Banking and financial regulation and reform in Myanmar.

• Author: Turnell, Sean

1. Introduction

   A well-functioning financial system is a critical component of any national strategy for economic growth and development. Banks and other financial institutions aggregate and mobilize a country's monetary resources, allocate these into productive investment, create the instruments that help fund government and mitigate risk, allow for technological change and improvements in productivity, and provide the means by which citizens can help protect themselves against some of the vicissitudes of life.

   Myanmar has not had a well-functioning financial system for fifty years. Since 2011, however, critical legislative foundations for reform have been put in place, technologies and other innovations have advanced, and international interest in Myanmar's financial sector has soared. Yet, reform implementation is a problem, trust remains in short supply, and many other crucial reforms are lacking. In short, considerable progress has been made in financial sector reform and institution building in Myanmar in recent years, but much also remains to be done.

   This paper examines the current state of Myanmar's financial sector, but with a particular focus on its banks, which, despite their many problems, are the location of over 99 per cent of the country's formal-sector financial assets. I outline the structure of banking in Myanmar, before exploring the reforms put in place since 2011. The performance of the banking sector is then examined in the wake of these reforms, as are the continuing constraints and the necessary measures through which further progress might come. The particular problems of rural finance are surveyed, as is the interest of foreign banks in Myanmar, and the international assistance the country is receiving from multilateral and bilateral institutions.

2. Commercial Banking in Myanmar

   Myanmar's past military regimes bequeathed upon the country a banking sector that is rudimentary and volatile. The location of monetary and financial crises that historically have created intense hardship, the sector has long been unable to fulfil its role as an aggregator, creator and efficient allocator of Myanmar's financial resources. In 2003, a spectacular banking crisis laid the sector low and took out some of the leading players. From this time, true financial intermediation took a back seat as the surviving banks refashioned themselves as the suppliers of transaction services (remittance facilities, the provision of transaction accounts), rather than as institutions that take in deposits and make loans in the traditional manner (Turnell 2009).

   In important but limited ways, Myanmar's banking sector has been reinvigorated in recent times by a series of reforms instigated by the Thein Sein government, and by other actions undertaken by the country's banks themselves. These reforms and innovations are explored in detail below, but suffice at this stage to say that they have driven a resurgence of bank deposits (which have tripled in the last three years), an increase in new players (six new banks in the same period) and a raft of new services and facilities. Curiously, though, the reinvigoration of Myanmar's banks is yet to be manifest in their role as intermediaries and the drivers of capital formation (more below).

   In terms of structure, Myanmar's commercial banking system is a tripartite arrangement comprising state-owned banks, semi-official banks (that is, partially privately owned or local government-owned banks and banks owned by military entities), and private banks. Table 1 catalogues each according to their ownership.

   Spread amongst these twenty-five banks are around 1,100 bank branches, over half of which belong to the state-owned institutions. Myanmar's leading private banks are currently in something of an "arms race" to establish new branches (the rival boasts of which are prominent in the local media), but the country continues to have the lowest bank branch per person ratio (less than two branches per 100,000 people) of any country in Southeast Asia (Foerch, San Thein and Waldschmidt 2013, p. 7). (1)

   Myanmar's private and semi-official banks have formed two industry associations: the Myanmar Banks Association (MBA, established in 1999), which is a broad industry lobby group; and the Myanmar Institute of Banking (MIB, established in 2002), which is primarily concerned with training. The MBA was originally the creation of the Central Bank of Myanmar (CBM) and was a semi-govemment body, but is currently attempting to chart an independent course (the MBA's senior officers are now private bankers). The MIB offers a one-year diploma and a two-year masters degree in banking. The institution labours at present in providing training that is up-to-date and relevant to modern banking practice (Foerch, San Thein and Waldschmidt 2013, p. 22).

3. Reforms under the Thein Sein Administration

   Since its installation in March 2011, the Thein Sein government has implemented a number of reforms with a bearing upon the financial sector. Such reforms did not feature prominently in the early initiatives of this government, but have been largely driven subsequently through a mix of international advocacy (from the International Monetary Fund [IMF], World Bank and a number of bilateral donors), as well as a cohort of economists within the government and central bank. The reforms include important new legislation, as well as the tweaking of existing rules and regulations, the most significant of which are discussed below.

   III.1 Exchange Rate and Foreign Exchange Reforms

   The signature economic reform of the Thein Sein administration, certainly in terms of its international visibility, has been the celebrated recreation of Myanmar's exchange rate regime in favour of a managed float. Under these new arrangements, a daily auction is held by the Central Bank of Myanmar (CBM) amongst the commercial banks to determine a reference rate for the kyat against the U.S. dollar, the euro and the Singapore dollar. Once set, other banks and money changers can then exchange the kyat within a band of +/-0.8 per cent above or below the reference rate. Since the effective float of the kyat, the currency has traded between a high of around K820 to US$1 (or, K820:US$1), to a low of about K1,000:US$1. (2)

   By implication, the move to a managed float for the kyat created the need for facilitating freedoms to be granted to Myanmar's banks to deal in foreign exchange, and to create a foreign exchange market via which the reference exchange rate could be derived. Hitherto, the dealing in foreign exchange was prohibited to all but a handful of state-owned banks (principally the Myanmar Foreign Trade Bank [MFTB] and the Myanmar Investment and Commercial Bank [MICB]). Accordingly, since 2011, a series of initiatives have been launched with respect to the foreign exchange activities of Myanmar's banks:

   * October 2011: Permits are granted to banks to open money change counters to deal in retail foreign exchange. By the end of 2013, over 100 foreign currency exchange booths were in operation (inside bank branches, as well as via stand-alone kiosks). Limited money change licences are also extended to some non-banks.

   * March 2012: Four of Myanmar's private banks (Kanbawza Bank, Co-operative Bank, Asia Green Development Bank and Ayeyarwady Bank) are granted permission to set up offices overseas (in Malaysia, Indonesia, Thailand and Singapore) to facilitate the remittances made by Myanmar's many workers beyond its borders (Myat May Zin 2012a).

   * May 2012: Myanmar's banks are permitted to accept deposits in foreign currencies (limited to the U.S. dollar, Singapore dollar and the euro), as well as kyats. Foreign currency deposits are available to both residents and non-residents of Myanmar. Once established, withdrawals from a foreign currency account can be in the form of any of the available currencies.

   * August 2012: Most of the private banks are given permission to issue and accept letters of credit for international trade transactions. Hitherto these too could only be traded by the state-owned MFTB and MICB, but in practice had been little used (not least since these banks demanded 100 per cent deposit backing for the instruments--rendering void the credit aspect of such payment devices). As one importer in Yangon observed, cash has long been king in Myanmar, even for trade transactions; "most people in the country bring money in a bag" (May Lay 2012a).

   * September 2012: Myanmar Oriental Bank (MOB) is allowed to sign an agreement with the world's largest international money transfer firm, Western Union, to offer inward remittance services into Burma (May Lay 2012b). This deal was quickly followed by similar arrangements between MOB's competitors with both Western Union, as well as its international rival, Moneygram, across ensuing months. By 2013, most of Myanmar's private banks had signed up with one or both of these firms. Notwithstanding these new products and arrangements, the informal hundi remittance system remains preferred by many Burmese nationals abroad. This is partly because hundi continues to be cheaper for smaller remittance payments, but partly too because it remains both familiar and trusted.

   * August 2013: An interbank market for foreign exchange is established (operations only commenced in March 2014). This market should greatly improve the efficiency of Myanmar's foreign exchange market, and bring the exchange rate of the kyat closer to that which genuinely and broadly brings together the supply and demand for the currency into equilibrium. Hitherto there have been prolonged periods (especially across 2012) when the kyat appreciated away from that suggested by trade fundamentals, not least because the (legal) foreign exchange market hitherto was confined to that for physical cash.

   III.2 A New Central Bank of Myanmar Law

   As formerly instituted, the CBM was unable to fulfil the functions allocated to it (under the...