya Bank, which claims to be the third largest in Myanmar in terms of deposits, with $1bn in the bank at 69 branches. "That's why we’ve tried to differentiate ourselves by setting up a centralised core banking system, so you can bank at any of our branches as if it is the branch where your deposit is," he says.

A number of banks have been restructuring to take advantage of new opportunities. Restructuring was necessary at AGD Bank to ensure it becomes the first bank listed on the Yangon Securities Exchange, which is expected to be launched next October. “Now we plan to be a public company and we are preparing for our initial public offering process,” says AGD’s Ye Min Oo. The bank has 48 branches. Under central bank regulations, private banks cannot lend to their main shareholders, in an effort to limit connected lending. “Tay Za cannot take loans from our bank, and nor can his family members,” says Ye Min Oo. “And the central bank is very strict about this. We have to report everything.” 

But business connections, inevitably, still help in Myanmar, as they do in most countries. "We use [founder] Zaw Zaw's connections for our business clients," admits Aya Bank’s Phyo Aung. “Every day he is doing marketing for the bank.”

Ultimately, the greatest growth potential for Myanmar's local banks will be not in electronic banking but in expanding their branch networks nationwide to make basic regulated banking services accessible to the people, one of the government’s objectives for tackling poverty and enhancing opportunities. "Less than 5% of the population hold deposits, so we have big potential," says CB's Kyaw Lynn. "They could not do banking before because there were no banks there."

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Read more about:  Asia-Pacific , Myanmar