Digital banking: The pressure on Myanmar
Sean Turnell, adviser to Myanmar’s leader Aung San Suu Kyi, discusses the liberalization, international opening and digitalization of the country’s banking sector.
By Jonathan Breen
I’m in a lucky position being a foreigner; having no ambitions to rise through the government means I can be an honest broker,” says Sean Turnell, whose official title is special economic consultant to the state counsellor, Myanmar leader Aung San Suu Kyi.
“Suu Kyi made clear from the beginning that I must always be absolutely frank with her and never second-guess what she wants to hear,” he says, adding: “she is equally frank back.”
Turnell, who is a former professor of economics at Macquarie University in Sydney and a former senior analyst at the Reserve Bank of Australia, meets weekly with Suu Kyi (or ‘The lady’, as she is known in Myanmar) to brief her on issues ranging from the economy to international affairs. He also uses these meetings to push for reforms; for Turnell, the most important of these is the opening up and liberalization of the financial sector because this would lure foreign capital and raise standards while providing small and medium-sized businesses with much-needed access to credit.
Asiamoney meets Turnell in an empty lobby of the Hilton Hotel in Myanmar’s vast but underpopulated seat of power, Nay Pyi Taw, where he is also director of research at the Myanmar Development Institute, a government-linked think tank.
Although he only began working directly with Suu Kyi after her release from house arrest in 2010, Turnell, now 55, has been involved with her National League for Democracy for nearly three decades.
While researching his PhD and working at the RBA in his native Sydney, Turnell was housemates with a group of political refugees who had fled Myanmar’s military junta.
Alongside his work at the RBA, Turnell began researching Myanmar’s economy and working with the exiled Burmese who would eventually return to lead the country.
At the time, Myanmar’s government-in-exile was spread across the world, so communication was difficult. But to those still in the country, Turnell became well known, partly because he was a fixture on BBC Burmese, the broadcaster’s news service covering Myanmar.
His research and his regular interviews caught the attention of Suu Kyi in the late 1990s, although it was not until 2010 that they finally met each other.
Aung San Suu Kyi made clear from the beginning that I must always be absolutely frank with her and never second-guess what she wants to hear - Sean Turnell
Turnell remembers the topic of their first meeting: “I wrote a book on Myanmar’s banking system (‘Fiery dragons: Banks, moneylenders and microfinance in Burma’) that had been serialized [on BBC Burmese], which must have been one of the dullest books ever broadcast. When I first met her, we talked about that.”
But he clearly made an impression and was brought on board officially by Suu Kyi in 2015, a few months before the NLD won its historic victory in Myanmar’s first openly contested elections in 25 years.
After decades of challenging Myanmar’s military junta and championing human rights and democracy, earning a Nobel Peace Prize for her work, Suu Kyi eventually came to power in 2016.
Since then, the process of democratic reform in Myanmar has been disappointingly slow; in addition, Suu Kyi’s administration has come under foreign pressure over a military crackdown against the Rohingya minority, a crisis that has proved a drain on the economy, hurting both tourism and foreign investment.
Myanmar has been accused of genocide at the International Court of Justice in The Hague but denies the charges, saying it was carrying out a legitimate campaign against Rohingya militants.
Suu Kyi made global headlines in December 2019 when she visited the ICJ to defend Myanmar against the charges; while a popular move among Myanmar’s citizens, it drew international criticism.
Aung San Suu Kyi
As an adviser, Turnell has become a welcome foreign voice in the jumble of domestic political noise.
“I think it is necessary to be very frank, but it might be politically complex,” he says. “Being a voice of reform, you can play the role of bad cop, you can say things that local policymakers might shy away from.”
In his career as an economist, Turnell’s areas of research interest included finance and labour markets, wages and employment, but he is now more focused on banking and finance in Myanmar.
Myanmar has taken several welcome steps to open up to foreign investors. For example, foreign financial institutions can now acquire up to 35% of local private banks, while last year the stock market was opened to international investors, allowing up to 35% foreign ownership of listed companies.
The securities law was amended again in March 2020 allowing offshore and Myanmar-based foreigners to open accounts with local brokers so they can trade on the Yangon Stock Exchange.
“We have had some big successes – and there are some more coming soon – but there have often been big pushbacks,” says Turnell, adding that when it comes to policies, “number one at the moment is to continue the opening up and liberalization of the financial sector.”
Myanmar’s government is attempting to bring the country’s banking system up to international standards. The banks operated with abandon for decades, and some of the larger names are still getting used to being told they have to play along. While a regulatory framework did exist before prudent banking regulations were brought in during 2017, it was more of a decoration than something people adhered to, Turnell says.
“The old central bank of Myanmar law, the old financial institutions of Myanmar law, [they] were fine pieces of work, they were brilliant,” says Turnell. “The fact they were complete fiction in terms of anyone adhering to them was neither here nor there – Myanmar could say: ‘We’ve got the best banking regulations in the world’, but they were just hung up in an office somewhere.
“So mid 2017 was really the first time the whip was cracked and the regulators said: ‘We are serious about this, you’ve got to meet all these provisions for non-performing loans and you’ve got to become proper banks with proper accounting’.
“Obviously that is going to be a huge challenge.”
It is common knowledge that many of the country’s banks have historical links to individuals with ties to the former military government.
AGD Bank, for example, was founded by Tay Za, who is widely regarded as Myanmar’s first billionaire and who owes his success largely to his close business links to the country’s former military rulers.
Za has built an empire in property, aviation, agriculture, gemstones, mining and even the capital’s premier football club, Yangon United.
Until December 2016 his links to the military junta meant he was subject to international sanctions, instigated by the US.
It is no surprise there has been some fierce opposition to the government’s clean-up plan.
As Turnell puts it, “there are some banks that are willing to wait out strict adherence to bank regulations in the hope that later regimes in Myanmar might go easier on them.”
But while the authorities are cleaning up the industry, they also have to respond to legitimate calls from banks for more freedoms; Turnell considers the most fundamental of these to be the liberalization of interest rates.
“There are barriers to it, but it has got to happen,” says Turnell. “All the policymakers recognize that it has to be done, it is just a matter of timing.”
Lending rates are fixed in Myanmar at 13% for collateral-based loans and 16% for uncollateralized loans. That prevents banks from pricing loans based on their assessment of the credit risk, rewarding low-risk borrowers with low interest rates while ensuring that high-risk borrowers pay more, which is a potential problem in a country with no centralized credit bureau.
“There is an overall fear that if you liberalize, interest rates would go through the roof and that would damage business,” Turnell says. “I don’t believe that.
“Banks don’t lend that much to small businesses anyway, so I think there would not be too much of an impact.”
While some banks highlight their lending to small and medium-sized enterprises, most small businesses still borrow from informal moneylenders. From a bank’s point of view, lending $1 million at 13% to a large company is far more attractive than lending $1,000 to an SME at the same rate.
What we’ve found overwhelmingly is that what small businesses need is access to finance; the problem is not so much the price of finance - Sean Turnell
CB Bank, the country’s third-largest bank and winner of Asiamoney’s best bank award this year, has a loan portfolio made up of 90% corporate and just 7% SME loans, for example.
“Politically it is difficult to argue because implicitly what you are saying is that the banks need to be able to charge smaller enterprises more,” says Turnell.
“But what we’ve found overwhelmingly is that what small businesses need is access to finance; the problem is not so much the price of finance.
“They would happily pay 16%, 17%, or 18% [a year] because their real alternative is a moneylender at 10% a month minimum – and 10% a month is not a bad rate in that case.”
How to provide such SMEs with access to credit?
“There are all sorts of programmes here and there, some development partners have so-called two-step loans where they give money to a local bank who will then on-lend at subsidized rates,” Turnell says.
“But this is too small because the amount of funds available is way too small. You’ve got to incentivize the banks to lend to viable enterprises.”
The central bank also fears freeing the deposit rate, which is set at 10%. The concern is that deposit rates could subsequently plunge, and savers such as the elderly would suffer.
But Turnell disagrees with that argument.
“I’m not convinced by that because I don’t think pensioners keep their money in banks, for all the reasons to do with instability and history,” he says. “Ordinary people here use banks, if they use them at all, for transactions. They don’t save substantial amounts of money, which again gets to the issue of why banks need to reform. This is not an interest-sensitive economy.”
While interest rates, NPLs and prudent regulations are at the top of the list of problems for domestic banks, foreign competition is a creeping concern.
Among the international financial community, the relaxing of restrictions on foreign financial institutions is the most talked-about part of Myanmar’s reforms. The goal is to create a level playing field with domestic institutions, and the government has taken steps towards this.
Last November, the financial regulator granted licences to five foreign insurance firms and a handful of foreign-domestic joint ventures.
Among the names that jumped at the chance to enter the local market were firms such as AIA, Japan’s Dai-Ichi and Prudential.
In early 2020, the first round of applications for a new type of licence for foreign banks was under way, which gives them the ability to create a local subsidiary, or effectively a standalone, 100% foreign-owned institution.
This suddenly, and relatively recently, became existential for the banks and they thought: "Oh have we misjudged? Is there going to be a tsunami of digital payments that blows us away" - Sean Turnell
It is a game-changer for Myanmar’s banking sector where international firms have, until now, been limited to establishing a local branch and barred from taking deposits, leaving them little to do apart from lend to local and international enterprises in Myanmar.
The new licences will allow them to grant loans and take deposits from companies, banks and individuals in foreign currency and in Myanmar kyat.
However, those local subsidiaries of foreign banks will have to deal with being cut off from the parent bank.
“The subsidiary is a Myanmar bank, a separate legal entity from the foreign bank’s home,” says Turnell. “The disadvantage of that is, say you wanted to give a loan of $100 million, you would still have to have $8 million in capital, but you wouldn’t be able to access your parent’s capital.”
In April 2020, the central bank said it had granted preliminary approval to Industrial Bank of Korea, KB Kookmin Bank and Thailand's Siam Commercial Bank for such subsidiaries.
The other option for foreign firms is to invest in local banks. But overseas investors can hold no more that 35% of a local institution; so far only Yoma Bank has reached that level, when Singapore’s sovereign wealth fund GIC and Norwegian private equity firm Norfund paid a combined K130 billion ($90 million) for a 30% stake in January, joining existing investor the IFC, which owns 5% in the bank.
Thailand’s Kasikorn Bank also received approval from the central bank for its plan to buy 35% of Myanmar’s A Bank, formerly Ayeyarwaddy Farmers Development Bank.
Letting interest rates loose and encouraging foreign investment is all well and good, but what every bank seems to be enthusiastically working on right now is digitalization.
In the last two years, all of Myanmar’s largest banks, as well as some of the smaller and international firms, have been trying to jump on the mobile banking wave.
It began in earnest after the popularity of the mobile payments and e-wallet provider Wave Money surged in 2018. The success of the app, backed by telecommunications company Telenor and Yoma Bank, led to a fear of missing out among the banks and a realization of the size of the possible disruption to the industry.
“This suddenly, and relatively recently, became existential for the banks and they thought: ‘Oh have we misjudged? Is there going to be a tsunami of digital payments that blows us away, despite all our branch networks and all that other stuff’,” says Turnell.
“There has always been a traditional view that mobile money and electronic, digital stuff wouldn’t work here because people have a lack of trust, they want the physical currency, people store wealth in gold and jade. So at first there was a certain complacency, then banks saw the growth of Wave Money and thought: ‘OK, we are going to get on with this’.”
Within the last year, banks have turned their efforts from reaction to Wave Money to a rollout of different digital products that will ultimately define the banking landscape in Myanmar as the country moves toward an integrated system of digital platforms inspired by Chinese firms such as Alipay and WeChat Pay – or at least that is what Turnell predicts.
“I think there is a huge revolution awaiting, and that is the lesson from China,” he says.
“The classic example is Alipay, which is the mobile payments platform, but the group is Ant Financial and they’ve got pension schemes, insurance companies, banks, everything, which just bolt on to the Alipay ecosystem.”
Myanmar, in comparison, is taking baby steps. There are many hurdles to interoperability within the financial system. For one, there is still little-to-no interbank lending.
So while the banks are rapidly developing their mobile and internet banking platforms, whether it be creating easy-use elements to attract customers or preparing to use the potential flood of data for credit analysis, they are still essentially working on their own. At the moment, the ball is still with the authorities.
“What we want is full interoperability, so it doesn’t matter what you are using, whichever bank you are, whichever phone company you use, you can just transfer around all the systems,” says Turnell.
“It does put pressure on the government and the central bank to make sure it actually works, which is hard enough for any country,” he adds, “but interoperability can be done quickly… and it needs to be done quickly, so I don’t think there will be a delay. The pressure is immense.”
Correction: Tay Za, the founder of AGD Bank, was mistakenly identified as Htoo Htet Tay Za, who is his son and now runs the bank