By Cary Springfield – firstname.lastname@example.org
On April 22, Japan’s Bank of Tokyo-Mitsubishi UFJ Ltd became the first foreign bank to open a branch in Myanmar. This was closely followed by branch openings by Japan’s Sumitomo Mitsui Banking Corporation (SMBC) and Singapore’s Oversea-Chinese Banking Corporation. The government, under the leadership of President Thein Sein, granted approval to the three banks in early April, which follows the decision at the beginning of last October to award provisional operating licenses in Myanmar to nine foreign banks in total. There are six remaining banks, therefore, to submit applications for final licenses in the next few months: Japan’s Mizuho Bank, Singapore’s United Overseas Bank, Australia and New Zealand Banking Group, Thailand’s Bangkok Bank, Malaysia’s Malayan Banking Berhad and Industrial and Commercial Bank of China.
The branch openings have come 52 years after the last foreign banking presence in the country—the banking sector was nationalised in June 1963, and all foreign banks at the time were either expelled or put under government ownership. Before foreign-banking licenses were granted, banks were allowed to establish only a “representative office” in Myanmar, but they could not engage in any direct income-generating operations by law, only research and marketing activities.
While foreign banks are currently prohibited from engaging in several banking activities, including the operation of retail-banking businesses and the extension of any form of lending facility to local businesses, the granting of operating licenses is a crucial step in the liberalisation of Myanmar’s financial-services sector, as well as its economy as a whole. Indeed, the Asian Development Bank believes that foreign-bank licenses have put Myanmar on the path towards making its debut sovereign-bond sale within the next five years.
At this stage, it would appear that getting an early foothold in Myanmar, through building relationships with local banking partners and foreign-owned businesses, seems to be the focus for the fortunate few who were awarded the licenses, rather than on growth or profit. Nonetheless, they are still allowed to conduct some basic operations within the country. SMBC, for example, has stated that it will focus on growing its transaction business and foreign-currency lending, while also providing online currency transfers through its local partner Kanbawza Bank.
2011-2015: A story of reform
Thein Sein’s government is generally considered to be a reformist one, particularly when viewed against the backdrop of previous regimes that have ruled during the nation’s turbulent post-independence history. The country opened its doors again to the rest of the world in 2011 when Sein took the reins of a quasi-civilian government, signalling the end of nearly 50 years of military rule during which Myanmar (or Burma as it was then called) was isolated by much of the outside world.
In the last four years, major developments have been initiated within Myanmar’s banking sector, an industry which is almost entirely in its infancy and which desperately needs to make up for lost time. In December 2011, ATM machines were allowed to be installed, resulting in 276 machines in place throughout the country by July 2013. The Myanmar Payment Union, which consists of more than 20 banks, moreover, was launched during the same month and has since expanded its network significantly to allow its customers to withdraw cash from ATMs operated by all member banks rather than just one bank. December 2013 saw Myanmar publish its first Mobile Banking Directive, while last year two major telecom operators opened for business, effecting the growth of mobile-money operations within the country. 2014 also witnessed the launch of several smaller private and state-owned banks, as well as a handful of local and foreign microfinance institutions.
President Sein also signed into law a new Central Bank Act in 2013 that gave Myanmar’s central bank a greater degree of autonomy from the Ministry of Finance and Revenue, while a syndicated loan system was also implemented to support the country’s farming industry, whereby agribusiness is allowed access to loans at a rate lower than the country’s regular lending rate. Outside of banking, foreign-investment laws were also relaxed soon after Thein came into power, allowing overseas firms to fully own businesses without the need of a local partner.
Several additional laws currently being weighed in parliament are expected to be implemented soon that will open up the financial sector further, including a new banking law that is likely to ease restrictions on lending and ensure banking regulation in Myanmar is in line with international standards such as Basel III. Set Aung, the deputy governor of the Central Bank of Myanmar, has previously stated that the banking law will have adequate credit-risk management and asset-liability management policies, and has alluded to the development of a comprehensive internal credit-rating system as a “work in progress”.
The Yangon Stock Exchange, a joint venture between state-owned Myanmar Economic Bank (owning 51 percent), Japan’s Daiwa Institute of Research (30.25 percent) and Japan Exchange Group (18.75 percent) is also due to make its debut in October and will replace the over-the-counter Myanmar Securities Exchange Centre. This will be a major milestone in the overall development of Myanmar’s capital markets. Deputy Governor Aung recently stated that he anticipates that the new exchange, despite being under the control of the finance ministry at this stage, will develop quickly given the fact that many of the companies expected to join have already gone through a listing in other countries.
A shallow banking system
Despite the progress that has been made, the banking sector is still extremely underdeveloped. Although the Myanmar government has awarded licenses and infrastructure projects in the fields of construction, electricity, energy, power, telecommunications and airport development, the support from financial institutions in the form of lending is still clearly found wanting. Project finance from banks and access to credit for private-sector businesses are sorely lacking, a consequence of the dearth of a foreign-banking presence and the dominance within the industry of Myanmar’s four bloated state-owned institutions: Myanmar Economic Bank, Myanmar Agriculture and Rural Development Bank, Myanmar Investment and Commercial Bank and Myanmar Foreign Trade Bank.
The World Bank’s Investment Climate Assessment for Myanmar, which was released at the start of the year, revealed that the top constraint for Myanmar business operations was the lack of access to finance. Bank borrowing financed a mere one percent of overall fixed-asset investment costs, while 92 percent of firms relied on their own forms of finance, illustrating the severity of the problem.
The private banks that do exist are often owned by commercial conglomerates—Kanbawza Bank (KBZ), for example, is part of the Myanmar Billion Group involved in the mining industry. Although KBZ does have credit-card and remittance services, most private banks tend to provide only lending to other members of their conglomerates, which means that credit is still a scarce commodity for the majority of individuals and local businesses.
A report by the International Finance Corporation in 2013 calculated that the population segment in Myanmar who are actually “banked”— that is, those who own a bank account—was a shockingly low figure of 5 percent. By the end of 2013, it was estimated that the 24 domestic banks operating in Myanmar had a total of only 863 branches serving the country’s 53.26 million population, making ease-of-access as measured by branch frequency comparable to the likes of South Sudan, Afghanistan and Haiti. A comparison with immediate neighbours such as Thailand, which has approximately 7,000 more branches and a population of only 14 million more people, and Indonesia, which has roughly 20,000 branches, reveals just how sparse access to finance has traditionally been in Myanmar.
A further indication of Myanmar’s relatively primitive banking system is the fact that the aggregate value of bank loans in the country comprises only 19 percent of GDP. This is almost half the percentage figure for Vietnam, another emerging economy within the region, and less than a fifth of the figure in Cambodia. A closer inspection of some of the banking regulations in Myanmar makes this statistic somewhat unsurprising. The maximum loan period is one year and can only be extended upon the payment of expensive fees, while loans must also be collateralised with the value of the collateral often required to be up to double the initial loan value. To compound matters, only a few illiquid forms of collateral, such as land and gold, are legitimately accepted.
The need for foreign investment
The rate at which the banking sector grows will principally depend upon how attractive Myanmar is perceived for foreign investment in the coming months and years. In March, Ian Wong, managing director for group strategy and international management at United Overseas Bank (UOB)—one of the nine banks awarded a Myanmar operating license last October—specifically cited foreign investment as the key ingredient for sustainable economic growth in Myanmar. Wong specifically recommends business investment in four key areas: infrastructure, manufacturing, communication and education, and he cited FDI (foreign direct investment) as being the key driver of job creation and income generation. To help with this process, UOB has established a Foreign Direct Investment Advisory Unit in Yangon that will share its expertise with local banking partners.
Investment has risen from $2 million in 1989, when the country first opened its doors to FDI, to approximately $5 billion in 2014, with approximately one-third of the total FDI stock currently invested in Myanmar’s nascent gas sector. The investment figures during this 25-year period would have been dramatically higher had the political situation in Myanmar been more stable. Classed as a “pariah state” by the outside world while the repressive military junta ruled until 2011, with its poor human rights record and lack of any clear democratic system within the country, resulting in Myanmar incurring political and economic sanctions from the Western world, and repelling foreign investment as a consequence.
The good news is that Myanmar appears to be viewed by its neighbours and potential future business partners with increasing favour. A recent UOB survey of management professionals of Asian companies with turnovers of more than $50 million found that Myanmar was considered among the top investment destinations in the ASEAN (Association of Southeast Asian Nations) region in 2015. The survey also found that approximately 25 percent of Asian businesses plan to expand into Myanmar this year, with the greatest proportional interest being shown by Hong Kong businesses (31 percent), followed by those in Thailand (28 percent), China (26 percent), Malaysia (25 percent) and Singapore (21 percent).
However, given that the World Bank recently ranked Myanmar 177th out of 189 countries in terms of ease of doing business, further liberalisation, reform and development of the banking sector will be vital in improving the business and economic landscape of a country that is still predominantly cash-based.
Prospects for the future
In its East Asia Pacific Economic Update report, the World Bank recently asserted that Myanmar’s economy could continue to grow at above 8 percent until at least 2017. The study cited continued service-sector growth resulting from gradual, ongoing banking-sector liberalisation as being a key driver of this future economic growth. The fact that further banking-sector reform is being considered as more of a certainty as the country progresses should be taken as a major positive.
Financial integration with its neighbours and cross-border trading opportunities will further help Myanmar’s banking system to flourish. As a member of ASEAN, Myanmar will benefit from the ASEAN Banking Integration Framework (ABIF), which was agreed upon in March. ABIF will ultimately require all 10 regional members, including Myanmar, to have a bilateral agreement in place with at least one of its neighbours that will allow each country to establish banking services within the other’s borders.
Furthermore, the end of the year will witness the launch of the ASEAN Economic Community, which will see goods, services, capital, funds and skills flow freely across member state borders within the region. This will encourage the growth of Myanmar-owned businesses to grow on an international scale, which through increased demand for financial capital will spur the growth of Myanmar lending facilities beyond its domestic borders.
Perhaps the clearest gauge of where Myanmar stands, and in which direction it is headed, will be determined following the general election due to take place in October this year, when Thein Sein is expected to stand down. The continuation of a government that has direct links to the isolationist military junta that previously ruled Myanmar is almost certain to keep the brakes on the rate of foreign investment, particularly from the US and Europe. It was certainly noticeable that neither US nor European banks joined the bidding process for licenses during the most recent round—very likely an indication that more political and economic reform is required before the West engages commercially with Myanmar.
There may even be a return to some of the Western-imposed sanctions should regressive policies return, which makes the 2015 election results crucially important. The US has been more than willing to reapply sanctions on Myanmar that it had removed in the past. Funds will only begin to start flowing in more convincingly when there are clearer signs that the country is permanently transitioning towards a market-based economy and political stability in the long run. Demand for financial support from the increasing number of foreign enterprises should then put pressure on the banking system to evolve accordingly.
It is worth noting that, prior to the Burmese junta nationalising banks in 1963, the country had 14 foreign banks operating within its borders. This was more than any of its Southeast Asian neighbours. If Myanmar wants to get back to anywhere near that level of dominance, a long road of reform lies ahead.
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