Viewed as a great, untapped market, Myanmar has been a subject of great interest for foreign investors in the recent years, where the inflow of foreign direct investment has considerably increased with more businesses expanding their operations into the country. The reforms and policy changes implemented by the various government agencies reflect the government’s receptive stance towards this increase in foreign investment. A legitimate concern for the foreign investors looking to establish their business or expand their operations is the availability of financing options to source the capital needed to do so. While current financial regulations remain generally underdeveloped, recent changes have indicated a strong positive trend towards further cultivating the financial services sector.
Financial Institution Regulations
Perhaps the biggest indicator of the trend towards the modernization of Myanmar’s regulations on finance is the government’s efforts to revise, amend and update the Financial Institutions of Myanmar Law (the “FIML”), which governs the licencing of the financial institutions in the country. Enacted in 1990, the current FIML allows the participation of private banks in the banking sector, which was monopolized by state-owned banks prior to the law’s enactment.
The proposed amendments to the FIML (embodied in what is to be called the “Banks and Financial Institutions Law of Myanmar”) imposes relatively stricter requirements on financial institutions, expressly imposing a capital requirement of approximately US$20 million for banks incorporated in Myanmar, and US$75 million for branches of foreign banks. In addition, the proposed amendments include a more stringent requirement on the maintenance of reserve funds of banks, requiring each bank to set aside a larger percentage of its net profits, should its reserve funds fall below 50% of its paid-up capital. The stringent requirements should provide more comfort for investors, as the same ensures the stability of the financial institutions operating in the country.
Nevertheless, the proposed amendments still include certain provisions that may be considered difficult for certain banks wishing to establish or expand its operations. For example, the proposed amendments allow the Central Bank of Myanmar (“CBM”) to make changes or otherwise modify the conditions and restrictions imposed under its licences. Such a provision increases the uncertainty borne by banks and may also serve as a disincentive for foreign financial institutions from establishing a presence in the country.
Provisional Licence granted to Selected Foreign Banks
In October 2014, the CBM, granted provisional licences that will allow nine foreign banks to engage in limited banking operations in the country. The recipients of the provisional grants are Australia & New Zealand Banking Groups Ltd.; Bank of Tokyo-Mitsubishi UFJ Ltd.; Sumitomo Mitsui Banking Corp.; Mizuho Bank Ltd.; Bangkok Bank Public Co.; Oversea-Chinese Banking Corporation; United Overseas Bank; Malayan Banking Bhd.; and Industrial & Commercial Bank of China.
With these provisional licenses, the foreign banks will now be able to engage in limited banking services, which consist mainly of foreign currency corporate banking to foreign-owned corporates registered in Myanmar. The foreign banks will likewise be allowed to partner with local banks and offer local currency denominated services. Presently, the foreign banks are liaising with the CBM to finalize the procedures for their entry into the Myanmar banking industry, which is expected to be completed by the first to second quarter of 2015.
The entry of foreign banks into Myanmar will ultimately redound to the benefit of the country. The most apparent benefit is the sizeable amount of funds that these banks will bring into the economy. The access to additional debt financing options will benefit foreign investors looking to establish their operations in Myanmar, or companies planning to expand existing operations. This will, in turn, stimulate further growth in the foreign investment sector, the pace of which has already grown tremendously in the recent years.
In addition, while the foreign banks will only be able to provide a limited range of services, the local banking industry will be motivated to further improve their services as exposure to systems and practices adopted overseas will raise their awareness to meet the higher standards their clients will expect of them and keep pace with their new competitors. Further, as the foreign banks will need to hire Myanmar citizens to operate their respective branches, the workforce in the banking industry will benefit from receiving the training provided by the foreign banks. Lastly, the presence of foreign banks will also lead to better regulatory development as the banks will lobby for the enactment or amendment of laws and rules which are consistent with international standards. Due to the exceptionally rapid progression of Myanmar’s economy, government authorities have struggled to enact or develop laws and rules to keep pace with this growth. The foreign banks, which already have experience in operating on an international level, will be able to provide valuable insight in the modernization of the current regulations. This will be particularly effective should the CBM continue its current approach to regulatory development of being receptive and open to the contributions of private banking institutions.
Developments in Offshore Loan Regulations
Aside from the developments which may provide access to onshore debt financing options, recent developments in foreign exchange regulations have also enabled easier access by private investors to off-shore debt financing. Prior to these recent developments, the authority to deal in foreign exchange transactions was only extended to state owned banks. Since the enactment of the Financial Institutions of Myanmar Law, the Foreign Exchange Management Law, and the Central Bank of Myanmar Law, the CBM has taken over the responsibility of being the primary regulating authority the banking sector. Since then, the CBM has authorized private banks to engage in foreign currency transactions allowing easier access to and additional options for foreign currency capital remittances by private investors.
The CBM has further clarified these regulations through the issuance of CBM Notification No. 7 (2014), which now describes the role of the CBM in the approval of these offshore loans. During this approval process, the applicant must submit to the CBM a report containing, among others, the business activities of the applicant, purpose of the loan, and indicative draw down and repayment schedules. Where previously the approval process was unclear, the issuance of this recent regulation has paved the way for greater regulatory clarity.
Finance on a Smaller Scale – Microfinance and Mobile Banking Services
On 30 November 2011, the Microfinance Law was enacted, which allows the incorporation of Micro-Finance Institutions, pursuant to the provisions of the Myanmar Companies Act. While microfinance activities have existed prior to the enactment of the Microfinance Law, these microfinance activities were, until the enactment of the law, largely unregulated, with lenders free to charge high interest rates. The enactment of the Microfinance Law is an initial step towards much needed regulation in the microfinance sector.
The law thereby provides for greater regulatory oversight, to the benefit of borrowers who are not usually able to satisfy the loan requirements of larger banking institutions. In particular, the law provides for the establishment of the Microfinance Supervisory Committee which is tasked with implementing the provisions of the Microfinance Law. The Microfinance Supervisory Committee has the power to prescribe rules and regulations which govern the operations of the Microfinance Institutions, and prescribe administrative penalties for violations thereof. Further, the Microfinance Law expressly states that the Committee may determine the minimum capital requirement of Micro-Finance Institutions and interest rates on loans that the latter may prescribe. The minimum capitalization requirement for registration of a microfinance entity is relatively low - it is set at US$15,000 and US$30,000 for “non deposit-taking” microfinance institutions and “deposit-taking” microfinance institutions respectively. In addition, the maximum interest that Microfinance Institutions may charge is capped off at 30% per annum.
Another indication of the rapid growth of Myanmar’s financial framework is the development of the mobile banking sector. The CBM issued Directive 4-2013 or the Mobile Banking Directive, which allows banks and financial institutions, together with technical service providers, to offer certain enumerated mobile banking services. Upon registration with the CBM, the service providers may perform mobile banking services which include wire transfers, deposits and withdrawals, and payments to individuals, businesses, and government institutions. While the mobile banking services may have little impact in terms of financing and investment, these services have the potential to become an investment opportunity itself as the services included therein may potentially cater to the needs of individuals and business enterprises. At the same time, consumers will be given a more convenient platform by which to settle their financial obligations, through the facility of an online or mobile payments system.
As Myanmar’s economy tries to catch up to the rest of the world, we will continue to see numerous developments in its legal system which, to date, have already matured at a remarkable pace. Other countries have responded positively to these developments, as is evident from the increased inflow of investments from Myanmar’s ASEAN neighbors, as well as Japan and Korea. In addition, in furtherance of the United States’ policy to ease sanctions against Myanmar in response to positive developments in its government policies, the US Department of Treasury lifted sanctions against four previously blocked Myanmar-owned financial institutions, namely: Asia Green Development Bank, Ayeyarwady Bank, Myanmar Economic Bank, and Myanmar Investment and Commercial Bank. Being part of an age of instant communication spread across various different media platforms, we are fortunate to be able to witness the rare instance where a country’s economy, undeveloped after decades of isolation, is suddenly thrust into a rapid pace of development, where growth is measured not by the lack of available technology or established legal systems, but by the capability of the economy and its economic actors to quickly adopt to this rapid pace of growth.