Myanmar Banking Sector 2025: The Way Forward - Roland ...
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z STUDY Myanmar Banking Sector 2025: The Way Forward September 2016
2 MYANMAR BANKING SECTOR 2025
Table of Contents
Myanmar's banking sector as a key growth driver ............................................................................. 4
1. Current situation and challenges for the banking sector ............................................................... 5
1.1 Status quo – Sector at a crossroads ...................................................................................... 5
1.2 First steps in the right direction .............................................................................................. 6
1.3 Diverse range of challenges................................................................................................... 6
1.4 State owned banks – Fighting history .................................................................................... 7
1.5 Domestic commercial banks – Three leaders and the rest? .................................................. 8
1.6 Foreign banks – The (restrained) elephant in the room ....................................................... 12
2. Enabling the banking sector transformation ................................................................................ 13
2.1 Steer interbank market development ................................................................................... 13
2.2 Foster access to credit ......................................................................................................... 14
2.3 Build trust in the system ....................................................................................................... 15
2.4 Increase capacity and autonomy of the central bank .......................................................... 16
2.5 Reform state owned banks .................................................................................................. 17
3. Banking 2025: Unprecedented growth to spur sector shakeup .................................................. 19
4. Conclusion ................................................................................................................................... 24
5. Appendix ...................................................................................................................................... 253 MYANMAR BANKING SECTOR 2025
Table of Figures
Figure 1: Banking-assets-to-GDP ratio, 2015 [%] .............................................................................. 5
Figure 2: Bank account ownership, 2014 [% population age 15+] ..................................................... 5
Figure 3: Banking market overview .................................................................................................... 6
Figure 4: Total domestic banking assets [MMK tr] ............................................................................. 7
Figure 5: Total domestic banking deposits and loans [MMK tr] ......................................................... 7
Figure 6: Private banks' assets, deposits and loan volumes ............................................................. 8
Figure 7: Concentration of top 3 private banks in ASEAN countries, 2015 ....................................... 9
Figure 8: Domestic private banks by equity, Mar 2016 [# banks] ...................................................... 9
Figure 9: Bank expansion levels, 2013-2016 ................................................................................... 10
Figure 10: Density of bank branch network, 2014 [# branches per 100,000 capita] ....................... 11
Figure 11: Branch density of domestic private banks in Myanmar, May 2016 ................................. 11
Figure 12: Total banking equity – breakdown by type of bank ......................................................... 12
Figure 13: Total banking assets projection [USD bn] ....................................................................... 19
Figure 14: Total banking loans projection [USD bn] ......................................................................... 19
Figure 15: Bank branch network projection [# branches] ................................................................. 20
Figure 16: Banking employment projection ['000 persons] ................................................................ 20
Figure 17: Total banking equity projection [USD bn] ........................................................................ 21
Figure 18: Assumptions for 2025 forecast ........................................................................................ 254 MYANMAR BANKING SECTOR 2025
Myanmar's banking sector as a key growth driver
In any country, financial services sector Myanmar's banking sector has atrophied over
occupies a unique place among all business the years and suffered many ailments.
sectors. It plays a vital role as a catalyst for Despite a recent resurgence, it remains small
overall economic development, seeding and unable to provide the required financing
growth in other sectors by providing the to support fast paced economic growth.
necessary funds to various economic agents, Fixing these shortcomings is a daunting task
namely private individuals and corporations. It considering the current inefficiencies.
is also in itself a key business sector
That said, the underdeveloped state of the
contributing a large number of well qualified
banking sector presents an opportunity to put
and high earning jobs and is arguably the
in place the right framework and initiate the
largest sector in the world in terms of
necessary adjustments before sheer size
revenues.
makes this kind of rectification more
No developed nation has reached an complicated.
advanced stage of development without a
Based on market needs and current
relatively large, sufficiently successful and
shortcomings, far-reaching reforms under the
reasonably sound financial sector. No
stewardship of the Central Bank of Myanmar
developing economy has enjoyed sustainable
(CBM) coupled with significant and steady
economic growth without a sound expansion
efforts from all stakeholders to implement
of its banking sector. Ultimately, the banking
change (Ministry of Finance, CBM,
crisis experienced around the world and its
commercial banks) are a must.
effects rippling through the economy is
testimony to the significance of banks in We believe that Myanmar's banking sector
modern economies. has a bright future and we foresee
exponential growth for the industry, slated to
Myanmar will be no exception. The creation
multiply its current asset base by a factor of
of a sound, inclusive and successful banking
eight and create over 120,000 jobs by 2025.
sector cannot be taken out of the country
development equation, no matter what the This study discusses and substantiates:
other priorities may be. 1. The current situation and challenges for
the banking sector
2. The short- and medium-term actions
necessary to enable banking sector
transformation
3. The positive outlook for the banking
sector through 20255 MYANMAR BANKING SECTOR 2025
1. Current situation and challenges for the banking sector
1.1 Status quo – Sector at a crossroads
Compared to other ASEAN countries, the over three years compared to approximately
contribution of Myanmar's banking sector to 10% in Vietnam. In addition to pure asset
the economy is limited. Myanmar's banking- growth, factors such as low financial
assets-to-GDP ratio of 49% is the lowest inclusion, with 30 million or 77% of the
among ASEAN peers. However, starting from population remaining unbanked (without an
a very low base, Myanmar's banking sector is account with a financial institution) and only
one of the fastest growing in the region, a fact 2% holding debit cards, underline the need
highlighted by an asset growth rate of 18% and the potential for catch-up and growth.
Figure 1: Banking-assets-to-GDP ratio, 2015 [%]
204
175
128
982)
572)
491)
Myanmar Indonesia Cambodia Thailand Vietnam Malaysia
Banking assets
CAGR, '12-15 [%] 18%1) 15%2) 23%2) 5% 13% 8%
GDP per capita
[USD '000] 1.3 3.5 1.1 5.7 2.1 9.6
Figure 2: Bank account ownership, 2014 [% population age 15+]
81
78
36
31
22 23
Cambodia Myanmar Vietnam Indonesia Thailand Malaysia
Has a debit card
[% population 5% 2% 27% 26% 55% 41%
age 15+]
1) 2016 data based on Roland Berger research 2) 2014 data
Source: World Bank Global Financial Inclusion Database, IMF, Myanmar MMSIS, Country regulators, Roland Berger research and data6 MYANMAR BANKING SECTOR 2025
1.2 First steps in the right direction
While the development of the overall financial Exchange (Securities and Exchange Law,
sector is still in a nascent stage, initial steps 2013)
have been taken to create a more modern
In addition, the passing of the new Financial
(regulatory) environment and framework.
Institutions Law of Myanmar (January
These include:
2016) represents a major step forward. It acts
> The easing of foreign exchange as the governing law for both domestic and
restrictions with the establishment of a foreign financial institutions and aims to
new managed floating exchange rate provide the basis for modernizing the sector
regime (Foreign Exchange Management over the next 20 years. The new law is in line
Law, 2012) with common law principles (e.g. promotes
> The Independence of the CBM has been accountability of licensed institutions for
confirmed, thus broadening its scope of transparency and good governance, without
responsibilities to include monetary and codifying, for instance, specific publication
foreign exchange policies as well as rules), aims to level the playing field between
prudential supervision (CBM Law, 2013) private and state owned banks, and reaffirms
> The laying out of a securities exchange the CBM's regulatory powers over the
framework, providing the basis for the banking sector.
development of the Yangon Securities
1.3 Diverse range of challenges
A closer look at the structure of the banking 1. Large (important) state owned banks
sector reveals that each of its three main with limited capabilities
pillars – namely the state owned banks, 2. High number of private banks of non-
domestic private banks and the recently critical scale
entered foreign bank branches – present their
own potentially unique challenges: 3. Foreign banks with strong equity base
but restricted scope of operations
Figure 3: Banking market overview
Central Bank of Myanmar
Domestic banks
Representative offices of foreign
State owned banks JV/private banks Branch of foreign banks
banks
1. Myanma Foreign Trade Bank 1. Myanmar Citizens Bank 12. Global Treasure Bank 22. Construction and 1. The Bank of Tokyo-Mitsubishi UFJ
2. Myanma Investment and Commercial Bank 2. First Private Bank 13. Rural Development Housing Development 2. Oversea-Chinese Banking Corporation
3. Myanma Economic Bank 3. Yadanabon Bank Bank Bank 3. Sumitomo Mitsui Banking Corporation
4. Myanma Agriculture and Development Bank 4. Myawaddy Bank 14. Innwa Bank 23. Shwe Rural and Urban 4. United Overseas Bank
5. Yangon City Bank 15. Co-operative Bank Development Bank 5. Bangkok Bank Public Company
6. Yoma Bank 16. Asia Green 24. Ayeyarwaddy Farmers 6. Industrial and Commercial Bank of China
7. Myanmar Oriental Bank Development Bank Development Bank 7. Maybank
8. Asia Yangon Bank 17. Ayeyarwaddy Bank 8. Mizuho Bank
9. Tun Foundation Bank 18. United Amara Bank 9. ANZ
10. Kanbawza Bank 19. Myanma Apex Bank 10. Bank for Investment and Development of Vietnam
11. Small & Medium 20. Myanmar
Industrial Microfinance Bank 1. State Bank of India
Development Bank 21. Naypyitaw Sibin Bank 2. Shinhan Bank
3. E.SUN Commercial Bank
1. DBS Bank 10. United Bank of India 21. Kookmin Bank 31. BRED Banque Populaire 41. Taiwan Business Bank
2. National Bank 11. Kasikornbank Public 22. Export-Import Bank of India 32. Busan Bank 42. Mega International
3. First Overseas Bank Company 23. The Export-Import Bank of 33. AEON Credit Service Commercial Bank
4. CIMB Bank 12. Woori Bank Korea Company 43. Ho Chiminh City Development
5. Bank for Investment and 13. Vietin Bank 24. Eastern Bank 34. PT. Bank Negara Indonesia Joint Stock Commercial Bank
Development of Vietnam 14. Korea Development Bank 25. Bank of Ayudhya Public 35. Bank of Taiwan 44. Qatar National Bank
6. Arab Bangladesh Bank 15. Standard Chartered Bank Company 36. Taishin International Bank 45. Sampath Bank
7. Siam Commercial Bank Public 16. Shinhan Bank 26. RHB Bank Berhad 37. Taiwan Shin Kong 46. Bank of China
Company 17. Industrial Bank of Korea 27. Commercial Bank of Ceylon Commercial Bank 47. KEB Hana Bank
8. Maruhan Japan Bank 18. First Commercial Bank 28. State Bank of India 38. CTBC Bank 48. BTMU Leasing (Thailand)
9. Krung Thai Bank Public 19. E.SUN Commercial Bank 29. Cathay United Bank 39. Yuanta Commercial Bank 49. ACLEDA Bank
Company 20. Bank of India 30. State Bank of Mauritius 40. Taiwan Cooperative Bank
Source: CBM7 MYANMAR BANKING SECTOR 2025
1.4 State owned banks – Fighting history
Despite a recent trend showing Figure 4: Total domestic banking assets [MMK tr]
a strengthening of private
Total domestic banking assets Domestic private State owned bank
banks, state owned banks [MMK tr] bank1) assets by assets by type
remain important (and in some type [MMK tr] [MMK tr]
cases dominant) players in +18% 38
35 20 18
Myanmar's banking sector,
30 15%
holding a significant portion of
45% 54%
the banking assets. Based on 23 38% 61%
our research, the relative share
33% 54%
of banking assets held by state
owned banks declined from
62% 55%2) 19%
67% in March 2013, to 46% in 67% 46%
March 2016 (Figure 4). 31%
20%
In addition to their Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2016 Mar 2016
comparatively high – too high –
Domestic private banks1) State owned banks Loans Cash Other assets3)
market share, state owned
banks present two key
challenges for the Figure 5: Total domestic banking deposits and loans [MMK tr]
development of the banking
sector overall. Total domestic banking deposits Total domestic banking loans
[MMK tr] [MMK tr]
On the one hand, state owned
banks are still operating under
their initial mandates, putting
+27%
them in direct competition with 27 +27%
1 15
private banks . On the other,
state owned banks face
significant operational 64%
challenges driven by limited 13 82%
7
capabilities overall, dated
2 50%
(nonviable) lending practices , 57%
3
and reliance issues . These 36%
50% 43%
challenges clearly demonstrate 18%
the need for far-reaching
Mar 2013 Mar 2016 Mar 2013 Mar 2016
reforms. (See section 2.5 –
Reform state owned banks) Domestic private banks1) State owned banks
1) Excluding foreign banks 2) Extrapolated based on Dec 2014
3) Other assets include government securities, guarantees, fixed assets
Source: Roland Berger research and data
1
Their mandates date back to when private banks were not able to provide most banking services, and accordingly, state owned banks currently offer almost all
classical banking products
2
Reflected in their relatively ineffective use and transformation of deposits
3
According to market participants8 MYANMAR BANKING SECTOR 2025
1.5 Domestic commercial banks – Three leaders and the rest?
Focusing on the domestic private banks, it deposits in Thailand and Malaysia (see
becomes clear that the recent change in Figure 7). However, what is specific to
relative strength (state owned vs. private Myanmar's current situation and creates an
banks) has been primarily driven by the top 3 additional challenge for smaller banks is the
banks (Figure 6). In Myanmar the top 3 banks very limited size of the overall banking
hold more than 60% of the total banking market.
market and have seen their own share grow
The 40% share of market available to smaller
in recent years. A concentration of assets
banks in Myanmar is equivalent to 10% of the
within the top banks is not an uncommon
market share available to smaller banks in
pattern in SEA with, for instance, the top 3
Vietnam and even less than 3% of what
banks capturing over 50% of
smaller banks are competing for in Thailand.
Figure 6: Private banks' assets, deposits and loan volumes
Domestic private banking1) assets Domestic private banking1) deposits Domestic private banking1) loans
[MMK tr] [MMK tr] [MMK tr]
20
+38%
17
+38%
16
+44%
62% 12
11
57% 66%
64%
8 56%
7
50% 4
52%
38% 53%
43% 34%
44% 36%
50% 48% 47%
Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2013 Mar 2016 Mar 2013 Mar 2016
Top 3 domestic private banks Other domestic private banks
1) Excluding foreign banks
Source: Roland Berger research and data9 MYANMAR BANKING SECTOR 2025
Figure 7: Concentration of top 3 private banks in ASEAN countries, 2015
Top 3 private bank shares
Number of Total private bank
Country private banks assets4) [USD bn] Banking equity Banking deposits Banking loans
Myanmar1) 24 17 36% 66% 64%
40 261 30% 34% 36%
Vietnam2)
59 549 49% 53% 57%
Malaysia3)
19 481 39% 50% 41%
Thailand
1) Excluding foreign banks
2) 2014 data; Including Vietnam Joint Stock Commercial Bank for Industry and Trade, Joint Stock Commercial Bank for Foreign Trade of Vietnam, Joint Stock
Commercial Bank for Investment and Development of Vietnam
3) Including Islamic banks
4) Exchange rates: 1,190.90 MMK/USD (as of Mar 31, 2016), 21,139.50 VND/USD (as of Dec 31, 2014), 4.29419 MYR/USD (as of Dec 31, 2015), 36.0006 THB/USD
(as of Dec 31, 2015)
Source: Annual reports, Roland Berger research
Anticipating an increase in the absolute market Figure 8: Domestic private banks1) by equity, Mar
size, smaller banks can expect to grab additional 2016 [# banks]
volumes, which may enable them to obtain a big
enough slice to survive. However, only very few 13
of them will be able to do so and remain
competitive on a standalone basis.
Based on current market share and size, we
consider only the top 3-5 domestic private banks
(and the newly entered foreign banks) to have
the minimum scale necessary to shape the
6
market in the short- and medium-term. This is
also clearly reflected by the amount of capital
(equity) domestic banks hold. Banks in Myanmar
suffer from the same limitation as the rest of the 3
Below minimum
economy that they are supposed to help finance, 2 paid-up capital
requirement
and that is a lack of capital. As of the end of (MMK 20 bn)
March 2016, only five banks had over USD 75 m under the banking
regulation for
in capital and two had over USD 100 m. Six of Equity2) of ≥ 100 ≥ 75 ≥ 16 < 16 Maintenance of
each bank < 100 < 75 Capital Funds
them did not even meet the new capital [USD mn]
requirement of MMK 20 bn (~USD 16 m)
1) Excluding foreign banks 2) Based on 1,190.90 MMK/USD conversion
decreed in the New Financial Law. rate (as of Mar 31, 2016)
Source: Roland Berger research10 MYANMAR BANKING SECTOR 2025
The dominance of the top 3 private banks is of all branches in Myanmar and they have
also reflected in the development of the added eight times more branches in the last
banking branch network across the country. two years than the rest of the domestic banks
Today, the top 3 banks own more than 50% put together (Figure 9).
Figure 9: Bank expansion levels, 2013-2016
Branch network of top domestic private banks1), May 2016 Branches added per domestic bank1)
[# branches] [Average # branches]
March 2013 August 2014
Kanbawza Bank >350
Top 3 domestic private banks
31 More branches
Top 3 = 54%
4x added by top
Ayeyarwady Bank >150 Other domestic private banks 7 domestic
of total private
bank branches private banks
State owned banks 4
Co-operative Bank >150
Myanma Apex Bank 74 August 2014 May 2016
Top 3 domestic private banks 60
Myawaddy Bank2) 37 8x
Other domestic private banks 7
More branches
added by top
Other private banks3) >450 State owned banks 0 domestic
private banks
1) Excluding foreign banks 2) As of Aug 2014, updated information not available 3) Other 19 domestic private banks
Source: May 2016 – Roland Berger data, Mar 2013/Aug 2014 – GIZ, Public information, Roland Berger research
Despite experiencing significant growth, it is However, even though the overall bank
important to remember that Myanmar is still in branch density is low and can be expected to
the early stages of development. There are increase with the development of GDP,
approximately four bank branches catering to geographical coverage remains very uneven
100,000 citizens in Myanmar, which is with clear signs of overcapacity in some
significantly lower than for its ASEAN peers areas. In Chin state, the ratio is less than 1 to
(Figure 10). 100,000. In West Yangon, the ratio is close to
Hong Kong levels (23 to 100,000) (Figure
11).11 MYANMAR BANKING SECTOR 2025
Figure 10: Density of bank branch network, 2014 Figure 11: Branch density of domestic private
[# branches per 100,000 capita] banks in Myanmar, May 2016
22.7
Tamu Muse
Mandalay
Det Khi Na
12.7
10.7 11.0
10.62)
West Yangon
(>20)
East Yangon
5.6
Kawthoung
4.3
3.8
Number of domestic private bank3)
branches per 100,000 capita
Vietnam Myanmar1)Cambodia Malaysia Indonesia Thailand Singapore Hong
Kong >10 5 - 10 3-4
1-212 MYANMAR BANKING SECTOR 2025
1.6 Foreign banks – The (restrained) elephant in the room
While the (expected) entry of thirteen foreign the overall market is the scale of the capital
banks (nine in 2014, four in 2016) is a recent they have committed to the market and thus
development, it has already had a noticeable the potential future lending foreign banks
impact on the overall market structure and is could provide. The entry of the foreign banks
expected to result in more significant changes has almost doubled the equity available in the
going forward. banking sector and with it, in theory, the
lending capacity.
One of the best indicators of the current and
potential future relevance of foreign banks for
Figure 12: Total banking equity – breakdown by type of bank
Total banking equity, Mar 2016 [USD bn] List of foreign banks with domestic banking license
1 The Bank of Tokyo-Mitsubishi UFJ
2 Oversea-Chinese Banking Corporation
3 Sumitomo Mitsui Banking Corporation
4 United Overseas Bank
5 Bangkok Bank Public Company
Foreign banks Domestic 6 Industrial and Commercial Bank of China
1.21) private banks
47% 1.32) 7 Maybank
8 Mizuho Bank
9 ANZ
10 Bank for Investment and Development of Vietnam
0.31) 11 State Bank of India3)
12 Shinhan Bank3)
State owned banks
13 E.SUN Commercial Bank3)
% Share of total banking equity
1) Exchange rate: 1,190.90 MMK/USD (as of Mar 31, 2016) 2) Includes foreign banks with preliminary licensing approval
3) Foreign banks with preliminary licensing approval (to enter by Nov 2016)
Source: Roland Berger research and data
Though this change in relative strength term, foreign banks have to focus on
(foreign vs. domestic banks) may present a wholesale banking services for foreign
temporary challenge for selected market corporates as well as developing partnerships
participants, we consider the impact for the with domestic banks to service their domestic
overall system to be overwhelmingly positive. corporate clients. Balancing the need to let
local domestic banks develop their
The entry of the foreign banks provides
capabilities and grow further with the
urgently needed capital for financing growth.
obligation to finance the economy will be a
Aside from that, foreign banks bring best
delicate act for the CBM. Ultimately,
practices to the market and are sound and
relaxation in current lending restrictions and a
stable institutions that can spearhead the
closer working relationship between key
introduction of new banking products
domestic players and foreign banks are
(together with local bank partners). While the
inevitable. (See section 2 – Enabling the
entry of foreign banks may be an opportunity
banking sector transformation)
for the overall sector and the top domestic
banks to position themselves as reliable Looking ahead, Myanmar's banking sector is
partners, the pressure on smaller banks to slated to grow. However, whether the sector
find their place in this new environment will will be key in driving overall economic growth
increase further. will depend on the extent of the reforms and
actions taken by the CBM, the banks
For the time being, the foreign banks have
(domestic and foreign) and other
received restricted licenses and the CBM has
stakeholders in coming months and years.
limited the scope of permitted business,
notably based on client types. In the short-13 MYANMAR BANKING SECTOR 2025
2. Enabling the banking sector transformation
Before examining which key reforms and This covers retail payments with
regulatory adjustments to put in place, it is provisions by the banking sector for
worth bearing in mind the core functions the diversified and efficient means of
banking sector requires to perform efficiently. payments to the general public (from
card-based payments to bank transfers to
1. Mobilization of domestic savings e-money). It also involves the
This requires an efficient deposit establishment of reliable payment
gathering function, which relies on an systems/infrastructure for large value and
absolute conviction among the public that interbank transactions. Irrevocability and
speed of execution (same day) should be
any institution duly approved by the
the cornerstone of such systems.
regulator will repay deposit balances at
par and on demand (or agreed terms). In Compared to 5 years ago, improvements in
other words, trust in the system. the banking sector are noticeable, with
significant achievements and a certain
2. Channeling of savings through credit to
amount of leapfrogging. For instance, CBM
their most efficient use in the economy
has developed – with international assistance
This requires rigorous, objective and – a fully functional Real Time Gross
impartial credit decision-making. An Settlement (RTGS) System, introduced
understanding of risk-based credit standardized T-Bill auctions and
practices and solid risk management dematerialized T-Bills as well as government
policies are needed to ultimately ensure bonds held by banks, which all are registered
borrowers can service their debt. This within a Central Collateral Registry managed
promotes safety for depositors' money by the Central Bank. Last but not least, the
within the banking system. In addition, CBM has given preliminary approval to 13
policy lending from government owned foreign banks to operate in the country and
and sponsored institutions needs to obey smoothly managed their entry.
strict mandates and guidelines. These
Yet against the backdrop of an efficient,
range from clear accounting and
inclusive and modern banking sector as
disclosure standards, to transparent
described previously, a great deal remains to
reflection of subsidy costs in public
be done. Critical initiatives should be
accounts, to independent governance
launched in the short- and medium-term to
and management structures.
enable the successful transformation of
3. Safe, fast and reliable means of making Myanmar's banking sector.
payments
We see five critical initiatives that need to be implemented in the short- to medium-term:
2.1 Steer interbank market development
The interbank market is the backbone of any securities market – it is the bedrock of all
banking sector. In a nutshell, it allows banks other money and capital markets.
with liquidity shortages to access funding or In Myanmar, most of the above is not yet
banks with excess liquidity to invest and earn
functional and until very recently (April 2016),
returns. It can also be a conduit for the
interbank lending and borrowing was not only
transmission of CBM monetary policies and
scarce, but discouraged by the regulations,
ultimately – together with the government
which (intentionally or not) promoted the use14 MYANMAR BANKING SECTOR 2025
of central bank money for funding needs. This approval by the Ministry of Finance for foreign
was a complete inversion of a sound banking banks to acquire government securities in
market, where the interbank market should primary auctions as well as in secondary
be the source of liquidity in the first instance markets.
and central bank facilities only representing a
A successful repo market can trigger appetite
last resort, with differentiated interest rates
for government securities, which in turn will
reflecting this pecking order.
provide an additional source of financing for
The CBM issued new directives in April 2016 Myanmar's fiscal deficit. Domestic and foreign
along with detailed operational guidelines banks will be more willing to acquire such
encouraging interbank lending and borrowing securities if they can mobilize these interest
in Kyat (Directive 26), relaxing collateral bearing instruments to access liquidity in the
conditions and promoting free rate setting in interbank market.
that market (interbank lending and borrowing
Changes in regulation to foster the
rate level were previously prescribed).
development of the interbank market are very
Although interbank lending in USD or other
recent and little impact can be observed in
foreign currencies has not been permitted to
terms of market participants' behavior.
avoid dollarization of the economy, a second
Whether they will shift from previous
directive (27) was issued allowing interbank
practices such as cross-depositing rather
swaps in USD with tenure of up to one year.
than interbank lending or borrowing, start
In our view, one final critical component is still transacting on several maturity horizons, or
missing and should be introduced to actively engage in swaps and repo operations
complete the range of instruments available will depend on the CBM. They must be able
and bolster the interbank market: the to create a conducive regulatory environment
repurchase agreement (repo) on government (a work in progress) and also to take a very
securities. Not only will repo provide a safe, operational role to kick-start those practices,
flexible and secured transaction option to including being counterparty to some
market participants through the use of the transactions.
CBM-operated RTGS and Collateral Registry,
It will also require some flexibility from
it will also provide the CBM with additional,
international financial institutions until best
flexible and indirect instruments to conduct
practices can be implemented, which may not
monetary operations. Repo tenders are the
be possible from day one of operations and
instrument or mechanism of choice used by
may not be a prerequisite to initiate a
central banks, at certain stages of their
significant positive change in market
respective development, to conduct open
structure. A trial phase with tight monitoring
market operations.
could bring additional comfort as well as
Beyond precise regulation and operational training to market participants and the
guidelines defined by the CBM, one key step regulator to help foster the development of
toward the implementation of such this critical element of a well-functioning
transactions is needed. This is the formal banking sector in Myanmar.
2.2 Foster access to credit
One of the commonly heard complaints about therefore need to carefully assess the
the banking system is the difficulty for a vast creditworthiness of potential customers. They
majority of economic agents to access credit. cannot and should not be expected to lend to
anyone who asks for financing but lacks the
To maintain a sound banking system, banks
ability to repay.
are expected to have responsible lending
practices and appropriate risk management Nevertheless, the existing banking sector
expertise. Private banks work for profit and practices and past regulation strongly limits15 MYANMAR BANKING SECTOR 2025
access to financing for a potentially the country. This ensures stability so that
creditworthy part of the population and some borrowing costs can be kept under control.
adjustments are needed to promote more risk Nevertheless, some relaxation of the upper
and reward based lending in the system. and lower limits for interest rates set by the
CBM should be considered.
A relaxation of eligible collateral rules and the
widening of the credit spread (difference The historic cap on lending maturity of one
between minimum deposit rate and maximum year has to be removed, providing the
credit rate, currently set at 5% by the CBM) opportunity to develop multi-year lending
would allow consumers with a higher risk practices and fostering the long-term financier
profile, but still creditworthy, to borrow (banks role of banks in the economy. Securing
to lend). longer maturity financing will help borrowers,
notably businesses, by providing them with
The new Myanmar Financial Institutions Law
better visibility on the funding of their long-
allows banks to provide unsecured loans
term investments and making periodic
(without collateral) and leaves it to the CBM
installments more affordable.
to rule on lending terms and define eligible
collateral. Based on previous regulation and In the longer run, when the banking sector
business practices, domestic bank lending has made more progress, the CBM may also
was limited to secured transactions (foreign consider dedicated policies to incentivize
banks have always been authorized to banks to lend more actively. For instance,
provide unsecured lending in their license). In some countries such as Indonesia have set
addition, eligible collateral was highly up penalty mechanisms for banks which do
restricted, e.g. to land, building, gold and not sufficiently leverage their deposit base.
gems and the recently added key agricultural Banks which do not put their deposits to use
export goods. In practice, banks mostly lent in lending to the economy (i.e. banks with a
against land and buildings, using a haircut low loan-to-deposit ratio) are required to hold
ratio on the collateral value as high as 50% additional (costly) reserves at the central
and, as such, behaved more like pawn shops bank.
than long-term financiers.
As for the remaining large unbankable part of
Lending intermediation margins are key for the population, microfinance and policy
banks to operate profitably and accept lending through dedicated state owned
customers with higher risk profiles. Full institutions or government subsidized
liberalization of interest rates is a complex schemes administrated by private banks
process, usually requiring a staggered should be the preferred mechanism to grant
approach, making sure the central bank has access to credit. These institutions require
the necessary instruments to intervene and dedicated regulation, which is currently being
monitor the market and the fiscal position of developed.
2.3 Build trust in the system
Another much needed element in the policy The new Myanmar Financial Law passed
mix to strengthen the banking sector is the early in 2016 imposes clear public disclosure
building of trust. Trust in the system is obligations on banks, as it should be, for
ultimately a matter of perception and a financial institutions seeking general public
regulator can do much to improve perception. deposits. Here, the CBM should take a very
strong stance to ensure those obligations are
Although Myanmar banks do report on a
met. After a limited grace period of e.g. six
regular basis to the CBM, none to date
months to allow banks to prepare their
publishes audited financial statements –
reports, the CBM should impose significant
regularly and in an acceptable timeframe.
penalties for lapses and potentially withdraw16 MYANMAR BANKING SECTOR 2025
the license from banks unable to provide system, notably private banks, by the general
audited financial statements in accordance public. Despite featuring the word insurance,
with the law. this should not be placed, as it is today, under
the responsibility of Myanma Insurance
Similarly, the reporting by banks to the
Agency, but rather administrated by a
regulator is still very manual, paper-based
dedicated agency or institution in close
and error prone. Some lapses are not
collaboration with the CBM.
uncommon, but clear penalties or
enforcement of penalties is lacking. The CBM Last but not least, setting up a Credit Bureau
has recently initiated selected reporting in would provide lenders with the credit history
electronic format for interbank transactions. of the borrowers and statistical information to
Currently limited to interbank market assess their creditworthiness. It also could
transactions, this should be rolled out to the introduce a more level playing field with all
entire reporting needs of the CBM. This lenders accessing the same information and
would be an opportunity to revisit the existing so driving the cost of borrowing down through
information and data requested from banks, competition for less risky customers.
modernize the process and reduce Eventually, it limits the presence of
duplication of data requests which have nonperforming loans in the system as lenders
unavoidably developed over the years. can take better informed decisions.
The CBM should also quickly disclose Both a Credit Bureau and a Deposit
selected aggregated information based on Insurance Agency will take time to implement
the reports collected. For instance, disclosure and are medium-term goals, which can
should target both market participants and contribute to strengthening the banking
the general public via the CBM's website. system and increasing trust in it. But
ultimately they are no substitute for strong
The creation of a deposit insurance
regulation, efficient banking supervision and
mechanism financed by the banking sector
banks' expertise.
should be considered and studied as it could
improve the perception of the strength of the
2.4 Increase capacity and autonomy of the central bank
A strong, independent and efficient central policy role, the CBM has a key role to play in
bank is key to foster growth in the economy the transformation of the banking sector.
and develop a stable banking sector. Central
The task is even more daunting considering
banks play a vital role in today's advanced
the capacity limitations the CBM is facing.
economies and their role has amplified in the
The CBM needs an appropriate human
last 20 years. The same holds true
resources and funding strategy for its
throughout the region, where certain central
activities and responsibilities. Both are yet to
banks have been instrumental in helping their
be developed.
country bolster growth and foster the
emergence of a strong banking sector since These are not minor adjustments but major
1997. injections of know-how, training, project
management and execution skills to tackle
In Myanmar, the CBM gained autonomy in
the challenges ahead. The CBM should build
2013 through the Central Bank Law and had
an overall transformation master plan based
its financial sector supervision powers
on previous recommendations from
reaffirmed in the new Myanmar Financial
multilateral institutions and current challenges
Institutions Law earlier this year. It is
identified. Such a plan will take time to yield
expected to play a leading role in supporting
results but should be initiated as soon as
the transformation of the country's economy.
possible. It should encompass:
Beyond its monetary and exchange rate17 MYANMAR BANKING SECTOR 2025
> A forward-looking plan for capacity modern central banks are usually large,
building at least for the next 5 years with a distinct from the government's annual general
10-year target in mind budget procedure and, as a testimony to their
> An exhaustive upskilling strategy for independence, approved unreservedly (they
existing employees and identification of are, however, audited and controlled a
training required and potential source for posteriori since they rely on public money). In
the training including peer central bank some instances, central banks only inform the
secondments, multilateral institutions, government of the budget they decide
external providers themselves.
> A recruiting approach including domestic It is critical that the budget of the CBM makes
and international university grants, private accommodations for the significant role it is
banks experienced hires, returnees designed to play. As per the current
> Clear and attractive career paths procedure, it is vetted by the Ministry of
Finance and the Parliament and there is a
> A market based and competitive
high likelihood that it could be restricted or
compensation plan
reduced in the overall efforts to curb
Like all regulators in the world, the CBM will government spending.
be in competition with the industry it regulates
A proper funding strategy of the CBM should
to attract talent and should be in a position to
be put in place taking into consideration the
offer attractive compensation and career
investment required and the additional
paths. Moving further from partial autonomy
operational expenses that it will inevitably
to full independence, the CBM should plan
incur, either to recruit permanent staff or
gradually to adjust its attractiveness as an
temporary external technical assistance. The
employer.
funding could come from different sources.
In the meantime, the CBM will need to rely Although the bulk of it should be borne by the
significantly on external support from its state, ultimately, some fixed-term
ASEAN peers and technical assistance from transformative projects could be funded from
multilateral institutions to address immediate international donors and multilateral agencies
capacity restrictions and possible lack of through development aid grants or loans. In
experience. This too, should be planned in addition, if the CBM plays a more active role
order for it to be discussed with potential in the interbank market, there will be an
expertise providers and financial donors. opportunity to generate income that could be
used to cover operational expenses.
There is limited policy autonomy when there
is limited financial autonomy. Budgets of
2.5 Reform state owned banks
For a long time, state owned banks used to state owned banks; for products such as
play an economically essential role. In a foreign currency transaction, state owned
closed economy, they were the only providers banks were the only providers. Today,
of certain banking services in the country, Myanmar's largest state owned banks
due to political sanctions and limited operate as commercial banks.
capabilities of the commercial banks. Their
Without anticipating the decisions to be taken
role, therefore, extended far beyond pure
further to a detailed review of the various
policy banks, extending credit to specific
state owned banks' situation, a few key
sectors of the economy or relaying
actions are to be considered:
government social programs. For instance,
until very recently, state owned enterprises 1. Clarify their mandate to focus them on
mandatorily had to bring their business to their policy-lending functions18 MYANMAR BANKING SECTOR 2025
2. Return to the CBM their government In the event that a bank were to retain
treasury operations and/or foreign selected commercial banking activities, it is
currency reserve management functions essential to make sure it is on a level playing
3. Wind down their commercial banking field: no monopoly in any sector (as is de
activities by transferring those activities to facto the case with agriculture loans); the
commercial banks and/or closing them same regulatory constraints, ratios and
down in a socially acceptable way supervision as private banks. In that case,
carving out the activities into a dedicated
4. Adjust nonperforming loan books and
legal entity would be advisable, to clearly
capital requirements and consider
separate them from the policy-lending
merging institutions
mandate.
5. Upgrade their governance, organization
and process to internationally recognized The reform of state owned banks is a critical
practices. This will require significant element in strengthening Myanmar's banking
effort in a multi-year program, drawing on sector. It is going to require significant effort
substantial technical assistance together and time. While the "what to do" might well be
with investments in their infrastructure (IT identified quickly, the "how to do it" will be a
systems) multi-year challenge.
Takeaway box – Profiles of the four state owned banks:
Myanma Economic Bank (MEB) has been the largest bank in Myanmar. It is the successor of the
State Commercial Bank (SCB) established in 1954, which provided a wide range of commercial
banking services across the country including saving deposit accounts, saving certificates, fixed
deposits, current accounts, credit facilities, payment order, FOREX services and cross border trade
services.
Myanma Agriculture and Development Bank (MADB) is the legal successor of the State Agricultural
Bank (SAB), established in 1953, which provided banking services in rural areas. It has been
mandated to support the development of agricultural, livestock and rural socioeconomic enterprises
in the country by providing banking services. For instance, it provides short- and long-term credit for
crop production, salt production, livestock, fish and dairy farming to ~2 million customers. The
MADB is authorized to make loans to state owned agricultural organizations, livestock
organizations, corporations, private entrepreneurs, village banks, farmers and farm laborers. Since
the 1990s, it has targeted the savings deposits of farmers by launching rural savings programs.
Myanma Investment and Commercial Bank (MICB) was established in 1990 under the Financial
Institutions of Myanmar Law (1990) and provides financial services to the private sector. The
services encompass domestic commercial and investment banking services, including current
deposit account, fixed deposit account, savings deposit account, internal remittances, loans and
advances, and international banking services such as foreign currency current deposit accounts,
foreign currency deposit account, foreign remittances, import and export.
Myanma Foreign Trade Bank (MFTB) was established in 1990 under the Financial Institutions of
Myanmar Law (1990). It is the legal successor of the Foreign Department of the State Commercial
Bank, which focused on international trade. It offers a wide range of international banking services
to its customers through its worldwide correspondent network of +260 banks in more than 50
countries. MFTB serves both private and government entities/individuals. Government departments
and state owned enterprises keep their foreign exchange accounts with MFTB.19 MYANMAR BANKING SECTOR 2025
3. Banking 2025: Unprecedented growth to spur sector shakeup
Despite the challenges identified previously, While we believe this to be a realistic and
our experience working in Myanmar on a achievable goal, we want to issue a word of
daily basis leaves no doubt in our minds that caution that this "best-case scenario" is not a
Myanmar does have the potential, the guaranteed development, but can only be the
willingness and the people it takes to become result of a tremendous effort by all
one of the most successful growth stories in stakeholders, including multinational
recent history. Myanmar has the opportunity organizations and other external supporters.
to leapfrog for the next ten years to a
By 2025, Myanmar's banking sector may
development level that will put it close to that
have changed completely:
of most ASEAN countries today.
1. Banking assets will have multiplied by a 2. Banking loans will have increased more
factor of 8 to reach USD 247 billion (23% than tenfold to USD 164 billion (29%
CAGR) CAGR)
Figure 13: Total banking assets projection [USD bn] Figure 14: Total banking loans projection [USD bn]
247 164
+23% +29%
65
88
321)
132)
2015 2020E 2025E 2015 2020E 2025E
1) MMK 38 trillion converted to USD based on 1,190.90 MMK/USD rate (as of Mar 31, 2016)
2) MMK 15 trillion converted to USD based on 1,190.90 MMK/USD rate (as of Mar 31, 2016)
Source: IMF, Central banks, Roland Berger research and projection20 MYANMAR BANKING SECTOR 2025
3. More than 460 additional bank branches will 4. Employment in the banking sector will have
have been opened, expanding the network to at increased to 180,000 persons (14% CAGR)
least 2,200 bank branches nationwide
Figure 15: Bank branch network projection [# branches] Figure 16: Banking employment projection ['000 persons]
Traditional channel-led expansion –
Unsustainable scenario considering
the changes in customer behavior 4,400 180
Alternative channel-led
expansion – Most realistic
scenario since banking needs of +14%
population in Myanmar may and 2,200
should be addressed via alternative
channels (i.e. non-branch)
95
2,200
1,737 463
1,300 501)
70%
60%
40% 30%
20142) 20163) 2025E 2025E 2015 2020E 2025E
(Scenario 1) (Scenario 2)
Domestic private banks1) State owned banks
Additional branches
1) Excluding foreign banks 2) As of Aug 2014 3) As of May 2016 based on Roland Berger data
Source: 2016 – Roland Berger data, 2014 – GIZ, Public information, IMF, National Statistical Office, Roland Berger research and projection
We currently expect asset growth of eight most bank branches follow a standardized
times the current level, loan growth of thirteen concept (though some exceptions exist)
times the current level, relatively limited providing basic transactional services. By
branch network expansion with growth below 2025, we expect to find a variety of branch
30% and more than triple the employment models in Myanmar, from flagship concepts
levels. We anticipate that a significant part of in Yangon to mini and mobile branches in
4
the sector's growth is going to be driven by more remote areas .
corporate banking business. In addition, the
While the development described here may
sector will not just grow, but also go through a
be a dream for any banker in more developed
set of qualitative changes. For instance, we
markets, for Myanmar's banks, these
assume it will not be the number of branches
that will have the most significant impact on
changing the sector, but their type. Today, 4
Part of the reason why the anticipated increase in the number of branches
will fall significantly short of asset growth is driven by the fact that we expect
low touch mobile solutions to be in place to serve the lower mass segment21 MYANMAR BANKING SECTOR 2025
changes present not just great opportunities, for addressing key initiatives will need to
but also significant challenges in preparing for come from outside the banking sector, as it is
the future. not possible to achieve growth at nine times
the current levels using retained earnings
The first and probably one of the most
only or current shareholders' capital injection.
challenging steps will be to find a way to
increase capital levels. The additional capital
Figure 17: Total banking equity projection [USD bn]
Catch-up effect 25.2
Additional equity to support loan growth
as banking-equity-to-loans catches up
with regional peers2) 5.9
GDP growth effect
Additional equity to
support increased
Normalization effect loans arising from
Additional equity to GDP growth 13.5
support increased loans
as lending normalize to
levels of other developing
country's banking sector1)
42% 2.83) 3.0
11%
47%
2015 2025E
Domestic private banks State owned banks Foreign banks Additional equity
1) Banking-loans-to-GDP ratio of developing countries (40%)
2) Banking-equity-to-loans ratio of weighted average for Vietnam, Thailand, Malaysia today (15%)
3) MMK 3.4 trillion converted to USD based on 1,190.90 MMK/USD rate (as of Mar 31, 2016)
Source: IMF, Central banks, Roland Berger research and projection
With the realization that even the larger Defining a competitive retail banking
banks will need to increase their capital – be strategy for the coming years will be
it via IPO, capital injections by current owners essential. Any strategy should not just focus
or private placement, or capital injection on increasing the numbers of customers, but
during acquisitions – domestic private banks also start considering customer profitability
can have only one goal from here on forward, and cost of acquisition. To do so, banks will
and that is to professionalize all parts of their need to review current customer
operations to become an attractive partner for segmentations, products and services as well
potential investors. This has to include: as channel mix to identify profitable (or
> Developing dedicated retail and corporate potentially profitable) segments and ways to
banking strategies capture them.
> Challenging current (and historic) Due to the currently limited number of
processes and modernizing operations customers in classically attractive segments,
> Developing a mobile banking value from mass affluent to high net worth
proposition to fend off telco operators (or individuals, customer segmentation cannot
benefit from cooperation) rely only on current assets and revenues but
will have to consider future potential too. In
addition to a forward looking segmentation,22 MYANMAR BANKING SECTOR 2025
the channel mix and how to steer customers as specific customer needs to derive the most
in this mix will be vital to ensuring profitability. suitable service portfolio. Based on the type
of customer and its development stage,
Banks will need to find answers to the
banks will have to be prepared to offer
question of how to service lower mass
everything from basic investment and
customers primarily via electronic and mobile
financing products to solutions for liquidity
channels, while making sure that the growing
management, foreign business banking, and
mass and more affluent segments can be
in the medium- to long-term, corporate
retained by leveraging branches and personal
finance solutions. Addressing these needs
interaction. In that respect, Myanmar banks
and expectations will not just be challenging
are facing a unique challenge that most of
from a product creation perspective, but also
their peers in other countries have thus far
from a sales and distribution perspective.
not faced, or are only starting to experience
"Selling" more sophisticated products
today, with the advantage of already having
requires qualified specialists, a well-
established operations.
coordinated sales approach and support
That challenge is competition not only from structures (tools and organization) to enable
banks but also from telecommunications relationship managers to successfully take on
operators and potentially other disruptive the task.
service providers, given that here, more than
On top of offering the right product mix and
anywhere else in the world, the mobile phone
having an effective go-to-market strategy that
is to be the main point of entry to banking
applies to retail and corporate banking,
services for the majority of the population. Of
having the right and modern operating
the ~80% of the population who do not have
model to deliver these services will be vital.
a bank account, many (if not all) of them are
With increasing scale, standardized
expected to have a mobile phone by the end
processes and automation are must-haves to
of 2017; and the vast majority of those
enable sustainable growth. In Myanmar, this
phones will be smartphones, which banks
might even be more important than in more
could take advantage of to provide app-based
developed markets, since qualified staff is
services. Cooperation and coopetition with
scarce. Having stable operating (especially
telecommunications operators and FinTech
credit) processes in place by allowing
firms, dedicated app-based mobile and
onboarding of new (if perhaps not fully
banking services, agent networks and
qualified) resources on a bigger scale is the
partners, and aggressive customer
only option.
acquisition strategies are key components
banks must consider in their quest to reach For most of the smaller banks, the question
out to the millions of unbanked customers, will not be one of growth and market share
who will rise to greater affluence and become but survival, plain and simple. Despite the
the backbone of their clientele in the next fact that in other SEA markets, a fair number
decades. of smaller banks coexist alongside a few top
banks that generally capture more than 50%
Besides retail banking focusing on network
market share, we believe that this will not be
expansion and new customer acquisition, a
possible in Myanmar. The key reasons for
corporate banking strategy may be even
this are the overall limited size of the market
more important. Asset growth in the initial
(less than 4% of the Thailand market),
years will likely not be driven by retail but by
increasing minimum capital requirements,
corporate customers, which requires a
and an anticipated increase in cost and
different approach to be successful.
required sophistication to comply with
To define a viable corporate banking strategy strengthening reporting and compliance
beyond captive business and related parties standards.
as is predominantly the case today, it will be
important to understand the attractiveness of
geographies, products and segments as wellYou can also read
