Being a bank in Myanmar isn’t easy, with lenders of all sizes facing insuperable challenges every day. Foreign banks love the frontier market’s potential, but remain virtual outsiders, denied the right to offer onshore services.
Local banks face their own knotty problems. Many are too small to last the course; even larger, well-run lenders with ambition and potential suffer from a lack of capital. Financial talent is in short supply, while risk management and corporate governance is “very weak”, says Kyaw Soe Min, deputy managing director at Myanma Apex Bank, a private lender founded in 2010. “There is no banking culture. We are stuck in the Stone Age – civilization has yet to reach us.”
Bankers spend their days grappling with laws that are either patchy or non-existent, or which date back to British times, notes Soe Min, referring to the time when London ruled the nation from afar.
The lack of a national land registry makes it hard to determine who owns what, while laws that cover stamp duty have “in every material respect not changed since 1898”, Yangon law firm VDB Loi notes in a September 2017 banking report.
These are problems with deep roots that will take years or even decades to resolve.
Yet there is one thing that the government can do to make life easier all round: sack the central bank governor. That may sound callous – but it’s true, and everyone knows it.
The current head of the Central Bank of Myanmar (CBM) is Kyaw Kyaw Maung. An old man in a young country, he is set to turn 80 next year. Eyebrows were raised when he was restored as governor in 2013, having run the bank from 1997 to 2007 when the country was under military rule. More surprise followed when Aung San Suu Kyi retained him three years later, after taking over from Thein Sein as civilian leader and leaving him as the only junta-era official still in office.
Asiamoney requested an interview with the central bank governor and submitted written questions, but never heard back.
"If we waited for them to call us, we'd be here all day."- Head of risk management
In itself, age should not matter. Warren Buffett is still going strong at 87, as is Li Ka-shing at 89. But it does matter when your decisions – or lack of them – are holding back a nation that is desperate for the future.
For her part, Suu Kyi was worried enough about the incumbent governor to canvass opinion across the financial sector.
Back in 2016, notes the chief executive of a leading Yangon-based bank, “she spoke to a lot of us. We all told her not to retain the governor, but she was worried about how it would look, having to sack him on day one. That wasn’t the kind of country she wanted to make.”
So the Nobel laureate and former darling of the West stuck with him, in the hope that he would loosen up and be the reformer the nation needed.
That didn’t happen.
The governor did little to placate concerns or confound low expectations, proving slow to pass new financial laws and even slower to explain them to confused bankers.
“I’ve lost count of the number of times I’ve been told by the central bank: ‘We set the rules. It’s up to you to interpret them’,” says one leading banker.
The head of risk management at another lender adds: “We meet with central bank units a lot. But it’s always us engaging them. If we waited for them to call us, we’d be here all day.”
It doesn’t help that the banks are all based in Yangon, while politicians and regulators live 200 miles away in the political capital Naypyidaw.
Keys to the castle
Can everything be laid at the feet of one man? Under Maung, the central bank can hardly be accused of acting swiftly and decisively. It took the central bank 18 months after the passing of a Financial Institutions Law in January 2016 to issue a set of rules that guide and govern the sector.
The rules force banks to maintain a liquidity coverage ratio of at least 20%, and to limit exposure to a single individual or entity to no more than 20% of core capital – no small challenge in an economy where the powerful often lend to themselves and friends.
But banks had a collective seizure when told in July 2017 they had six months to recover all outstanding open-ended ‘overdraft loans’ – credit disbursed to customers on preferential terms and then constantly rolled over.
These facilities are ubiquitous, making up an estimated 70% of the $9 billion national lending pool. The new norms, which aim to bring local banks closer to international standards, made sense. Yet the central bank at first turned a deaf ear to warnings that the tight deadline could destabilize the entire system.
It finally relented in December, redrafting rules to let banks reduce the share of overdraft loans on their books to 50% of the total by July 2018, and 20% by the middle of 2020.
These issues wouldn’t matter as much if the governor were in charge of a less important body. Central banks are powerful institutions, often misunderstood but vital to economic health. But the CBM is unusually influential, if only because so much of the economy remains disconnected and so many financial laws and regulations unwritten, or in dire need of revision.
“We need reform,” says a leading banker. “This is a top-down culture, and we need an active top-down regulator. The governor is neither of those things.”
When Hal Bosher, adviser to the chairman, and chief executive of Yoma Bank, one of the best-run private lenders, says the “keys to the castle sit in the central bank”, he makes a valid point.
Power emanates from the central bank. When it does not – when that power is misused or diluted – both the banking sector and the wider economy suffer.
It is famously hard to prove a theory in the absence of fact, but that is not the case here. Examples of the central bank failing to write, pass and implement legislation that would strengthen the banking system, boost capital creation and private investment, and raise financial inclusion, are legion.
Take financial inclusion. Data is hard to pin down, but leading bankers reckon that fewer than six million people, or just one in every 10 Myanmar citizens, have access to formal banking services. Part of the problem is the lack of a national credit bureau, something bankers have been pleading for.
“Without a credit bureau, we cannot assess creditworthiness, as there’s no hard data available on anyone,” says Soe Min at Myanma Apex Bank. “We learn about customers based on their interactions with us, which takes time. Say we take them at face value. Some of them try to cheat by giving us fake salary slips and tax returns, and it’s up to us to spot the fraud. The challenge, and it’s a huge one, is the lack of consistency and validity in personal data across the system.”
This hurts everyone. It stops lenders identifying low-risk citizens who might be young and employed but new to the banking system and who just want to take out a loan to buy a washing machine or scooter. But it also impedes efforts to improve financial inclusion. Back in 2011, before the country began opening up to the world, the government passed a microfinance law with the aim of extending financial services to tens of millions of unbanked people.
By the end of 2017, a total of 256 microfinance institutions (MFIs) were in operation onshore, according to the IFC, the private sector arm of the World Bank.
Yet local microfinance providers often struggle to lend to the needy, because they are unable to borrow.
“Banks don’t know how to assess MFI risk,” says a Yangon development banker. “They have no credit history, no assets, no value, no lending history. And they lack that because they cannot borrow the capital they need to lend. It’s the ultimate Catch-22. The largest bank here has $6 billion to $7 billion in deposits and the largest MFI has zero deposits. It’s a crying shame.”
That may finally be changing. The first fully operational credit bureau should open its doors in the second half of 2018 – though it is still waiting for approval from the central bank.
The bureau is the result of a lot of hard work by the IFC and the Myanmar Banks Association, and will draw on a huge pool of customer data sucked in from the country’s big lenders.
“We all worked together on it,” says one bank deputy chief executive. “It’s a collective effort. Once that’s in place, with data widely shared, it will be a lot easier to determine risk and disburse loans.”
Then there’s the thorny issue of capital. Banks are keen to raise money any way they can. The 2016 financial institutions law requires banks to have minimum paid-up capital of K20 billion ($15 million). And while reliable data is hard to pin down, bankers in Yangon say just 60% to 70% of lenders meet that requirement.
“The system needs a lot more capital,” says Yoma Bank’s Bosher. “Helping banks self fund is the best way of improving industry profitability. We need to be able to issue different financial instruments, including preferred debt and tier-2 capital.”
And yet banks constantly find themselves thwarted by an institution that seems uncertain of either its own mind or its moral obligations. “The only constraint to banks being able to raise capital or reform is the central bank,” notes one executive.
Banks regularly submit requests to issue debt, only to be rebuffed. Aya Bank, the second-largest private bank by loans and deposits, lodged a request with the central bank to issue tier-2 debt in September 2017 that is still pending.
“The aim is to double our capital base by the end of 2018 and then double it again,” says Azeem Azimuddin, Aya’s chief financial officer and adviser to the chairman. “That will raise our capital adequacy ratio in line with international standards.”
And what of foreign banks buying into domestic lenders and being allowed to serve locals onshore?
Letting Myanmar’s banks sell stakes to foreign investors that are committed to the market’s long-term development would seem a no-brainer. After all, every foreign bank has to commit $75 million in paid-up capital to secure an operating licence – and some, like Singapore’s OCBC, have doubled their capital base. Foreign banks have the money that local banks need.
“They should be allowed to buy stakes in local banks, so long as everyone agrees,” says Yoma Bank’s Bosher.
Aya’s Azimuddin agrees, pointing to signs that laws are slowly changing to let foreign banks do more retail and corporate business onshore.
“We’re not afraid of the competition,” he says. “However, foreign bank branches should have to incorporate locally so they can make long-term investments in technology and knowhow to build local capacity.”
But again the central bank is clearly conflicted. Larger players like Yoma, Aya and KBZ, the largest bank by deposits and customers, should be able to take care of themselves. But Myanmar has a plethora of lenders: 28 in total, including 14 in private hands and 10 part-owned by ministries and government bodies.
(Curiously, one area where the central bank has been proactive is in the distribution of new licences. In December 2017, it approved the creation of five sector-specific lenders, including Myanmar Tourism Bank, Mineral Development Bank and the wonderfully named Glory Farmer Development Bank.)
Many smaller outfits are severely under-capitalized, and authorities are clearly concerned about exposing them to tough new competition.
“National aspirations play a key part in the puzzle,” says George Koshy, head of compliance and risk management at United Amara Bank. “I worked in Ghana, where foreign banks moved in and local ones got crowded out. You want strong local banks, but you also want competition, and it’s a case of finding where the right balance is.”
That may change. In December 2017, president Htin Kyaw approved a revised Companies Act that will allow foreign investors to buy up to 35% of local firms in non-sensitive industries – though it isn’t clear if banking will be added to that list.
Another capital-raising avenue open to banks involves selling shares to investors. But this generates yet more obstacles. Stock listings are approved by the Securities and Exchange Commission, which in 2016 opened the Yangon Stock Exchange, a shiny new bourse based in an opulent building across Sule Pagoda Road from the old Myanmar Stock Exchange.
The new bourse heralded a new dawn for Myanmar capital markets, but it hasn’t arrived. Just five companies are listed on the YSE, including the smallish private lender First Private Bank, which completed its $7.2 million listing in January 2017 and Myanmar Citizens Bank, part-owned by the commerce ministry, which raised $1.2 million from its August 2016 share sale.
Most lenders have broached the idea of a listing in Yangon or Singapore or both with the SEC, only to be rebuffed or ignored.
“We talk about it,” says the chief executive of a top-five bank. “But it will take five or 10 years to complete.”
The YSE is tiny and illiquid, often closes on hot afternoons, and had a market cap, at close of trading on March 9, of just $440 million.
Banks are, however, planning for the future: in 2017, Aya Bank launched its own underwriting business, Aya Trust Securities, with more than half an eye on its own future stock listing.
Change at last
The good news is that change is on the horizon. Maung is scheduled to step down as central bank chief in July, with his replacement likely to come from inside the CBM, bankers and government officials say.
Three eminently qualified candidates stand out, two deputy governors appointed to their posts in July 2017, and a wild-card choice.
Bo Bo Nge, 49 years old and a graduate of London’s School of Oriental and African Studies, is an economist by training and a former head of risk management at KBZ Bank. He joined the central bank shortly after being elected to the economic committee of the ruling National League for Democracy, Aung San Suu Kyi’s political party.
Soe Thein is another highly qualified candidate. An accountant by training who previously headed the finance ministry’s budget department, he has been highly visible of late.
When the central bank granted approval to seven foreign banks (their names have not yet been released) to provide export-financing services onshore to local corporates, it was Soe Thein who made the announcement. And it was Soe that announced in March that the central bank would fully liberalize the financial sector over the next five to 10 years and allow banks to set their own interest rates.
Then there’s Soe Win, an accountant who has been grappling with the country’s bureaucracy since the early 1980s and who founded Deloitte Touche Myanmar Vigour, the largest domestic auditor, in 2003.
"We had the wrong guy, but after July, we should have the right guy."- Banker
Soe Win would be, one senior government adviser says, “an exceptional choice. He would be new to the central bank, but that would not be a bad thing, and he would be the reformer we need. The only doubt would be whether he would turn down the post due to health or old age.”
One development official notes that as July approaches, the bank is becoming notably more decisive, with a greater focus on bank supervision and new regulations. The leading candidates in line for the governorship are all “proactive”, he says, “and as soon as the old guard is gone, I’m sure things will improve.”
Myanmar has so far to go, and so much to do. The financial sector is a work in progress, dominated by tycoons who made their fortunes from the old, closed economy. Banks are data-poor, short on liquidity and skilled labour, and burdened by too many dud loans.
In November, Soe Thein, who was instrumental in giving lenders more time to recover billions of dollars in overdraft loans, said most banks did not “know the magnitude of [their] non-performing loans”. Most lenders post NPL ratios of between 5% and 6% but that, the central bank deputy governor admitted, was “lower than the real situation”.
But for the first time since Myanmar began opening up to the world, there are signs of progress. This year will see the rollout of the first credit bureau, giving banks greater surety when disbursing loans. Foreign banks are precluded from buying stakes in local peers, but each year their presence and product range, and their commitment to the market, grows.
And after a half-century of isolation, and a further five years of stasis, while it laboured under the wrong leader, the central bank is gearing up for some much needed internal reform.
“We had the wrong guy, but after July, we should have the right guy,” says a leading banker. “We have spent too many years not making enough progress. Hopefully, that is about to change.”
Where are the experts?
When Myanmar began opening up to the world in 2012 after a half-century of military rule, it faced a dilemma.
The country had little money and few real banks. Those that existed were owned by tycoons (Yoma Bank and KBZ, for example) or military-run conglomerates (such as Innwa Bank).
It urgently needed capital, so nine foreign lenders – all from Asia, including ANZ, Bank of Tokyo-Mitsubishi UFJ and Singapore’s OCBC – were ushered in. They opened rep offices in 2013 and secured full banking licences two years on, with four more lenders later added to the list. Each provided $75 million in paid-up capital to secure access to the frontier market.
With the capital in place, the authorities cast around for ways to make their banks better. In came the World Bank’s private-sector arm, the IFC, providing $12 million in convertible loans to Yoma Bank and Myanmar Oriental Bank (MOB), to expand lending to small and medium-sized enterprises and improve risk management.
German development agency GIZ is helping six lenders including KBZ, MOB and Shwe Bank to meet IFRS compliance requirements, says country head San Thein.
But what the sector really lacked was expertise, an issue it’s seeking to redress.
Chee Seng Liew – the deputy managing director at CB Bank, the second-largest lender by total deposits – says training is “the biggest barrier to development.
When I joined in 2013, we had 1,000 staff; now we have 8,000. Imagine the level of training that was needed.” What the bank needed was its own development programme (the number of trained staff in Myanmar was nonexistent, Liew says), so he looked around for help.
“We’ve engaged with GIZ, with the Asian Development Bank, and a few other multilaterals,” he says. “Bank of Tokyo-Mitsubishi has been helping with trade finance and credit risk management. But it’s slow: these are complex skills, the training is ongoing, and our best staff often get poached by foreign banks.” As the sector develops, a chasm is emerging between lenders that seek out (and can afford) outside help and those that do not and cannot.
A key development is the hiring of highly qualified foreign staff. CB Bank’s Liew was previously at First Gulf Bank.
Mike DeNoma joined KBZ, Myanmar’s largest bank by assets, in May 2017, after long stints in Taiwan at CTBC Bank and in Singapore at Standard Chartered.
Christopher Loh joined United Amara Bank four months later, from Malaysia’s RHB Banking Group.
Most take up technical roles in IT, or senior roles whose titles are designed to deflect attention away from the power they wield.
DeNoma is adviser to KBZ chairman Aung Ko Win, one of Myanmar’s richest men. Liew at CB Bank is an adviser to chairman Khin Maung Aye. Azeem Azimuddin is adviser to Aya Bank chairman Zaw Zaw. And Hal Bosher, despite being chief executive of Yoma Bank, officially describes himself on his business cards as adviser to Serge Pun, another tycoon, and chairman of Yoma. “Regulators are wary of any overt foreign influence in the sector,” notes an executive at a leading multilateral.