BANKING and FINANCE in MYANMAR BANKING and FINANCE in MYANMAR Iii ACKNOWLEDGMENTS This Paper Was Written by Sean Turnell

ii BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR iii ACKNOWLEDGMENTS This paper was written by Sean Turnell. The author is grateful for comments and suggestions on earlier drafts from Steve Parker, Lynn Salinger, Daniel Swift (USAID), Tocher Mitchell, Bruce Bolnick, Timothy Buehrer, Show Ei Ei Tun, BANKING and other participants in the Economic Reform and Growth Dynamics Study workshop held at the PSDA office in Yangon, Myanmar, on January 13–14, 2016. The author also benefited from useful discussions with Declan McGee AND FINANCE (the United Kingdom’s Department for International Development), from the members of the National League for Democracy’s Economic Committee, and from a wide variety of people in Myanmar’s banking fraternity. IN MYANMAR PRESENT REALITIES, FUTURE POSSIBILITIES

PHOTO CREDITS DISCLAIMER The team would like to thank the following for the photos provided. This document is made possible by the support of the American people through the United States Agency for - Jeffrey Barth International Development (USAID). Its contents are the sole responsibility of the author or authors and do not - Soe Zeya Tun necessarily reflect the views of USAID or the United States government. - Tom Cheatham - Asian Development Bank II- World Bank BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR III ECONOMIC REFORM AND GROWTH DYNAMICS DISCUSSION PAPER SERIES LIST OF ACRONYMS In 2015, as Myanmar prepared for new elections, the United States Agency AGD Asia Green Development Bank for International Development (USAID) commissioned a set of discussion AML Anti-money laundering papers to review Myanmar’s economic status, benchmark its performance ANZ Australia and New Zealand Banking Group relative to other countries, and identify priority policy reforms, investments, APG Asia/Pacific Group on Money Laundering and institutional innovations to re-establish the country on a new, ASEAN Association of Southeast Asian Nations inclusive growth path. This effort has been led by Nathan Associates under ATM Automatic teller machine the Private Sector Development Activity (PSDA) and the Association AYB Ayeyarwady Bank of Southeast Asian Nations (ASEAN) Connectivity through Trade and CB Co-operative Bank Investment project Economic Reform through ASEAN Integration program. CBM Central Bank of Myanmar CFT Combatting the financing of terrorism Nathan Associates has a long history of providing economic analysis of CHDB Construction and Housing Development Bank the Myanmar economy. Originally headed by the economist Robert R. DFID Department for International Development (U.K.) Nathan, who helped develop the United States’ first national accounts in FATF Financial Action Task Force (OECD) the U.S. Department of Commerce, Nathan Associates was founded in FDB Farmers Development Bank 1946 to provide applied economic analysis services to clients in the United FIL Financial Institutions Law States and around the globe and started working in Burma in 1951 at the FIML Financial Institutions of Myanmar Law request of the U Nu government. The latter sought “advice with respect FIND Financial Inclusion for National Development (World Bank) to various important aspects of the country’s economy and engineering FMI First Myanmar Investment problems and assistance in solving practical operating difficulties.” Nathan FPB First Private Bank Associates worked in Burma until 1959 with two U.S. engineering firms to FRD Financial Regulatory Department, Ministry of Finance deliver this advice, initially with funding from the U.S. Technical Cooperation FY Fiscal year Administration (a predecessor to USAID) and later with direct support GDP Gross domestic product from the Burmese government. GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit In 1953, Nathan Associates, along with the firms of Knappen Tippetts GoM Government of Myanmar Abbett McCarthy Engineers and Pierce Management, delivered to the U GTB Global Treasure Bank Nu government an 8-year economic and social development program. The IBSB Insurance Business Supervisory Board comprehensive plan, “Economic and Engineering Development of Burma,” IFC International Finance Corporation laid out a strategy of economic and administrative policies to stimulate IMF International Monetary Fund growth in agriculture and irrigation, transportation, telecommunications, IT Information technology power, and industry, along with an analysis of the country’s macroeconomic K Myanmar kyat conditions. Unfortunately, what the report called a “golden opportunity” KBZ Kanbawza Bank for rapid growth was lost, as many of the recommendations were set aside LIFT Livelihoods and Food Security Trust Fund due to political developments in the late 1950s and early 1960s. MAB Myanmar Apex Bank MADB Myanmar Agricultural Development Bank The present set of discussion papers is designed to revive the initiative MAP Making Access Possible begun more than 60 years ago, providing a careful analysis of conditions MAPCO Myanmar Agribusiness Public Corporation in Myanmar and recommendations on how the country can accelerate its MCB Myanmar Citizens Bank integration into the global economy and deliver growth and prosperity to MEB Myanmar Economic Bank all of the people of the country. MEC Myanmar Economic Corporation Lynn Salinger, Principal Associate at Nathan Associates, has wled the design MEHL Myanmar Economic Holdings Limited and implementation of the discussion paper series in collaboration with MFI Microfinance institution Steve Parker, Chief of Party of the Private Sector Development Activity, and MFL Microfinance Business Law Tim Buehrer, Chief of Party of the ASEAN Connectivity through Trade and MFSP Mobile financial service providers Investment Project. Daniel Swift has supervised the effort from the U.S. MFTB Myanmar Foreign Trade Bank Agency for International Development Mission to Burma. MICB Myanmar Investment and Commercial Bank

IV BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR V MMB Myanmar Microfinance Bank MOB Myanmar Oriental Bank CONTENTS MP Member of Parliament MSEC Myanmar Securities Exchange Center Acknowledgment...... II MSLE Myanmar Small Loans Enterprise List of Acronyms...... V MUFJ Mitsubishi UFJ 1. Introduction...... 3 NBFI Nonbank financial institution 2. Context...... 5 NGO Nongovernmental organization A Note on Data...... 7 NLD National League for Democracy 3. Central Banking in Myanmar...... 9 OECD Organization for Economic Cooperation and Development Independence and the 2013 Central Bank Law...... 10 PBUB Peoples’ Bank of the Union of Myanmar Evaluating the CBM’s Autonomy...... 12 PGMF Pact Global Microfinance Fund Exchange Rate Reforms...... 14 POS Point-of-Sale 4. Structure of Myanmar’s Banking Sector...... 19 PSDA Private Sector Development Activity Supervision and Regulation...... 20 RDB Rural Development Bank Reforms and Initiatives...... 22 REER Real effective exchange rate Sanctions...... 25 ROSCA Rotating Credit and Savings Associations Money Laundering Problems Linger...... 26 S Section 5. Individual Bank Profiles...... 29 SAMB State Agricultural Marketing Board State-Owned Banks...... 29 SDN Specially Designated National Private Banks...... 31 SEL Securities Exchange Law Semiprivate Banks...... 38 SEZ Special economic zone The New Policy Banks...... 39 SLCM Sohan Lal Commodity Management 6. Mobile Banking and its Possibilities...... 43 SEE State economic enterprise 7. The Return of Foreign Banks...... 46 SME Small and medium enterprise Local Opposition and a Restrictive Mandate...... 48 SPDC State Peace and Development Council Licensed Foreign Banks...... 49 TFB Tun Foundation Bank Joint Venture Banks?...... 50 UAB United Amara Bank Second Round of Foreign Bank Entry...... 51 UNDP United Nations Development Program 8. The New Financial Institutions Law of Myanmar...... 53 UOB United Overseas Bank (Singapore) 9. Rural Finance...... 57 USAID United States Agency for International Development Myanmar Agricultural Development Bank...... 57 USDP Union Solidarity and Development Party Some Initiatives Beyond the MADB...... 62 YSX Yangon Stock Exchange 10. Informal Finance: Ubiquitous and Time-Honored...... 65 Credit and Savings...... 65 International Remittances...... 68 11. Microfinance...... 73 Microfinance Law...... 76 12. The Unfortunate Return of Cooperative Credit...... 81 The China Loan...... 81 Different This Time?...... 85 13. Capital and Financial Market Developments...... 87 Treasury Bond Market...... 87 Treasury Bills...... 88 A Sovereign Rating for Myanmar?...... 88 Developing a Stock Exchange...... 89 14. Insurance...... 95 Foreign Insurance and an Opportunity Lost...... 97

VI BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR VII 15. Recommendations...... 99 Central Banking...... 99 ILLUSTRATIONS Exchange Rate...... 99 Bank Supervision...... 100 Tables Reforming State-Owned Banks...... 100 Table 1. Private Sector Lending (% of GDP) in ASEAN Countries, 2015.....6 Foreign Banks...... 101 Table 2: CBM as State Financier (2005-2011)...... 9 The New Financial Institutions of Myanmar Law...... 101 Table 3: CBM as State Financier: Thein Sein Administration...... 12 Rural Finance...... 101 Table 4: CBM Deposit Auction Outcomes...... 14 Microfinance...... 102 Table 5: The Banks in Myanmar...... 19 Cooperative Credit...... 102 Table 6: Comparing Myanmar’s Prudential Ratios...... 20 Bond and Bill Markets...... 102 Table 7: Bank Deposits and Lending...... 31 Stock Exchange...... 103 Table 8: Informal Credit Providers in Myanmar...... 66 Insurance...... 103 Table 9: Microfinance in Myanmar: By the Numbers...... 74 16. Conclusion...... 105 References...... 106

VIII BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR IX 1. INTRODUCTION

obilizing Myanmar’s latest thinking on financial sector financial resources, while reform as applicable to Myanmar’s M expanding financial inclu- particular circumstances and sion, is an indispensable component history. The study offers practical of the country’s reform process. recommendations Myanmar’s Notwithstanding this widely monetary authorities can use now and aknowledged necessity, financial in the future. sector reform in Myanmar has been slow. Held back by inertia, the This study is divided into sections resistance of incumbent interests, and dealing with central banking, the sheer complexity of the task, only monetary, and exchange rate in the final year of the Thein Sein policy; the structure of Myanmar’s administration were the fundamentals banking sector; some individual of financial reform put on the agenda. bank profiles; the return of foreign As a result of this and given inevitable banks to Myanmar; mobile parliamentary and implementation banking and its possibilities; the Financial Institutions Law delays, the real task of reinvigorating new ; Myanmar’s financial sector falls to the rural finance; informal financial country’s next government. services; microfinance; the return of cooperative credit; capital and The purpose of this study is to assess financial market developments; and, the state of Myanmar’s financial finally, the return of private insurance sector, identify the problem areas companies to Myanmar. It concludes and chokepoints, and suggest ways with recommendations. forward. The paper draws on the

2 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 3 2. CONTEXT

yanmar’s financial sector Business Index celebrates Myanmar’s has historically involved improvement over its 2015 result M much drama and not a (167 out of 189, compared with 177 little ruin. The subject of a crippling out of 189 in 2015). And yet, the financial crisis in 2003, the universal same survey reported a slippage in the nationalization of banks in the ease of getting credit—from 171st to 1960s, and periodic episodes of 174th place (World Bank 2015b). currency demonetization, the sector began a fitful process of reform and Table 1 lists the total credit provided recovery over the past decade. This to the private sector (a key indicator accelerated during the Thein Sein of the contribution of a financial administration, albeit fitfully and sector to economic development) in with many limitations, as this study member countries of the Association demonstrates. of Southeast Asian Nations (ASEAN). Under the Thein Sein administration, When viewed against widely growth in this metric has been strong. used metrics for financial sector Growing by 50 percent a year in fiscal development, Myanmar continues year (FY)2012/13 and FY2013/14, to lag. Observing the overall private sector credit expanded at a context, the German development still relatively impressive 36 percent agency GIZ (Deutsche Gesellschaft in FY2014/15 (World Bank 2015a, für Internationale Zusammenarbeit) 20).1 As these data indicate, even concludes that the “financial sector though Myanmar has experienced in Myanmar is the least developed of strong growth in this metric during all countries in Southeast Asia and the Thein Sein government, the cannot adequately fulfill its role as country remains well behind its The World Economic Forum a financial intermediary” (Foerch et peers and neighbors—not just the six al. 2015, 15). The World Economic original ASEAN members, which are ranks Myanmar at 134 out of Forum ranks Myanmar at 134 out of now largely middle-income, but even 144 countries in businesses’ 144 countries in businesses’ ability the poorer, new entrant, socialist- to access finance (Foerch et al. 2015, transition countries of Cambodia, ability to access finance. 11). Meanwhile, the 2016 edition Lao People’s Democratic Republic, of the World Bank’s Ease of Doing and Viet Nam.

1 This growth probably decelerated during the second half of calendar year 2015, according to private briefings with various monetary authorities in Myanmar.

4 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 5 TABLE 1. PRIVATE SECTOR LENDING (% OF GDP) IN ASEAN COUNTRIES, 2015 a broader problem: the lack of real it is critical to get rural finance in banking done by Myanmar’s banks Myanmar right. ASEAN ‘6’ % ASEAN (CLMV) % and their inability to undertake it. In recent years, great efforts have Brunei Darussalam 31 Myanmar 15 Restricted in the ways noted above, too many of Myanmar’s banks are been made to reform Myanmar’s Indonesia 36 Laos 39 effectively little more than complex financial sector. These efforts, led Philippines 36 Cambodia 45 pawnshops and apply little but the by a small core of reformers within the Thein Sein government—too Thailand 97 Viet Nam 97 most rudimentary credit analyses and often struggling against recalcitrant Malaysia 134 other standard methodologies to their lending. As Myanmar’s Minister of colleagues and vested interests—as Singapore 173 Finance put it, “Myanmar’s existing well as by some especially innovative Source: Almekinders et al. (2015) and author’s calculations banks are not yet fully matured and energetic private enterprises, in asset and liability management have been little short of heroic. Yet, it has not been enough and Meanwhile, and notwithstanding formal banking sector, spread among and liquidity forecasting” (Oxford notwithstanding all the changes, the shiny new bank shopfronts, just 60,000 borrowers (MAP 2014, Business Group 2014, 51). Myanmar remains without the automatic teller machines (ATMs), 8). The footprint of Myanmar’s A related problem is that Myanmar’s financial system it needs. The task point-of-sale (POS) terminals, and all formal financial system is, in short, an banks universally report very low of reforming and rehabilitating the other accoutrements of modern extraordinarily narrow one. levels of nonperforming (or Myanmar’s financial sector will thus banking that have recently appeared, compromised) loans. While this fall to the new government led by Myanmar’s formal financial system The incapacity of Myanmar’s sounds like a virtue, the reported the National League for Democracy is not inclusive. Data on financial financial system to sustain long-term numbers are almost certainly the (NLD) that will form in 2016.3 inclusion are variable and unreliable, finance—critical for capital formation result of poor accounting and This government will not start from but it is highly plausible that no more and industrial transformation—is It is highly plausible that no disclosure structures, rather than scratch, but the road ahead will be as than about 10 percent of Myanmar’s another indicator of the still- an unusually virtuous cohort of steep as it is promising. population has a bank account, unresolved ills besetting the country’s more than about 10 percent borrowers. In the place of hard and only a few more have access to financial sector. Hemmed in by A NOTE ON DATA regulations that prohibit financial information on this front, Myanmar’s formal lending. Less than 3 percent of of Myanmar’s population Data problems in Myanmar are the institutions from lending for anything banking scene is constantly awash Myanmar’s population has any type stuff of legend and, accordingly, but the short term and require has a bank account, and only with rumors of failed and failing of formal insurance.2 much remarked upon. In recent years, abnormally high levels of collateral, banks, to the great detriment of political change in Myanmar, as well In the absence of access to formal almost no loans in Myanmar are for a few more have access to systemic stability. as international assistance from a host financial services, most people in terms of more than one year and formal lending. Less than Finance in rural Myanmar is in the of agencies, has improved matters Myanmar rely on the informal most are for less than six months. Finance in rural Myanmar worst state of all and constitutes significantly. Nevertheless, problems sector—for loans, to place savings, Long-term capital aggregation and 3 percent of Myanmar’s perhaps the most critical problem and anomalies persist. This paper to make and receive remittances. allocation in Myanmar do not take is in the worst state of all of the country’s financial sector. The uses official data provided by the According to Making Access Possible place through the country’s formal population has any type of international and historical narrative formal authorities in Myanmar, but (MAP), a collaboration of a range of financial sector. and constitutes perhaps the formal insurance. of financial capital providing the augments these with data gathered government and multilateral agencies, means for industrial transformation from other sources (including foreign donors, and founded by the Unfortunately, matters at the other most critical problem of the is familiar. Less understood is the way the International Monetary Fund United Nations Capital Development end of the scale—managing the short- country’s financial sector. that financial access is transformative [IMF], World Bank, and other Fund (UNCDF), over 9 million term liquidity that sustains financial for agriculture. This is despite the multilateral agencies) and interviews people in Myanmar had loans from institutions day-to-day—are scarcely fact that the phenomenal and much with key industry players. All data the informal credit sector in 2013, better realized. Liquidity management remarked-upon growth of the Asian are subjected to what reason and to a value of Myanmar kyat (K) 5.4 across the financial sector is poor and, “tigers” was first a story of great experience suggest are plausible. trillion (then equivalent to US$5.7 as a consequence, liquidity crises and productivity gains in intensive, Naturally, responsibility for the billion). This compared with K5 credit squeezes are routine. Of course, small-scale, household agriculture— conclusions so reached by this process trillion in credit extended from the the periodic liquidity crises highlight and the finance that supported it. rests solely with the author. Accordingly, for this reason alone,

2 Such metrics are the consensus across the spectrum of studies of Myanmar’s financial sector, including MAP 2014, MAP 2014b, World Bank 2014, Livelihoods and Food Security Trust Fund (LIFT) 2014. 3 This paper was written before the NLD Government was formed.

6 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 7 3. CENTRAL BANKING IN MYANMAR

lthough created in 1948 context in which the CBM has as a paragon of monetary enjoyed little control over its nominal A orthodoxy, the Central responsibilities. Formally a unit of Bank of Myanmar (CBM) has spent the Ministry of Finance and Revenue much of its existence as little more (hereafter, Ministry of Finance), it has than a financing arm of the state.4 traditionally not been close to being Excessive government spending an independent institution. Table 2 (much of it devoted to the military), below illustrates this role at the outset deficient and dysfunctional taxation of the installation of the Thein Sein arrangements, and a general lack of government. As can be seen from the understanding of the importance data here, printing money for the of monetary stability, created a state was the CBM’s task at hand:

TABLE 2: CBM AS STATE FINANCIER (2005-2011)

Financial Central Bank Government Treasury Bonds Year Lending to Government Outstanding

2005/06 2,165 79

2006/07 2,763 118

2007/08 3,534 180

2008/09 3,881 298

2009/10 4,727 896

2010/11 6,021 1,311 Source: Myanmar Central Statistical Organization

4 Starting its existence as a converted “currency board,” the then Union Bank of Burma (as the central bank was once named) could hardly have had a more orthodox pedigree. Such orthodoxy did not take long to be dissipated. For more on Myanmar’s monetary and banking history, see Turnell (2009).

8 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 9 INDEPENDENCE AND THE come from within the CBM itself, the independently of the government. conducts deposit and credit auctions. 2013 CENTRAL BANK LAW other five being “external professional As noted, the Central Bank Law So far these are really only useful Perhaps the biggest single legislative experts selected by the government” contains provisions for delivering for sterilizing the CBM’s buying reform enacted by the Thein Sein and approved by the parliament such security, but these are uncertain and selling in the foreign exchange administration in the context of the (CBL, s 9). Directors cannot be and incomplete. It is, for instance, market (to stabilize the kyat) rather financial sector was the promulgation members of parliament or a political unclear whether the removal of senior than in influencing broader monetary of a new Central Bank of Myanmar party, nor can they hold more than staff or CBM directors requires conditions, which are affected more Law. This law, which came into 5 percent equity in a corporation parliamentary approval, just as it is by the floors and caps the CBM effect in July 2013, is designed to (CBL, s 10). The expertise of the uncertain whether the same pertains imposes on the interest rates that establish the legal independence of five external directors must be in to a presidential finding that a banks pay and charge (more below). the CBM and, of perhaps even greater operational areas of central banking: director is incapable of discharging A key insight into the conduct of importance, the perception of such economics, finance, banking law, duties. In this area alone, the role monetary policy around the world independence within and outside accounting, and/or auditing. The of the president is unilateral and is that transparency and openness the country. The 1990 Central Bank deputy ministers of the ministries unchallengeable—and thus somewhat in open market operations can Law contained many of the technical of Finance and National Planning problematic for the notion of credibly assist central banks in achieving aspirations and methodologies and Economic Development are establishing perceptions that the their objectives by shaping market of international-standard central permitted to attend the monthly CBM is genuinely independent of the expectations. This is recognized in the banking (few of which were ever meetings of the Board but (in theory) The CBM is authorized President’s office. Central Bank Law (CBL, s 46), which implemented), but lacked the now are not allowed to take part in its asserts that the CBM will “announce standard notion of independence.5 deliberations (CBL, s 21e). under the Central Bank In modern central banking practice, to the public” its dealings in financial transparency and accountability markets for policy ends. The same The core of the 2013 Central Bank Law to conduct what The governor and deputy governors are meant to be the natural section of the Central Bank Law seeks Law (CBL) consists of a number of the CBM enjoy a degree of security accompaniment of independence. is commonly known as to clarify the uses of minimum bank of measures that assert the CBM’s Central Bank Law of tenure. Their appointments, Under the 2013 , reserves for policy purposes. autonomy from the Ministry of made by the president but requiring open market operations: the CBM is compelled to submit Finance and its spendthrift past. The parliamentary approval, can be reports on monetary conditions to Other Implications of the New governor of the CBM is elevated to terminated only on the basis of buying and selling financial parliament at least twice a year, and to Central Bank Law the level of a minister of the cabinet voluntary resignation; breaches of the publish quarterly reports on monetary (CBL, section [s] 108). An initial appointment requirements (being securities to influence developments (CBL, s 38–39). Thus In conjunction with the CBM’s 6 greater responsibilities and powers, plan to make the CBM even more convicted of a crime occasioning monetary conditions (CBL, far it has fallen short in this. independent of the government by imprisonment or acquiring equity four new policy committees have Monetary Policy Instruments been established within the CBM. making the institution a Union-level ownership in excess of the 5 percent s 45). Myanmar, however, body, similar in status to the Auditor limit); missing more than three These are concerned with monetary To perform its monetary policy policy, financial stability, payments General’s Office (part of the executive consecutive board meetings; or being does not yet possess the duties, the CBM is authorized under branch of government, but apart from the subject of a presidential finding systems, and foreign exchange active secondary markets in the Central Bank Law to conduct 7 cabinet), was shelved, as it would have that they are incapable of discharging management. How much power what is commonly known as open these committees wield, and how required constitutional amendment. their duties. The term of office for securities that would allow market operations: buying and selling the governor of the CBM is five years, they mesh with the responsibilities of Under the new law a board of financial securities to influence and that of directors is four years. these operations. Instead, the three new deputy governors is, as directors is the CBM’s ultimate monetary conditions (CBL, s 45). Both the governor and directors can yet, unclear. As will be seen later in internal decision-making body. It Myanmar, however, does not yet serve only two terms (CBL, s 9b). the CBM conducts deposit the context of Myanmar’s practice of has nine members and is chaired by possess the active secondary markets exchange rate policy in recent times, the governor of the CBM. Four of Security of tenure is important in and credit auctions. in securities that would allow these in this area opacity reigns. these (the governor and three newly- granting senior officers and directors operations. Instead, the CBM created deputy governor positions) of the CBM the confidence to act

5 The former Central Bank of Myanmar Law No. 15/1990 was automatically repealed upon the promulgation of the new law (CBL, s 118). The new law states that “rules, regulations, bylaws, orders and 6 The latest annual report available on the CBM’s website, for instance, is for fiscal year 2011/12. directives made or issued under the repealed Bank Law … or under any other power shall, in so far as they are not contradictory to the provision of this [new] law, continue to have effect” (CBL, s 119). The 7 Staff numbers at the CBM are also expected to double over the next few years, to over 2,000 across its practical impact of this provision remains to be seen. three offices in Nay Pyi Taw, Yangon, and Mandalay.

10 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 11 Given Myanmar’s unfortunate history law and internal appointment and coverage. The latter problem is As noted earlier, in the absence of of periodic demonetization episodes, dismissal procedures. Above all, its already distorting decision-making functioning government debt markets the 2008 Constitution includes ability to break away from its hitherto within the CBM, as will be shown within which to conduct open market a guarantee “not to demonetize primary role of financing the state later in this report. operations, Myanmar has attempted currency legally in circulation” will be critical. to use another, potentially useful Monetary Policy (Constitution, s 36e).8 This is mechanism. This takes the form of What is the outcome thus far on this reinforced in the 2013 Central Bank deposit auctions conducted by the aspect? The CBM’s longstanding role as the Law, which includes the assurance default financier of state spending CBM, and by which it can in theory that any “necessary” withdrawals of As with so much else on the reform remains, absent significant fiscal drain liquidity from the banking currency notes in circulation take front in Myanmar, the answer is reform, the most important barrier system or inject funds into it. Thus place only with the approval of the some progress, with much still to to conducting appropriate monetary far the deposit auctions have not parliament (CBL, s 67a). be done. As Table 3 reveals, and as policy in Myanmar. But it is not really succeeded, however. The rates offered by the CBM have been too EVALUATING THE CBM’S the IMF notes in its latest (2015) the only one. Notwithstanding the low to attract loose liquidity from the AUTONOMY Article IV Report, the CBM remains reforms of recent years, the country banks when the system is in surplus, Of course, achieving effective the primary vehicle for funding remains without the fundamental while efforts to use the auctions to independence for the CBM depends Myanmar’s budget deficits. institutions, instruments, and augment liquidity when conditions on much more than its governing infrastructure necessary for a truly market-based policy framework. become tight are undermined by Interest rates are fixed without too easy (and cheap) recourse to TABLE 3: CBM AS STATE FINANCIER: THEIN SEIN ADMINISTRATION consideration of market conditions, the CBM’s discount window (IMF Financial Central Bank Lending Government Treasury interbank and money markets 2015, 8-9). The CBM publishes the Year to Government Bonds Outstanding scarcely exist, CBM lending to the results of the auctions on its website, banks is too readily available, and the but the data reveal the very large gap 2011/12 7,673 1,817 between deposit auction offers and Despite the rising yields, country lacks the reliable government debt instruments that would provide the amounts subsequently purchased 2012/13 8,318 2,487 large and persistent the means for the conduct of open at those auctions. Table 4 presents a month-end sample of deposit 2013/14 8,726 2,804 market operations. All these issues disparities remain between are explored in more detail later auctions over the past year. Despite 2014/15 10,126 2,900 in this study. Of course, making the rising yields, large and persistent the CBM’s “liquidity- disparities remain between the CBM’s Source: Myanmar Central Statistical Organization monetary policy management all the mopping” objectives, and harder is Myanmar’s historical legacy “liquidity-mopping” objectives, and of monetary instability, arbitrary the outcomes achieved. Such “money financing” of Myanmar’s the IMF was especially pessimistic, the outcomes achieved. policymaking, and a broad, profound budget deficits amounted in suggesting that Myanmar’s economy mistrust in monetary institutions. FY2014/15 to around 2.2 percent of was simultaneously in danger of gross domestic product (GDP). This, overheating and that the “downside in turn, has led to rapid growth in risks to growth and stability in the reserve money in Myanmar which, near term” had increased (IMF according to the IMF (2015, 31) grew 2015, 5). Putting some numbers to by over 11 percent in FY2014/15 and these troubling indicators, the IMF was projected to expand a further 18 estimated that inflation will rise to percent in FY2015/16. 13 percent by the end of FY2015/16 (far above that of peer countries), the This effectively “loose” monetary current account deficit will widen to policy of the CBM has consequences, 9 percent of GDP, and the CBM’s especially for inflation. In the foreign reserves will decline to just aforementioned Article IV report, less than 2½ months of import

8 Myanmar has experienced three “demonetization” episodes over the last 50 years, the most bizarre of which included the replacement of decimal currency notes with a series based upon the number nine. For more on these, see Turnell (2009).

12 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 13 TABLE 4: CBM DEPOSIT AUCTION OUTCOMES9 Myanmar’s commercial banks to relative decline in the exchange rates determine a reference rate for the of most commodity-producing and Deposit Bids Accepted/ CBM Offer Range of Bid Yields Month Volumes CBM Deposits on kyat against the U.S. dollar, the euro, transition countries. Kyat millions Accepted (%) Kyat millions Offer (%) and the Singapore dollar. Once the reference rate is set, banks and money Instead of accepting and explaining Dec 2014 80,000 4.00-4.00 20,050 25.0 changers can then exchange the kyat this decline, however, Myanmar’s within a band of +/-0.8 percent above monetary authorities (including Jan 2015 80,000 4.48-5.00 25,000 31.3 or below the reference rate. the CBM, within which, however, opinion was not at all unanimous) Feb 2015 215,000 4.4-4.5 40,000 18.6 The new exchange rate arrangements joined in the broader anxiety.

Mar 2015 197,000 3.35-3.5 100,000 40.8 met with near-universal acclaim, and Accordingly, instead of letting were long regarded as the signature the kyat fall to an exchange rate Apr 2015 434,000 3.4-5.5 5,000 11.5 economic reform of the Thein Sein that brought kyat demand and administration. Moreover, for the first supply into balance, the authorities May 2015 240,000 3.5-4.5 100,000 41.7 year or so after the change, matters intervened and sought to prop up ran relatively smoothly. Indeed, to the the reference rate of the kyat by June 2015 200,000 5.65-5.8 50,000 25.0 extent that there were complaints over allocating it at the auction according July 2015 300,000 6.3-6.5 135,000 45.0 the new arrangements, they mainly to the amount bid, rather than at an centered upon the kyat’s appreciation equilibrating price. From then on, Aug 2015 385,000 6.85-7.00 100,000 26.0 across FY2012/13, driven notably by the authorities implicitly defended a the broad international enthusiasm quasi-official exchange rate of around Sept 2015 250,000 6.85-7.00 100,000 40.0 for Myanmar’s reform narrative and K1,105:US$1 (as against a market

Oct 2015 380,000 7.00-7.00 3,000 0.8 the country’s economic potential. price then of around K1,267:US$1). However, as it turned out, the This artificially created an excess Note: Presented here is a sample of the auctions held in each period, selected as close as possible to the end of each month. “Bids accepted” percentages are the author’s calculations. new system had some underlying demand for U.S. dollars over supply, technical problems, not least of leading to shortages of that currency Source: Central Bank of Myanmar which was the delayed emergence and the imposition of restrictions on of a functioning interbank market quantities of dollars that could be Progress has been made on the EXCHANGE RATE REFORMS for foreign exchange—a delay that withdrawn from banks (not to exceed monetary policy front in Myanmar A year before the 2013 Central Bank simultaneously kept the role of US$5,000 per transaction, with a under the Thein Sein administration. Law was promulgated, Myanmar’s the CBM artificially central to the maximum of two transactions per Central is the already-discussed exchange rate arrangements were whole system of determining the week). granting of a degree of independence revolutionized by the government’s exchange rate, while also continuing These restrictions applied even to to the CBM and its revitalization decision in April 2012 to allow the to provide space for an informal designated foreign currency accounts, through some key personnel foreign exchange value of the kyat foreign exchange market and an and to both individuals as well appointments. Likewise, there has to be determined through a managed accompanying shadow rate for the as large corporations—the latter been some movement toward float. Myanmar’s previous dual kyat. leading to significant difficulties creating the “missing” monetary exchange rate system—with an In late 2014 affairs started to go for foreign firms in meeting payroll institutions and market infrastructure. official rate that set the kyat at further awry. Reversing the earlier and other routine payments. Other Nevertheless, much remains to be around K6:US$1, compared with trend, the kyat began what soon administrative controls were placed done if Myanmar is to enjoy the an unofficial market rate that mostly turned into a rapid and sustained on access to foreign exchange, while monetary and financial stability fluctuated around K1,000:US$1— decline against the U.S. dollar. By the parliament directed the CBM to the country needs to support its had long been the most public late 2015 this decline was on the investigate whether domestic private economic transformation. Necessary symbol of the country’s economic order of 20 percent or so, leading to banks were hoarding U.S. dollars. reforms to such institutions and idiosyncrasies. something of a misguided panic in Remarks by the speaker of the lower instruments are outlined in Under the new arrangements, an some quarters in Myanmar. In fact, house of the parliament also led to recommendations at the end of this auction is held each morning among much of the “fall” of the kyat could suspicions about the two foreign study. have been better expressed as a rise in telecommunications firms (Telenor the value of the U.S. dollar, a global and Ooredoo). The speaker implicitly 9 Central Bank of Myanmar, “Results of Deposit Auction,” http://www.cbm.gov.mm/deposit-auction, (accessed November 5, 2015). phenomenon most apparent in the accused the two firms of draining

14 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 15 Myanmar of U.S. dollars through happening through the banks any the announcement, was “intended culture is not conducive to modern repatriation of profits and other more. That’s when we came to the to promote the use of the kyat in central banking. Expertise in the funds. Such accusations played to brink of collapse.12 making payments for goods and CBM is overwhelmingly organized what might be regarded as traditional services within the country and to cut along the lines of the command-and- suspicions of “foreign finance” in Finally, the CBM, supported in down the use of cash by encouraging control frameworks of the past, while Myanmar. The companies vigorously the background by a number of domestic debit cards and credit cards, many of the staff are conservative denied the allegations.10 multilateral agencies, reversed its internal payment cards, and on- and resist change. Even though teams nascent efforts to set a particular kyat line payment system.”14 The CBM’s of foreign experts work inside the Meanwhile, a black market for rate. Averting the mini-crisis for the statement was a curious one—not CBM (from the IMF, certain Japanese foreign currency was reenergized time being, the CBM said in public least because it was almost impossible development and monetary agencies, and an informal exchange rate statements that it would henceforth to imagine that domestic credit and GIZ, and the Bank of Thailand), emerged at growing variance to the amend the reference rate debit cards were a substitute for U.S. interactions between them and quasi-official rate, peaking in July …in line with the market price dollar payments, especially among local staff are limited and primarily 2015 when the informal U.S. dollar 15 …in order not to have multiple enterprises heavily engaged with formal. Significant cohorts within rate was 16 percent higher than international tourists. the CBM have a degree of hostility the quasi-official rate. Speculators, exchange rates for foreign currency.…Now we have decided to foreign advice; accordingly, in notably including Myanmar’s private The reasons behind these CBM many areas lip-service rather than banks, poured into this market. to let the FX auction discover the actions have been difficult to fathom. market price so that our reference Put simply, and as it implementation is a common Unwilling and often unable to buy Dollarization is a potentially real response to suggested reform. or sell foreign currencies at the new, rate will reflect the market problem in Myanmar, especially for 13 presently stands, the CBM’s official exchange rate, many banks prevailing rate. a central bank anxious to establish its Similarly undermining reform within bought and sold from and into this The post-July 2015 calm lasted a few internal culture is not monetary and regulatory authority the CBM is the degree to which it unofficial market. Commenting on months, until ever-growing concerns across a sector with multiple is factionalized, functionally and in conducive to modern central the issue later, the chair of Kanbawza over the dollarization of Myanmar’s circulating currencies. Nevertheless, other ways, and decisions are made Bank took umbrage at the term economy brought about a new set of banking. Expertise in the the arbitrary nature of these decisions in what are in effect intellectual “black market” that had been used in restrictive measures in mid-October and their erratic timing did little but and policy-making silos. The describing the practice: 2015. The CBM suddenly revoked CBM is overwhelmingly remind people, within Myanmar and new Financial Institutions Law of outside, of the country’s unstable Myanmar, for example, remained They call it the black market, the foreign exchange licenses of hundreds of businesses in Myanmar organized along the lines of monetary past. unknown to the CBM’s Supervision but it’s the real market. It’s very Department, the department most including hotels, restaurants, the command-and-control difficult for banks to follow the The hand of powerful government affected by the law, until after it 11 telecommunications companies rules. figures in this episode cannot was presented to a parliamentary (“telcos”), supermarkets and other frameworks of the past, be discounted. Nevertheless, it An official at the CBM said retail outlets—close to all nonbank committee. while many of the staff are also reveals some deep-seated anonymously: license holders. As it turned out, the problems within the CBM itself, Under the Thein Sein administration revocation applied just to businesses’ We deliberately made our currency conservative and resist notwithstanding that inside its walls de jure reform of the CBM made acceptance of payments in physical are some dedicated and highly skilled substantial progress. For de facto appreciate, while there was an foreign currency. The CBM said actual depreciation happening. change. reformers. Put simply, and as it change, Myanmar must await new that the cancellation of the licenses, presently stands, the CBM’s internal hands at the wheel. The whole informal market re- with all to be revoked within days of emerged, no transactions were

10 For these controversies, see Clare Hammond, “Telecom Operators Set the Record Straight on USD Flows,” Myanmar Times, July 30, 2015, http://www.mmtimes.com/index.php/business/technology/15758- telecom-operators-set-the-record-straight-on-usd-flows.html, (accessed November 2, 2015).

11 Cited in Antoni Slodkowski and Simon Webb, “Return of the Dollar Black Market Shows Limits of Myanmar’s Reforms,” Reuters, October 19, 2015, http://www.reuters.com/article/2015/10/20/us-myanmar- dollars-insight-idUSKCN0SD2E020151020, (accessed October 21, 2015).

12 Ibid. 14 Aung Hla Htun, “Myanmar Revokes Forex Licences to Control ‘Dollarization,” Reuters, October 18, 2015, http://www.reuters.com/article/2015/10/18/myanmar-forex-idUSL3N12I04K20151018, (accessed October 13 CBM official cited in Clare Hammond, Aye Thidar Kyaw, and Jeremy Mullins, “Central Bank’s Kyat Rate 19, 2015). Jumps,” Myanmar Times, July 14, 2015, http://www.mmtimes.com/index.php/business/15487-central-bank-s- kyat-rate-jumps.html, (accessed October 23, 2015). 15 This does not, however, stop the advice of foreigners being used within the CBM in various turf battles.

16 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 17 4. STRUCTURE OF MYANMAR’S BANKING SECTOR

s befits a country in of banks in which state actors play a transition, the structure of controlling role, a dozen private banks A Myanmar’s banking system of varying quality and energy levels is a hybrid bearing all the marks of and, finally, nine new foreign banks past upheavals and new trajectories. (Table 5), the system is both familiar Consisting of a quartet of fully and tailored to Myanmar’s unusually state-owned policy banks, a gaggle turbulent financial history.

TABLE 5: THE BANKS IN MYANMAR

State-Owned Banks Semiprivate Banks* Private Banks Foreign Banks

Myanmar Agricultural Gems and Minerals Asia Green Development Australia and New Zealand Development Bank Development Bank** Bank Banking Group Myanmar Economic Bank Global Treasure Bank Asia Yangon International Bangkok Bank (Thailand) Bank Myanmar Foreign Trade Bank Innwa Bank*** Bank of Tokyo-Mitsubishi UFJ Ayeyarwady Bank (Japan) Myanmar Investment and Myanmar Citizens Bank Commercial Bank Co-operative Bank Industrial and Commercial Myanmar Construction and Bank of China Housing Development Bank Farmers Development Bank** Malayan Banking Berhard Myanmar Microfinance Bank First Private Bank (Maybank, Malaysia) Myanmar Tourism Bank** Kanbawza Bank Mizuho Bank (Japan) Myawaddy Bank*** Myanmar Apex Bank Overseas Chinese Banking Nay Pyi Taw Sibin Bank Myanmar Oriental Bank Corp. (Singapore) Rural Development Bank Shwe Rural and Urban Sumitomo Mitsui Banking Development Bank Small and Medium Industrial Corp. (Japan) Development Bank Tun Foundation Bank United Overseas Bank (UOB, Yadanabon Bank United Amara Bank Singapore) Yangon City Bank Yoma Bank

* Includes ministerial, municipal, military, and other banks with significant government ownership, but trading as commercial banks.

** Not yet in operation

*** Military-owned bank

18 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 19 SUPERVISION AND • Minimum capital adequacy ratio Bank supervision is supposed savings and loans being lower than REGULATION of 10 percent of risk-weighted to entail on-site inspections by they would otherwise be—is just Formally the CBM has long adhered assets the CBM and provision of data, one consequence of the caps and to the international standard for including daily, weekly, monthly, floors on interest rates. Interestingly, bank supervision known as the • Liquidity ratio (liquid assets to and annual reporting of critical the prescribed bank deposit rate Basel Accords. Historically, however, current liabilities) of a minimum prudential metrics, from banks to as of early 2016 is lower than that bank regulation and supervision in of 20 percent the CBM. Some of this reporting is of the minimum rate payable on Myanmar have been ad hoc, reactive, • Single borrower exposure limit of also meant to be public, but few of Myanmar’s treasury bonds, which is and opaque. Under Myanmar’s 20 percent of capital and reserves Myanmar’s banks make even annual one reason for the relative increase previous military regimes the Basel reports publicly available. Bank in attractiveness of these instruments Accords were given lip service but • General provision against bad and auditors must be appointed with the among local investors in recent times. then largely ignored. The 2013 doubtful debts of 2 percent of CBM’s approval and are accountable Central Bank of Myanmar Law loan portfolio both to the Central Bank and the Other inhibiting, and prudentially 17 reinforces the CBM’s role as sector commissioning bank. unnecessary, restrictions include: • Reserves to deposits ratio (in the supervisor, giving it broad-ranging form of cash balances with the • A prohibition on private powers (CBL, s 68–75) in “regulating The bank regulations examined CBM) of 5 percent thus far are more or less in line banks lending to farmers and financial institutions for the stability 18 with international standards, even cultivators; of the monetary system….” Given the • Minimum K30 billion of paid- if imperfectly implemented, and past, however, clearly implementation up capital if engaged in both • A ban on banks’ lending for terms roughly supportive of prudent, will be key. domestic and foreign exchange of more than one year; functional banking. Significantly, banking The problems of implementation however, an additional array of • A cap on aggregate bank lending thus duly noted, as matters presently • Maximum 10 percent equity An additional array of enmeshing regulations have impaired of 80 percent of the deposit base; stand, the CBM is meant to hold the ability of Myanmar’s banks to holding in any nonfinancial • A ban on granting uncollateralized the country’s banks to an expanded enmeshing regulations have perform financial intermediation institution loans19 (currently all loans must version of the broad Basel framework. of the standard variety. The most be backed by urban land, a fixed An important part of this are the • Capital-to-deposits ratio of 4 impaired the ability of obvious of these are the interest rate deposit account or government following prudential standards that all percent ceilings and floors set by the CBM. Myanmar’s banks to perform bonds, machinery, gold, or a banks supervised by the CBM must These determine that the private limited range of agricultural formally meet. (The list is followed by banks in Myanmar must pay 8 financial intermediation of commodities); a comparison in Table 6 with ratios percent on deposits and charge no elsewhere.) the standard variety. The more than 13 percent on loans. Such • Excessive requirements on rates are often below Myanmar’s most obvious of these are collateral margins: with the high and volatile inflation rates, exception of a deposit account, TABLE 6: COMPARING MYANMAR’S PRUDENTIAL RATIOS 16 the interest rate ceilings and rendering the returns to both savers which must exactly match the Prudential Regulation Myanmar Viet Nam India Indonesia and the banks themselves negative in size of a loan, all collateral items floors set by the CBM. real terms. Financial “repression”— must have a value in excess of 200 Capital Adequacy Ratio 10% 9% 9% 8% resulting in the volumes of both percent of loan value; and Liquidity Ratio 20% 15% 25% n.a Lending to Single Entity 20% 15% 15% 20% 10% of deposits with Yes, but discretionary 17 While many of these restrictions are not clear-cut prohibitions, the many CBM “instructions” and Reserves Requirement 4% n.a the CBM upon individual banks “directives” serve to inhibit nearly completely many practices. For instance, certain CBM instructions seem to suggest that long-term loans can be made, if funded by long-term deposits. Others imply loans beyond Source: Organization for Economic Cooperation and Development (OECD) (2014) one year are prohibited generally. Likewise, the instructions dictating the interest rate cap and floor are contradicted by instructions on hire purchase products (near universally not offered in practice) that allow an annual 15 percent interest charge. There is a plethora of other similar examples.

“Hire purchase” refers to an arrangement whereby a purchaser pays for a good over a number of periods. In the United States and Canada, a hire purchase is referred to as an installment plan, although under a hire purchase ownership remains with the seller until the last payment is made, whereas under an installment plan the purchaser takes ownership immediately.

18 Except Global Treasure Bank and Rural Development Bank.

16 Table derived from a number of sources, including Financial Institutions of Myanmar Law, a similar table 19 The 1990 Financial Institutions of Myanmar Law allowed uncollateralized loans, but following the 2003 in OECD (2014, p.198), and the website of the State Bank of Viet Nam, http://www.sbv.gov.vn, (accessed banking crisis, collateral-backed loans only have been permitted. The CBM has apparently told banks that November 5, 2015). uncollateralized lending will be permitted once a credit bureau is established.

20 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 21 • A ban on private banks paying • Loan procedures too complex REFORMS AND INITIATIVES Changes made during the Thein Sein interest on foreign currency 28%; These changes have Necessary major legislative change to administration (usually through CBM deposits (at present only state- reform Myanmar’s banking system regulatory notifications) include: owned banks are allowed to pay • Loan term too short 28%; been sufficient to drive has only just come to pass. As shall • Eliminating the requirement that interest on such accounts). • Interest rate too high 27%. the increases in private be examined in more detail below, a new bill to undertake this necessary banks raise stand-alone capital and As shall be examined later, these Similarly, the regulatory constraints bank lending and deposit reform—the Financial Institutions seek approval for the opening of regulations on Myanmar’s banks have facing Myanmar’s banks produce other Law (FIL) was placed in the Bank each new bank branch. a number of deleterious effects. The mobilization highlighted unorthodox outcomes, especially when and Financial Affairs Development • Reducing the long-standing collateral requirements are especially combined with other problematic Committee of Myanmar’s parliament elsewhere in this study, minimum capital-to-deposits ratio damaging, not least in conforming to aspects of Myanmar’s political in late 2014, sparking a highly a banking culture already disposed to requirement on banks from 1:10 economy. For instance, the lack of and are indicative of the divisive debate. It did not emerge to 1:25. The 1:10 requirement, focus on collateral valuation rather a properly functioning legal process from the committee before the than credit and business analysis. which was implemented in the through which banks might seek to great potential that could parliament concluded ahead of wake of Myanmar’s devastating Regarding banks’ capabilities in credit foreclose on the land of defaulting Myanmar’s elections, but it appeared and business analysis, some industry be harnessed quickly given 2003 banking crisis to limit the borrowers often leads banks to insist again—and was passed—in the post- amount of leverage that banks players are blunt. According to a that property be placed in their name The lack of a properly substantial reform. election, lame duck parliament in late took on, had become a substantial senior executive of one of the major at the outset of a loan. Should there functioning legal process November 2015. barrier to mobilization of deposits. private banks, most of Myanmar’s be default, no court process is thus banks are “clueless” when it comes needed for the bank to claim the asset. through which banks might Because of the delays in passing the • Expanding the list of allowable to credit assessment—as opposed to In the meantime, however, the ability FIL, the transformation of Myanmar’s loan collateral to include—in valuing collateral, in which their skills of borrowing firms and individuals to seek to foreclose on the banking system, and especially addition to urban land—gold 20 “are up there with the pawnshops.” pursue their interests based on their the bringing of its supervisory and and a small range of agricultural The basic credit product available true asset/capital position is clearly land of defaulting borrowers regulatory framework up to the commodities. In practice, however, to business in Myanmar is an norms of a modern financial system, impaired. often leads banks to insist Myanmar’s banks usually still overdraft secured by collateral, has not taken place. This is cause insist upon land as loan collateral. which overwhelmingly is urban land. Meanwhile, the regulations noted that property be placed in for much regret. Progress has been Naturally, this precludes most small- above apply to the private and made around the edges of reforming • Creating a national deposit and medium-sized enterprises (SMEs) semiprivate banks, but only incom their name at the outset of Myanmar’s financial sector, but these insurance program. Centered on from the financing considerations of pletely to those wholly owned by the advances have not been sufficient to a state-owned insurance company banks. According to surveys collated state. Among the latter cohort, the a loan. create financial intermediation of the (Myanmar Insurance), this by the Organization for Economic Myanmar Agricultural Development sort that can create and allocate the voluntary program for all banks Cooperation and Development Bank sits under the Ministry of capital the sector needs for genuinely is meant to cover a maximum of (OECD) (2014, 193), the vast Agriculture and is not required to meet transformational growth. K500,000 (about US$400) per majority (64 percent) of enterprises of the CBM’s regulations. With respect borrower. Banks pay Myanmar Nevertheless, changes have been all sizes and sectors in Myanmar had to the other state-owned banks (which Insurance a premium of 0.25 made to some of the strictures on neither borrowed from a bank nor are now formally supervised by the percent of deposits covered. Myanmar’s banks, and their modes of sought to do so because of an array of Financial Regulatory Department Although 17 of Myanmar’s private operations, such that in appearance, perceived insurmountable obstacles, (FRD) of the Ministry of Finance— banks are said to have taken up and partly in reality, they are different listed here in order of seriousness of also the regulator for microfinance the insurance initially, not all institutions than they once were. the obstacles concerned:21 and insurance), certain regulations are have continued with it. According meant to apply (most concerned with These changes have been sufficient to some of Myanmar’s bankers, • Collateral requirements too loan size, term, interest charges, and to drive the increases in private bank the level of residual distrust in inflexible 34%; borrower attributes), but these do not lending and deposit mobilization the country’s formal financial include capital or other prudential highlighted elsewhere in this study, sector is such that an insurance metrics. and are indicative of the great scheme would do little to sustain 20 Private conversation with the author, 2015. potential that could be harnessed confidence in a crisis and, as such, quickly given substantial reform. was an “unnecessary expense.”22 21 Other issues included perceptions that banks did not understand business financing; disclosure requirements were too stringent; banks delivered poor customer service; difficulties in providing necessary financial information; and an acknowledged failure of businesses themselves to know how to access banking services. Actual data supplied by the OECD at http://dx.doi.org/10.1787/8888933134787, (accessed August 22 Private correspondence between a private bank executive, speaking anonymously, and the author, July 22, 2015). 2015.

22 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 23 • Permitting banks to provide (which arrived in November and • Allowing private banks to open global financial system and impeded automatic teller machines (ATMs), December 2012, respectively) money change counters and deal the flow of new ideas, methods, and issue debit cards, permit purchases have been followed into Myanmar in foreign exchange (October norms. through point-of-sale (POS) by the cards of China’s Union 2011). terminals, and (in May 2015) Pay (February 2013) and Japan The U.S. Treasury’s Office of issue credit cards. These freedoms Credit Bureau (September 2013). • Allowing private banks to offer Foreign Assets Control has eased have created what is probably In November 2013, Co-operative foreign currency deposits to both sanctions in several steps. Beginning the most visual manifestation Bank (CB Bank) introduced the Myanmar residents and foreigners April 17, 2012, U.S. firms were of Myanmar’s banking reforms. Easi Travel Master Card, a prepaid (May 2012). allowed to provide financial services to Myanmar for the purposes of In practice, however, the spread travel debit card that Myanmar • Allowing banks to sign agreements of ATM networks has yet to citizens can use abroad.24 religious, humanitarian, and other with international remittance nonprofit activities. Effective July transform consumer banking firms. The first such deal, between in Myanmar because of the • Establishing a credit bureau is in 11, 2012, the U.S. Treasury issued progress (to be operational in June Myanmar Oriental Bank and general licenses allowing U.S. firms to requirement that each card have Western Union, was signed in a separate (non-interest bearing) 2016), with the assistance of the export financial services to Myanmar September 2012. 26 account that cannot be used International Finance Corporation and make investments there. In for any purpose but to access (IFC) of the World Bank and the • Creating an interbank market for February 2013, U.S. sanctions on ATMs. With respect to using United Kingdom’s Department foreign exchange (August 2013). Myanmar’s banking sector were debit cards beyond ATMs, POS for International Development This market remains, however, further eased when it was announced transaction terminals are now in (DFID). Employed all over the undeveloped and relatively that four banks included on the place in several hundred retailers, world, but especially useful in illiquid. U.S. Treasury’s Specially Designated restaurants, and hotels across countries where title over property Nationals (SDN) list could now SANCTIONS Myanmar. However, poor Internet is often difficult to establish, credit conduct business with U.S. financial One of the most significant changes 27 connections in many locations bureaus create what is effectively institutions. The four banks were afforded Myanmar’s banking sector somewhat undermine their reputational collateral by allowing the state-owned Myanmar Economic since the advent of Thein Sein’s impact. lenders “to access borrowers’ credit Bank (MEB) and the Myanmar history, evaluate loan risks, and administration comes from outside Investment and Commercial Bank • In light of developments with make lending decisions more the country through the lifting of (MICB), as well as two banks respect to ATMs and electronic quickly.”25 financial sanctions. Such sanctions founded by two of Myanmar’s most cards, global card-issuing firms were dominated by those applied by prominent “cronies,” the Asia Green such as Visa and MasterCard In addition to the above deregulatory the United States, under the 2003 Development Bank (AGD) and the have arrived. An initiative measures concerning domestic Burmese Freedom and Democracy Ayeyarwady Bank (AYB). Being on essentially led by the private banks operations, in April 2012, the banks Act (BFDA) and the Tom Lantos the SDN list had excluded these (especially Kanbawza Bank), received a series of new freedoms (JADE) Act of 2008, which banned banks from engaging in business with the initial motivation was to that accompanied the reform of the export of U.S. financial services U.S. financial institutions, despite provide card services to facilitate Myanmar’s exchange rate regime (the to Myanmar. Sanctions and, more the generalized lifting of the broad the growing numbers of foreign shift from the old fixed peg to the significantly, the deliberate policies of financial services ban. With respect tourists.23 MasterCard and Visa managed float, as discussed above). the past State Peace and Development to the two private banks, this latest These included: Council (SPDC) regime to wind easing is limited to the conduct of down much of the banking system transactions business (primarily funds after Myanmar’s 2003 financial crisis, transfer, correspondent relations, effectively isolated Myanmar from the and the like). U.S. banks continue 23 Amid the many reports detailing the visits of envoys of the global debit and credit card issuers, see S. Vallikappen, “Sacks of Cash in Myanmar Hard to Rout For MasterCard, Visa,” Bloomberg, October 21, 2013, http://www.bloomberg.com/news/articles/2013-10-20/sacks-of-cash-in-myanmar-hard-to-displace-for- 26 See General License 16, “Authorizing the Exportation and Re-exportation of Financial Services to mastercard-visa, (accessed February 8, 2016). Myanmar,” Department of the Treasury, July 11, 2012, http://export.gov/thailand/doingbusiness/burma/ sanctions/, (accessed May 6, 2016). The United States maintains a Specially Designated Nationals list of 24 MasterCard, “MasterCard and CB Bank Announce First Prepaid Travel Card in Myanmar,” MasterCard individuals and groups (such as terrorists and drug traffickers) with whom U.S. persons and firms are news release, October 8, 2013, http://newsroom.mastercard.com/press-releases/mastercard-and-cb-bank- prohibited from doing business. announce-first-prepaid-travel-card-in-myanmar-2/, (accessed November 5, 2015). 27 For the SDN list, see https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default. 25 International Finance Corporation, “IFC Supports Central Bank of Myanmar to Develop Credit Reporting aspx. U.S. Department of the Treasury, “General License with Respect to Asia Green Development Bank, System and Expand Access to Finance for Businesses,” IFC news release, November 14, 2014, http://ifcext. Ayeyarwaddy Bank, Myanmar Economic Bank, and Myanmar Investment and Commercial Bank,” February ifc.org/IFCExt/pressroom/IFCPressRoom.nsf/0/473BF09BE6D000A485257D90003B2EB2?opendocument, 22, 2013, http://www.treasury.gov/resource-center/sanctions/Programs/Documents/Myanmargl19.pdf, (accessed November 4, 2014). (accessed March 4, 2015).

24 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 25 to be restricted from investing in anti-money laundering body in AGD or AYB or from forming joint the world is the Financial Action venture relations with them. Both Task Force (FATF) of the OECD. owners remain on the SDN list At various points in the past it has individually, as do three other banks: excoriated Myanmar, including it the Myanmar Foreign Trade Bank on annual lists of non-cooperating (the state-owned institution that jurisdictions and urging its exclusion controls much of Myanmar’s revenues from the international financial from gas and other foreign exchange), system. In 2015, recognizing efforts as well as the military-owned Innwa made, FATF took a somewhat and Myawaddy Banks (controlled softer line. Nevertheless, its findings respectively by the military’s two confirm that Myanmar is not yet giant holding companies, Myanmar where it needs to be. Here is FATF’s Economic Corporation and Myanmar October 2015 judgment: Economic Holdings). Myanmar has taken important Of course, over and above the steps toward improving its AML/ specificities of who is sanctioned CFT [anti-money laundering or not is a general lingering impact and combating the financing of of sanctions on international terrorism] regime…However, perceptions—an important matter despite Myanmar’s high-level given the escalating fines levied on political commitment to work banks that fail to comply with past with the FATF and APG prohibitions. Many international [Asia-Pacific Group on Money- banks accordingly remain wary of Laundering] to address its strategic Myanmar broadly as a jurisdiction, AML/CFT deficiencies, Myanmar unwilling to drill down into the has not made sufficient progress specifics of the actual customers in implementing its action plan, with whom they might be dealing.28 and certain strategic deficiencies Clearing such perceptions away remain. Myanmar should will take time and perhaps require a continue to implement its action wholesale change to the Myanmar plan to address these deficiencies, political economy. including by: (1) adequately criminalizing terrorist financing; MONEY LAUNDERING (2) implementing adequate PROBLEMS LINGER procedures to identify and freeze At various points Myanmar’s terrorist assets; and (3) ensuring government has introduced an operationally independent legislation designed to combat money and effectively functioning laundering. An important regulatory financial intelligence unit. The issue more or less everywhere, FATF encourages Myanmar to it has an elevated importance in address the remaining deficiencies Myanmar—a country known for and continue the process of being one of the world’s leading implementing its action plan.29 sources of narcotics. The principal

28 As an example of this phenomenon, see Jeremy Mullins, “US Banks Stay Picky on Myanmar Transformers,” Myanmar Times, June 19, 2015, http://www.mmtimes.com/index.php/business/15108-us-banks-stay-picky-on- myanmar-transfers.html, (accessed August 22, 2015).

29 FATF’s statement was made on October 23, 2015. See http://www.fatf-gafi.org/countries/j-m/myanmar/ documents/public-statement-october-2015.html, (accessed November 3, 2015).

26 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 27 5. INDIVIDUAL BANK PROFILES

STATE-OWNED BANKS in FY2014/15 accounted for just ince its independence from 29.5 percent of GDP (compared Britain in 1948, state-owned to 58.5 percent for private banks), banks have played an unusually down 2.5 percent since 2013 (IMF prominentS role in Myanmar. 2015, 20). Private sector lending by Established according to the fashion state-owned banks now accounts for of the times and a widespread belief just 2.5 percent of GDP, compared that private (but especially foreign) with private sector lending by the finance constituted both a threat private banks of 16.1 percent (IMF to sovereignty and a hindrance 2015, 31). Naturally, one set of to the state’s development goals, customers that the state-owned state domination of Myanmar’s banks does not have to fear losing financial sector reached its apogee through competition is state-owned in 1964 when all private banks organizations of any form. State were nationalized. Soon after, and actors are compelled to bank with together with already established their state-owned brethren.30 sector-focused state-owned banks, these banks were merged into a single Myanmar has four fully state-owned entity—the monolithic People’s Bank banks: the Myanmar Economic of the Union of Myanmar (PBUB). Bank (MEB); the Myanmar Foreign This was subsequently divided along Trade Bank (MFTB); the Myanmar sectoral lines in the mid-1970s, Investment and Commercial creating three of the four currently Bank (MICB); and the Myanmar operating state-owned banks, along Agricultural Development Bank with the CBM. Private banks were (MADB). The MEB is a broad allowed to form in Myanmar from banking institution with a large 1990 under the Financial Institutions network of rundown branches, of Myanmar Law of that year. lax lending standards, indifferent Nevertheless, until very recently, the management, and obsolete systems; state-owned banks greatly dominated it functions primarily as a funding the sector. vehicle for state economic enterprises, and to provide treasury and other The state-owned banks’ domination functions for the government. MEB of Myanmar’s banking sector is surely loans to the private sector account for coming to an end. This report has less than 10 percent of the bank’s total already noted growth in private sector assets (OECD 2014, 195). It surely banks; similar growth has eluded has significant bad loans on its books the state-owned banks. Their assets and, despite its branch network,

30 A requirement confirmed in answer to a question in Myanmar’s lower house of parliament (thePyithu Hluttaw) in August 2015. “Pyithu Hluttaw Roundup,” The Global New Light of Myanmar, August 26, 2015, 2.

28 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 29 would struggle to hold depositors in to do with the funds at its disposal. in a truly competitive financial sector. In November 2015 an unnamed a competitive banking environment. As noted, some of this liquidity With their activities hitherto centered official of the CBM speculated on the According to one senior official has made its way (unprofitably) to on rationing funds (especially future of all the state-owned banks. within the MEB, it “will take time to the MADB, but increasingly the foreign exchange) and ensuring the After acknowledging that all would become efficient with new products, MEB has become a large buyer of Increasingly the MEB has implementation of regulation (such continue to lose market share to as we are unfamiliar with modern Myanmar government treasury bills. as determining evidence of foreign their private sector counterparts, he banking systems.”31 This practice has had consequences become a large buyer of earnings), they are increasingly losing suggested that only dramatic changes for the treasury market. The MEB, market share to their more customer- would make them competitive: First, A recent audit report of the MEB at the insistence of the Ministry of Myanmar government focused competitors. That said, both they need to focus on developing revealed that it has not been Finance, has been unwilling to pay banks remain a haven for the foreign human resources and infrastructure, 32 treasury bills. profitable since 1990. As shall be the minimum interest rate necessary exchange deposits of government as well as policy reforms. Second, they examined in more detail below, one of to sell all the bills in an open market departments, state economic need to be corporatized or reformed the most significant borrowers from at the clearing rate. The forced enterprises, and some individuals through public-private partnerships, the MEB is the MADB, which takes allocation of bills to the MEB at (domestic and foreign). In early which will hopefully happen at some just over half of MEB’s loan portfolio, below the clearing rate has imposed a 2015 rumors spread in Myanmar stage under the NLD government.35 but which pays an interest rate of just below-market yield that discourages banking circles that the MICB would PRIVATE BANKS 4 percent on its loans, funds on which other buyers and leaves the CBM to be restructured and privatized. As the MEB itself pays 8 percent. In the take up the slack. of early 2016, nothing concrete had As noted at the outset of this study, first six months of the 2015/16 fiscal emerged. Myanmar’s private banks are not yet year the MEB had interest revenues of The organization Making Access the institutions the country needs. K9.3 billion, against interest expenses Possible (2014, 2) is sanguine that the The MADB is in perhaps the Nevertheless, their growth (albeit of K240 billion. Naturally, it cannot MEB could become the future vehicle worst shape of all the state-owned from a very low base) has been absorb losses of this magnitude and for greater savings mobilization in institutions. Its under-performance is impressive. Table 7 shows deposits in November 2015 it requested Myanmar, but acknowledges this an important contributor to the lack from and lending to the private Notwithstanding the additional allocations of nearly K80 would require dramatic modernizing of progress in Myanmar’s agricultural sector. With the caveat that some 33 The narrative of growth billion from the Union budget. of the bank’s systems. The World losses it incurs, across 2015 sector as a whole. Given its would-be of the deposit growth has taken Bank is currently engaged in an overwhelmingly belongs to central role in rural Myanmar, as well place through the MEB (as noted Notwithstanding the losses it incurs, advisory capacity on the possible deposits strongly flowed to as the methodological peculiarities of earlier), the narrative of growth across 2015 deposits strongly flowed reform of both the MEB and MADB. the private banks. rural lending, the MADB is examined overwhelmingly belongs to the private to the MEB—and momentarily away Its findings are eagerly awaited. the MEB—and away from in much more detail below in the banks. from private banks deemed by many section on rural finance. as vulnerable to Myanmar’s rising Following recent reforms to private banks deemed political and other risks. According to Myanmar’s exchange rate system by many as vulnerable to the IMF (2015, 20), MEB deposits as discussed above, the MICB and are now the equivalent of over 5 MFTB have lost much of their Myanmar’s rising political TABLE 7: BANK DEPOSITS AND LENDING percent of Myanmar’s GDP.34 As a previous dominance of formal foreign Lending to consequence, the MEB is fairly awash exchange business. Like the MEB, and other risks. Fiscal Year Deposits % GDP % GDP Private Sector with liquidity but has little idea what they would be hard pressed to survive 2011/12 7,010 16.2 3,255 7.5

2012/13 11,733 24.6 4,899 10.3

2013/14 16,494 30.2 7,471 13.7

31 The senior official was a manager of the MEB branch in Nay Pyi Taw. Aye Thidar Kyaw, “Rethinking 2014/15 20,399 32.5 10,125 16.1 Myanmar’s State-Owned Banks,” Myanmar Times, August 31, 2015, http://www.mmtimes.com/index.php/ business/16227-rethinking-myanmar-s-state-owned-banks.html, (accessed September 4, 2015). Source: IMF (2015, 31)

32 “Myanmar Economic Bank has been Losing Money for Two Decades: Audit Report,” Eleven News, July 13, 2013, http://elevenmyanmar.com/index.php?option=com_content&view=article&id=2752:myanmar- economic-bank-has-been-losing-money-for-two-decades-audit-report&catid=33&Itemid=356, (accessed October 7, 2014).

33 Htoo Thant, “Deposit Rate at Myanmar Economic Bank Set to Triple,” Myanmar Times, November 27, 2015, http://www.mmtimes.com/index.php/business/17846-deposit-rate-at-myanma-economic-bank-set-to- triple.html, (accessed December 1, 2015). 35 Aye Thidar Kyaw, “More Challenges Ahead for State-Owned Banks,” Myanmar Times, November 4, 2015, 34 After the National League for Democracy’s victory in the November 2015 elections, this process was http://www.mmtimes.com/index.php/business/17350-more-challenges-ahead-for-state-owned-banks.html, reversed and deposits flowed again to private banks. (accessed November 5, 2015).

30 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 31 Such is the aggregate and numerical known for winning numerous Established in 2010, Ayeyarwady Third-placed on most measures, picture of Myanmar’s private banks. corporate social responsibility Bank has grown so rapidly that it is CB Bank was created out of a Naturally, these disguise considerable awards.37 KBZ Group regularly tops now, by most measures, the second series of mergers in 2004 of three variation in individual bank strategies the Ministry of Finance’s list of top largest private bank in Myanmar. cooperative banks, then state-owned: and performance. Individual analyses taxpaying companies.38 Casting Doing business under the shortened Co-operative Bank, Co-operative of Myanmar’s private banks are something of a shadow over the “Aya Bank” brand with over 115 Farmers Bank, and Co-operative offered below. smooth image of the KBZ Group, branches and around 230 ATMs, Aya Promoters Bank. The three were however, have been the recent Bank is one of Myanmar’s best-known managed by the Ministry of The Big Three (unresolved) allegations of substantial financial institutions. A part of the Cooperatives.43 The Ministry no Three banks—Kanbawza, involvement of KBZ founders Max Myanmar group of companies, longer holds any equity in CB Bank, Ayeyarwady, and Co-operative (CB) with Myanmar’s highly lucrative, Aya Bank is also one of the most though staff and historical linkages Bank—dominate private sector retail and sometimes illicit, jade business technologically savvy of Myanmar’s suggest informal ties cannot be banking in Myanmar. That said, (Global Witness 2015). banks. It offers Internet, mobile, discounted. CB Bank was converted Kanbawza and electronic bill-payment services into a public company soon after could almost be regarded Kanbawza Bank itself has greatly as its own category. By far Myanmar’s under its “i-banking” platform, built the mergers and is now part of the expanded its capital base across the Kanbawza Bank itself has biggest bank (it is three times larger with the assistance of Ireland’s CR2 Kaytumadi group of companies that years, which now stands at a fully- Group.41 In December 2015 Aya has interests in insurance (Citizen than the next biggest bank in terms greatly expanded its capital paid K100 billion. KBZ has around Bank had around K2,500 billion in Business Insurance), construction, of assets, and nearly twice as large K5,000 billion in assets, 12,000 in terms of number of branches and base across the years, which assets, K2,100 billion in deposits, and real estate, tourism and hotels, employees, around 300 branches, loans outstanding of around K1,500 mining, and agriculture. staff head count), Kanbawza Bank and nearly 300 ATMs. It offers more (KBZ) is the dominant private-sector now stands at a fully-paid billion, and held K350 billion in or less the full range of allowable government securities. The bank’s CB Bank has fully paid-up capital of financial institution in Myanmar. banking products in Myanmar, and K100 billion. KBZ has around K20 billion, which places it precisely Founded in 1994 in Taunggyi (Shan loans-to-deposit ratio is a conservative in May 2015 became the first bank in 70 percent.42 Aya Bank has fully at the CBM’s minimum. Accordingly, State), Kanbawza Bank is part of the the country to issue its own branded K5,000 billion in assets, it is likely that a capital-raising by CB broader KBZ Group encompassing paid-up capital of K30 billion, credit card after the CBM authorized 12,000 employees, around which means it will not have to raise Bank will take place in the short to airlines, insurance (IKBZ—more on the reintroduction of credit cards.39 medium term. As shall be examined which below), tourism, agroindustry, new capital to reach the new CBM In September 2015 KBZ signed an 300 branches, and nearly 300 reserves minimum of K20 billion. in more detail later, CB Bank is one infrastructure, light industry, and agreement with Microsoft Corp. to of the institutions (the other two 36 CB Bank is one of the import-export. The KBZ logo is modernize the bank’s IT (information ATMs. Aya Bank is the first Myanmar bank being Yoma and United Amara Bank) one of Myanmar’s most recognized technology) infrastructure.40 institutions ... engaged in to be compliant with International engaged in innovative agricultural symbols. Depending upon the performance of Financial Reporting Standards and financing through its collaboration innovative agricultural The KBZ Group’s early history had the Yangon Stock Exchange, a stock is also the first to be audited by one with India’s Sohan Lal Commodity it well associated with prominent market listing for the bank is in the financing. of the four major global accounting Management Group (SLCM), members of the old SPDC regime, foreseeable, though not immediate, firms, Deloitte. Aya Bank has over which provides credit against stored but more recently it has become future. 5,000 staff and employs a significant commodities. Since 2013, CB Bank number of Myanmar expatriates. The has been in an alliance with Japan’s bank has a close working relationship MUFJ Bank (subsequently one of with Mizuho Bank, one of the three nine foreign banks given banking 36 See KBZ Group’s website, www.kbzgroup.com, (accessed August 18, 2015). Japanese banks holding a banking licenses in Myanmar) for the 37 Beyond its political connections, the extent to which jade mining was critical in the group’s beginnings license in Myanmar (more below). provision of technical assistance. remains a question.

38 Aye Thidar Kyaw, “Shifting Top Taxpayers as KBZ Leads Lists,” Myanmar Times, January 2, 2015, http://www. mmtimes.com/index.php/business/12693-shifting-top-taxpayers-as-kbz-leads-lists.html, (accessed August 18, 2015).

39 Aye Thidar Kyaw, “KBZ with First Domestic Credit Cards in a Decade,” Myanmar Times, May 22, 2015, http://www.mmtimes.com/index.php/business/14620-kbz-with-first-domestic-credit-cards-in-a-decade.html, (accessed August 18, 2015). 41 Ayabank has a sophisticated website that is both a financial services platform and a source of information about the bank, http://ayabank.com/, (accessed August 8, 2015). 40 It is probable that these systems are currently in place only in about a quarter of KBZ’s branches. Microsoft, “Myanmar Conglomerate Kanbawza Group Embarks on its Digital Transformation,” Microsoft 42 http://ayabank.com/investor-relations/financial-highlights/, (accessed August 8, 2015). Corp., September 21, 2015, https://news.microsoft.com/apac/2015/09/21/myanmar-conglomerate- kanbawza-group-embarks-on-its-digital-transformation-journey-with-microsoft/, (accessed November 1, 43 CB Bank has a sophisticated and interactive website: www.cbbank.com.mm, (accessed November 3, 2015). 2015).

32 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 33 Also assisting CB Bank, but integrity and vision of its owners and high levels of liquidity across the Asia Green Development Bank specifically in the context of managers. cycle, means that Yoma is often a (AGD), United Amara Bank (UAB), supporting the bank in providing lender of liquidity to other banks and Myanmar Apex Bank (MAB) financing for micro, small, and Since the return of its full banking during tight conditions (especially were established, alongside Aya Bank, medium enterprises, is the German license in 2012, Yoma has surged back the regular seasonal peak in January- in the final wave of new banks created government-owned development as one of Myanmar’s leading banks. Yoma has surged back as March). under the old military regime. All bank, KfW.44 Through the Ministry It is now probably the fifth-largest three have grown strongly, if not to Myanmar Oriental Bank of Finance, KfW is providing CB private bank and by some measures one of Myanmar’s leading (MOB), the extent of Aya Bank, though both is the country’s most internationally like Yoma, was a member of the first Bank with EUR3.3 million to lend to banks. It is now probably AGD and UAB have been somewhat SMEs. connected financial institution. wave of private banks allowed in constrained by problems related to Setting out to be a bank servicing the fifth-largest private the early 1990s. It has strong ties to their owners. CB Bank has over 140 branches small to medium enterprises, Yoma Myanmar’s ethnic Chinese business throughout Myanmar, along with a has partnered in this endeavor with bank and by some measures community. With over K230 billion AGD, which currently has just over large ATM network. It is a prominent the World Bank’s private financing in assets, 26 branches, and 1,000 50 branches, K500 billion in assets, player in the Myanmar banking arm, the International Finance is the country’s most staff, the MOB specializes in servicing K30 billion in paid-up capital, and scene, though its hitherto close Corporation (IFC). To this end, in small traders in their domestic and over 2,000 staff, was founded as a internationally connected competition with KBZ seems to have September 2014 the IFC provided international operations. In February part of the Htoo Group. Its owner, lost momentum somewhat over the Yoma Bank with a US$5 million financial institution. 2014 the IFC entered into an as an individual, as well as both last year or two. CB Bank’s seasonal convertible loan (convertible to agreement with MOB to supply a the Htoo Group and the AGD, are liquidity management is less than equity) aimed at allowing Yoma to US$5 million trade-finance facility on the U.S. Treasury’s SDN list. it could be and it stopped making extend an additional 1,000 new to allow it to “help local companies In 2015, however, the owner and new loans during the tight monetary loans (up to an aggregate of US$370 increase their imports and exports, groups relinquished their 60 percent conditions of January to March of million) to small and medium generate more foreign exchange, stake in the bank, selling part of 2015, as did KBZ. enterprises, with the IFC covering the and create jobs.”46 In August 2015 their equity to an existing director of foreign exchange risks of the funding this interest in Myanmar Oriental AGD and the remainder to a son of Resurgent and Growing Banks arrangement.45 Another partnership by the IFC was expanded in the Myanmar’s former long-time dictator, This category includes some of the of possible great import for Yoma, form of a US$7 million convertible General Ne Win. The latter aspect 47 new players established in 2010 (Asia and perhaps for the sector as a whole, loan. The arrangement was almost caused considerable controversy and Green Development Bank, United is its joint venture with Telenor, the identical to that reached earlier with was regarded as harmful to AGD’s 49 Amara, Myanmar Apex Bank) as well Norwegian telecommunications Yoma to support lending to SMEs. standing. In October 2015 AGD as some transforming institutions company, to establish the mobile- According to the joint statement from released its annual results, reporting such as the Global Treasure Bank. money product “Wave Money,” the the IFC and MOB, “IFC’s long- a drop in profits occasioned by Above all, however, it includes Yoma details of which are outlined below. term financing will help MOB move increasing competition among the Bank. Finally, the German development closer towards its goal of providing banks for deposits (with banks agency GIZ is also working with more than US$200 million in loans routinely paying above the 8 percent Yoma was the second biggest private Yoma, especially on staff training. to small and medium enterprises, its minimum interest rate) and in bank in Myanmar before the 2003 core client group, by 2019.”48 MOB selling remittance products, as well as banking crisis laid waste to the sector. A large portion of Yoma Bank’s loans enjoys a strong reputation within increasing costs from the expanding For a decade after these events, are self-amortizing (around half), Myanmar’s banking scene as a player branch network and from upgrading Yoma was relegated to simply being with the remainder in the form of with a keen commercial focus. IT systems. Meanwhile, AGD’s plans a provider of remittance services and business overdrafts (40 percent) and operated under a restricted license to hire purchase (10 percent, mostly on this end. Nevertheless, even during vehicles). Such a portfolio, plus the this period it stood out for the bank’s predilection for maintaining 46 The deal was signed on February 18, 2014. Details on this and other aspects of MOB’s operations can be found at the Bank’s website, www.mobmyanmar.com, (accessed August 14, 2015).

47 IFC, “IFC Helps Myanmar Oriental Bank Expand Financing for Small Businesses to Spur Economic Growth,” August 19, 2015, IFC News, (accessed August 20, 2015). 44 For more on KfW’s activities in Myanmar, see https://www.kfw-entwicklungsbank.de/International- financing/KfW-Development-Bank/Local-presence/Asia/Myanmar/index.html, (accessed November 26, 48 Clare Hammond, “IFC Signs Second Convertible Loan with Local Bank,” Myanmar Times, August 20, 2015, 2015). http://www.mmtimes.com/index.php/business/16074-ifc-signs-second-convertible-loan-with-local-bank.html, (accessed August 21, 2015). 45 IFC, “IFC and Yoma Bank Ink Deal to Expand Financing for Small and Medium Enterprises in Myanmar,” IFC Press Release, September 16, 2014, http://ifcextapps.ifc.org/ifcext/pressroom/ifcpressroom.nsf/0/ 49 See Kyaw Hsu Mon, “Ne Win’s Scions Plan Takeover of Tay Za’s Bank,” The Irrawaddy, July 22, 2014, http:// DA68A4369A7ED58185257D55002561CE?opendocument, (accessed November 3, 2015). www.irrawaddy.org/business/ne-win-scions-plan-takeover-tay-zas-bank.html, (accessed August 17, 2015).

34 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 35 to list on the planned Yangon Stock • Asia Yangon International • Global Treasure Bank (GTB). tourism interests include a joint Exchange (YSX, more on which Bank (10 branches, just over 100 Formerly the Myanmar Livestock venture with the Hilton Group. below) are, according the bank, “at employees and around 7,000 and Fisheries Development Bank The bank currently has 65 the final stage.”50 account holders). Very little is and owned by the eponymous branches, nearly 3,000 employees publicly known about this bank, government ministry, the bank and around K1 trillion (US$1 United Amara Bank (UAB) is also which has no website and seems was privatized and renamed in billion) in assets.57 Myanmar Apex an institution with an ownership to advertise little. The bank’s 2013. As a result of its former Bank is on the cusp of becoming structure that would prove financial services seem to be role and ownership, GTB has one of the major players in problematic to potential foreign exclusively wholesale, with a slant an unusually widespread branch Myanmar banking. investors. Part of the IGE Group, toward real estate and property network, with 107 branches Tun Foundation Bank which is still subject to U.S. sanctions development. in most of Myanmar’s states • (TFB). and is associated with a former and regions.54 As with most of TFB is a well-respected bank First Private Bank Minister of Industry under the old • (FPB). Myanmar’s private banks, GTB founded in 1994 soon after private SPDC regime and a leading figure Founded by an influential figure derives much of its business from banks were first reauthorized broadly within the United Solidarity in Myanmar banking, Dr. Sein remittances. In volume terms these in Myanmar. It is a commercial and Development Party (USDP), Maung, FPB has long been rose 27 percent across FY2014/15, bank, but unusual in that most UAB has around K600 billion in innovative along a number of but fierce competition in this of its profits are allocated to a assets, around 5,000 employees, product lines, including mobile product line saw equivalent charitable trust that supports 52 58 40 branches, and K30 billion in banking. Likewise, as a public profits down by 50 percent across health and education projects. 51 authorized and paid-up capital. company of around 6,700 the same period.55 The legacy TFB has long been prominent As noted earlier, UAB is one of shareholders, FPB’s ownership of past loans made while the in promoting economic reform three private banks collaborating structure is progressive in the bank was in government hands dialogue in Myanmar, and in with India’s SLCM group in the Myanmar context. No single weighs heavily on GTB, which the relatively closed-off 2000s development of a commodity owner controls more than 2 reported nonperforming loans to sponsored research and held a warehouse receipt plan to provide percent of shares. Dr. Sein Maung the fisheries sector rising to 7.26 number of seminars on Myanmar’s finance for agricultural producers. (who remains chairman) is not percent in late 2015.56 Industry economy. In FY2014/15 TFB in favor of a public listing on the began bringing all its branches Some Smaller Institutions rumors put the figure at three forthcoming YSX, noting concerns times that. online through an agreement with Some relevant, smaller institutions about speculators and the fear that the international IT firm Oracle to also exist. These institutions are “you lose control once you join • Myanmar Apex Bank. One install modern banking hardware 53 59 mostly lowly capitalized. Because the stock exchange.” FPB has of the four banks created in and software systems. been cautious about expanding its 2010, Myanmar Apex Bank is a of that, the aforementioned new Shwe Urban and Rural branch network beyond the nearly subsidiary of the Eden Group of • minimum capital requirements under Development Bank. This is a new Financial Institutions Law of 30 it now has and has been equally companies. This group is mainly the new institution, created in June 2014, Myanmar will, if promulgated, likely conservative in its online banking involved in construction, but also and ATM services. FPB has K100 has interests in retail petroleum, with initial paid-up capital of K10 create pressure for consolidation. billion; this suggests that capital Banks in this category include: billion in authorized capital, and agriculture, and tourism. The so will not need to raise more for regulatory purposes.

54 For more details on the products and services offered by the Global Treasure Bank, see the bank’s website, www.gbmm.com.

55 Aye Thidar Kyaw, “Bank Profits Squeezed by Growing Competition,”Myanmar Times, October 27, 2015, 50 Aye Thidar Kyaw, “AGD Banks Prepares IPO as Profits Drop,”Myanmar Times, October 26, 2015, http:// http://www.mmtimes.com/index.php/business/17196-bank-profits-squeezed-by-growing-competition.html, www.mmtimes.com/index.php/business/17175-agd-bank-prepares-ipo-as-profits-drop.html, (accessed (accessed October 28, 2015). October 28, 2015). 56 Ibid. 51 See website of UAB, http://www.unitedamarabank.com/, (accessed November 4, 2015). 57 See the website of Myanmar Apex Bank, http://www.mabbank.com/, (accessed November 2, 2015). 52 In addition to being founder and chair of First Private Bank, Dr. Sein Maung currently serves as vice-chair of the Myanmar Banking Association and is perhaps the most outspoken (across many years) of all of 58 For details of the charities supported and other information on TFB, see the bank’s website at http:// Myanmar’s bankers. www.tunfoundationbankmyanmar.com/eng/, (accessed November 2, 2015).

53 Jeremy Mullins and Myo Lwin, “Profiles: A Look at Two Private Banks,” Myanmar Times, July 15, 2014, 59 “Tun Foundation Bank Upgrades Online Systems,” Myanmar Times, May 12, 2014, http://www.mmtimes. http://www.mmtimes.com/index.php/special-features/194-your-money-2014/11030-profiles-a-look-at-two- com/index.php/business/10290-tun-foundation-bank-upgrades-online-systems.html, (accessed November 2, private-banks.html, (accessed November 4, 2015). 2015).

36 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 37 will need to be raised at some not provide much public information was long notable for the fact that its in most countries their creation point.60 This bank is the creation on its activities, but it has around shares were listed for over-the-counter has led to severe disappointment. of the tycoon owner of Myanmar’s 40 branches, around K1,100 billion trading at the Myanmar Securities Notwithstanding its advisory role at Sky Net television network, who in assets, and some 2,500 staff. The Exchange (more on which later). A the CBM and more broadly with the has numerous other interests Aung Thitsa Oo Insurance Company mid-size bank with a dozen branches, government, the IMF has had little in tobacco, gems, alcohol, and is an affiliate of Myawaddy. Both MCB focuses on trade finance. It success in stemming the momentum agribusiness; he is well connected, Myawaddy Bank and MEHL remain has around K200 billion in assets, in the policy bank direction. Drawing with businesses in sectors where sanctioned by the United States and and paid-up capital just short of the attention to the issue in its 2014 market competition is limited by appear on the U.S. Treasury’s SDN In most countries state- CBM’s new K20 billion minimum. Article IV Staff Report on Myanmar, protective policies. list. The bank’s authorized capital is the IMF cautioned: owned “policy” or K75 billion. MCB strongly opposed SEMIPRIVATE BANKS Innwa Bank is a subsidiary of the While policy banks can be development banks have led the authorization of mobile money Beyond the four major state- second of Myanmar’s dominant arrangements by nonbank institutions useful, international experience owned banks are other institutions military enterprises, the Myanmar to severe disappointment. such as telecommunications firms.63 shows they often make poor connected in various ways to organs Economic Corporation (MEC). lending decisions and are not of the state (the military, ministries, Whereas MEHL mostly concentrates Three of Myanmar’s formal banks are commercially managed, meaning local government) in Myanmar. on trading and light industry, MEC owned by the municipal authorities that they incur large losses that Accordingly, the banks in this focuses on heavy industry. Like of Yangon, Mandalay, and Nay ultimately have to be covered by category perform an amalgam of MEHL, its share capital is owned by Pyi Taw respectively (Yangon City the government budget. They policy functions as well as those more serving and retired military officers, Whereas MEHL mostly Bank, Yadanabon Bank, and Nay therefore need to protect the familiar to commercial banking. who similarly fill senior positions Pyi Taw Sibin Bank). Each of these quality of their loan portfolios, in both MEC and Innwa Bank. concentrates on trading and banks is capitalized at very low levels be closely supervised and operate By far the most prominent of these Formally registered as an investment (K500 million, K300 million, and on a level playing field with other are the Myawaddy and Innwa banks. and development bank (a distinct light industry, MEC focuses K3 billion), has no more than a few commercial banks, which requires Myawaddy is owned by the giant category under the 1990 Financial on heavy industry. thousand customers, and has just a strong management and credit military conglomerate, Myanmar Institutions of Myanmar Law), Innwa few branches. Very little is known of assessment skills. The number Economic Holdings Limited Bank currently has just over 30 their activities and it is difficult to of new policy banks should be 61 (MEHL). MEHL share capital is branches and about K300 billion conceive of them as banks at all in the minimized and their external owned in turn by the Directory of in assets. It has authorized capital conventional sense.64 borrowing tightly circumscribed. Procurement of Myanmar’s Ministry of K30 billion, so it will not need (IMF 2014, 15) THE NEW POLICY BANKS of Defense (which holds A, or voting, to raise capital to meet the CBM’s shares) and various armed forces’ new minimums. Innwa is a little less Under the Thein Sein administration, As a matter of routine, IMF Article cooperatives, regimental associations, shy than its Myawaddy sibling, but the changes made to banking and IV reports allow all member and veterans organizations (which information on the bank’s activities finance in Myanmar have mainly governments to respond to the hold B shares). MEHL has interests in is still rather opaque.62 Innwa is been in a liberal, market-oriented findings of IMF staff; in this instance many parts of Myanmar’s economy, affiliated with the Aung Myint Moh direction, however fitfully and the Myanmar authorities took up but especially in gem production and Min Insurance Co. Both MEC and incompletely implemented. Standing the opportunity to respond to the marketing, hotels, tourism businesses, Innwa are sanctioned and appear on in stark contradiction to this general concerns over the policy banks. construction, real estate, beverages, the U.S. Treasury’s SDN list. trend, however, has been the rise of Pointing to and trading. The chairman of the state-owned “policy” or development political imperatives Myawaddy Bank is usually a senior Myanmar Citizens Bank (MCB) was banks, all aimed at a target sector of … … [they] military officer, as are members of the established in 1991 and is part-owned the economy. explained that they considered bank’s board. Myawaddy Bank does by the Ministry of Commerce. MCB that such banks could play an Of course such banks are not new to important role in developing the Myanmar, nor are they uncommon economy in areas where market- elsewhere in the world. However, based incentives alone would 60 Thiha, “Banking—Another Business Step of Shwe Than Lwin,” Consult Myanmar, June 16, 2014, http:// consult-myanmar.com/2014/06/16/banking-another-business-step-of-shwe-than-lwin-2/, (accessed August 21, 2015).

61 The company was formerly known as Union of Myanmar Economic Holdings Limited (UMEHL), and is often referred to by this name, even today. 63 MCB’s website can be found at http://mcb.com.mm/, (accessed November 26, 2015).

62 Unlike Myawaddy Bank, however, Innwa Bank has a website, http://www.ablmm.com/, (accessed 64 Information on these banks here is gleaned through author’s private correspondence with industry November 2, 2015). players.

38 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 39 under-serve segments of the and investment bank rather than a local governments whose agricultural local bankers, many local regulators, population, or specific sectors such commercial bank.66 It can, however, sectors overlap the Ministry’s and also international agencies (the as agriculture (IMF 2014, 16, undertake commercial banking responsibility areas. IMF concerns have already been emphasis added). activities with the permission of noted) and advisers to the sector. The the CBM. It makes loans, backed Meanwhile, two new policy banks are IFC’s representative in Myanmar was Myanmar Tourism Bank The same respondents gave some by collateral, directly to micro and pending: a especially (and, unusually, publicly) ground to the IMF, however, with the small enterprises, but it makes that is the creation of the Myanmar critical, declaring in the pages of the Gems latter reporting that their Myanmar uncollateralized loans to low-income Tourist Federation, and a Myanmar Times in August 2015 his and Minerals Development Bank interlocutors “… indicated that they borrowers indirectly, using the concerns over the narrow focus of the were exploring options to mitigate Central Cooperative Society as its proposed by the Myanmar Gems and banks and the contagion that their 68 risks, including consolidation of intermediary. MMB’s deposit interest Jewelers’ Entrepreneurs Association. failure could bring:70 policy banks into one national rates are relatively high and above the Progress toward establishing both development bank …” (IMF 2014, regulatory minimums—8.25 percent of these banks is well advanced. Banks need a diversified asset 16). per year on call deposits, while term The CBM has already approved an base, otherwise it’s a recipe for application for a banking license for disaster. For example, one bad Nothing since has been heard on deposits of a year or more earn 10 percent. Loans are mostly charged the Tourism Bank. For the Gems and year for Myanmar tourism could this consolidation proposal. In the Minerals Bank the process of raising significantly impact a bank meantime, the following are some of at the 13 percent per annum ceiling. The extent to which this bank is sufficient capital—K20 billion is the focused on tourism … The policy the known details about each of the target in light of the requirements of banks are still small but it’s a new policy banks. implicated in the great expansion of cooperative credit in Myanmar the new FIL—is underway. Potential matter of confidence. There is Construction and Housing (referred to in Section 12 of this investors willing to contribute K400 no guarantee that a small bank Development Bank (CHDB). study), as funded by loans from the million are being offered directorships failure won’t cause a confidence CHDB was established by the China Export-Import Bank is, at of the bank; this amount might be crisis across the whole industry. Ministry of Construction in this point, somewhat obscure. The beyond most of Myanmar’s mining This could lead to uncertainty and July 2013 to offer longer-term widespread belief within banking The widespread belief within companies but for “jade entrepreneurs people may decide to withdraw loans to property developers and circles in Myanmar is that the MMB on the other hand, this amount is their money as a precaution, 69 construction companies, as well as controls up to about 30 percent of the banking circles in Myanmar nothing.” which in itself can trigger a bank homebuyers for lower-cost housing run. China loan dispersal. is that the MMB controls up Reaction to the New Policy Banks and apartments. Its loan terms are Rural Development Bank (RDB). Finally, acknowledging the enduring up to 8 years, significantly longer to about 30 percent of the Myanmar’s new policy banks seem to Very little information is publicly shortage of qualified bankers in than the mandated, annual terms of have been a step too far for a number Myanmar, the IFC representative available with respect to the RDB.67 China loan dispersal. other banks, but still well short of the of industry players in Myanmar, who said he feared that “the new banks mortgage terms (30 years and more) Created by the Ministry of Livestock, are overwhelmingly skeptical of the Fisheries, and Rural Development, are likely to drain the already-thin that are routine in much of the world. banks’ viability and anxious about resources.”71 Thus far the CHDB seems to have the RDB seems to be the replacement the damage they might cause the made little impact on the market, for the partially spun off Global rest of the sector. This is true of the with potential borrowers complaining Treasure Bank, which was previously about uncertain procedures as well as the Ministry’s financial arm when the still too-short loan maturities.65 it was the Myanmar Livestock and Fisheries Development Bank. Myanmar Microfinance Bank However, the RDB’s ownership (MMB). Created in July 2013, seems to be more widely spread, MMB is licensed as a development including interests held by various 68 Clare Hammond, “Industry Banks Add to Sector’s Risk,” Myanmar Times, August 21, 2015, http://www. mmtimes.com/index.php/business/16111-industry-banks-add-to-sector-s-risk.html, (accessed August 22, 2015).

65 Myat Nyein Aye and Tin Yadandar Htun, “Yangon Urgently Needs Low-Cost Housing,” Myanmar Times, 69 The assertion by U Myo Myint, President of the Myanmar Mineral Entrepreneurs Federation as reported June 9, 2015, http://www.mmtimes.com/index.php/business/property-news/14938-yangon-urgently-needs- in Chan Mya Htwe, “Gems and Minerals Bank to Register in September,” Myanmar Times, September low-cost-housing.htm, (accessed August 2, 2015). 2, 2015, http://www.mmtimes.com/index.php/business/16268-gems-and-minerals-bank-to-register-in- september.html, (accessed September 4, 2015). 66 Details from the website of MMB, http://www.mmbbank.com.mm/, (accessed August 21, 2015). 70 Clare Hammond, “Industry Banks Add to Sector’s Risk” op.cit. 67 At the time of writing, Rural Development Bank’s website was “under construction,” http://www. rdbankmm.com/, (accessed August 21, 2015). 71 Ibid.

40 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 41 6. MOBILE BANKING AND ITS POSSIBILITIES

n recent years great excitement similar laws in Bangladesh and other has accompanied the rise, in countries further down the track on practice but even more for the this front, the directive listed a very potentialI , of mobile money schemes. liberal number of services that banks Based upon the mobile phone in Myanmar are authorized to offer and its attendant networks, such by mobile phone: arrangements have been presented (with no little evangelical fervor at • Payment and receipt of times) as the last, best solution for remittances, onshore and offshore; chronic financial exclusion among • Deposit and receipt of cash poor and geographically dispersed through bank branches, agents, populations. and ATMs;

The transformative possibilities • Payments to and from of mobile banking and money government, businesses, and arrangements have been a perennial individuals (bills, salaries, taxes, concern of just about every study of pensions, dividends, premiums); Myanmar’s financial sector. Mobile banking has also been the subject • Bank transfers between accounts, In December 2013 the of great media interest, locally and individuals; and internationally, even catching the CMB issued its Mobile • Microfinance payments and attention of The Economist which repayments. Banking Directive [which] described it as a “leapfrogging” opportunity as early as 2013.72 However, the directive limits the size listed a very liberal number of individual mobile transactions to a In an attempt to make manifest maximum of K500,000. A maximum of services that banks in the promise of mobile banking for of three transactions are allowed per Myanmar, and to get on top of its Myanmar are authorized to day and they cannot total more than prudential regulation, in December K1 million. offer by mobile phone. 2013 the CBM issued its Mobile Banking Directive. Based upon

72 “Mobile Banking in Myanmar: Leapfrog Spotting,” The Economist, September 28, 2013, http://www. economist.com/news/finance-and-economics/21586841-mobile-phones-may-regenerate-countrys- withered-banking-system-leapfrog-spotting, (accessed August 16, 2015).

42 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 43 The CBM’s directive made it new FIL, and despite the fact that receive and deposit cash. Such agents this emerging sector all around the clear that, thus far, Myanmar is the CBM has already drafted—but Thus far, Myanmar is have been critical to the success of world, but in Myanmar, too, there are pursuing only a bank-led model of not issued—permitting regulations). mobile money arrangements, which start-up firms with energy and fresh mobile banking. Under this model, MFSP mobile operator-dominated pursuing only a bank-led elevates further the importance of ideas. One such firm is MyChat, a differentiated from nonbank models platforms exist in a number of model of mobile banking. the telecommunications companies local Myanmar social media company in which a mobile phone company is countries, most prominently (telcos) and their vast networks of known for offering chat services. usually the dominant counterparty, throughout Africa, where the Kenya- agents selling SIM cards and other In October 2015 it signed up with a customer must use a bank account based M-Pesa system (of Safaricom, phone services. Telenor already has the online, London-listed payment to make and receive payments. Banks a telecommunication firm and great experience in building and provider MySquar to offer a MyPAY use mobile phone operators to make subsidiary of Vodaphone) is in many operating MFSPs.75 mobile payment service in Myanmar. actual transfers of funds, but these ways the exemplar of the mobile MyPAY has said that it is “looking at operators function only as the agents money business. M-Pesa began almost Outside of the large telcos, banks, partnering with a financial institution of banks. Of course, under this model accidentally when increasing numbers and other institutions, other players rather than a telco,” thus keeping banks are also responsible for their of Kenyans started transferring are also hovering around the edges within the CBM directive.76 customers’ money in the operation of monetary value to each other in the of mobile banking and payments. mobile banking: form of “air time” on their mobile Such actors are, of course, central to phones. This phenomenon quickly … banks and financial institutions expanded into the provision of shall take responsibility for the financial services, especially through losses of customers that occur as the addition of optional financial the result of any inappropriate products. Today M-Pesa and actions of their branches, associated extensions dominate the 73 cashpoints, agents and partners. banking sector in Kenya as well as 74 Currently six local banks in Myanmar some neighboring countries. offer mobile banking (Ayeyarwady, The aforementioned and still-to- CB Bank, FPB, Myawaddy, Innwa, be-authorized “Wave Money” joint and Yoma) built upon platforms venture between Yoma and Telenor that access the networks of the two (49 percent owned by Yoma, 51 new foreign mobile phone operators, percent by Telenor) is indeed a Genuine mobile financial Telenor of Norway and Ooredoo true MFSP, rather than simply a service providers (MFSP) of Qatar. The mobile platforms mechanism linking existing bank of Ayeyarwady and CB Banks are products to existing customers based on mobile operators probably the most advanced and by mobile phone. Wave is an widespread. interoperable service that functions rather than banks, are not Nevertheless, and as noted already, through SMS as well as mobile yet authorized in Myanmar, genuine mobile financial service applications using the Internet and, providers (MFSP) based on mobile most importantly, via Telenor’s vast despite being allowed under operators rather than banks, are and growing network of agents, as not yet authorized in Myanmar well as functioning at bank branches the new FIL. (despite being allowed under the and ATMs at which customers can

75 Notably in Pakistan where, indeed, Telenor owns a controlling stake in one of that country’s leading banks. For more, see Richard Handford, “Telenor Aims for H2 Money Launch in Myanmar, as Rival Ooredoo Gets Its Man,” Mobile World Live, May 12, 2015, http://www.mobileworldlive.com/asia/asia-news/telenor-aims-h2- 73 Cited from Vanderbruggen and Dharmasi (2014), p.5. money-launch-rival-ooredoo-gets-man/, (accessed November 4, 2015).

74 M-Pesa is also in India, Afghanistan, and Eastern Europe and is seemingly on the expansion path in many 76 Catherine Trautwein, “MyCHAT to Get Mobile Payments,” Myanmar Times, October 20, 2015, http:// countries. In its aborted efforts to secure one of the telecommunicationslicenses offered in Myanmar to www.mmtimes.com/index.php/business/technology/17082-mychat-to-get-mobile-payments.html, (accessed foreigners in 2013, Vodaphone included a Myanmar version of M-Pesa in its bid. October 28, 2015).

44 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 45 7. THE RETURN OF FOREIGN BANKS

n 1962, the incoming military year before (which was assisted by regime nationalized the a German consultancy firm), the I foreign banks operating in “winners list” caused few shocks: Myanmar. Active in the country for over a century and a part of the • Australia and New Zealand (ANZ) transformative story of Myanmar’s Banking Group (Australia); agricultural sector in the 19th • Bangkok Bank (Thailand); century, local subsidiaries of many of the storied names of international • Bank of Tokyo-Mitsubishi UFJ banking—the Hong Kong and (Japan); Shanghai Banking Corp., the • Industrial and Commercial Bank National City Bank of New York, of China (China); Chartered Bank, and Lloyd’s— were absorbed into the Peoples’ • Malayan Banking Berhad Bank monolith. For the next 50 (Malaysia); years, foreign financial institutions continued to be unwelcome in • Mizuho Bank (Japan); Myanmar. Nominally allowed under • Overseas Chinese Banking Corp. the 1990 Financial Institutions of (Singapore); Myanmar Law, in practice foreign banks remained a non-starter. To the • Sumitomo Mitsui Banking Corp. extent that foreign banks entered (Japan); and into the discourse at all in Myanmar, • United Overseas Bank it was usually just to fill the role of (Singapore). pantomime villains in nationalist (often government-sponsored) The lineup was nonetheless revealing. narratives of the country’s history. For All three of Japan’s giant banks those who wanted to look beyond received licenses, reflecting the size these caricatures, there was little but and increasing regional ambitions the faded magnificence of the old of these institutions as well as In 2014 all of that changed. bank buildings of downtown Yangon, Japan’s own substantial investment crumbling reminders of paths in its Myanmar diplomacy. The On September 30, the CBM otherwise once traveled. two Singapore banks were likewise expected, especially given Singapore announced the names of In 2014 all of that changed. On banks’ traditional roles of facilitating September 30, the CBM announced high-end financial services for nine foreign banks that were the names of nine foreign banks that Myanmar’s elite and providing the were to be awarded licenses to operate to be awarded licenses to means by which the less privileged in the country. A keenly awaited working in the region send money operate in the country. decision which followed a generally home to Myanmar. No one could well-regarded selection process the have doubted that at least one bank

46 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 47 from Thailand, Malaysia, and China challenged. The competencies Notwithstanding these opinions, LICENSED FOREIGN BANKS would be included (the first and of the foreign banks are much Foreign banks are restricted foreign banks are restricted in By the end of October 2015, all nine last of these being the largest of higher, the technology is better, significant ways and quarantined foreign banks granted provisional Myanmar’s trading and investment the balance sheet is bigger. Local in significant ways and from many parts of Myanmar’s entry the previous year had moved partners), while Australia’s ANZ banks will need to adapt and go financial sector. Among the forward. Licenses were received, quarantined from many took the single Western bank down-market, to the SMEs [small requirements and restrictions imposed offices had been established, and slot. A last-minute decision by and medium-sized enterprises] parts of Myanmar’s financial on them are: various outreach activities extended Standard Chartered not to submit where it is almost impossible for (most of the foreign banks have an application made ANZ a near the foreign banks to follow.78 sector. • Minimum paid-up capital of training and technology-sharing certainty, especially given that its only US$75 million; agreements with local banks). Modest Lest this sound like a retreat, the competitor was a somewhat unlikely • One branch only; beginnings in banking business itself bid from a small French bank.77 Yoma chair also made clear that were also made, thus far mostly this foreign banking segment of the • An income tax rate of 35 percent consisting of (as expected) facilitating LOCAL OPPOSITION AND A market was also the most important (versus 25 percent for local banks); the trade and funding needs of home RESTRICTIVE MANDATE for Myanmar’s future. Noting that the country investors in Myanmar.81 The arrival of foreign banks in local banks needed to learn structural • A prohibition on lending to Myanmar took place amidst the modernization and technology from Myanmar nationals or enterprises, However, a couple of the banks have stiff opposition of most of the local the foreign competitors, he also except in partnership with a local been more adventurous. Japan’s Bank players, who spent considerable suggested that what they needed was bank; and of Tokyo-Mitsubishi UFJ (MUFJ) time and resources first in resisting confidence: “The local banks should and Singapore’s United Overseas • A ban on taking deposits from their entry and then, once foreign be very confident in what they can do Bank (UOB) are especially active, Myanmar nationals. banks had been approved, in limiting .… They have a better understanding Japan’s Bank of Tokyo- both in the size and scope of their foreign banks’ allowable activities. of the local market, something foreign The Transfer of Immoveable Property activity and the extent to which they The local banks were worried about banks cannot buy.”79 Mitsubishi UFJ (MUFJ) and Act also imposes restrictions. It are already pushing up against the their ability to compete with the prohibits foreigners from taking regulatory limits of activity. Coming to a similar conclusion was new foreign banks, with most seeing Singapore’s United Overseas land as collateral, so even if foreign Dr. Sein Maung. Summarizing hopes, MUFJ, the first of all the foreign these foreign banks as an existential banks were permitted to lend to local fears, and tensions, he declared that Bank (UOB) are especially banks to arrive, brought US$100 threat and, perhaps for some, also firms these loans would be limited. Myanmar would not be ready for any million in capital (an additional US$ seeing them as a welcome source On the other hand, the interest rate more foreign banks until they came active, both in the size and 25 million over the US$75 million of salvation. The chair of Yoma floors and caps imposed on the local up with concrete ways to transfer minimum) and in August 2015 Bank suggested at a conference in scope of their activity and banks do not apply to the foreign skills to local players: made the first unambiguous local August 2015 that the arrival of the entities. The end result of all of this? currency loan by a foreign bank: foreign banks pointed to the strategic the extent to which they are The foreign banks in Myanmar are Without a strategy it’s just lip- K900 million (around US$740,000) direction in which local institutions relegated in essence to the providing service. Technology and software already pushing up against to a Japanese/Myanmar joint venture needed to move: financial services to other foreign we can buy, but when it comes to trading house.82,83 MUFJ’s Myanmar the regulatory limits of investors. In many, even most cases, At the top end of the market, local improving skills and knowledge, operation lends in Singapore dollars these will be investors who hail from and foreign banks are fighting over we have to rely on the foreign and euros, as well as U.S. dollars, and activity. the same countries from which the a few thousand clients. Tactically, banks. I expect a lot from them, as currently has around 120 customer individual banks themselves come. if you continue with that strategy without their cooperation we can’t 80 as a local bank you will be learn much. 81 ANZ Bank, the most globally-focused of Australia’s large banks, is representative in this context. Apart from a commitment to service multinationals and companies broadly wanting to access Myanmar, ANZ has 77 The French bank was BRED (Banque Populaire S.A.), a cooperative bank with over 250 branches in made a point of stressing its (and, by extension, Australia’s) strength in “natural resources, infrastructure and France and, of relevance here, 75 branches in French overseas territories. Via a subsidiary, COFIBRED S.A., agriculture.” See ANZ Bank, “ANZ Receives Final Myanmar Banking License Approval,” ANZ Bank news the bank also partnered with the IFC and the German development bank KfW to bring the Cambodian release, September 30, 2015, http://www.media.anz.com/phoenix.zhtml?c=248677&p=irol-news&nyo=0, microfinance bank, ACLEDA, to Myanmar (examined elsewhere in this paper). (accessed November 1, 2015).

78 Quoted in Clare Hammond, “Foreign Banks Call for Market Access,” Myanmar Times, July 28, 2015, 82 Of historical interest: one ancestor of the much-merged MUFJ is the Yokohama Specie Bank (YSB). An http://www.mmtimes.com/index.php/business/15702-foreign-banks-call-for-market-access.html, (accessed extraordinary institution that financed much of Japan’s involvement with the rest of the world in the first November 2, 2015). half of the twentieth century, the YSB was active in colonial Myanmar from 1914. During the Japanese occupation of Myanmar (1942–1945), it even effectively served for a while as the central bank. After the 79 Quoted in Khine Kyaw, “Myanmar, Foreign Bankers See Need for Closer Cooperation,” The Nation, war, YSB was reorganized into the Bank of Tokyo (Turnell 2009). August 3, 2015, http://www.nationmultimedia.com/business/Myanmar-foreign-bankers-see-need-for-closer- cooper-30265739.html, (accessed November 2, 2015). 83 Taiga Uranaka, “MUFG is First Foreign Bank to Make Myanmar Currency Loan,” Reuters, August 6, 2015, http://www.reuters.com/article/2015/08/06/mufg-myanmar-idUSL3N10H1R820150806, (accessed August 80 Quoted in Clare Hammond, “Foreign Banks Call for Market Access,” op. cit. 11, 2015).

48 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 49 firms. Over 80 percent of these JOINT VENTURE BANKS? to find possible foreign bank partners • Shinhan Bank (South Korea), customers are subsidiaries of Japanese The idea that local and foreign banks because the foreign banks require, corporations, though the bank also could form joint venture operations unacceptably, 80 percent ownership • State Bank of India, 88 includes among its clients Coca- has survived the arrival of the foreign of prospective joint ventures. • State Bank of Mauritius, Cola and Unilever. So far, MUFJ banks. Pushing the model rather SECOND ROUND OF has collected around US$70 million more than most, however, is Taiwan’s • Taiwan Business Bank, FOREIGN BANK ENTRY in deposits in Myanmar. It has also Cathay United Bank, which also has • Taiwan Cooperative Bank, and borrowed in kyat from local banks to a funding arrangement with KBZ. In February 2016 the CBM announced a second round of foreign augment its local currency capacity. Cathay United has such a joint • Taiwan Shin Kong Commercial bank applicants. Thirteen pre- venture subsidiary (Indovina Bank) Bank. UOB 89 made the first onshore in partnership with Viet Nam’s largest qualified applicants were named: foreign currency loan by a foreign The most interesting aspect of (partly-)private bank, Vietinbank. • Bank for Investment and bank in May 2015 and had loan the list of new applicants is the Others are less convinced. Singapore’s Development of Viet Nam, commitments across its first year of largest bank, DBS (a surprise preponderance of banks from Taiwan 84 business of over US$300 million. omission from the foreign bank • Cathay United Bank (Taiwan), (8 of the 13). The list is not, however, The other banks that have brought license winners) regarded looser random: banks from countries that • CTBC Bank (Taiwan), in significantly more capital than partnerships that bring in new already have a licensed banking entity the regulatory minimum are technologies and ideas as plausible, • E.SUN Commercial Bank in Myanmar were automatically Bangkok Bank (US$200 million) but saw joint venture arrangements as (Taiwan), excluded. As with the first round of and Sumitomo Mitsui (US$200 posing a risk of reputational damage: foreign bank entry, each applicant 85 million). Meanwhile, Mizuho Bank “If foreign banks take an interest in • First Commercial Bank (Taiwan), was given a period in which to set up was the first to take advantage of operations and to ensure functional a local bank and there is a scandal, • Kookmin Bank (South Korea), the relaxed conditions allowed by it will taint the reputation of the banking operations before the license Myanmar’s special economic zones entire group.”87 First Private Bank’s • Mega International Commercial itself would be awarded at the end of (SEZs), by opening a second office Dr. Sein Maung also had misgivings, Bank (Taiwan), first quarter 2016. in November 2015 at the Thilawa albeit from a very different angle. SEZ, a special economic zone that has Noting that foreign banks were vital attracted the support of the Japanese to the local banks “when it comes to government and the investment of a improving skills and knowledge,” he 86 number of Japanese corporations. added that it has proven challenging

84 Siow Li Sen, “UOB Helping Clients Invest in Myanmar,” The Business Times, June 30, 2015, http://www. businesstimes.com.sg/banking-finance/uob-helping-clients-invest-in-myanmar, (accessed November 2, 2015).

85 Sara Perria, “Foreign Banks Go Native with a Flourish in Myanmar,” Nikkei Asian Review, June 11, 2015, http://asia.nikkei.com/Business/Trends/Foreign-banks-go-native-with-a-flourish-in-Myanmar, (accessed November 2, 2015).

86 “Mizuho Bank to Open Office at Thilawa,” Bangkok Post, November 3, 2015, http://www.bangkokpost. 88 Ibid. com/news/asean/753148/mizuho-bank-to-open-office-at-thilawa, (accessed November 4, 2015). 89 Central Bank of Myanmar, “Information Regarding the Award of Banking License in the Republic of the 87 Chief Executive of DBS Group Sin S. Lim quoted in Clare Hammond, “Foreign Banks Call for Market Union of Myanmar,” Central Bank of Myanmar Press Release, February 6, 2016, http://www.cbm.gov.mm/ Access,”op. cit. sites/default/files/regulate_launder/20160208_press_release_final_0.pdf, (accessed February 8, 2016).

50 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 51 8. THE NEW FINANCIAL INSTITUTIONS LAW OF MYANMAR

he need for new legislation regulation, as well as measures and In essence, the FIL is governing the activities of devices that are successfully employed financial institutions grew elsewhere in the region. In essence, a very good law; if it is T more obvious and urgent during the FIL is a very good law; if it the Thein Sein administration: to is implemented properly it could implemented properly drive forward reform, place domestic reinvigorate the reform process in it could reinvigorate the regulation in conformity with Myanmar. At the time of writing international norms, and to better (January 2016), the FIL has been reform process in Myanmar. support (the many) technological and passed by both of Myanmar’s houses methodological changes in banking of parliament and, accordingly, has over the last two decades. The become law. It will be implemented old overarching law, the Financial through enabling rules and Institutions of Myanmar Law (FIML), regulations that had yet to appear. promulgated in 1990, more often disregarded than observed, had However, the FIL will present become obsolete. Implementing significant challenges to the and observing laws matters more in incumbent local banks in Myanmar, Myanmar than simply writing and as well as to their owners and senior passing them. Nevertheless, the time executives. Given how successful However, the FIL will to replace the FIML had come. these banks and executives were in pushing back against foreign bank present significant In December 2014 a draft new entry (noted above), a keen struggle Financial Institutions Law (FIL) can be expected. Such a struggle, and challenges to the incumbent made its long-awaited appearance. its outcome, will reveal the extent to Written under the auspices of the which Myanmar might emerge with local banks in Myanmar, as CBM, the draft FIL was largely the a competitive open economy, or one well as to their owners and creation of the World Bank and that is crony-dominated and state- other international advisers, and centred. Some of the key features of senior executives. accordingly incorporates much of the FIL include:90 international best practice in bank

90 The draft is available on the CBM website, http://www.cbm.gov.mm/content/1075, (accessed October 29, 2015).

52 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 53 • All existing banks must be The new features offer some representative offices under the breach connected lending injunctions. authorized under the new law, promising possibilities and a few areas If properly applied, the FIL FIL, but they are not permitted to In short, if properly applied, the FIL and thus all bank owners, senior to watch with caution: offer financial services. will rule out of banking many of the executives, and board members will rule out of banking many existing and dominant personalities. must meet the FIL’s various “fit • The restriction on lending • Meanwhile, a significant omission of the existing and dominant and proper person” tests. Such to related parties, as well as in the FIL are references to the The new FIL is well-crafted banking disclosure requirements regarding state-owned banks. These are legislation. It incorporates a great tests are standard everywhere, of personalities. course. However, despite being the interests of bank directors, seemingly not captured within many regulatory innovations arising greatly needed in Myanmar in transparency rules on holding its remit, thus continuing out of experience during the global order to build a strong and trusted companies and the like, should (even exacerbating) regulatory financial crisis and is cognizant of banking sector, and being paid add to the measures above in distortions and misdirection on many of the other developments that lip-service in Myanmar’s existing overhauling Myanmar’s banking the state/private divide in banking affect modern banking (not least banking laws, these tests have sector. in Myanmar. in the areas of e-banking and cyber hitherto largely been ignored. security and standards). It is also • The FIL has some good sections Some areas will clearly raise the an extraordinarily complex piece of • In being reauthorized under dealing with money laundering. hackles of some of the incumbent legislation. Such complexity may be the FIL, all existing banks must As noted earlier, Myanmar has local banks. Stated simply, if the law something of a problem. Myanmar’s surrender their banking licences often been criticized for falling is properly applied, many current banks are not yet compliant with the within six months of the new short in this area. The provisions bank owners and executives will fail basic Basel I prudential and capital law coming into effect. This in the FIL would, if implemented, “fit and proper person” tests, while adequacy framework, let alone the requirement has caused concern effectively address this otherwise the activities of their banks will Basel II, III, and IV follow-ups. among Myanmar’s private banks, significant barrier to international anxious that potential doubts dealings with Myanmar’s banks arising from this process could and their customers. cause nervousness among • The FIL has some very forward- depositors and other creditors. looking provisions for authorizing • It establishes requirements for e-money, e-banking, mobile capital adequacy, liquidity, banking, and other emerging large exposure limits, and other technologies. It also encourages measures that carry with them the creation of credit bureaus. the lessons from the 2008-09 All of these have much potential, global financial crisis, and could and their effectiveness is amply be regarded as state of the art in demonstrated elsewhere in bank supervision. Yet, and not emerging markets, not least in withstanding how “best practice” Africa. they are in a global sense, they • The FIL has some very well are also adapted to the particular developed proposals for circumstances and difficulties in a unwinding and (potentially) country such as Myanmar. rehabilitating failing and failed • All banks must have a minimum banks. All are very state of the art, capital of K20 billion. and with the lessons of 2008-09 at the forefront. • It establishes some very necessary restrictions on lending to related • One negative aspect of the new parties. Such loans must be FIL is its maintenance of a broad approved by a minimum of a hostility toward foreign finance. two-thirds majority decision of In this case, it is in the form of a bank’s board, and the loans an injunction against foreign must fully meet existing collateral “nonbank financial institutions” requirements. (NBFIs). Foreign NBFIs can open

54 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 55 9. RURAL FINANCE

yanmar’s agricultural and in its organizational culture.92 Myanmar’s agricultural sector, the source of They include: livelihood of over 70 sector, the source of M The MADB’s Lending Is percent of the country’s population, Insufficient and Too Narrow is chronically undercapitalized.91 livelihood of over 70 Few farmers enjoy any access at all • The MADB offers seasonal crop percent of the country’s to formal finance, and those that production loans (terms of less do receive far less than they need. than 1 year) and term loans (a) population, is chronically Informal finance—family, friends, 1-3 years or (b) more than 3 local moneylenders—are the recourse years. The former represented 98 undercapitalized. of most people in rural Myanmar, but percent of its outstanding loans such finance is expensive, unreliable, in 2014 and was concentrated all too-often socially destructive, and on production of just four no more sufficient than its formal commodities—paddy, sesame, counterpart. peanuts, and beans. It provides MYANMAR AGRICULTURAL no funding for other fruits and DEVELOPMENT BANK vegetables, the rearing of livestock, The Myanmar Agricultural food processing, or just about Development Bank (MADB) was any other activity up or down the created in 1953 to provide Myanmar’s value chain (World Bank 2014, farmers with the affordable credit 19). they needed and is the only financial • Despite this narrow concentration, institution to serve this population even the financing of the four for much of its history. Myanmar’s crops falls well short of need. second largest bank in terms of The MADB provides production branch outreach (around 220 loans only for the first 10 acres branches throughout the country), of cultivation per farm, and in the MADB currently claims around 2 the case of paddy—by far the million customers (Nilar Win 2013, dominant crop, comprising nearly 6; World Bank 2014). 90 percent of cultivator loans by The MADB’s problems are The MADB’s problems are myriad, value—only up to K100,000 per acre. This amount is significantly myriad, fundamental, and fundamental, and chronic. They are embedded in the bank’s authorizing up from previous years; however, it is still notably less than average chronic. legislation, in its practices, in its deficient and obsolete infrastructure, per acre paddy production costs,

91 Less than 3 percent of all formal lending in Myanmar goes to the rural sector (OECD 2014, 208).

92 The worst limitations with respect to the performance of the MADB are not due, however, to restrictions in the Myanmar Agricultural Development Bank Law (as amended in 1996). That said, plans to modify the law—a necessary but not sufficient condition if the bank is to be turned around; were reportedly afoot. See “Plan to Improve Myanmar Agricultural Development Bank Law,” The Global New Light of Myanmar, January 26, 2015, http://globalnewlightofmyanmar.com/plan-to-improve-myanmar- agricultural-development-bank-law/, (accessed August 4, 2015).

56 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 57 which range from K200,000 for • In addition to narrowly defined • The MADB is currently operating • Exacerbating the MADB’s lack of poor quality rice to K400,000 for loan purpose, borrowing from the on an interest rate margin of just financial sustainability is a long- high quality rice. In short, even MADB is also restricted in other 0.5 percent (MAP 2014, 10). standing requirement (written in farmers who receive MADB loans ways. As noted below, the MADB According to MAP, the MADB the 1990 Myanmar Agricultural are significantly underfunded. The conducts no credit assessment of currently subsidizes its average Development Bank Law itself) that average size of an MADB loan is borrowers, but entire townships borrower (with respect to the 75 percent of the bank’s profits around K200,000 (approximately are excluded from its lending average loan size) at around be transferred annually to the US$170). if any of their inhabitants are US$15 (MAP 2014, 19). state. This significantly reduces in default against past loans. the MADB’s ability to likewise • There are significant differences Likewise, many cultivators in • For most of its history, the use retained earnings to boost the in access according to farm size. Myanmar are without formal MADB has been unable to fund bank’s currently (inadequate) K1 According to Making Access use-title over the lands they its lending through deposits billion authorized capital base. Possible (2014, 9) 54 percent of farm. According to the World accumulation. The country’s long Risk Management at the MADB Is farmers with plots of 10 acres or Bank (2014, 17), the number of history of monetary instability, Largely Non-Existent larger have access to MADB loans, potential borrowers excluded in and the wariness with which a ratio that falls to just 24 percent Myanmar’s rural populace this way is estimated at around 3.5 • The MADB undertakes no credit for farmers who have plots of 2 million—one and a half times the regarded the MADB in particular, acres or less. meant that savings mobilization analysis or other assessments number of farmers currently given of its borrowers. Instead, credit loans. through the bank was never more • Term loans (of up to three than marginal. In recent years committees from villages in years) are meant to be available • One of the most damaging aspects however the MADB has been townships that are not in arrears for longer-maturing crops such of MADB’s loans is that they must discouraged from seeking deposits, on previous loans automatically as sugarcane, tea, and coffee. be repaid, in full, at harvest. Given not least by Myanmar’s parliament approve loans once relevant However, in 2012, such loans the great poverty of the majority amidst (justifiable) concerns documentation has been amounted to little more than of Myanmar’s farmers and their that withdrawals were made too completed. MADB staff are not 2 percent of the MADB’s total lack of financial reserves, this difficult. According to the World represented on these committees, portfolio, with sugarcane taking means that near-universally they Bank (2014, 23) more than 90 nor do they play an advisory or the dominant share. must sell their crops immediately percent of the MADB’s deposits other role. • The MADB devotes a tiny at harvest—precisely at the have been withdrawn since 2011. • In place of individual credit amount of funding (0.02 percent moment at which, furiously assessment, the MADB lends to competing against each other, • In the absence of necessary of its portfolio in 2014) for farm deposits, the MADB depends farmers in groups of between 5 machinery. Such loans cover only the prices they can yield for their and 10 people, who collectively product are at their lowest. upon subsidized borrowings up to 50 percent of the value of from its state-owned sibling, guarantee each other’s loans. Such the machine in question, which The MADB Is Financially the Myanmar Economic Bank joint-responsibility “contracts,” serves as collateral for the loan Unsustainable (MEB), to fund lending. The though widely employed beyond (World Bank 2014, 21). MEB currently provides funds Myanmar, are the source of much • The MADB has no control over to the MADB at a 4 percent per resentment among the country’s • Apart from these limited loans for the interest rates it charges and pays agricultural producers. machinery, MADB loans are purely year interest rate; the extent of the on its loans and deposits. These subsidy is readily apparent given for funding working capital. No are set instead by the Ministry of • The concentration of the MADB’s loans are currently provided for that the MEB must pay 8 percent lending in a very narrow range Agriculture and Irrigation. After per year on its own deposits. As longer-term investment. Other a reduction in June 2014, the of commodities and activities, financial instruments routinely the World Bank (2014, 9) notes, uncollateralized and largely MADB charges a highly subsidized it is the Myanmar government employed by farmers elsewhere rate of 5 percent a year on its loans undiversified, only aggravates the that must bear the cost of MADB 94 in the world (such as warehouse (down from a range of 13–18 risks the bank faces. receipt financing, letters of credit, loans and the fiscal burden they percent, while 8 percent was paid impose. trade finance, and leasing) are not on deposits) (World Bank 2014).93 offered. 94 Myanmar’s fitful introduction of new farmland laws will give an increasing number of farmers use title 93 Kyaw Ko Ko, “State Bank Lowers Interest Rates on Loans to Farmers to Stimulate Growth,” Myanmar over their land. Such title may at some point provide the MADB and other banks with collateral against Times, May 29, 2014, http://www.mmtimes.com/index.php/business/10518-state-bank-lowers-interest-rates- rural lending, but much remains to be done. For a discussion of Myanmar’s new land laws, and their on-loans-to-farmers-to-stimulate-growth.html, (accessed August 4, 2015). problems and complexities, see Fink (2015).

58 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 59 The MADB Does Little to Promote system, it is hard for the bank’s • Notwithstanding its very public However, this is not the whole story. Financial Inclusion management to perform its role, the MADB is the only state- In 2014, plans emerged, for instance, business functions and manage owned bank not to have a website. for a Farmers Development Bank • While the MADB has the risks. (World Bank 2014, 30) (FDB).95 Created by the Myanmar MADB and the Floods second-largest branch network Farmers Development Party, the FDB of any bank in Myanmar, these MADB Governance Is Poor Adding to the MADB’s longer- principals proposed to raise capital branches are too few to provide for of K30 billion. Majority ownership genuinely inclusive outreach. Its • The MADB is not supervised term woes, though in large part yet by the CBM. Indeed, it is not another manifestation of its inability of the FDB is meant to reside with branches are within a reasonable party members and other farmers distance for less than half of formally a bank under the to deal with Myanmar’s challenging Financial Institutions of Myanmar (51 percent), with foreign investors Myanmar’s farmers. As a result, environment, has been the damage Law participating as well, although this for the majority of potential , but a stand-alone entity wrought by the country’s July-August of the Ministry of Agriculture 2015 floods. The destruction affected last aspect would require a special borrowers, access to the bank dispensation from the CBM.96 entails considerable travel costs. and Irrigation. Accordingly, the about 20 percent of Myanmar’s MADB is not required to meet, cultivated area, temporarily displaced The FDB reportedly signed a • Contrary to best practices in rural and is unlikely to meet, any of the 1.6 million people, and caused memorandum of understanding finance, MADB staff are not prudential requirements imposed economic losses equivalent to about with Thailand’s Krung Thai Bank to permitted to travel to villages and on banks under any of Myanmar’s 3 percent of Myanmar’s FY2014/15 provide technical assistance and to 97 no mobile banking platforms have laws pertaining to financial GDP (Government of the Union of “invest in the business.” As of this as yet been developed. institutions. Myanmar 2015). Clearly, a sizeable report, nothing appeared certain, even number of the MADB’s borrowers if a functioning private agricultural • The inaccessibility of the MADB’s • The World Bank concludes that were badly affected, and their loans bank is certainly called for. branches is mirrored in difficulties corporate governance within compromised accordingly. The end of of internal communications the MADB broadly is “weak” In late 2015 a similar institution, the current season in April 2016 will no less dimly lit in what is publicly within the bank. The MADB’s (2014, 9). The bank’s board reveal the extent of the loan losses. information-technology has no independent members known about it, was announced More broadly, this latest natural in the form of the “Ayeyarwaddy infrastructure is inadequate and and is comprised of individuals disaster highlights the MADB’s obsolete, communications and solely drawn from the agriculture Farmers Development Bank” exposure to natural disasters in a that may trade under the name the movement of money between ministry. The board meets country often afflicted by them. the head office and branches takes infrequently and none of its of “Abank.” This bank, founded place mostly through post, fax, deliberations, nor those of the SOME INITIATIVES BEYOND by a consortium that includes the and physical transfer, with all the MADB’s senior management, THE MADB Ayeyarwady regional government and attendant inefficiencies and risks are made public. The chairman The overbearing but dead weight of 15 partners of the Ayeyar Hinthar these entail. of the board is the agricultural the MADB, along with the notable Companies Group, is ostensibly minister. The MADB has no audit lack of substantial reform more about supporting agriculture in its The MADB’s Internal Systems Are committee, and its accounts are broadly in Myanmar’s agricultural broadest sense, including support Obsolete and Inadequate neither independently audited sector (a standout failure of the to millers, livestock producers, and rubber producers, as well as factories • The MADB uses paper-based nor prepared in compliance Thein Sein administration), has that may emerge.98 Abank is also documents for all records and has with international accounting precluded much in the way of private looking at linking with the foreign very limited IT systems for data standards. sector initiatives in rural finance. retention and analysis. • Most senior staff are political 95 “Myanmar Opposition Party to Set Up Agricultural Bank,” Nikkei Asian Review, October 25, 2014, http:// • Communication with customers is appointees (many are retired asia.nikkei.com/Business/Deals/Myanmar-opposition-party-to-set-up-agricultural-bank, (accessed October 23, 2015). Thurein Hla Htway, “Banking on the Farm Vote,” Nikkei Asian Review, March 6, 2015, http://asia. similarly rudimentary. In its 2014 military personnel) with little or nikkei.com/Politics-Economy/Policy-Politics/Banking-on-the-farm-vote, (accessed October 23, 2015). Specific no knowledge of rural finance CBM regulations upon the MFDP can be found at the central bank’s website http://www.cbm.gov.mm/ analysis of the MADB, the World content/873, (accessed October 23, 2015). Bank concluded that under its methodologies. The MADB’s professional staff, who are often 96 A dispensation seemingly given, among other concessions, courtesy of the specific regulations for the current operational arrangements: FDB. See the CBM’s dedicated regulations, http://www.cbm.gov.mm/sites/default/files/regulate_launder/ skilled in such techniques (most of regulation_for_farmer_development_bank.pdf, (accessed November 5, 2015). …it is difficult for MADB to its 2,000-plus staff have bachelor 97 “Myanmar Opposition Party to Set Up Agricultural Bank,” Nikkei Asian Review, op. cit. manage customers’ accounts degrees), enjoy little operational and notify customers of their 98 Chan Mya Htwe, “Ayeyar Hinthar Opens Ayeyarwaddy Farmers Development Bank,” Myanmar Times, autonomy (World Bank 2014, 31). December 1, 2015, http://www.mmtimes.com/index.php/business/17892-ayeyar-hinthar-opens-ayeyarwady- debt burden. With the existing farmers-development-bank.html, (accessed December 3, 2015).

60 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 61 banks, retailing the wholesale funds when some of the European banks the latter can provide. At the time had in place similar arrangements) Perhaps the most promising of writing, no details with respect to can potentially greatly increase their capital, proposed branch network, incomes.99 of all of the initiatives in and the like were available. SLCM’s arrival in Myanmar has rural finance during the SLCM been in partnership (briefly noted above) with some of the country’s Thein Sein administration Perhaps the most promising of all leading private banks (Yoma, CB has been the warehouse/ of the initiatives in rural finance Bank, United Amara). The banks during the Thein Sein administration lend against the warehouse receipts collateral management has been the warehouse/collateral supplied by SLCM against the management arrangement introduced commodities stored by the farmers. arrangement introduced by the Indian agri-logistics firm This collateralized lending against by the Indian agri-logistics Sohan Lal Commodity Management product safely in the hands of a (SLCM). This arrangement, under trusted third party minimizes risks firm Sohan Lal Commodity which farmers are given advances and transaction costs to the lending against the collateral of their stored banks. Naturally, the three banks Management (SLCM). crop, is a time-honored one that charge the standard maximum allows farmers to receive funds lending rate against the loans of 13 they need while allowing them to percent per year. The maximum time the arrival of their crop to the size of a loan against a farmer’s crop market. At present, and for many is 60 percent of the value of the Allowing farmers to store decades, Myanmar’s farmers have 100 stored commodity. At present the their product to better time had to sell their product more or less arrangement is modest. By late 2015, immediately upon harvest, at which around US$1 million worth of its arrival in the market can time the prices they can command are loans had been disbursed against 15 at their minimum. Allowing farmers commodities stored in warehouses of potentially greatly increase to store their product to better time a capacity of around 100,000 square their incomes. its arrival in the market (as they feet.101 did in the colonial era in Myanmar,

99 Lloyd’s Bank and Chartered Bank were the pioneers for the method in Myanmar in the early years of the 20th century. For more, see Turnell (2009).

100 Zaw Htike, “Yoma Bank, Indian Firm Plan Warehouse Receipt Financing,” Myanmar Times, January 26, 2015, http://www.mmtimes.com/index.php/business/12884-yoma-bank-indian-firm-plan-warehouse-receipt- financing.html, (accessed October 19, 2015).

101 “Agri-logistics Firm SLCM Group to Foray into ASEAN, African Regions,” Economic Times, July 5, 2015, http://articles.economictimes.indiatimes.com/2015-07-05/news/64112229_1_agri-logistics-rs-50-crore- disbursement, (accessed October 19, 2015).

62 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 63 10. INFORMAL FINANCE: UBIQUITOUS AND TIME-HONORED CREDIT AND SAVINGS The overall scale of the informal sector he myriad of problems with in the Myanmar economy, which the MADB compels many employs an estimated 65 percent of farmers in Myanmar to find the country’s working population, alternativeT credit in the informal credit also influences the scale of informal sector. Needing to plug the funding financing. The MAP data (in Section gap of inadequate MADB loans and 2 of this paper), which suggest that the meet the repay-at-harvest requirements, informal financial sector was at least as farmers borrow from commodity large as its formal counterpart, provide brokers, input suppliers, informal one snapshot of this, but simply talking Simply talking to people in moneylenders, family, and friends. to people in Myanmar from all walks of life, and from the poorest to the Myanmar from all walks of Of course, the MADB’s failures are wealthiest and most-connected, makes just one element in the persistence of manifest the utter ubiquity of this life, and from the poorest informal finance in Myanmar. The informal realm. broader lack of trust in formal financial to the wealthiest and most- institutions, along with the great weight Informal finance in Myanmar takes of history, practice, and familiarity, is many forms. Table 8 gives the broad connected, makes manifest key to the survival of arrangements categories of informal finance providers, the utter ubiquity of this that continue to dominate the financial the interest rates they charge, the landscape of most of Myanmar’s citizens. collateral they demand (if any), and informal realm. According to MAP focus group surveys, the loan size and repayment terms they respondents had: offer.102

... positive perceptions about All of these informal sources of credit using financial services offered have been around in Myanmar for by unregulated financial service centuries. Informal moneylenders have providers … because they felt that more or less always been ubiquitous, but these were more convenient and that they loom largest in Myanmar’s broader the requirements set by regulated history in the episode of the Chettiars, a financial institutions excluded money-lending caste from Tamil Nadu low-income earners. Respondents in India who became instrumental in indicated that although unregulated financing the country’s transformation All of these informal sources providers charged high interest rates into the world’s largest rice exporter for credit, they were the preferred by the early twentieth century. In the of credit have been around choice because of their proximity, colonial era, the Chettiars were the flexible operating hours, immediate critical conduit through which the funds in Myanmar for centuries. relief and negotiable borrowing of the exchange banks, largely European, terms. (MAP 2014, 15) were distributed to the cultivators

102 The information collected in this table is derived from scores of interviews and other field research by the author down the years. It has been cross-checked against data reported by Proximity Designs in its 2014 report on financial inclusion in rural Myanmar.

64 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 65 TABLE 8: INFORMAL CREDIT PROVIDERS IN MYANMAR finance), has existed in Myanmar from item if it had to be sold. Recourse to pawn the earliest days. It is perhaps an obvious brokers has traditionally transcended Informal Finance Interest Rate Collateral Type Loan Size Loan Term Provider Charged relationship for the extension of credit, wealth and class, but in recent times but in Myanmar it is costly (especially (with the rise of private banks, credit Day minimum/month Informal Moneylenders 10-20%/month Usually none Negotiable as compared to the MADB-subsidized cards, and other facilities) it has become maximum loans that levy just 5 percent a year and more a practice of the poorer sections of Rotating Credit & Savings Peer pressure/social Up to around K1 Maximum of around 104 3-5%/ month banks that levy 13 percent) and is not, Myanmar society. Associations (ROSCAs) capital million one year at least yet, potentially transforming in On the savings side of the equation, Agricultural Merchants/ Repeat Business Usual value of Harvest period the way that truly innovative value chain 4-5%/ month Brokers Relationship harvest (~6 months) finance has come to be. Commodity informality is again the dominant feature in the financial landscape of most of Gold and other broker finance was ubiquitous and Pawnshops 2-20%/ month Based on collateral Maximum of 4-5 months103 items formalized during the colonial era, when Myanmar’s citizens. Because many people Because many people in it was provided, at base, by European in Myanmar are remote from, excluded from, or untrusting of banks and other Myanmar are remote from, trading enterprises. After Myanmar in the countryside. Chettiar lending with some cash to spare and a need to became independent, it continued to play formal institutions, savings primarily take the form of items of intrinsic value, methodologies (detailed in Turnell 2009) supplement their own families’ incomes. excluded from, or untrusting a formal role in rice production in the foreshadowed many of those at the According to MAP (2014b, 15), there form of advanced purchase by the State with the exact type depending upon cutting edge of rural and microfinance are an estimated 400,000 informal of banks and other formal Agricultural Marketing Board (SAMB). wealth and occupation. Thus savings providers today, and they provided moneylenders in Myanmar—or roughly For much of its existence (under this take the form of gold, jewelry (often institutions, savings primarily financing for Myanmar’s rice sector for one for every 1,000 adults in the country. and later names), the SAMB enjoyed a worn, especially for women as bangles), many decades. But the Chettiar story did monopoly over the buying and selling of stored paddy, other durable foodstuffs, Rotating Savings and Credit Associations take the form of items of not end well. With the arrival of the Great paddy in Myanmar (Turnell 2009). and cash (with fresh U.S. dollar bills (ROSCAs), as labeled in Table 8 and so Depression came mass land alienation intrinsic value. greatly preferred). All of these items are as defaulting borrowers surrendered called in the academic vernacular, are As with all of these informal financial overwhelmingly stored in the home and their land as collateral to the Chettiars. likewise endemic throughout Myanmar. instruments and arrangements, its surrounds, in boxes, trunks, tins, pots, Then came the Second World War, the They go under different labels according pawnshops are likewise ancient and and sometimes even safes. Of course, expulsion of the Chettiars by the invading to local custom, with many bearing the ubiquitous in Myanmar. Pawnshops in the ROSCAs noted above are a social Su Kye Japanese, and a post-war settlement in name of . All share the same basic Myanmar take many forms—from the mechanism by which kyats are saved in newly independent Myanmar that made methodology as community groups, with 184 outlets of the state-owned Myanmar another informal way. As with every facet clear the Chettiars would not be welcome up to 20 members who pool savings, Small Loans Enterprise (MSLE), to of the informal sector, informal savings are back. usually on a weekly basis, and take turns private pawnbrokers registered with the a feature of most households in Myanmar. drawing or borrowing from the collective MSLE and with local authorities (just Few of the richest residents of Myanmar Today Myanmar’s informal moneylenders “pot.” ROSCAs depend greatly on trust over 1,800), to informal and unregistered will be without gold or the ubiquitous are overwhelmingly from the same and, as such, their membership often operators offering tiny sums at very high wad of pristine US$100 notes.105 ethnic background as the communities comprises people who work together interest rates (MAP 2014, 6). Many INTERNATIONAL in which they operate. As can be seen or enjoy some other binding social ties. pawnbrokers only accept gold and REMITTANCES from Table 8, the interest rates they Breaches of trust by members are not other items of value, while others will charge are high, but their procedures, unknown, but are readily punished lend against household items of next to For many developing countries, the paperwork, and other requirements through social censure. Apart from being no intrinsic value but of high use value money sent by their citizens from abroad The interest rates they are not especially burdensome. Who commonplace throughout Myanmar, to their owners. The maximum loans constitutes a larger source of foreign are these moneylenders? They come in ROSCAs are also a familiar feature extended are typically no more than about exchange than international trade, aid, or charge are high, but their 106 myriad forms. Some are relatively rich of Burmese refugee communities in 65 percent of the value of the pawned foreign investment. According to the local landholders, the most prosperous neighboring countries. procedures, paperwork, and of the farmers of a village or tract. Some Credit advanced by commodity brokers 104 For an interesting window into the life of a small-scale, unregistered pawnbroker and his clients, see are professionals, in that moneylending other requirements are not Joshua Carroll, “Inside Myanmar’s Pawn Shop Culture: ‘We Wouldn’t Accept Filthy Kitchen Utensils, or Used is more or less the heart of their business. and middlemen, which in other countries Underwear,’ ” The Guardian, April 27, 2015, http://www.theguardian.com/global-development-professionals- has been the subject of much research and especially burdensome. network/2015/apr/27/inside-Myanmars-pawn-shop-culture-we-wouldnt-accept-filthy-kitchen-utensils-or- Many are local shopkeepers. Many used-underwear, (accessed October 27, 2015). celebration (often relabeled as value chain are simply Burmese women, “aunties” 105 Very much favored today is the latest design of the US$100 note, complete with the encircling “blue ribbon” colors and dynamic watermarks.

103 In Yangon, the local government (the Yangon City Development Committee, YCDC) has set the 106 As shall be seen, international remittances are overwhelmingly made through informal mechanisms, but maximum pawnshop term at 4 months, 10 days. in-country payments are increasingly undertaken by way of private banks.

66 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 67 World Bank, in 2015 such remittances, the links these and similar international are a number of ways, depending upon the accounts of informal operators in made by an estimated 250 million monetary transfer firms have established the circumstances. One of the most Thailand, and some of these operators migrants across the globe, will have with Myanmar banks. These firms have common, highly applicable in the context make payments to the recipients of amounted to around US$440 billion captured some of the remittance business of Myanmar, is that the debt between Myanmar banks. Thus, banks are to developing countries alone.107 The to and from Myanmar but, as noted the two hundi dealers will be settled in effectively incorporated into informal sheer volume of remittances, coupled in more detail below, mostly they have goods. Many hundi dealers are, in fact, remittance channels (Kubo 2015, 1-2). with the fact that they are both relatively made life easier for the informal providers shop keepers and traders of various kinds, hundi stable and often countercyclical, makes of remittances services, rather than their with hundi dealing being a side activity. When banks are not accessible, them a potentially powerful source of customers. Myanmar’s banks themselves So, in the case above, goods to the value settlement can occur through the exchange development finance. do little in the way of direct transfers with of the remittance debt will ultimately of near-monetary commodities such as overseas institutions, despite increasing The remittances sent by make their way from the hundi dealer in gold, precious stones, and, sometimes, Many of the issues relating to remittance linkages, especially into the region. Thailand to the Myanmar counterpart. contraband such as narcotics. payments, however, are clouded by a Myanmar’s estimated In short, the informal finance sector In cases such as Myanmar, with little In practice, various complications come lack of data and information on the continues to dominate the remittance in the way of domestic production of method used to remit funds. The IMF 2 million or so migrant into the simple picture painted above, most business in Myanmar. complex consumer items, the importation of which, however, only add to the appeal records annual data on official worker of goods presents a ready avenue for Informal Remittance Channels and workers and refugees who of the hundi system. For instance, to ensure remittance payments, but these are hundi settlements. But beyond such Instruments security, the Burmese migrant worker is limited to payments made through official live outside its borders ... in-kind settlements are a number of banking channels. Remittances that flow usually given an authentication code by other reconciliation devices. When hundi through private and unofficial channels, Informal movements of money to and are made overwhelmingly the dealer in the host country. This from Myanmar take many forms, hundi dealers have access to financial code is communicated by the hundi dealer and via nonbanking instruments, are institutions, funds can be directly sent not recorded. This is problematic for including the most obvious method (85 percent plus) through to an equivalent in Myanmar (usually of simply carrying cash in and out in through banks or money transfer firms. by phone) and by the Burmese migrant many countries and circumstances, but informal payment This is increasingly the case according it is especially significant for migrants person. Above all, however, remittances worker to their beneficiary in Myanmar in Myanmar are done through what to pioneering new research (Kubo (also usually by phone). This beneficiary from countries in which trust in banks is mechanisms. 2015). The banks’ now more efficient mostly absent. As is apparent throughout is universally known throughout the must reveal the authentication code to country as the hundi system. distribution channels (established in their the hundi dealer in Myanmar in order to these pages, this describes the situation in own right and through Western Union Myanmar precisely.108 receive the remittance payment. Another Known variously around the globe as and the like) have led to a situation in complication to the simplified example hawala According to the IMF (2015, 30) official (in the Arabic-speaking world), which “informal remittance methods have above is that often the hundi commission chiao hui poey kwan worker remittances to Myanmar totaled (China), and been evolving along with the development is not an explicit independent charge, hundi around US$1.3 billion in FY2014/15 (Thailand), is a device in which of Myanmar’s banking sector” (Kubo but an implicit fee levied by discounting (just over 2 percent of GDP). Of course, monetary value is transferred through Hundi is a device in 2015, 1). As Kubo further notes, the exchange rate through which the and as noted above, these official flows a network of dealers or brokers from specifically in describing the situation as it remittances are calculated. Finally, and as greatly understate the remittances sent one location to another. The mechanics which monetary value involves the remittance channels between is readily apparent from the above, at the of their operations are relatively Myanmar and Thailand: by Myanmar’s estimated 2 million or is transferred through core of the hundi system is trust. For the so migrant workers and refugees who straightforward, as can be seen in the senders and receivers of remittances such example in the box below. Informal money transfer operators live outside its borders, and which are a network of dealers or make use of bank branches as the trust is won by observation of the system made overwhelmingly (85 percent A number of matters remain unresolved interface with remitters and recipients. in successful operation and by repeated brokers from one location hundi plus) through informal payment in the above example. First, the hundi Many migrant workers transfer funds dealings. Among dealers themselves mechanisms.109 Informal payment trust is often based on kith and kin dealer in Thailand now owes the hundi to another. from branches and automated teller mechanisms persist, despite the arrival dealer in Myanmar for the remittance machines (ATMs) of Thai banks to relationships. of Western Union and Moneygram and payment. How will this be settled? There HOW HUNDI WORKS 107 World Bank, “Remittances Growth to Slow Sharply in 2015, as Europe and Russia Stay Weak; Pick Up Expected Next Year,” World Bank press release, April 13, 2015, http://www.worldbank.org/en/news/press- release/2015/04/13/remittances-growth-to-slow-sharply-in-2015-as-europe-and-russia-stay-weak-pick-up- Person A, a Burmese migrant worker in Thailand, desires to send money home to her expected-next-year.print, (accessed October 27, 2015). family in Myanmar. To do this, she approaches a hundi dealer whom she knows and pays

108 them, in baht. The hundi dealer now contacts their counterpart (another hundi dealer) One of the major barriers to the use of formal transfer mechanisms is, not surprisingly, the legal status of in Myanmar, who pays Person A’s family in kyat. The amount received by the family will the sender. If a migrant worker is without legal status in the host country, using a bank or a formal money transfer firm (where formal identification is usually a requirement) is both difficult and risky. This also be the kyat equivalent of that paid by Person A in baht, less an amount representing precisely describes the typical situation of the migrant from Myanmar. the commission charged by the two hundi dealers. As far as Person A is concerned, the transaction is now complete. She has sent her money home. 109 For more on the background of these, see Turnell, Bradford, and Vicary (2009).

68 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 69 11. MICROFINANCE

icrofinance has a proportion of all of these, in turn, somewhat long and promote microfinance as a sector M tortured history in into which they will allocate funds. Myanmar. For much of the time the For such actors, microfinance ticks sector has existed, in various forms all sorts of boxes for their donors and since 1997, at the fringes of legality. constituencies back home. As such, Dependent on specific memoranda and in contexts in which Myanmar of understanding and often simply finds itself now, microfinance is often on regulators looking the other way, the “first cab off the assistance rank,” for the longest time microfinance in that is, the initial, almost-obligatory, Myanmar teetered between achieving donor priority. genuine success and coming to a sudden halt. The trouble, of course, is that the influx of funds and new players In 2015, microfinance in Myanmar into microfinance, especially into gained new legal foundations, and countries that lack supporting has achieved growth and outreach. infrastructure, can undermine Altogether, around 250 microfinance prudence and good practice. The Around 250 microfinance institutions (MFIs) are now present in disasters created by excessive flows the country, serving over 1.2 million of donors’ funds into microfinance institutions (MFIs) are now clients and with a total loan portfolio lending is a long list that includes of just over US$200 million. The recent crises in Bangladesh, Bosnia, present in the country, MFIs include a handful of prominent India, Mexico, Nigeria, and Pakistan international nongovernmental (Roodman 2012, 275–279). serving over 1.2 million organizations (NGOs), around 20 So far in Myanmar the problem clients and with a total loan local NGOs, nearly 80 financial cooperatives, a dozen or so foreign of excessive funding is not yet in portfolio of just over US$200 microfinance companies, and nearly evidence. However, a proliferation of 100 local microfinance companies. MFIs is already a cause of concern. million. Many of the local microfinance Some of Myanmar’s MFIs are companies are former and current effective, efficient, and of a scale and money-lender firms. ambition from which much might be expected. Others are moribund Many of Myanmar’s MFIs were institutions established merely to established during the Thein Sein occupy a license in the misguided administration, during which time belief this would give them access to Myanmar became, and to some mobile payments business and thus extent remains, something of a speculative gain. Others, including hotspot for footloose international some 50 financial cooperatives investors, NGOs and global charities, that have been rebranded and the multilateral lending institutions, are masquerading as MFIs, raise and the development agencies of prudential and consumer protection a number of governments. A great concerns.

70 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 71 In the light of these concerns, to issue new MFI licenses of just one- plans; its ambitions include adding Vision Fund Myanmar was founded the regulator of microfinance in year duration. Table 9 provides data 500,000 new borrowers and in 1997 by the global charity World Myanmar, the Financial Regulatory on the largest and most promising of increasing its lending portfolio by Vision.115 It does not seek to be a Department (FRD), began in 2015 Myanmar’s MFIs: over US$100 million over the next financial institution in the narrow three years (2016 to 2019). sense, but uses its MFI to further the organization’s broader humanitarian TABLE 9: MICROFINANCE IN MYANMAR: BY THE NUMBERS * ACLEDA Myanmar is a subsidiary and development goals. Number of Deposits Number of Loans Outstanding of the Cambodian Bank of the same Institution Depositors $US 000s Borrowers $US 000s name, but its operations come with Proximity Finance is the MFI unit the backing of the IFC, which holds of the Proximity Designs social PACT Global Microfinance 673,828 35,689 623,864 112,152 Fund** a 15 percent stake.113 COFIBRED, enterprise in Myanmar.116 Established ACLEDA Myanmar 46,202 308 32,863 8,572 a cooperative bank from France in 2004, it offers today a vast array Vision Fund Myanmar n.a. n.a. 58,943 8,029 that had been a bidder for one of of products and services designed Proximity Finance* n.a. n.a. 35,808 5,982 Myanmar’s foreign bank licenses, to match the needs of rural dwellers DAWN Microfinance 54,630 497 53,800 4,706 and the German government- in Myanmar. Proximity made its * As of June 30, 2015, except where indicated. ** As of December 31, 2015. owned development bank, KfW, initial outreach with finance to fund

Source: Microfinance Information Exchange (MIX Market)110 hold another 15 percent each, while its customers’ purchases. Most of its ACLEDA Bank (Cambodia) itself current customers are farmers who owns the remaining 55 percent. The cannot access funds from the MADB. existence of the IFC as a shareholder MICROFINANCE LAW As seen in Table 9, microfinance in lending methodologies (at the core in ACLEDA has proved valuable for The most important development Myanmar is greatly dominated by the of which is the celebrated peer group the MFI in raising offshore funds, affecting microfinance in Myanmar PACT Global Microfinance Fund, lending model and the stipulation on including the ability to pay a higher under the Thein Sein administration which is very large even by global lending only to women) with business interest rate (13 percent) on such has been its formalization and standards.111 It accounts for more than training of various forms, PGMF funds than those permitted to other legalization through the Myanmar 50 percent of microfinance lending is both an MFI and a development foreign MFIs. This ability was granted Microfinance Business Law (MFL) of in Myanmar. An institution with NGO. Apart from making loans as a one-off authorization. As can be November 2011. a long history in Myanmar, PACT through the peer groups, PGMF seen from Table 9, ACLEDA runs a began as a project of the United encourages voluntary savings among reasonably substantial microfinance The MFL authorizes the Nations Development Program its clients to the elastic limits of what business in Myanmar. It currently establishment of microfinance (UNDP) in 1997 with a ministerial is allowable. Borrowers also pay has around a dozen branches, but institutions to carry out a liberal array memorandum of understanding into a Beneficiary Welfare Fund (1 is licensed to eventually operate in of activities, including to: against what was, otherwise, a percent of the value of their loans, nearly 80 townships in the Yangon singular lack of legal authorization while PGMF contributes a matching and Bago regions. Just over 34 • Extend microcredit; percent of its loans are made in rural for microfinance. After 15 years of amount) to meet contingencies and • Accept deposits; living such a precarious existence help borrowers in distress.112 PGMF areas, as encouraged by the FRD. (during which time, nevertheless, the reports a repayment rate on its ACLEDA has paid-up capital of K8 • Receive and accept remittances; PACT MFI grew and expanded), in current portfolio of 99.3 percent. billion. In FY2014/15 it recorded a • Carry out insurance business; February 2012 it was transformed profit of nearly US$1 million. In its The latest data on PGMF lending (and legally established under the FY2014/15 annual report, ACLEDA • Borrow locally and from abroad; are included in Table 9, but since new microfinance law—below) into noted that it was examining “the and the Pact Global Microfinance Fund the creation of PACT, its various possibility of becoming a full (PGMF). Mixing Grameen Bank arrangements claim around 1 million commercial bank.”114 • Carry out other financial activities. borrowers. PGMF has expansion

113 See ACLEDA Myanmar’s website, http://www.acledamfi.com.mm/mm/eng/, (accessed November 6, 110 Mix Market Microfinance data for Myanmar can be found at http://www.mixmarket.org/mfi/country/ 2015). Myanmar%20%28Myanmar%29?gclid=CKimzc-coMcCFcGTvQodAZUNJg, (accessed August 11, 2015). 114 ACLEDA MFI Myanmar Co., Ltd., “Annual Report 2014-2015,” Bahar Township, Yangon Region, p. 11. 111 Much of the information is from PGMF’s website, http://www.pactworld.org/country/pact-global- microfinance-fund, (accessed November 6, 2015). Background on the MFI’s early years in Myanmar can be 115 For more on the background on Vision Fund’s early history in Myanmar, see Turnell (2009). See Vision found in Turnell (2009). Fund’s website, http://www.visionfund.org/1966/about/, (accessed November 6, 2015).

112 The August 2015 floods in Myanmar imposed severe losses on many of PGMF’s borrowers and, 116 See the Proximity Finance website, http://www.proximitydesigns.org/products-services/financial-services, accordingly, this fund is currently being heavily drawn upon. (accessed November 6, 2015).

72 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 73 Minimum capital standards is now around 200 MFIs of varying • Requiring MFIs to make at least provision of a safe savings vehicle are specified under the MFL, qualities and capacities. Another half of their lending in rural areas; and a means by which clients’ own appropriately at differential levels implication, apparent even in the and funds can be employed for capital depending on whether an MFI takes absence of crises, is that many of expenditure and consumption- in voluntary deposits or not. For the activities theoretically allowed Many of the activities • Requiring MFIs to meet a smoothing without recourse to deposit-taking MFIs the minimum under the MFL are not permitted liquidity ratio of at least 30 borrowing is likely to be the real amount of paid-up capital is set at in practice. Notably, these include theoretically allowed under percent, a debt to equity ratio of contribution they make to broader no more than 5:1, and a solvency 118 K30 million (less than US$30,000), an interpretation of the FIL that the MFL are not permitted economic development objectives. and for non-deposit taking MFIs voluntary deposits cannot be collected ratio of greater than 15 percent (LIFT 2014, 85). Meanwhile, some of the 2014 capital must be a minimum of by MFIs, even those with deposit- in practice. Notably, these freedoms listed above have proved K15 million. Such an initial capital taking licenses (discussed in more Despite the advocacy of MAP, include an interpretation in practice to be much less than they requirement is common throughout detail below). This restriction on deposits FIND, funding bodies such as the the microfinance industry (but the seem. For instance, the theoretical In 2014 a series of reforms were made of the FIL that voluntary Livelihoods and Food Security Trust ability of local MFIs to borrow from capital minimums in Myanmar are ... restrains not just the to the regulations governing MFIs. Fund (LIFT), and just about every the MEB is rendered irrelevant by very low), as are the different amounts cannot Some of these came at the behest of deposits be collected MFI in Myanmar, the cap on the the inability of that institution to for deposit and non-deposit taking ability of MFIs to properly maximum interest rate MFIs could institutions. two international studies into ways by MFIs. lend against anything other than of improving financial inclusion and appropriately fund charge remained at 30 percent per the aforementioned, very narrowly Overseeing the evolving regulation in Myanmar—the UN Capital year (2.5 percent a month), while the defined physical collateral. Foreign and supervision of microfinance in Development Fund’s Making Access themselves and achieve minimum deposit interest rate to be MFIs are similarly prevented from paid was maintained at 15 percent Myanmar is the Financial Regulatory Possible (MAP) project, mentioned financial sustainability, borrowing from international banks. Department (FRD).117 The FRD and used throughout this study, and per year. Although in theory such borrowings was formed out of the Myanmar the FIND (Financial Inclusion for but also the possible Other impediments likewise can be undertaken at any interest rate, Microfinance Supervisory Enterprise, National Development) project of the remained, not least the interpretation in practice the CBM does not allow contribution of the sector itself spun out of the long-standing, World Bank. Among the measures of the MFL that MFIs were not to loans upon which a rate of more than state-owned pawnshop in Myanmar, introduced, which were a mix of 10 percent a year is levied. Given broadly to Myanmar’s take voluntary deposits (beyond 5 the MSLE. greater freedoms and new prudential percent of the value of a borrower’s that foreign banks normally require requirements, were: financial and economic loan), or any deposits from a foreign exchange hedging premium Over time, the details of the rules and on loans to entities in Myanmar— regulations governing microfinance • Increasing the maximum single nonborrowers. This restriction on development. deposits, presumably made out of a on top of a margin that takes into in Myanmar have evolved to loan cap on MFIs from K500,000 account counterparty risk generally— include a great many standards to K5 million; concern for the safety of depositors’ savings against the backdrop of few international commercial lenders that attempt to meet international would provide funds at anything less best practice. Likewise, the FRD • Allowing MFIs (foreign and Myanmar’s history of financial domestic) to seek equity financing; crises—and the great number of than between 13 to 17 percent a year has been created to mimic the 119 small, poorly managed, and relatively (LIFT 2014, 85). institutions that in other countries • Allowing local MFIs to borrow regulate microfinance entities. obscure MFIs that had been allowed In a similar vein, the FRD has, in from the Myanmar Economic to spring into existence—is a Yet the FRD struggles to properly Bank; practice, banned the provision of implement the laws and regulations Few international significant impediment. It restrains term deposits and other bank-like it is supposed to implement; it also • Allowing foreign MFIs to borrow not just the ability of MFIs to products through which MFIs might has very little capacity to understand from foreign financial institutions, commercial lenders would properly and appropriately fund legitimately fund themselves, even up to a maximum of $US3 themselves and achieve financial and incorporate the many new provide funds at anything if those products were offered just methodologies and technologies million; sustainability, but also the possible to borrowers. Such deposit types being applied elsewhere in the world. contribution of the sector broadly to can also greatly assist MFIs in their • Allowing MFIs to offer mobile less than between 13 to 17 This has many implications for the Myanmar’s financial and economic ability to properly deal with the phone-based payment services; sector, not least the lack of confidence percent a year. development. As study after study liquidity mismatch that naturally inspired in its supervision of what has shown in recent years, MFIs’ arises from financial intermediation.

118 For more on this understanding, see Roodman (2012). 117 The FRD website is located in the Myanmar Small Loans Enterprise section of the Ministry of Finance website—underlining the point that MFI regulation in Myanmar is yet to be placed within an appropriate 119 Among the very few financial firms offering exchange rate hedging in Myanmar, none offer a price below framework. See http://www.mof.gov.mm/en/content/myanma-small-loans-enterprise. 10 percent of a transaction.

74 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 75 The injunction was almost certainly As noted above, this delay has enacted under pressure from the caused a degree of consternation formal banks—leaning on the among a small cohort of MFIs, regulator at a time when they whose formation seems to have been feared losing market share to rivals predicated precisely on using their who could not only offer a higher MFI status as the basis for getting interest rate but also, because of the into the mobile payments business. international backing of many of the Some legitimate operators seem MFIs, offer an extra dose of perceived to have been similarly minded. In safety and security along the way. August 2015, Thailand’s leading mobile phone retailer, Jay Mart, Progress in integrating the was authorized to establish a joint transformative possibilities of mobile venture, microfinance operation telephony and microfinance has in Myanmar (JP Finance) that will similarly been slow, despite the ostensibly be built around a phone fact that microfinance is one of the network.121 Scant details are available services explicitly allowed under the at this stage.122 CBM’s Mobile Banking Directive.120

120 Vanderbruggen and Dharamsi (2014, 5).

121 “JMT to Enter into Micro-Finance in Myanmar,” Mizzima, August 14, 2014, http://mizzima.com/business- domestic/jmt-enter-micro-finance-myanmar, (accessed August 16, 2015).

122 Myanmar’s MFIs have complained about most of these restrictions. See Joshua Carroll, “Myanmar’s Microfinance Leader Says Rules are Too Tight,” Catalyst Asia, June 1, 2015, https://catalystasia.wordpress. com/2015/05/18/myanmars-microfinance-leader-says-rules-are-too-tight/, (accessed August 11, 2015).

76 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 77 12. THE UNFORTUNATE RETURN OF COOPERATIVE CREDIT

ften listed as microfinance and many cooperatives are moribund providers in Myanmar in reality. Nevertheless, the claims O are the various financial themselves illustrate the esteem the cooperatives that exist in the country. cooperative system continues to have Organized under the Ministry of for many in authority in Myanmar. Cooperatives (itself posing something THE CHINA LOAN In Myanmar, cooperatives of a problem in terms of regulatory clarity), there is, and always has Policymaking with respect to banking and financial affairs under the Thein have mostly been a failure, been, a very large gap between the rhetoric of what cooperatives do in Sein administration has been, for the not least because they Myanmar and the practical realities most part (and with the policy banks on the ground. The cooperative and latest foreign exchange license require levels of trust and movement has made enormous issues aside), mercifully absent of the sometimes eccentric initiatives that social capital that have never strides in many countries around the world, especially in contributing were hitherto a feature in Myanmar. existed. to financial inclusion. In Myanmar, In August 2013, however, echoes of cooperatives have mostly been a the past could be heard when news failure, not least because they require broke of a large—up to US$900 levels of trust and social capital that million—loan negotiated between have never existed—in the colonial Myanmar’s Ministry of Cooperatives era, the early independence years, or and the Export-Import (Exim) Bank the present. Yet, and notwithstanding of China. This loan, to be drawn down in tranches, was to be lent on Over half a million this unpromising record, it is claimed that there are around 1,700 such to Myanmar’s cooperatives which, borrowers are collectively institutions in Myanmar.123 Nearly in turn, would provide loans to 50 of these (belonging to the Central individual borrowers. The Exim Bank claimed for the cooperatives, Cooperative Society, more on which loan was to be repaid in 10 years and below) hold MFI licenses. Over half came with an interest charge of 4.5 over K20 billion in loans, a million borrowers are collectively percent per year and a management fee of a further 1 percent. Meanwhile and around K30 billion in claimed for the cooperatives, over K20 billion in loans, and around K30 for the individual borrowers of the deposits. billion in deposits (OECD 2014, cooperatives the loan terms were 210). These numbers are unreliable, very attractive; they were initially

123 Private communication with an official in the Ministry of Cooperatives.

78 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 79 publicized at 1.5 percent a month be required to save, to a minimum The actual borrower of the U.S. In reaction to the Cooperative (note that MFI loans are charged at of K50,000 in the case of the dollar loan from China is the Ministry’s announcements, Phyo 2.5 percent) and were subsequently K500,000 loans.126 Myanmar Foreign Trade Bank Win, a member of parliament reduced to 1.1 percent.124 (MFTB), which then advances (MP) with the National League • Under the new system, loans can the Ministry of Cooperatives an for Democracy (NLD), said that The distribution of funds under these be used for a number of business equivalent sum of kyat for lending on cooperative enterprises had “always arrangements is a vast process, as is, purposes, but the expectation is to cooperatives.129 The loan appears been a failure.”133 Other MPs accordingly, the purported expansion that farmers will use capital to to have been taken in U.S. dollars to at the time took a similar line, of the cooperatives network itself. buy equipment such as tractors, finance the import of Chinese goods. with Representative Tin Nwe Oo These are some of the elements: tractor trailers, trucks, engines, As such, the whole arrangement is rhetorically asking, “how many times generators, water pumps, and • According to the Minister of like a vast hire purchase (or rent- has the cooperative system succeeded motorbikes. Urban borrowers to-purchase) plan.130 The benefits in our country?” while also remarking Cooperatives, the number of are expected to purchase taxis, cooperative societies will increase to the Chinese suppliers from this on the high interest rate China was sewing machines, trishaws, and 135 by 5,000 and, subsidiary to these, are clear and apparent. Whether the charging for its initiating credit. motorbikes, although the last item arrangement locks local borrowers Upper house MP Phone Myint Aung borrowing groups consisting of is presumably excluded in Yangon, five-person teams, functioning into the purchase of items they might (of the New National Democracy given the ban on motorbike not otherwise choose is an open (and Party) opined that the loan program under a cooperative society, 127 circulation there. 131 within which members would worrying) question. “won’t really change the lives of the farmers.”135 Minister of Cooperatives guarantee each other’s loans, will • Meanwhile, as a pilot project for Longer term, and noting the gap Upper house MP Phone Kyaw Hsan acknowledged that “the be extended to each of Myanmar’s the broader system, cooperative between the size of the Chinese 125 cooperative system has not succeeded 60,000 villages. credit is expanded among eight loan and the ultimate cost estimates townships of Myanmar’s capital, Myint Aung (of the New in the past” but added that “we will • The ministry promises to of the expanded program, Deputy try to learn from our mistakes.”136 Nay Pyi Taw. This involves the National Democracy Cooperatives Minister Than Tun supply each village borrowing provision of an extra K7 billion group K100,000 in start-up made clear that the intention of the Upon this issue of the system’s in funds, spread among 205 Party) opined that the ministry was to seek “aid, grants, and ability to cope with expansion, and capital. From this point, savings cooperative societies and their mobilization and loan repayments, loan program “won’t really concessional loans from international of the Ministry of Cooperatives and roughly 12,500 members. Loans organizations.”132 The quest for regulators in directing it all, outside together with further government are up to K500,000 (in line with grants, are meant to aggregate change the lives of the international funding has also been observers have also been skeptical, as the broader program) and are a theme in a number of the speeches captured by MAP: funds sufficient to offer borrowers meant to be used for the purchase loans of K100,000, rising in time farmers.” made by Minister of Cooperatives of agricultural vehicles and Kyaw Hsan. to K500,000 per household. machinery.128 Against these loans, borrowers will

124 Jay Supetran, “The China Loan: Managing and Sustaining Development,” Myanmar Insider, August 2015, http://www.myanmarinsider.com/the-china-loan-managing-and-sustaining-devel/, (accessed November 4, 2015).

125 The comments of the deputy minister were made before an international conference on microfinance in Myanmar, held in Nay Pyi Taw on May 9–10, 2013. The proceedings of the conference, “Emerging Microfinance Sector in Myanmar: Regional Lessons on Selected Issues,” can be found at: http://www. 129 See Khin Oo Tha, “Chinese Bank to Loan $100 Million,” Mizzima News, August 20, 2013, http://www. mm.undp.org/UNDP_Publication_PDF/MFWSreport.pdf, (accessed October 23, 2015). The expansion of mizzima.com/business/economy/9883-chinese-bank-to-loan-100-million. Myanmar’s cooperative credit system may involve the absorption of the large PACT/UNDP microfinance institution noted above. Such an idea has never been far from the thoughts of the Cooperative Ministry 130 The August 20 report in the New Light of Myanmar supports the idea that this is the arrangement. (to the consternation of the PACT/UNDP people), but the issue came to the surface in more blunt ways during some of the speeches and announcements related here. Likewise, sometimes mentioned as the 131 It cannot be assumed away that some of the foreign exchange proceeds of the loan may end up in wholesale distribution vehicle for funds through the cooperative system is the Myanmar Microfinance Bank places and pockets not properly intended. (MMFB), discussed above. Details have been elusive. Apex funding vehicles (such as the potential role of the MMFB as a supplier of wholesale funds to retail MFIs) sat atop the cooperative credit system in both 132 Statement made at the aforementioned international conference on microfinance in Myanmar, held in the colonial and post-independence eras without much utility. Nay Pyi Taw on May 9–10, 2013.

126 These proposed loan terms are cited from “President U Thein Sein Calls for Hard Work,” The New 133 U Phyo Win is cited in Win Ko Ko Latt, “MPs Approve Loan Despite Concerns Over Interest,” The Light of Myanmar, August 20, 2013, pages 1 and 9. Myanmar Times, August 20, 2013, http://www.mmtimes.com/index.php/national-news/7947-mps-approve- loan-despite-concerns-over-interest.html. 127 Statement made at the aforementioned international conference on microfinance in Myanmar, held in Nay Pyi Taw on May 9–10, 2013, in conference proceedings. 134 Tin New Oo is cited in Khin Oo Tha, op. cit.

128 For more on this pilot plan, see Hsu Hlaing Htun, “First Phase of Ambitious Ministry Lending Program 135 Phone Myint Aung is cited in Khin Oo Tha, op. cit. Launched in Nay Pyi Taw,” The Myanmar Times, August 25, 2013, http://www.mmtimes.com/index.php/ national-news/7946-first-phase-of-ambitious-ministry-lending-program-launched-in-nay-pyi-taw.html. 136 Kyaw Hsan cited in Win Ko Ko Latt, op. cit.

80 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 81 A key issue facing the rapid it is perhaps fair to say that the paid to China’s Export-Import taxis, and sewing machines evoked by growth of the cooperatives is the consensus among financial sector While the overall volume Bank has to be met by the ultimate the Minister of Cooperatives. limited use of prudential standards stakeholders in Myanmar was that borrowers—that is, Myanmar’s and professional management the cooperative credit system as it of credit promised under farmers, small enterprise proprietors, One interesting future development on the China cooperative loan is the systems, and, for example, clients existed was essentially moribund, an the revitalized cooperative and workers. are not required to undergo artefact of history unsuited to modern possibility it could be classified as While the overall volume of credit an “odious debt”—a debt taken on needs and risk assessments prior financial practices. system is large, the loans to disbursals. The supervisor promised under the revitalized “and spent against the interests of DIFFERENT THIS TIME? (Ministry of Cooperatives) has available to individual cooperative system is large, the loans the population of a state, without its limited tools to manage the funds, Not least of the serious difficulties available to individual borrowers consent, and with full awareness of borrowers are not. At the and the mandatory annual audits presented by the announced are not. At the projected maximum the creditor” (Howse 2007, 2). The expansion of Myanmar’s cooperative of K500,000, they are insufficient highly pertinent consequence of debts may be insufficient as the loan projected maximum of book grows. This is particularly credit system is that highlighted by to be transformative, even for so designated is that they may not— important since, although the MPs above; such initiatives have K500,000, they are insuffi microenterprises, and are well short indeed, should not—be repaid. Yet Myanmar has had experience been applied many times before, with of the funds required for the very another issue for Myanmar’s future with cooperatives for a long time, dismal effect. Are matters different cient to be transformative, items held out to attract potential government to ponder. now? It is hard to see how they borrowers—the tractors, motorbikes, sustainability at this scale is not even for microenterprises. yet proven and will require a few would be. The program outlined years of operation. (MAP 2014, 17) thus far seems designed to repeat past errors, especially in the way it The MPs and others cited here were is so completely state-driven and surely right to be concerned. Put operated. In fact, this latest version simply, cooperatives have always been actually broadens the state’s role. a failure in Myanmar.137 Established State direction is not only apparent in initially by the British colonial the construction and funding of the authorities to dilute the dominance system itself, but also in the provision of the Chettiar moneylenders, as of the goods for which borrowings well as to curry favor with the are made. As noted above, it would local populace, the first iteration of seem that the items against which the cooperatives collapsed in the 1920s loans are made are procured from the amid both economic depression and a Ministry of Cooperatives, direct from widespread lack of faith in the system. Chinese suppliers, and with no local The revival of the cooperatives after review. Such critics point to the independence, when they were seen as an acceptable device existing More than a few of the criticisms relatively high interest rate from MPs and others of the somewhere between capitalism and charges of this debt; its 4.5 socialism, more or less went the same cooperative credit expansion plans center on its funding through the way, especially with respect to an percent-per-year levy plus all-pervasive belief that cooperative Chinese loan. Such critics point loans did not have to be paid back. to the relatively high interest rate management fee compares After the military coup in 1962, charges of this debt; its 4.5 percent- especially unfavorably with cooperatives were once again a chosen per-year levy plus management fee compares especially unfavorably vehicle for credit provision. In reality, concessional lending from however, they were little more than with concessional lending from the 138 elements of the security apparatus and World Bank, Japan, and others. the World Bank, Japan, and distribution devices for corruption, Myanmar is hardly in a position to be before disintegrating into irrelevancy. complacent about external debt and others. Up until the recent pronouncements, its recurrent costs. And the interest

137 For details on the long history of financial cooperatives in Myanmar, see Turnell (2009).

138 The World Bank’s 40-year, US$260 million development loan to Myanmar is charged at 0.75% per year.

82 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 83 13. CAPITAL AND FINANCIAL MARKET DEVELOPMENTS

yanmar’s formal financial moment, these yields exceed the sector is a bank-based minimum interest rates banks must M one in the pattern pay on deposits. As a result, the bonds familiar to many transition and find customers among the banks developing countries. Myanmar’s themselves, and to a very limited government has issued treasury bonds extent among domestic private and bills since the 1990s, but these investors. However, basing the bond Basing the bond market instruments are overwhelmingly market upon administratively fixed bought by the central bank (in yields is not a sustainable option over upon administratively fixed the manner of “money financing” time. Myanmar’s volatile inflation, discussed earlier) and by banks (also uncertainties with respect to the yields is not a sustainable as noted previously, and increasingly banking sector, and other broader now the MEB). A formal, private- doubts mean that administratively option over time ... in what sector bond market does not exist in set yields will not always, or even would amount to a relatively Myanmar. Similarly, markets to hedge mostly, deliver bond buyers. Instead, risk through financial derivatives in what would amount to a relatively simple reform that could and similar instruments are as yet simple reform that could advance unknown. Progress has been made in sound public finances, the current advance sound public recent years in developing financial bond system could be replaced by one finances, the current bond markets in Myanmar, though the pace in which bonds are sold at auction, has been slow. This section explores the standard method of selling bonds system could be replaced by some of the issues, focusing first more or less everywhere. The market- upon the government bond and bill determined rates for Myanmar’s debt one in which bonds are sold markets, and then the proposal for a thus generated would aid not just in Yangon Stock Exchange. its sale. The rates would also form at auction. reference rates upon which a newly- TREASURY BOND MARKET freed financial sector broadly could International practice, as well price the provision of finance. as economic and public finance orthodoxy, tells us that by far the best The decision in April 2013 to mechanism, beyond current revenues, allow secondary market trading in for financing government expenditure Myanmar government bonds was a is selling treasury bonds. Myanmar positive, though insufficient, move in currently sells such bonds at fixed aid of the above. Likewise welcome yields determined by the government was the establishment in September (in the growing magnitudes revealed 2014 of a Treasury Department in Table 2 and Table 3). At the under the Ministry of Finance

84 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 85 which could, if and when the Public to anything smacking of a loss of the Myanmar government and the of Finance, but directs that body to Debt Management Law is finally control. Another is that higher yields ratings agencies as preparation for a be transparent on the magnitude passed, create part of the necessary will impose greater fiscal financing possible future rating, as well as to and types of debt taken on, as well infrastructure for prudent public costs. As noted above, the role of the improve data collection and investor as the scale and method of funding 140 spending and financing. MEB engaging in the bill auctions, Establishing a sovereign outreach. these through the sale of government bidding below market-clearing securities. The draft law also spells TREASURY BILLS yields and yet receiving substantial risk rating is one of the The move toward seeking a sovereign out the debt-raising capabilities of In addition to its bond issues, allocations, only exacerbates matters. rating was applauded by more or less state and regional governments, as Myanmar’s Ministry of Finance sells necessary foundations for all sides of the political and other well as state economic enterprises. short-term (mostly three-month The bill auctions take place every two debates in Myanmar. Such ratings, as the development of capital The former can borrow, but must maturity) treasury bills to fund the weeks. The volumes put to tender imperfect as they certainly can be, are have such borrowing approved by mismatch between government vary significantly, however, with very nevertheless important in allowing markets in Myanmar. the Union government which, in expenditures and receipts. large amounts issued for sale toward the pricing of government bonds turn, must record and integrate this Traditionally these bills, which were the end of the financial year to plug and, with these then established as a debt in the Union budget as a whole. sold at an unattractive and low urgent funding shortfalls. The IMF benchmark, a whole superstructure State economic enterprises remain fixed yield in order to reduce the recommends spreading out the sales of private debt instruments priced restricted to borrowing only from the cost of such financing, were simply to avoid the selling pressures and according to varying degrees of risk. state-owned banks. sold to the CBM. In that way they subsequent default take-up by the In short, establishing a sovereign constituted a significant component CBM (2015, 8). risk rating is one of the necessary Throughout the Thein Sein of the financing of Myanmar’s foundations for the development administration, assistance in the budget deficits noted throughout Foreign banks are, at present, of capital markets in Myanmar—a development of Myanmar’s capital The draft law ... assigns the this study. In March 2015, however, precluded from participating in modest, but positive step. markets was on tap from a number the auctions. As with the other an important, if as yet incomplete, In March 2015, however, financing of government of sources. Support for the creation reform was set in motion when the impediments above, the effect of this Some other reforms discussed during of the stock market is outlined government announced its first is to constrain a potentially important an important, if as yet debt to the Ministry of the Thein Sein administration but below, but for the creation of a bond auction for K50 billion of treasury source of deficit financing. left incomplete at its conclusion market, assistance has come from the incomplete, reform was Finance, but directs that included the aforementioned bills. Conducted by the CBM A SOVEREIGN RATING FOR Japan-ASEAN Fund for Technical Public Debt Management Law that through a tender system, the first MYANMAR? set in motion when the body to be transparent on Assistance and the ASEAN Bond auction attracted five bidders, all seeks to establish a new set of rules Market Initiative.142 One of the final initiatives of the with respect to government debt licensed financial institutions, and government announced its the magnitude and types of Thein Sein administration with 141 DEVELOPING A STOCK just over half of the bills on offer were instruments. In particular, the respect to Myanmar’s capital first auction for K50 billion EXCHANGE taken up. Somewhat unfairly, the debt taken on, as well as the draft law (which was to replace the markets was its commissioning of Government Securities CBM came under criticism for the colonial-era For over a decade, Japan’s Daiwa the Standard Chartered Bank of of treasury bills. scale and method of funding. Act shortfall at the time, but the result of of 1920) assigns the financing Securities has been involved in a the United Kingdom (universally of government debt to the Ministry 50-50 joint venture with the MEB this first auction was not, in context, known for its role in emerging a bad outcome. More warranted has markets) and Citigroup of the United been criticism since (see IMF 2015, States as sovereign credit ratings 5) that the Ministry of Finance advisors.139 The appointment, made continues to put an upper limit on with some fanfare in August 2015, the yields the bill auctions deliver, was accompanied by warnings that and, as a consequence, bill sales still Myanmar was not yet seeking a do not meet their targets. sovereign rating and international 140 Standard Chartered Bank, “Myanmar Appoints Citi and Standard Chartered as Sovereign Credit Ratings bond sales were not immediately Advisors,” Standard Chartered Bank press release, August 12, 2015, https://www.sc.com/en/news-and- Why the resistance to market- media/news/asia/2015-08-12-Myanmar-appoints-Citi-and-Standard-Chartered-as-Sovereign-Credit-Ratings- determined yields? One answer is the in the cards. Rather, the two banks Advisors.html, (accessed September 14, 2015). were to act as a bridge between old hostility within senior leadership 141 Aye Thidar Kyaw, “Public Debt to be Handled Differently,” August 12, 2015, http://www.mmtimes.com/ index.php/business/15933-public-debt-to-be-handled-differently-if-draft-management-law-goes-ahead.html, (accessed October 30, 2015).

142 “Activities on the Development of Capital Markets in Myanmar,” website of the Central Bank of Myanmar, http://www.cbm.gov.mm/content/activities-development-capital-market-myanmar, (accessed September 16, 2015). An outline of JAFTA’s program on Myanmar’s bond market can be found in a brief 139 Kyaw Hsu Mon, “Standard Chartered, Citi to Advise on Credit Rating,” The Irrawaddy, August 12, 2015, memorandum, “Technical Assistance on Developing Bond Markets,” on the ASEAN website, http://www. http://www.irrawaddy.org/business/91213.html, (accessed August 14, 2015). asean.org/archive/jobs/TORDBM1-My.pdf, (accessed September 16, 2015).

86 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 87 establishing the Myanmar Securities Joint-Venture Company Limited, the Myanmar Agribusiness Public In July 2013, a new Securities Exchange Center (MSEC) in with the objective of having a fully In July 2013, a new Securities Corporation (MAPCO, a creation of Exchange Law (SEL) was enacted by Yangon.143 The basis of what was computerized trading platform (a the Myanmar Rice Federation).147 As Myanmar’s parliament to establish supposed to be a fully functioning scaled-down version of Tokyo’s own) Exchange Law (SEL) was it turned out, at the official opening the necessary legal infrastructure for stock exchange, the MSEC was up and running by 2015. The joint of the YSX on December 9, 2015, a stock exchange. Drafted with the enacted by Myanmar’s never more than a very small-scale venture has paid-up capital of K32 six companies were approved to list. assistance of Japan’s Policy Research affair that listed and traded just two billion (authorized capital of K100 parliament to establish Asia Green Development Bank was Institute, the SEL established the stocks (Myanmar Citizens Bank and billion) and is owned by MEB (51 not one of them, but joining FMI Myanmar Securities and Exchange the Forest Products Joint Venture percent), Daiwa Institute of Research the necessary legal and MAPCO were First Private Commission to regulate securities Corporation). Trading was paper- (30.25 percent), and the Japan Bank Limited, Great Hor Kham markets, set out the procedures for based and extraordinarily thin (it was Exchange Group (18.75 percent).144 infrastructure for a stock Public (a construction-engineering- obtaining a securities trading license, often said that there were buyers, but Interestingly, given the ownership exchange. infrastructure firm), Myanmar and outlined the legal framework no sellers of the listed stocks) and structure of the YSX as well as the Citizens Bank, and Myanmar- for the YSX.149 Updating Myanmar’s illiquid. Had events gone to plan, presumed role to be played by the Thilawa SEZ Holdings (the company company law remains a significant the initial over-the-counter trading MEB in the MSEC, the bank chosen managing the Thilawa SEZ). pending item (along with what on the MSEC would have graduated to create the settlement systems for reporting requirements will emerge). to a full bourse with the MEB the YSX was Kanbawza Bank (out of The official opening of the YSX, A hangover from the old Company running settlement functions and all five bidders for the role).145 something of a marquee moment Law in Myanmar, which dates back backed by new securities laws and for Myanmar’s financial world and to 1914, and a major disincentive regulations. A number of half-hearted Projecting that between 180 to 300 its inhabitants, was, nevertheless, an for international investors in equities initiatives to these ends were launched firms would be listed and trading by odd affair. Not the least reason for in Myanmar, is the current policy in the early 2000s, not least prompted 2020, Daiwa also began approaching this was an announcement made at establishing that the presence of even by the CBM, but Myanmar’s political prospective Burmese companies the opening that no actual trading of a single foreign investor in a Burmese environment precluded anything likely to list. The construction of stock would take place yet for some company renders it to be classified material. the computerized trading backbone months. This caught the attention of as a foreign entity—and accordingly of the stock exchange has been the international press especially, but subject to a number of restrictions, In 2012, however, momentum for funded by Japan’s International it did allow a particularly apt quote not least in the use and ownership of 146 finally realizing the establishment of Cooperation Agency. In September from Chairman of the Securities and land.150 a fully functioning stock exchange 2014 it was announced that the Exchange Commission Myanmar in Myanmar accelerated materially. first three stocks to be traded on Dr. Maung Maung Thein (who was Listing Rules In April 2012 it was announced that the YSX would be the Asia Green also deputy finance minister) that the operators of the Tokyo Stock Development Bank, the prominent “we waited a long time for the stock On August 14, 2015, the YSX Exchange had now joined the MEB- investment holding company First exchange market to appear, it doesn’t announced the criteria companies Daiwa partnership collectively in Myanmar Investment (FMI, of which matter that we need to wait one or would have to meet to list on the 151 the Yangon Stock Exchange (YSX) Yoma Bank is a subsidiary), and two more months to sell shares.”148 exchange. These included a range

147 “Yangon Stock Market Launch in 2015,” Bangkok Post, September 30, 2014, http://www.bangkokpost. com/business/finance/435138/new-myanmar-stock-exchange-to-list-three-firms.

148 Zin Thu Tun, “YSX Rings Opening Bell, but Trading Will Not Start for Months,” Myanmar Business Today, 143 Myanmar had a stock exchange that survived from the late 1920s to the early 1960s (at which time December 14, 2015, http://www.mmbiztoday.com/articles/ysx-rings-opening-bell-trading-will-not-start- it was abolished, along with much other private enterprise as noted in these pages). The Rangoon Stock months, (accessed December 30, 2015). Exchange traded, at its peak in the early 1930s, in the stocks of 51 companies, mostly mining and oil and rubber enterprises. Seven members (brokers) belonged to and ran the exchange, upon which they also 149 Than Htike Oo, “Japan to Help Myanmar Create a Securities and Exchange Law,” Mizzima, August 14, speculated on their own account. It was a rather clubby affair, and to become a member, a broker had 2012, http://www.mizzima.com/business/7751-japan-to-help-Myanmar-create-a-securities-and-exchange-law. to be proposed by at least two existing members and be elected by all the others. The exchange met to html, (accessed September 17, 2014). trade once in the day, in early afternoon. U Tun Wai (1962) writes that, in addition to the formal brokers, “were about twenty or thirty street or pavement brokers located mainly on Mogul Street.” 150 This highly restrictive effect was supposed to be remedied by the promulgation of a new company law for Myanmar in 2015. As it turned out, however, the parliament did not pass this legislation before it 144 Thomas Rhoden, “Yangon’s Stock Exchange in Comparative Analysis,” paper presented to the 2015 completed its final sitting in August 2015. Accordingly, this obstacle remains in place. For more on the new Conference of Myanmar/Myanmar Studies, Chiang Mai University, Thailand, July 25, 2015. Company Law, see Alexander Bohusch, “Update of the Myanmar Companies Law,” Myanmar News, Luther Law Firm Limited, June 2015, http://www.luther-lawfirm.com/fileadmin/user_upload/PDF/Newsletter/ 145 Kyaw Phone Kyaw, “KBZ Chosen as Settlement Bank for Upcoming Stock Exchange,” Myanmar Times, Myanmar/NL_Myanmar_07-2015-Updated_Draft_of_the_Myanmar_Companies_Law.pdf, (accessed May 5, 2015, http://www.mmtimes.com/index.php/business/14290-kbz-chosen-as-settlement-bank-for- September 14, 2015). upcoming-stock-exchange.html, (accessed September 14, 2015). 151 The criteria were published the same day in the government’s newspaper, “Announcement of YSX’s 146 Antoni Slodkowski, “Daiwa Looks to Lead $380 Million Investments in Myanmar,” July 23, 2012, Reuters, Listing Criteria,” The Global New Light of Myanmar, August 14, 2015, p.12, http://www.moi.gov.mm/npe/ http://www.reuters.com/article/2012/07/23/us-Myanmar-japan-investment-idUSBRE86M07B20120723. nlm/?q=download/file/fid/2036, (accessed August 16, 2015).

88 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 89 of measures that seek to ensure Broking and Underwriting Licenses makers in seeking potential firms for in Myanmar) was allowing foreign market integrity, as well as consumer listing. In selecting the underwriters, investors to buy stocks—gaining both protection: Meanwhile, a notification from the role of the Japanese (both the a more stable investor cohort and the Securities Business Supervisory Tokyo Stock Exchange staff as well tapping another source of capital in • Listing companies must have at Commission of the Ministry of as those from Daiwa) was critical in the process. least 100 shareholders; Finance set out a series of different conducting compliance and capacity licenses for securities companies checks.153 The inclusion of Daiwa The specific fears regarding the • The paid-up capital of listing to provide services to the YSX. In performance and even worth of companies must be a minimum in this is noteworthy, especially particular, minimum paid-up capital given that a subsidiary of the firm the YSX are echoes of a very broad of K500 million at the date of requirements are set to gain a license and still unsettled debate among application; (Daiwa Securities Group) was one of in: the entities offered a license. Other economists as to the efficacy of financial markets in countries • Listing companies must have been • Securities underwriting license winners included Aya Bank 154 without traditions of trading in secure trading profitably for at least two K15 billion, and United Amara Bank. years before the date of application property rights. Far better, argues the to the YSX; and • Securities dealing K10 billion, International Comparisons nay side of this debate, for countries such as Myanmar to trust in banks— • Listing companies must establish • Securities broking K7 billion, and Nascent stock exchanges have institutions better able to deal with systems to prevent insider trading. emerged in a number of transition contingent information and close • Securities investment advice economies in recent times. For borrower monitoring. This is a long Naturally, on top of these provisions, K 0.03 billion. Myanmar, the most relevant of argument without proximate hope came other widely used listing these—for what to do and what Other, nonfinancial requirements of resolution. In the meantime, the requirements—“fit and proper not to do—are the stock exchanges on securities companies are more readers of the Myanmar Times can persons” tests for listed company in Viet Nam (two, one each in demanding, especially in the context console themselves that their concerns directors, disclosure and reporting Hanoi and Ho Chi Minh City), of Myanmar where engagement mirror (consciously or unconsciously) requirements to the exchange, Cambodia, and Laos. After a in formal financial markets is not the concerns over stock markets of various proper accounting troubled early history, the exchanges something most citizens could probably the greatest modern thinker practices, compliance and taxation in Viet Nam could be regarded have experienced within its borders on economics: arrangements, and so on. The listing as something of a model for what in recent years. These include requirements have not escaped the YSX could become, while As the organization of investment requirements that directors of criticism, and, in the immediate the exchanges in Cambodia and markets improves, the risk of the securities businesses have at least one aftermath of their proclamation, Laos provide a cautionary tale of predominance of speculation does year of experience in the industry; a skeptical dialog took place in what should be avoided. The two … increase … Speculators may do and that every securities business the pages of the privately owned Vietnamese exchanges collectively no harm as a bubble on a steady must have an expert with at least Myanmar Times.152 In this forum, listed, as of September 2015, stream of enterprise … a serious three years of experience in the sector, a number of concerns were raised, around 600 companies with a situation can develop … when the latter surely opening the door most centering upon possible market market capitalization of over US$60 enterprise becomes the bubble almost exclusively to foreigners or manipulation by listing firms making billion. The Lao exchange lists four on a whirlpool of speculation. expatriates. available only minority stakes to companies (market capitalization When the capital development of the public and keeping control in In early October 2015 it was of around US$1.3 billion), while a country becomes a byproduct of the hands of their otherwise private announced that conditional the Cambodian exchange lists two the activities of a casino, the job is owners. Other issues included a lack underwriting licenses had been companies (US$0.2 billion).155 One likely to be ill-done (Keynes 1936, of detail with respect to disclosure offered to 10 bidders. This highest of the successful innovations of the 158–159). requirements (nothing specifically on form of license to operate on the Vietnamese markets (surely replicable the timing of reports and statements exchange allows the winning firms within a year, for instance), and to engage in dealing, brokering, and with respect to the voting rights of consulting services. More broadly, public shareholders at annual general such firms are expected to be market 153 Clare Hammond, “YSX Provisional Licenses Awarded,” Myanmar Times, October 9, 2015, http://www. meetings. mmtimes.com/index.php/business/16911-ysx-provisional-licences-awarded.html, (accessed October 20, 2015).

152 Clare Hammond, “Yangon Stock Exchange Listing Criteria Lacking Protection for Investors,” Myanmar 154 Ibid. Times, August 17, 2015, http://www.mmtimes.com/index.php/business/16018-yangon-stock-exchange- listing-criteria-lacking-protection-for-investors.html#.VdGzy-UBbGY.mailto, (accessed August 18, 2015). 155 Data from Investment Frontier, http://www.investmentfrontier.com/, (accessed September 14, 2015).

90 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 91 14. INSURANCE

ny understanding of and the 1996 Insurance Business Law Myanmar’s financial sector created both an insurance sector A must recognize its repression regulator (the Insurance Business for most of the past 50 years. Supervisory Board [IBSB] to sit under Certainly this theme has emerged the Ministry of Finance), and the many times in this study—whether legal possibility for private insurance looking at banking, monetary companies. policy and prudential regulation, or rural finance. And yet, perhaps no The creation of private insurance companies proved to be a long and Perhaps no component of component of Myanmar’s financial sector has been so restricted as drawn-out process, with more than a few false dawns. Finally, in 2012 and Myanmar’s financial sector insurance. as part of the broader financial sector has been so restricted as Insurance was a vibrant if somewhat liberalization measures elsewhere small corner of Myanmar’s examined here, the IBSB called for insurance. financial world in the colonial era. bids for licenses to conduct insurance Independence brought about the business in Myanmar. In order to entry of the state into the insurance receive a license, bidders had to sector through the nationalization commit to various criteria, including of the Myanmar National Insurance minimum capital requirements—K6 Company, a local entity, in 1952. billion for life insurance-only firms, In 1959, this was followed by the K40 billion for general insurers, and establishment of the Union Insurance K46 billion to be able to do both. Board, which created a state Of this capital, 10 percent had to be monopoly in life insurance. In 1964, placed on deposit with the MEB to all private insurance companies were meet immediate payouts, 30 percent nationalized and ultimately rolled had to be deployed in the purchase of The requirement that into the Insurance Division of the government bonds, and the remaining Myanmar’s insurance monolithic state bank monopoly— 60 percent (initially deposits in the the aforementioned Peoples’ Bank of MEB) could be withdrawn one year companies all charge the Union of Myanmar (PBUB).156 after licensing. This state of affairs lasted until the the same premiums is breakup of the PBUB in 1975, when Minimum capital requirements are, insurance services were shifted to of course, appropriate and standard counterproductive in a Myanmar Insurance, a new state across the global insurance industry. As with Myanmar’s banking sector, sector that currently reaches monopoly authorized under the Union Bank Law of the same year. however, other decidedly unhelpful little more than 2 percent of The 1993 Myanmar Insurance Law regulations greatly inhibit the sector, updated legislation on insurance not least the requirement that the population. products and services, while Myanmar’s insurance companies same premiums maintaining the state monopoly, all charge the in

156 For more on the PBUB, see Turnell (2009, 231–232).

92 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 93 order to avoid what the regulators • IKBZ Insurance (KBZ Group); world as instruments in capital insurance business. It would seem a consider to be “harmful competition.” It would seem a pity if the accumulation. Unlike the liabilities pity if the funds and experience of Together with the prohibition on • Pillar of Truth Insurance (Parami of banks and most other financial foreign insurance companies were not foreign insurers (more below), this Energy Group); funds and experience of institutions, the liabilities of exploited by a country needing both policy is surely counterproductive insurance companies are long-term. capital and improved infrastructure. • Young Insurance Global (Young foreign insurance companies in stimulating outreach in a sector Accordingly, their assets to match Investment Group). As with foreign banks, foreign that currently reaches little more were not exploited by a them must also be long-term. This than 2 percent of Myanmar’s Among the firms above, half—IKBZ presents an ideal scenario for a insurance companies bring with them population. Equally problematic (Kanbawza), Citizens Business country needing both capital country such as Myanmar whose methods and practices—informed and is a requirement that all insurance (CB), First National (Asia Green needs for long-term funding of both by competitive efficiencies companies in Myanmar (the state- Development Bank), Ayeyar and improved infrastructure. physical infrastructure is critical. home country regulators—that can owned Myanmar Insurance as well as Myanmar (Aya Bank), Aung Thitsa Bonds issued for infrastructure be emulated in Myanmar. This is the new private entities) are required Oo (Myawaddy), and Aung Myint financing are the foundational technology and best practice transfer to use government bonds to match Moh Min (Innwa)—are associated investment class of the global at little to no cost. any liabilities that exceed capital. with conglomerates that also hold This may be handy in financing banking licenses. Some of the government deficits, but it deprives firms’ owners are on U.S. sanctions the private credit market in Myanmar lists (First National, Global World of a substantial capital resource. Insurance, Aung Thitsa Oo, Aung Myint Moh Min, and Ayeyar). In the end, the IBSB received 20 applications for insurance licenses, FOREIGN INSURANCE AND from which a dozen firms were AN OPPORTUNITY LOST chosen. These firms, and their Myanmar’s current policy of owners, were: excluding foreign insurance Myanmar’s current policy of companies, more or less nakedly • Aung Myint Moh Min Insurance designed to protect the nascent (but excluding foreign insurance (Myanmar Economic Corp.); overwhelmingly crony-connected) companies ... represents an • Aung Thitsa Oo Insurance local firms, represents an opportunity (Myanmar Economic Holdings lost, arguably even more so than the opportunity lost. Limited); restrictions imposed on foreign banks.

• Ayeyar Myanmar Insurance (Max The magnitude of such lost Myanmar Group); opportunities by the banning of foreign firms is little understood • Capital Life Insurance (Capital in Myanmar, certainly by the Diamond Star Group); government, but also more broadly among the country’s business • Citizen Business (CB) Insurance commentators. To most in these (Citizen Business); cohorts, insurance is necessary to • Excellent Fortune Insurance help individuals protect themselves (Excellent Fortune Development against some of the vicissitudes of Group); life. Without available insurance services (few Myanmar people hold • First National Insurance (Htoo insurance of any kind), other financial Group); instruments—primarily savings and debt—must be used to self-insure in • Global World Insurance Group order to manage risk. (Asia World Co.); Less understood, however, is the • Grand Guardian Insurance role of insurance firms around the (Shwetaung Development Co.);

94 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 95 15. RECOMMENDATIONS

his review of Myanmar’s Myanmar’s monetary authorities. financial sector points to Longer term, and with all the the need for reforms that, if reforms above, more sophisticated implemented,T will create the financial metrics could be targeted with a institutions and instruments the view to achieving the ultimate goal country needs for economic growth. of price and monetary stability. Items listed in italics refer to practical measures that can be immediately • Appoint a credible and applied under existing arrangements experienced person to the and under existing laws. Here are position of governor of the proposed reforms, laid out in the CBM. This simple, early step order of discussion in this study: could be undertaken by the new government. CENTRAL BANKING • Deliver genuine the CBM • Modernize and computerize independence by properly funding internal systems within the CBM. Myanmar’s budget deficits by EXCHANGE RATE the sale, through competitive • Move closer for now to a true tender, of treasury bonds and bills. managed float, with the CBM Among other things, this will intervention only taking place require the removal of current caps in disorderly market conditions, on the yields of such tenders. since it is unlikely that Myanmar • Create a fully functioning will possess foreign reserves interbank market for liquidity. At sufficient to support and defend present there is little interbank any form of fixed, or quasi-fixed, activity in Myanmar. This will exchange rate in the foreseeable require making access to the future. Opportunities for buying CBM’s discount window more foreign exchange by the CBM expensive than is currently the during periods of (often seasonal) case. upswings in the market value of the kyat should be exploited to • Widen the bands of the build a larger foreign exchange administratively determined deposit buffer. and lending rates, with a view to removing them completely in the • Allow basic instruments, such as short to medium term. Following swaps and forwards agreements, this, and with the creation of for all real-sector foreign exchange (marketable) treasury instruments transactions. At present, these and with interbank liquidity in cannot be offered by Myanmar’s place, market-based monetary policy banks. becomes possible. BANK SUPERVISION • Commit to a plausible and viable • Expedite the promulgation of the Financial Institutions Law of monetary policy target. For the new Myanmar short term this should simply be . Initially use this as the reserve-money targeting, a simple legal basis for the implementation measure largely controllable by of simple prudential rules, approximating Basel I, and

96 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 97 incorporating straightforward manner of the strategy employed • Implement public reporting arrangements. As with many of leverage, liquidity ratios, and the in Vietnam) and, ultimately, requirements on licensed banks, the issues raised here, diagnostic like. privatized. according to section 75d, and in studies and preliminary policy particular require publication remedies have already been • Start a rolling audit of all private • Consider, as some international of annual audited financial conducted and formulated. A banks, beginning with the largest, agencies recommend, preserving statements). new government in Myanmar with a view to ascertaining their the MEB as a safe savings vehicle should commence some of the • Implement and strictly enforce true state of health. Possibly in the medium term, against a changes recommended on this section 53, limiting the amount of conduct rudimentary stress tests. broader financial context that front, as circumstances allow and lending by banks to related parties. is both likely to remain highly in ways that offer both justice • Review the Mobile Banking A similar injunction was contained volatile, and yet is one in which (compensation for past seizures Directive with a view to expanding in the Financial Institutions of savings mobilization is critical. The when land itself cannot be the range of activities that Myanmar Law (1990) but poorly bank’s current condition is difficult returned) and security of tenure telecommunications firms can enforced. to judge without a review of the for current, legitimate occupants. undertake. multilateral agencies’ diagnostic • Authorize, as provided under studies mentioned above. • Encourage warehouse financing • Extend banking hours. Current section 140, the rollout of true and similar innovative arrangements restrict hours to “mobile financial service providers,” • Review the new policy banks with arrangements, and adjust collateral 9:30 a.m.–3:00 p.m., Monday to exemplified internationally by the a view either to closing them or requirements to support them. Friday. These are inconvenient merging them with other banks, M-PESA system and as proposed by to many enterprises in Myanmar including private ones, where Telenor/Yoma for Myanmar. Draft MICROFINANCE and are an unnecessary obstacle to applicable. regulations for implementing this • Remove or (at least) expand the business. aspect of the FIL are already written margins of allowable interest rates FOREIGN BANKS and await the signature of the that MFIs must pay and can charge. • Issue a new CBM directive on • Allow foreign banks to make kyat collateral replacing the current governor of the CBM. Given the political sensitivities loans to Myanmar enterprises of increasing lending rates, array of directives and instructions RURAL FINANCE and provide a full range of other liberalization on the deposit rate that cause confusion and reinforce financial services as befits their • Remove, quickly, restrictions on the view that land is the only side (removing the deposit-rate floor) business operations in the country. the lending by private banks to the might be the best place to start. acceptable collateral. rural sector. • Let foreign banks buy Myanmar REFORMING STATE-OWNED • Allow voluntary deposits from government bonds, both for their • Restructure the MADB into a BANKS members of MFIs, whether or own sake (as institutions that will genuine rural bank. This action not those borrowers are members, • Rectify a significant oversight have increasingly longer-term kyat should be a priority. Diagnostics of the new FIL, which does if those MFIs can pass certain liabilities), and as the sources of of the bank’s structure, prudential tests. There are not include state-owned banks needed longer-term capital for governance, operations, and under its regulatory umbrella. ample international examples of Myanmar. performance are largely complete, safeguards that can be employed In the interests of prudence and and relevant international models competitive neutrality, this needs • Permit a multilateral interbank that allow for the safe aggregation for effective rural banks exist on of substantial deposits by MFIs. to be addressed. currency swap market to enable which a reform package can be foreign banks to lend in kyat and based. • Raise the minimum regulatory • Review the findings of participate in treasury bill and the multilateral agencies’ capital for MFIs. Capital of K15 bond auctions. • Reform land titling and enhance million (non-deposit-taking MFIs) comprehensive diagnostic studies land tenure security. This has THE NEW FINANCIAL and K30 million (deposit-taking) of the state-owned banks. From direct relevance to the financial INSTITUTIONS LAW is too low to allow for any capital this information, consider closing sector because of the importance the Myanmar Foreign Trade The new FIL is itself a source of cushion on losses, and opens up of land as collateral, especially the sector to non-serious players. Bank or merging it, possibly with change. A number of elements for rural lending. In recent years the Myanmar Investment and within the FIL could be immediately attention has been drawn to • Audit existing licensed MFIs to Commercial Bank. The resulting implemented (even without the Myanmar’s increasingly opaque determine which institutions entity should be put on a strict application of the entire program) to and dysfunctional land titling should not be in the business. commercial footing, an equity the good of the financial sector, and stake sold to a foreign buyer (in the beyond:

98 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 99 • Permit MFIs to collaborate with (YSX). As the examples of telcos to offer mobile money Cambodia and Laos attest, stock products and services. This is exchanges can quickly become allowed by the Microfinance locations of fevered speculation, Business Law, but not yet in insider trading, and barely practice. veiled gambling. Myanmar needs to take care to avoid such • Allow domestic MFIs to (effectively) a scenario emerging out of the borrow from the MEB by releasing YSX. Accordingly, in developing the latter’s collateral requirements to the exchange, the regulatory the microfinance sector. authorities and YSX management • Allow foreign MFIs to pay more are urged to “hasten slowly.” than the implicit 10 percent interest Initially, this might suggest cap on loans from foreign banks and a modest listing of stocks in other lenders. companies beyond reproach.

• Encourage foreign banks to lend • Shut down quickly any early hint to foreign MFIs, an allowable of insider trading or other fraud. activity under the rules governing INSURANCE foreign banks, and replicate • Remove restrictions that bar proven methodologies (not least in domestic insurance companies Myanmar itself historically) for the from competing on premiums. distribution of wholesale finance. Under current arrangements, • Allow MFIs to levy fees on services consumer utility from insurance is beyond loans. compromised, and existing firms are under little pressure to innovate or COOPERATIVE CREDIT achieve operational efficiency. • Undertake a diagnosis of this sector and publish the results so • Remove the ban on foreign insurance that it is possible to understand companies as soon as practicable. As the true state of this sector. The this study has argued, the benefits need for this diagnosis is urgent. to Myanmar from the foreign Information on Myanmar’s investment and technical expertise cooperative credit societies is for long-term capital funding would opaque when available at all. swamp what are, in any case, extraordinarily minor risks. • Declare, in the interim, a moratorium on drawdowns from the • Free insurance companies (domestic China Export-Import Bank loan. and foreign) to invest in securities that match their investment profiles BOND AND BILL MARKETS and strategies. In short, they should • Ensure, as mentioned before, that not be restricted (as they are at both types of instruments are sold present) to just the purchase of through open tender. government bonds; they should be • Allow foreign banks to participate able to buy and hold their corporate as buyers in Myanmar bond and equivalent. This in itself would do bill markets. much to stimulate the necessary growth of the corporate bond market STOCK EXCHANGE in Myanmar. • Move gradually in developing the Yangon Stock Exchange

100 BANKING AND FINANCE IN MYANMAR BANKING AND FINANCE IN MYANMAR 101 16. CONCLUSION

he development of this a more concerted reform surge Myanmar’s financial sector is required, one that must include T will be an important and transforming the state’s role in the necessary component of the country’s financial sector. Such transformation hoped-for trajectory along a broader must include reducing the state’s path of transformational growth. For own claims on Myanmar’s financial the longest time a source mostly of resources, creating a regulatory instability and underperformance, environment that instills trust along under the Thein Sein administration with greater freedoms to transact, and the first shoots of financial sector greatly curtailing the role of state- revival have emerged. Driven owned institutions in a sector that by reforms, albeit incomplete, needs to respond to the needs of free to Myanmar’s exchange rate and private actors. arrangements, banking regulations, and microfinance laws—and even In 2009 this author wrote a book more so by technological and that attempted to tell the history of methodological initiatives launched Myanmar’s bankers and financiers. Fiery Dragons by private financiers in a more The book was called liberal economic environment— in homage to the entrepreneurs the country’s financial sector has who were greatly responsible for exhibited strong, if uneven and Myanmar’s emergence as the world’s unstable, growth. Nevertheless, largest rice-exporting nation at the the sector does not yet provide the dawn of the twentieth century. financial intermediation, nor the For the past 50 years the fires of financial access, Myanmar needs to Myanmar’s bankers have been doused. join the development story of its peers May the future bring them roaring and neighbors in Southeast Asia. For back.

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