The banking sector can be considered as the backbone of an economy. An efficient banking sector channels much needed capital to develop important infrastructures and industries in a country, thus spurring economic development. Despite having a vibrant banking sector with 14 foreign banks before 1963, the nationalization of all banks in that year and almost five decades of poor management by the previous governments have stifled the development of the banking sector in Myanmar. Thus, ever since the reforms that started more than three years ago, the Myanmar government puts banking sector reform at the top of its priority list. As the latest push for the banking reform, at the beginning of October 2014, the Central Bank of Myanmar awarded nine preliminary licenses to foreign banks to open branches in the country.
According to Melvin Poon, Financial Services Leader of PricewaterhouseCoopers (PwC), Myanmar is regarded as one of the world’s most “under-banked” countries, where bank loans comprise a mere 19 percent of GDP – a far cry from the numbers of some of the other emerging economies such as Vietnam (36 percent) and Cambodia (108 percent). According to Making Access Possible Report by UNCDF, FinMark Trust and, Cenfri, less than 5 percent of adults have bank accounts and only 30 percent of adults claimed to have access to any kind of financial service from a regulated financial service provider.
In addition to the general population, Myanmar businesses are burdened by the poor banking system as well. According to Myanmar Business Survey carried out together by UN ESCAP, OECD, and UMFCCI in May 2014, over half of the firms surveyed believe that they lack adequate financing in general. “Interest rates,” “access to capital,” and “external finance access” are considered by the surveyed firms as among the top ten major barriers for businesses. The statistics from the Ministry of National Planning and Economic Development reveals that by the end of March 2014, the total demand deposits in both state-owned banks and private banks (a total of 3.02 trillion kyats) made up just 27.5 percent of the total money supply (10.99 trillion kyats). The other 72.5 percent was made up of currency in circulation, reflecting the low penetration of banking services in Myanmar—and the Myanmar public’s low level of trust towards the banks.
Despite the current state of the banking sector, the government has ambitious goals to improve it. U Maung Maung Thein, Deputy Union Minister of Finance, stated in a conference in Nay Pyi Taw in May 2014 that the government was working to increase the percentage of the population with access to banking services to 40 percent in 2020. The Myanmar government has also taken many steps to reform the banking sector. In July 2013, the Central Bank of Myanmar Law was passed, resulting in the formation of an autonomous Central Bank, which previously operated under the Ministry of Finance and acted primarily as a money-printing institution to fund government projects. By the end of 201, Myanmar’s banking sector consists of 23 local private banks, 4 state-owned banks, and 43 representative offices from foreign banks. Yet, since local banks have little banking experience and expertise, the government would have to rely on foreign banks to advance the banking reform in the initial phase.
In order to accommodate foreign banks into the country’s banking sector, the government formulated a three-stage plan originally. According to the plan, the government would allow foreign banks to
- Open representative offices in Myanmar.
- Form joint-ventures with local banks.
- Open and operate branches in Myanmar under licenses.
In terms of the initial stage of allowing foreign banks to open representative offices in Myanmar, 13 foreign banks were given licenses from 1993 to 2010. Since 2011, the new civilian government has given 30 additional licenses, increasing the number of total representative offices from foreign banks to 43 at the end of 2014. As for the second process for foreign banks to form joint-ventures with local banks, the government decided to skip it and push directly to the third which is to allow foreign banks to open branches in Myanmar. At the end of August, the Central Bank received proposals from 25 foreign banks. Two months later at the beginning of October, the Central Bank decided to award preliminary approvals to 9 foreign banks to operate branches within one year.
The licensed banks are:
- ANZ Bank (Australia)
- Industrial and Commercial Bank of China (China)
- Bank of Tokyo-Mitsubishi UFJ (Japan)
- Sumitomo Mitsui Banking Corp. (Japan)
- Mizuho Bank (Japan)
- Malaysia’s Malayan Banking Berhad (May Bank)
- Bangkok Bank (Thailand)
- Overseas-Chinese Banking Corporation (Singapore)
- United Overseas Bank (Singapore)
According the regulations by the Central Bank, each foreign bank will need to provide US$ 75 million of minimum investment capital and can open only one branch in Myanmar. Their services will be limited to wholesale banking and lending to foreign investment companies and local banks. They are restricted from providing retail banking and lending directly to Myanmar citizens in Myanmar kyats. Also, to lend to local companies, they will have to work via or together with Myanmar banks. Given that it has only been three months since foreign banks were given preliminary licenses, confusion looms over their cooperation with local banks. Chris Hughes, Managing Partner at Baker & McKenzie, predicted that these lending options would possibly come in two major forms:
- Specified lending and project financing, in which foreign banks provide lending to local banks to fund a particular sector or project in Myanmar.
- Unspecified, general lending, in which foreign banks will provide lending to local banks, which then on-lend the loans “as they see fit” to local business.
Foreign banks will also cooperate with domestic banks on “provision of guarantees, interest rate and other risk management products and technical assistance in credit assessment and portfolio management,” according to Chris Hughes. Nonetheless, lending to local businesses and the risks attached with it will be managed largely by local banks. Although local banks can negotiate the interest rates for the loans obtained from their foreign counterparts, they must charge the exact interest rates set down by the Central Bank of Myanmar when they on-lend the money to Myanmar businesses.
Most importantly, by the end of September 2015, these nine foreign banks must fulfill their commitments included in their initial proposals in order to receive the final license for operation. According to Melvin Poon, the commitments include ensuring smooth functioning of the branch operation from the very start and complying with requirements laid down by the Central Bank of Myanmar. However, there might be delays in actual operation of the branches. U Than Lwin, senior consultant at Kanbawza Bank believed that the foreign banks would first need to familiarize with the rules and regulations in Myanmar’s banking sector within one year. They would also face major obstacles in areas such as telecommunication, electricity, land prices, and staffing.
The arrival and subsequent operation of foreign banks will no doubt boost the economic reform. After the launchings of two foreign telecom operators in the middle of 2014, the licensing of 9 foreign banks by the Central Bank will send a signal to the global business community that the Myanmar government means business. In addition to the symbolic meaning, the arrival of foreign banks will also bring substantial benefits to the economy. Foreign banks would bring in more capital at a lower cost for both foreign investors and local businesses. For foreign investors in Myanmar, they would now have the opportunity to work directly with the banks in their home countries, according to Edwin Vanderbruggen, partner at VDB Loi. Foreign banks will also enable faster transactions in foreign trade as well, so local investors can enjoy the faster speed of trade or even expand their export market access, according to Thomas Chan, Executive Director at KPMG Advisory (Myanmar). Melvin Poon forecasted that the projected growth of Myanmar’s economy over the next few years would be 8 percent to 9 percent with the arrival of foreign banks.
Central Bank’s Regulation Capacity
Many—including some banking experts—believed that the Myanmar government should take it slow in opening up the banking sector to foreign banks. Two IMF country reports published in 2014 point out that the Central Bank of Myanmar “will be hard-pressed to adequately supervise” foreign banks due to its “nascent supervisory capacity.” Likewise, Vikram Nehru—Chair in Southeast Asian Studies and Senior Associate at Carnegie Endowment for International Peace and a consultant at the World Bank and the Asian Development Bank—believes that a strong regulatory framework must be set up before the government allows foreign banks to enter. In “Banking on Myanmar: A Strategy for Financial Sector Reform,” written for Carnegie Endowment, he suggests that the Myanmar government “may wish to err on the side of caution” given the country’s currently weak institution and regulatory framework.
On the other hand, many welcome the long-awaited arrival of foreign banks and believe that the Central Bank cannot afford to wait anymore. Edwin Vanderbruggen believes that investors need foreign banks for financing, and they want it now. Thomas Chan compared the Central Bank’s licensing of foreign banks with a surgery. “The economy will not be able to wait so long for all the parts to be completely in place before proceeding with the development of the financial sector,” he said. By restricting the pace and scope of foreign banks in Myanmar, the Central Bank will gain some time to learn and adapt to this new banking environment.
Competition with Local Banks
Even before foreign banks were given the preliminary licenses to operate, their arrival in Myanmar’s banking sector has been controversial. Myanmar banks have been lagging behind regional and international banks in almost every area including capital, expertise, technology, etc. Not unexpectedly, the fiercest opposition came from local banks due to the fear that foreign banks would come to dominate over them.
Despite the concerns from local banks, Chris Hughes believed that the arrival of foreign banks should be very positive for local banks on the whole. With the arrival of foreign banks, local banks will benefit from
- Access to capital at a lower interest rate
- Exploration of new financial opportunities
- Management and technical knowledge
- Innovative services and products
- Improvement in technology
- Development of the regulatory framework
Current regulations by the Central Bank allow local banks to continue developing their retail and corporate services to local clients while enabling foreign banks to learn about doing business in Myanmar—a win-win outcome, rather than a zero-sum competition. As a result, Thomas Chan believed that foreign banks would not compete directly with the local banks in short to medium term. Even if the competition does exist, Melvin Poon believed that the competition would be beneficial to the banking sector as a whole since it would encourage local banks to step out of their comfort zones and start to innovate and upgrade their facilities, capacities, and services. Nonetheless, the competition should not become too overwhelming for the local banks, he admits.
One major challenge to the banking sector is the shortage of experienced and skilled banking professionals in the banking sector. According to the Making Access Possible report, the financial sector would require an additional 400,000 jobs by 2030. Dr. Hla Nyunt, Deputy Managing Director at Global Treasure Bank estimated that around 5,000 skilled employees from local banks would leave for foreign banks, resulting in a huge vacuum for the local banks to fill. The shortage of qualified staff will pose a threat even to the Central Bank itself. IMF points out in its country report in October 2014 that the Central Bank of Myanmar must “develop policies to attract and retain qualified staff, a task that is becoming more urgent as foreign banks will enter the labor market for staff with experience and qualifications.” However, most of the training centers in Myanmar now focus mainly on general business management, accounting, sales and marketing, and IT. Although Yangon Institute of Economics used to offer degrees in banking and finance during the 1970s, the only national institute that is providing banking training and courses now is the Myanmar Institute of Banking (MIB) under the Myanmar Banks Association. However, its outreach and training programs are described by GIZ as “too limited,” and it is open to current bank employees only. Myanmar Institute of Finance—the first private banking institute in Myanmar—will be opened in 2015 to help fill the sector’s human resources gap. Hal Bosher, CEO of resurgent Yoma Bank, said that his bank has recruited Myanmar repatriates with extensive banking experience abroad for most of the management-level positions.
In conclusion, licensing of nine foreign banks to open branches in the country will bring both opportunities and challenges to Myanmar. Without a doubt, foreign banks will bring capital, technology, management and skills to Myanmar’s fledgling banking sector. On the other hand, as experts have pointed out, the Central Bank must keep up with its capacity to regulate and nurture the banking sector. While encouraging competition to force local banks to improve and innovate, it must also protect and create opportunities for local banks. According to Melvin Poon, it is a wise balance that Myanmar must find for itself.
ANZ Bank (Australia and New Zealand Banking Group Limited)
First started as the Bank of Australasia in Sydney in 1835, ANZ Bank is among the top four banks in Australia and the largest banking group in New Zealand and Pacific. It is also among the top 50 banks in the world and one of the 20 largest banks globally in terms of market capitalization. In 2014, ANZ Bank’s total asset stood at AUD 772 billion. Operating in 32 countries with a total of 48,000 employees, the bank has a global customer base of 8 million. It has set a target to have 25 to 30 percent of the group’s profit after tax outside of Australia and New Zealand by 2017, so winning the preliminary license to open a branch in Myanmar will move the bank one step closer to reaching its goal.
ICBC (Industrial and Commercial Bank of China Limited)
Established in 1984, ICBC is currently rated the largest bank in the world by The Banker magazine. It has the total asset of US$ 3.1 trillion by the end of 2013. By the end of June 2014, the bank has a total of 442,706 employees in 17,550 institutions worldwide: 17,219 of them in China and 331 in 40 countries and regions. In 2013, the bank served 4.7 million corporate customers and 432 million personal customers. ICBC is the first foreign bank to open a representative in Myanmar after the 2010 election. As of November 2014, the Chinese investment made up 35.5 percent of the total FDI in Myanmar, and the trade with China represented 34.6 percent of Myanmar’s total trade in 2013. Given China’s crucial economic importance to Myanmar, it is interesting that ICBC is the only Chinese bank to have opened a representative office in Myanmar. This stands in sharp contrast with the licensing of three banks from Japan, a country that has been trying to counteract China’s influence in Myanmar since the reform began.
Bank of Tokyo-Mitsubishi UFJ (BTMU)
Bank of Tokyo-Mitsubishi UFJ was formed after the merger of the Bank of Tokyo Mitsubishi and UFJ Bank in 2006. It is the largest bank in Japan and one of the largest in the world. Its total asset amounted to US$ 1.95 trillion and total income was US$ 35 billion as of March 2014. The bank had 37,527 employees in 764 domestic branches and 75 branches in 40 other countries—the largest overseas network by all Japanese banks.
Sumitomo Mitsui Banking Corporation (SMBC)
Sumitomo Mitsui Banking Corporation (SMBC) was formed in 2001 through the merger of two leading Japanese banks: Sakura Bank and Sumitomo Bank. It is regarded as the number two bank in Japan by The Banker magazine. As of September 2014, it has the total revenue of ¥3,105.9 billion (about US$ 28.3 billion) and the total asset ¥144,064.1 billion (about US$ 1.31 trillion). With 25,573 employees, the bank has 505 branches in Japan and 41 branches and representative offices in 39 countries. In Myanmar, SMBC is the first Japanese bank to open a representative office in 2001.
Mizuho Bank was established after the merger of Mizuho Bank and Mizuho Corporate Bank in 2013 and is rated the number three bank in Japan by The Banker magazine. Its parent group, Mizuho Financial Group has an asset of US$ 1.71 trillion as of September 30th, 2014. Mizuho Bank is operating with 26,250 total employees, 461 branches and sub-branches in Japan, and 43 branches and representative offices outside of Japan.
Established in 1960, Maybank is the largest financial services company in Malaysia by market capitalization. It is also the fourth largest bank in Southeast Asia by assets. According to its 2013 annual report, at the end of 2013, its market capitalization stood at 88.1 billion Malaysian ringgit (around US$ 26.8 billion), and its total asset at 560.4 billion Malaysian ringgit (around US$ 170 billion). It has over 47,000 employees; more than 2,200 offices in 20 countries (including all ten ASEAN countries); and 22 million customers worldwide. In 2013, May Bank was rated 13th World’s Strongest Bank by Bloomberg Markets magazine and among the top 100 Global Banks by The Banker magazine. Its representative office in Myanmar was commenced in 1995.
OCBC Bank (Oversea-Chinese Banking Corporation Limited)
Formed in 1932 from the merger of three local banks, OCBC Bank is the oldest bank in Singapore and the second largest financial services group in Southeast Asia by assets, which totaled S$ 338 billion at the end of 2013. It is also rated as the World’s Strongest Bank in 2011 and 2012 by Bloomberg Markets magazine. With key markets in Singapore, Malaysia, Indonesia, and Greater China, the bank has a network of over 450 branches and representatives in 17 countries and regions. Its total income in 2013 was S$ 6.6 billion. OCBC Bank’s history in Myanmar dates back to 1923 when the Oversea-Chinese Bank—one of the three local banks that later merged to form OCBC bank—opened its branch in Yangon till 1963. In 1994, it returned to Myanmar again and set up a representative office in Yangon—along with two other Singaporean banks. In 2014, OCBC Yangon celebrated its 20th year of continuous operation as a representative office.
UOB Bank (United Overseas Bank)
UOB Bank was originally established as the United Chinese Bank in 1935 and changed its name in 1965. The bank has a network of more than 500 branches and offices in 19 countries in Asia Pacific, North America, and Western Europe. According to Forbes, it has 23,471 employees, S$ 284 billion total assets, and S$ 6.7 billion total income in 2013. Like OCBC Bank, UOB Bank is also one of the first banks to set up representative offices in Myanmar in 1994.
Bangkok Bank, founded in 1944, is the largest commercial bank in Thailand and one of the largest regional banks in Southeast Asia. It has the total assets of approximately US$ 64 billion. The bank employs 25,653 employees in 1,213 branches, including 28 overseas branches and representative offices in 13 other countries—the largest overseas network by any Thai bank. It has 17 million accounts including business and retail customers.