Myanmar battles to build a banking system from scratch

By Eric Ellis

Over dinner at an elegant villa by Yangon’s fashionable Inya Lake, an energetic, 30-something Myanmar businessman, whom we’ll call Than, neatly illustrates the potential – and the problems – for Myanmar banking.

Middle-class Than is an example of what is now possible in Aung San Suu Kyi’s more open and democratic Myanmar, a young economy in the wobbly throes of transitioning from decades of military-enforced socialism when oligarchs prospered. He’s ambitious about the opportunities that this nation of 54 million people has unleashed, and runs a flourishing trading domain that extends to property and, for want of a better term, financial services.

Than employs a floating staff of about 20 in a cash-based business turning over tens of thousands of dollars. And he manages most of it by smartphone, in a country where telecoms have gone from being mostly banned by the generals to providing widespread 4G in just a few years. Than and his kind would seem model customers for an emergent banking system on the up in a fast-changing developing economy.

Except he’s not. Asiamoney asks Than which one of Myanmar’s 24 registered banks he prefers to use. The question, a basic one in most markets, is not so much lost in translation as mystifying. Than looks baffled. “I don’t use a bank,” he says. “My money is at home with me.”

Like many Burmese, Than doesn’t trust banks to keep his money safe. Despite a nationwide expansion in branches, ATMs and mobile coverage by Myanmar’s leading banks, many of which have only been in business since financial sector reforms in 2010, only roughly one in ten people has a bank account here. And even fewer use their accounts for regular, commonplace transactions other than to extract their monthly salary in a single ATM withdrawal. In a creaking monetary system where the biggest denomination bank note is K10,000 ($7.25), everyday life is still largely transacted with piles of cash. 

There’s good reason for locals to be wary of their banks, which for years were state-owned fronts for ruling generals. Than is old enough to remember Myanmar’s crippling 2003 financial crisis, when devastating bank runs forced the collapse and closure of several prominent banks as the authorities looked on, powerless. Memories of that calamity remain vivid here, and the authorities’ mismanagement still haunts the system.

As Asiamoney is often reminded by local bankers and consultants during 10 days of interviews in Yangon, the same central bank governor who presided during that crisis, 78-year-old Kyaw Kyaw Maung, is still in the seat today, a vestige of a fading era when the junta was in charge.

Than also knows the stories of how inept past military regimes would demonetize the kyat without warning, wiping savings out in an instant. Far better on balance, Than reasons, to turn any kyat profits he generates into dollars, gold or gems and stash them in hidden safes at home and elsewhere rather than risk keeping them in a bank. 

But the military is out of power – almost – and there’s a sky-high expectation that a new, normalized Myanmar can catch up economically with the regional neighbours. Than says “one day, maybe” he will use a bank account.

However, there’s another reason why the Thans of Myanmar are a problem for the unformed financial system here, arguably much more of an impediment to the sustained growth and health of the sector under this hopeful new government than a failure to build client confidence in the system.

Than, in effect, runs his own mini-bank, lending his ready cash to others in his community and business circles at rates four to five times higher than the official 13% lending rate designated by the Central Bank of Myanmar to approved banks.

Perhaps after another decade of progress, savvy operators like Than may well be running an authorized financial services business absorbed into a functioning regulatory regime. Even though licensed bankers say they could easily meet demand for credit, draconian regulations, the lack of a system of credit checks and unreliable records make it almost impossible to do so, with the result that often the business goes to people like Than.

“The informal market is pretty widespread here, and it’s a big risk,” says Hal Bosher, de facto CEO and adviser to the chair of Yoma Bank, the country’s fourth-largest bank by assets.

Than generates funds for lending from his own business activities, which isolates him from the wider system if things go wrong. But others don’t honour such niceties. Yoma’s Bosher says he’s seen locals borrow from a bank at the state-fixed rate using collateral – cash, gold and property – and then lend on the borrowed cash in the informal market.

Bankers say that ultimately the central bank is to blame for such activity because of the restrictions it places on licensed banks trying to do what would pass for normal business in most other markets.

“There’s a limitation with products and an inability to target certain sections of the population,” Bosher says. “They have to figure out a way to bring the informal market into properly regulated formal banking, which really means providing carrots for the consumers to come into the formal sector.”

Given the history of financial markets in Myanmar, “there’s a lot of caution and concern, and that’s understandable,” Bosher adds. “Nobody has the appetite for rip-roaring, tear-up-the-floorboards-and-change-overnight type of business. But I think at some point the risks will tilt more towards not doing something rather than doing something. Inertia will be the greater risk.”

Adviser Liew Chee Seng at CB Bank, the second-biggest bank by assets, agrees. “It’s inertia and a lack of confidence and sometimes a lack of authority.”

Liew says there has been hardly any deregulation since the new financial institutions law was passed by parliament last year, just weeks after Suu Kyi’s National League for Democracy took office, ending more than 60 years of military dictatorship and junta rule.

“There has not been a fast-enough transition,” Liew says. “There’s a lot of businesses opening up, but at a government level they have not been fast enough to deregulate or issue new regulations. There are so many things that need to be fixed and the new government may have a problem prioritizing. I think it’s a capacity issue.”

Liew continues: “Consumer banking is not developed because there’s no mortgages, no personal loans. Some banks are trying the hire-purchase route, but it’s very rudimentary; the rules are unclear.”

Bosher adds: “The problem for a lot of these guys is that they lend through overdraft. If you give someone a perpetual interest-only loan, you’ve got a problem if you don’t know if that guy has ever got the money. You may own his house on Inya Lake as collateral but does he have cash flows? Can they pay? And if the market tips over? There’s a lot of outstanding questions. Financial inclusion in this country is very limited and hence there’s a lot of room for growth.”

At AGD Bank, CEO Htoo Htet Tay Za says his bank directs a lot of resources and marketing at public education. “Most people still lack an understanding of a bank’s typical products and services,” he says. “We should make banking easy and implement it as part of people’s day to day lives.” 

Liew at CB Bank says all the 24 private-sector banks “have a lot of work to do to convince the public that we’re safe.”

But lack of education is only part of the problem. Yoma’s Bosher says the issues facing Myanmar banking are less educational and more functional: “The banks are not where they should be in terms of what they offer. Right now, we don’t meet the needs of our customers because we can’t, we are not allowed to, it’s supply driven. In five years’ time, depending on how progressive the regulators are, I think you’ll see much less cash, and I think that will allow a leaner, definitely more customer-driven system.”

 He says a more efficient payment system would boost the economy and do away with locals “just handing out from a bag of cash.”

Bankers are particularly frustrated by the country’s lending requirements, whereby a customer must provide collateral in the form of land, real estate, gold or cash in order to take out a loan, particularly since it prevents local banks from developing their credit risk skills. Liew calls it pawnshop lending and says it is leading to bad habits. 

“There can be a lack of credit skills among the lenders,” he says. “It’s very limited, and the Myanmar banks are ingrained into this type of lending.”

Moreover, the central bank fixes interest rates for lending at 13%.

“This makes it very difficult to price to risk, which is a problem,” says Yoma’s Bosher. “If I can’t price your risk, I’m not going to lend to you.” He says it limits economic growth by excluding potential customers from accessing lending. “If I’m lending to someone secured at 13%, how can I lend to someone unsecured at 13%?” 

It’s not just CB Bank and Yoma who would like to see progress in implementing much-promised banking reforms and realistic policymaking from the central bank. The same gripes of frustration and impatience are echoed across the banking sector and in a frank report by the German financial consulting firm Roland Berger, which is required reading for every Yangon banker.

Though couched in diplomatic language, the Berger report is laced with warnings that Myanmar authorities need to act on reform – and act fast.

“Myanmar’s banking sector has atrophied over the years and suffered many ailments. Despite a recent resurgence, it remains small and unable to provide the required financing to support fast-paced economic growth. Fixing these shortcomings is a daunting task considering the current inefficiencies,” the Berger report says, before taking aim at the central bank. Both are yet to be developed,” it says.

“Based on market needs and current shortcomings, far-reaching reforms under the stewardship of the central bank of Myanmar coupled with significant and steady efforts from all stakeholders to implement change are a must. These are not minor adjustments but major injections of know-how, training, project management and execution skills to tackle the challenges ahead. The CBM should build an overall transformation masterplan based on previous recommendations from multilateral institutions and current challenges identified. Such a plan will take time to yield results but should be initiated as soon as possible.”

Of course that’s just one opinion, albeit an authoritative one. Asiamoney repeatedly asked the central bank and finance ministry, both based in the faraway capital Naypyidaw, for input but we received no responses.

“And that’s the problem,” grumbles one banker. “They don’t seem to realize that they need to be out there, visible and consulting.”

Another banker sums up the situation: “Of all the ministries and departments in need of reform, they (the central bank) are the ones that need the most work and it’s becoming increasingly apparent. Other areas of the economy have developed and are very innovative, such as in telecoms, but not the central bank, and it shows.”

He notes that “the World Bank is there, the IMF is there, the Asian central banks are advising and various other internationals and there’s all these cross-currents, there’s a lot of moving parts.”

Bankers say an opportunity was lost during last year’s power transition from the military to the rule of de facto leader Suu Kyi when the new democratic government did not move to replace the veteran Kyaw Kyaw Maung as central bank governor. 

“This would’ve sent a very positive message that she was focused on economic reform,” says a banker. “There was an atmosphere created of heightened expectation and that’s been dissipated now. They have to drive reform from the top. That’s what people are used to here.”

Governor Kyaw Kyaw Maung is now expected to retire in 2018, having been at the helm of the central bank from 1997 to 2007 and again from 2013, when he was reappointed by the military regime as the central bank became formally separated from the finance ministry.

The country’s banking system is clearly at a crucial turning point.

“After years of isolation and barely any banking services available in the country, the banking sector has sprung to life with the creation of private banks and the gradual introduction of basic banking services in the last five years,” says the Roland Berger report. “At the same time, first steps toward improving the regulatory environment were taken. The potential for development is huge but it will require decisive, conducive and steady actions from the government and the regulator.”

Still, despite the impediments, bankers like Bosher are optimistic. “I think some people will soon realize that we’ve got to go, and will do it with some fairly clean strokes. My feeling is that there’s going to be a rapid acceleration, there’ll be a cork out of the bottle moment.”

He adds: “Many of the banks have much more capacity than they’re currently allowed to show, and I think at some point again it’s just going to go pop and you will see a flood of innovation hit the market. That will all come to pass, and when it does it will go white hot.”

An even more eloquent sign of how Myanmar banking is evolving comes from World Bank data showing how clients are progressively switching from Myanmar’s sclerotic state-owned banks to the emerging privately owned sector.

The World Bank calculates that assets held at Myanmar’s private-sector banks jumped 27% to K23.3 trillion ($17 billion) in the year to June 2016. That’s in sharp contrast to the slumping assets of state-owned banks, which fell 14% to K16.5 trillion during the same period.

But this rapid loss of support for the state banks, which served the ministries that own them and which once dominated Myanmar banking, has rung alarm bells.

“The declining market share of the SOBs and stagnating loans and advances are warning signs for the sustainability of the SOBs,” the World Bank says. “Reforming these banks before they descend into dire financial state is critical.” The World Bank has embarked on a three- to five-year programme to overhaul them.

The World Bank also warns that some Myanmar banks follow reporting procedures based on woefully outdated standards from 1990.

“Official data show an increase in banking sector capital from K683 billion in 2013 to K1.4 trillion in 2016. The capital-adequacy ratio (CAR) in June 2016 was around 19%. However, paid-up capital, CAR and risk-weighted assets are all based on the 1990 financial institutions law standards, which are now dated,” the World Bank says.

Similarly, reported non-performing loans also follow the asset classification and loan-loss provisioning requirements under the 1990 financial institutions law, which are not consistent with international practice, it says, adding that the central bank reports that the NPL ratio has more than doubled over the last year, rising from 1.6% to 3.6%. 

“It is noteworthy that while there has been no marked increase in the capital and CAR of the banks, the NPLs have risen substantially,” the World Bank says. It warns: “Banking sector soundness indicators as currently reported do not accurately reflect systemic risks.” 

At the SME-focused Yoma Bank, Bosher says his NPLs are under 2% and cites the rigours of having the World Bank’s International Financing Corporation as a backer to safeguard higher standards.

“I know every loan in my book intimately,” says Bosher. “My average credit is $300,000. It’s not retail but also not corporate – that’s our sweet spot, and we like it because it offers a diversified book.”

Still, for all the frustrations, bankers say progress is being made in luring locals to the market. The World Bank notes that the number of bank accounts in Myanmar grew by a quarter between 2010 and 2014. Local bankers estimate that number has probably grown by another 10% to 15% since then. At CB, Liew says the bank tallies around 700,000 accounts, three times more than in 2012.

Trade finance is some way off, Liew says, as the more-capitalized foreign banks licensed here secure that beachhead. But as the economy expands, Liew expects to see small club deals evolving for emerging Myanmar corporates.

“I think this is the next stage of development, to fund infrastructure and the like,” Liew says, and he’s talking with multilateral agencies to help push the process along. 

“We are getting ready for club banking,” he says. “We’ve hired Asean nationals who know that type of banking from elsewhere. We would not be able to fund a $50 million project, so we will have to do a club deal, smaller deals with perhaps two or three other banks. 

We could definitely do that. That’s how the market takes off and scales up.”