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Asia-PacificJune 1 2018

Banks wait on Myanmar reforms

Stung by a financial crisis in 2003, Myanmar has since taken a strict line on fiscal prudence but now observers fear this is curbing growth. Banks, both domestic and foreign, are lobbying for reforms to relax the rules on lending, as Peter Janssen reports.
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Myanmar

Reforms are afoot in Myanmar’s fledgling banking system. The current governor of the Central Bank of Myanmar, Kyaw Kyaw Maung, is due to retire in July and hopes are high in the industry that his successor will prove more proactive in liberalising banking practices.  There is a slim chance that the succession will not take place and the term of current governor Kyaw Kyaw Maung (who was central bank governor between 1997 to 2007) will be extended. This would be bad news for reforms, bankers and economists concur. The recent nomination of Soe Win – the country managing partner of Deloitte and a respected reformer – as the new finance minister, is seen as a good sign for financial liberalisation.

Mindful of the last banking crisis in 2003, Mr Maung has been understandably cautious about reform but some economists think this caution is now a barrier to economic growth. 

Government prudence

Since coming to power in the November 2015 general election, the government of state counsellor Aung San Suu Kyi has opted for fiscal prudence, cutting back on printing money to stimulate growth – a measure adopted by the military-backed government of former president Thein Sein – and curtailing many infrastructure and construction projects. As a result Myanmar’s currency, the kyat, has stabilised in recent months, inflation has been curbed to about 4% to 5% and the country is enjoying some macroeconomic stability.

But economic growth has also slowed, from 7% in fiscal year 2016/17 (ending March 31) to 5.9% in fiscal year 2017/18, according to World Bank estimates. Foreign direct investment has dropped steadily from $9.5bn in financial year 2015/16 to $6.5bn in 2016/17 to $5.7bn in the last financial year. This is partly due to the military crackdown on Rohingya Muslims in Rakhine State in August and September 2017, which sent 700,000 refugees across the border to Bangladesh and renewed Myanmar’s pariah status among Western democracies on the human rights front.

As a result, the World Bank has urged the government to resort to fiscal spending to boost growth and to provide jobs and public services to the masses that voted for it. “General government spending at 15% of gross domestic product [GDP] is much lower than what is needed to deliver these improvements, and well below countries at a similar level of development that spend more than 20% of GDP on public services,” said the World Bank in a November 2017 report.

Banking reform hope

Myanmar’s banks are arguing the case for reform so they can play a bigger role in the economy. The central bank fears another crash – that of 2003 resulted in runs on some banks and several going under. Many observers fear that local banks still lack the acumen needed to judge credit risks.

There are 24 domestic private banks in Myanmar, four state-owned banks and 13 foreign banks. Another five Myanmar banks will join the roster this year. The top three private banks – KBZ, Aya and CB – accounted for 58% of the total private bank assets, 64% of total loans and 66% of deposits in financial year 2016/17, according to Myanmar Financial Services Report. Less than 20% of the population hold bank accounts.

There is a long wish list for reforms among Myanmar-based and foreign banks. Some required changes are easy, such as changing banking hours. “There is a lot of talk about financial inclusion but if you’ve got banking hours from 9am to 3pm, Monday to Friday, it is very difficult for customers to access the formal financial system,” says Hal Bosher, chief executive at Yoma Bank, ranked fourth in the country by assets.

The central bank has imposed tight controls over bank interest rates, keeping them at an 8% minimum for deposits and a 13% cap for credits, to discourage risk taking. “We’ve got to give the banks the freedom to appraise their own risks,” says Sean Turnell, an Australian economist from Macquarie University who has served as special economic consultant to Ms Suu Kyi since she took office in early 2016. “We’re awaiting a whole bunch of banking reforms, the most important being the lifting of interest rate controls. That’s the real game changer, along with weaning the system off the old overdraft model.”

Mandatory repatriation and surrender of foreign exchange to banks would get more dollars into the formal market and strengthen the local interbank market

Azeem Azimuddin

Overdraft overhaul

The central bank launched a crackdown on the overdraft system in 2017. Overdrafts are loans to clients at fixed interest rates, which are rolled over annually without being called in to assess the value of the collateral. In July 2017, the banks were given until the end of the year to reduce overdrafts to 20% of loan portfolios.

As they accounted for more than 75% of Myanmar’s $9bn in bank loans, it was a tall order that could have resulted in chaos (and perhaps a crisis) had the directive been fully carried out. Instead, the central bank relented in November and introduced a phased-in reduction to 50% by mid-2018, 30% by mid-2019 and 20% by mid-2020.    

“Why was a high level of overdraft there in the first place?” asks Azeem Azimuddin, chief financial officer at Aya Bank, ranked second in Myanmar by size and market share. “It was because the central bank prohibited loans of more than one year. So for decades that was the rule, and all of a sudden you want to correct it in six months or even three years?”

The maximum term of loans has now been extended to three years from the previous cap of one year. The central bank declined to comment on the various issues raised in this article. 

Bankers would prefer to see a complete lifting of term limits on loans. Three years, for instance, is not sufficiently long to provide finance to an independent power provider, which takes at least three years just to build. The mortgage market, which is ripe for take off, is likewise severely limited by the three-year limit.

Land is another contentious issue in Myanmar’s banking system. Nearly all bank loans use land or buildings as collateral, primarily because of the central bank’s refusal to accept other forms of risk management. Rents at Yangon offices and apartments have dropped by more than 25% during the past two years of slowing growth, thanks in part to increased supply. Land prices are falling too.

Despite the drop in land prices, most industry observers do not anticipate another banking crisis. “So far, there has been no significant impact,” says Kyaw Lynn, CEO at CB Bank, which is ranked third in assets. “This is because we have always valued land at 20% less the market value, and lend only 35% to 50% of the valuation.”

A digital play

Like other big banks in Myanmar, CB has been expanding quickly over the past four to five years, emphasising its digital banking services. The bank claims to have 500,000 mobile bank users. “I think 70% of our transactions are digital transactions now,” says Mr Lynn. Such figures are impressive for a bank with 206 branches that can only open 9am to 3pm. “Digital banking is the cornerstone of our bank and our future,” adds Mr Lynn.

Making banking easier via digital channels is one means of attracting Myanmar’s unbanked into the formal banking system, but there is a widespread belief that much more needs to be done to tap into the country’s huge 'informal' money market. While the country's nominal GDP is an estimated $70bn, its purchasing power parity GDP is estimated at $290bn, according to International Monetary Fund figures. Bankers say the central bank could easily get more of the black market dollars into the banks.

“Myanmar is the only country in the region that does not have mandatory requirements for repatriation of foreign exchange earnings, nor any mandatory requirement for surrender of those earnings to authorised, licensed banks,” says Aya Bank’s Mr Azimuddin. “Mandatory repatriation and surrender of foreign exchange to banks would get more dollars into the formal market and strengthen the local interbank market.”

SME hopes

Another potentially lucrative move for the Myanmar economy could be to allow banks more leeway in lending to small and medium-sized enterprises (SMEs), which account for 98% of Myanmar’s registered companies and 70% of the workforce. The vast majority of all SMEs (and farmers) are still borrowing from the informal sector at rates ranging from 2% to 5% a month. The central bank’s two cardinal rules on bank lending – only use land as collateral and do not lend for more than one year (now three) – curtail bank lending to these sectors.

“Generally speaking, deposits come from the mass market but we can only lend to people with collateral; effectively this is a wealth transfer from the poor to the rich,” says Yoma’s Mr Bosher. “And you’ve got millions of Burmese out there who are actually reasonably creditworthy, but you can’t lend to them because the regulations don’t allow you to.”

He suggests one solution would be for the central bank to allow banks to lend unsecured at whatever rates they choose to SMEs, but only 5% of their balance sheets “until they have demonstrated their ability to do this responsibly”.  

Despite the constraints, Myanmar banks are pursuing avenues to lend to SMEs, often through subsidised programmes initiated by international development organisations such as the Asian Development Bank, USAID, Japan International Co-operation Agency and the German development agency GIZ, but also with government support. Under the credit guarantee insurance scheme, for instance, CB Bank and the Small & Medium Industry Development Bank are lending to SMEs without collateral, with the government assuming 60% of the risk.

You’ve got millions of Burmese out there who are actually reasonably creditworthy, but you can’t lend to them because the regulations don’t allow you to

Hal Bosher

CB Bank and the country’s leading KBZ Bank – with 511 bank branches and 1085 ATMs nationwide – have set up SME banking centres to target SMEs. “As Myanmar’s leading bank committed to achieving 100% financial inclusion with a vision to improve the quality of life in the country through banking, KBZ Bank is providing SMEs access to finance and resources,” says Mike DeNoma, CEO of KBZ. “Our one-stop SME banking centre offers SMEs across the country tailored solutions such as business consulting and matching, SME entrepreneur and financial literacy training and dedicated government SME advice and services.”

Foreign interest

In one of the few legislative breakthroughs of 2017, the Myanmar parliament approved an amendment to the companies law, changing the foreign equity threshold from 1% to 35% for companies to still be considered Myanmar entities, thus allowing them to get listed on the stock exchange and enjoy other Myanmar company privileges. The act is expected to go into effect in August and it could allow foreign banks to take up to 35% in local Myanmar banks.

Currently Western banks, functioning under tough Basel III requirements, are unlikely to be interested. Even Asian banks might think twice about taking a minority stake in a local bank but there are hints that the central bank might allow foreign banks to take a majority stake in a Myanmar bank. “Some of the regional banks that missed out on getting a licence – for example, from Taiwan, South Korea or Thailand – could see it as an opportunity if they can get a majority stake, but 35% is not enticing,” says one foreign bank executive.

Between 2014 and 2015, the central bank granted 13 licences to foreign banks, but limited them to one branch and permitted them to lend only to foreign companies. Foreign banks have their own wish list for reforms from a new central bank governor. For starters, they would like the central bank to release the $40m of blocked capital at each foreign bank, which could be better used on loans. They would also like it to waive a 20% limit of lending to a single borrower, which limits foreign banks’ ability to satisfy the demands of some of their bigger multinational customers. Most importantly, the foreign banks would like to be allowed to lend to Myanmar companies.

“Personally, I would like to see foreign banks play a greater role in the market,” says Mr Turnell. “They cannot lend to local companies but it’s the local companies that most need access to finance, and foreign banks have much deeper pockets than local banks.”

He is also a keen advocate of allowing foreign insurance companies into the local market, a move he says is opposed by local insurance firms: “They seem to want the joint-venture model, to force the foreign insurance companies to pony up the capital. This is the traditional political argument here. It’s part of the broader struggle.”   

Correction: In the original version of this article it was incorrectly stated that Soe Win had been nominated to be the new governor of the Central Bank of Myanmar. He was in fact nominated to be the new finance minister. 

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