Organised by: Myanmar’s Banking Sector in Stormy Waters Staying on the reform course before and amidst COVID-19 crisis 2020 GIZ Banking Report 5th Edition, January 2021

Myanmar’s Banking Sector in Stormy Waters Staying on the reform course before and amidst COVID-19 crisis 2020 GIZ Banking Report 5th Edition, 2021

Agricultural Finance Trade Finance Deposits Remittances Card services and digital finance 68 72 74 76 78 Chapter 5 – The Regional Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Performance of the Myanmar banking sector in a regional comparison Access to finance in a regional comparison 84 90 Chapter 6 – Myanmar and the COVID-19 crisis . . . . . . . . . . . . . . . . . . . . . . . . . . 94 CERP and MERRP: two sides of the same coin Working Committee and Task Force 94 98 COVID-19 Fund 100 Monetary Management 104 Impacts on the Economy 108 Chapter 7 – Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 References 118 Annex 1: Prudential requirements for banks in Myanmar 124 Annex 2: Summary of Instructions for Commercial Banks 126 Endnotes 130 3

List of Tables Table 1: Loans disbursed by MADB from 2017 to 2019 (in billion MMK) . . . . . . . . . . . . . . . . . . Table 2: Loan disbursement of the first tranche of the COVID-19 Fund . . . . . . . . . . . . . . . . . . . Table 3: Loan disbursement of the second tranche of the COVID-19 Fund (as of 14 October 2020) . List of Boxes Box 1: Myanmar in figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 2: Laws affecting the financial sector of Myanmar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 3: Laws drafted by the respective ministries in 2019 and 2020 . . . . . . . . . . . . . . . . . . . . . Box 4: IFRS Transformation in Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 5: GIZ Financial Literacy Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 6: Bancassurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reliability and consistency of data Data in Myanmar is scarce, not always reliable, and inconsistent. This holds especially true for the financial sector. Most financial institutions do not publish their annual reports or disclose data. Transparency is, however, increasing, as are the efforts towards improving disclosure of financial data. Since December 2016, the Central Bank of Myanmar publishes key banking data in quarterly reports. Legal reforms that are being implemented are, furthermore, intended to help ensure a consistent application of international financial reporting standards. This report uses data from official Myanmar sources, international organizations, and individual financial institutions. Additionally, the GIZ has conducted surveys and interviews with national and international finance experts and representatives of the Myanmar financial industry. Whenever data is presented, the source is clearly stated. The GIZ, nevertheless, cannot guarantee the accuracy of this data. Most data should be treated carefully. 68 101 102 24 32 32 37 70 82 5

3. GIZ supports training providers for the banking sector in the development of human resources in the banking industry. In this context, the GIZ assists in the development of adequate and demand-oriented qualification and training measures at the Yangon University of Economics. Furthermore, the GIZ facilitates cooperation and the exchange of information concerning human capacity development among Myanmar banks. 4. GIZ supports the banking industry directly in developing adequate structures, processes, and products for SME finance and the application of International Financial Reporting Standards (IFRS). Two Myanmar partner banks are being supported by the GIZ in the development of tailor-made financial services for SMEs, with the goal of increasing their respective SME-loan portfolio, and three Myanmar partner banks have been supported to implement financial reporting standards. For more information, please visit https://www.giz.de/en/worldwide/17772.html 7

Foreword Myanmar is amid turbulent times. Since 2012 the country has started to transform its political and economic system. The recently held elections on 8 November 2020 have confirmed the strong will of the Myanmar people to move on with this transformation process by providing a clear mandate to the present Government under the lead of the NLD. Indeed, with the outbreak of the Covid-19 pandemic in early 2020 – in addition to the political repercussions in the aftermaths of the Rakhine crisis – the implementation of the Government’s reform agenda was constrained. The economy was hit hard, in particular by travel and trade restrictions. In April 2020 the Myanmar Government responded quickly with the Covid-19 Economic Relief Plan (CERP). Despite the limited resources available, a massive loan program with reduced interest rates was provided for small and medium enterprises (SME) in the agriculture and service sectors as well as for light manufacturing. This immediate and very helpful support was highly welcomed by the local business community. However, it also created additional risks for the stability of the financial sector. The Ministry of Planning, Finance and Industry as well as the Central Bank of Myanmar (CBM) need to monitor their efforts for r ecovery of the economy and at the same time assure that the transformation process of the financial sector will not be derailed. Despite the ongoing crisis the Myanmar Government continues with its reform agenda. With the merger of the Myanmar Economic Bank (MEB) and the Myanmar Agriculture Development Bank (MADB) it has already taken the necessary steps to consolidate the state-owned banks. Moreover, the financial sector has been further opened to foreign investors and the insurance sector has been liberalized to some extent by allowing foreign companies to offer life insurance products and general insurance companies to buy stakes in local insurances. Furthermore, financial institutions have entered the transition to International Financial Reporting Standards (IFRS) and the Central Bank of Myanmar has set up a clear timeline in order to get all the banks to meet the IFRS regulations by the end of the fiscal year 2023. In these difficult times support to the SME sector – the engine of growth of the Myanmar economy – is essential. Since 2012, GIZ has been providing substantial development assistance to this sector in the country. With its private sector support program, GIZ will be committed to continue this assistance for another three years. In addition, GIZ will continue to support the Financial Institutions Supervision Department of the CBM to achieve the reporting requirements for commercial banks and help to build a sound financial sector. GIZ will also carry on with assistance to the Yangon University of Economics (YUE) to enhance academic and post-graduate skills for the banking industry. The ongoing support of GIZ to the Myanmar Parliament with its Banking and Monetary Affairs Development Committee (BMADC) will also help to facilitate the process of legislative reforms needed for the transformation agenda. 9

Abbreviations and Acronyms AAT ABIF ACCA AGD AMC AML Association of Accounting Technicians ASEAN Banking Integration Framework Association of Chartered Certified Accountants Asia Green Development Bank Asset Management Company Anti-Money Laundering ASEAN Association of Southeast Asian Nations ATM AYA AYB Automated Teller Machine Ayeyarwady Bank Asia Yangon Bank EU EUR FATF FDI FFMs FISD FPB FRD FSV GAP European Union Euro Financial Action Task Force Foreign Direct Investment Form Filling Machines Financial Institutions Supervision Department First Private Bank Financial Regulatory Department Forced-Sale-Value Good Agricultural Practices BCGE Business Coalition for Gender Equality G Bank Glory Farmer Development Bank BMADC Banking and Monetary Affairs Development Committee BFRIC BFSD CB CBM CCI CEO Banking Sector Reporting Standards Implementation Committee Banking and Financial Sector Development Co-operative Bank Central Bank of Myanmar Chamber of Commerce and Industry Chief Executive Officer CERP COVID-19 Economic Relief Plan GDP GIZ GTB HR IASB IBFT IBSB IFC IFRS Gross Domestic Product Deutsche Gesellschaft für Internatio nale Zusammenarbeit Global Treasure Bank Human Resources International Accounting Standard Board Inter-bank Fund Transfer Insurance Business Supervisory Board International Finance Corporation International Financial Reporting Standards Chartered Financial Analyst IMF International Monetary Fund Combating of the Financing of Terrorism INNWA Innwa Bank ISA IT JICA KBZ KfW LCCI MAB MAC International Standards on Auditing Information Technology Japan International Cooperation Agency Kanbawza Bank Kreditanstalt für Wiederaufbau London Chamber of Commerce & Industry Myanmar Apex Bank Myanmar Accountancy Council MADB Myanma Agricultural Development Bank MBA MBF MCA Myanmar Banks Association Master of Banking and Finance Myanmar Coffee Association 11 CFA CFT CHIDB Construction, Housing and Infrastruc- ture Development Bank CMLL Control of Money Laundering Law CMP COO Cut-Make-Pack Chief Operating Officer COVID - 19 Corona Virus Disease 2019 CPA CSO CRM DHT DICA DISI Certified Public Accountant Central Statistical Organization Cash Recycling Machine Directorate of Hotels and Tourism Directorate of Investment and Company Administration Directorate of Industrial Supervision and Inspection

Executive Summary Chapter 1 – Introduction Myanmar is a lower middle-income economy with strong economic growth over many years, which also translated into substantial poverty reduction. Nevertheless, the country is still considered one of the least developed nations in the world. The Myanmar economy is severely affected by the COVID-19 pandemic. The World Bank estimates that Myanmar’s GDP growth rate will fall from 6.8 percent in FY 2018/19 to 0.5 percent in FY2019/20. Low-income households and micro, small and medium enterprises (MSMEs), in particular, are the hardest hit. The Myanmar government released the COVID-19 Economic Relief Plan (CERP) in April 2020 to mitigate the economic impacts posed by the corona crisis. According to the CERP, several relaxations in the banking regulations have been made as part of the economic stimulus program together with supporting funds allocated to ease the impact of the pandemic on both businesses and banks. The impact of the current crisis adds to the longer term and systemic challenges in the Myanmar banking sector, which struggles to fulfil its role as a fully-fledged financial intermediary. Banks have grown rapidly in size during the last decade but, of course, the momentum of growth is now slowing down due to the economic impact of the COVID-19 pandemic. Chapter 2 – Regulatory and Supervisory Framework Since the Financial Institutions Law came into effect in 2016 the Central Bank of Myanmar (CBM) issued some remarkable regulations and directives in order to upgrade the local banking system which would match international standards, while the private banks had to make painful adjustments to meet the requirements demanded by these regulations and directives. In order to further develop the financial sector, the government of Myanmar is currently engaged in an on-going process of drafting and enacting new laws, notably the Foreign Exchange Management Law, the Insurance Business Law, the National Payment System Law, and the Secured Transaction Law. In 2019 and 2020 the Central Bank of Myanmar (CBM) issued various regulations and directives to further promote the banking sector. However, most of the directives released in 2020 intend to mitigate the worst effects of COVID-19 on the economy. In the course of the year 2020, the CBM reduced the key annual interest rates three times to strengthen the economy. As of November 2020, the CBM rate stands at 7%, the minimum deposit rate 5%, the maximum collateralised lending rate 10%, and the unsecured lending rate 14.5%. The CBM also tempo- rarily lowered the minimum reserve requirement from 5% to 3.5% of total deposits until 31 March 2021, and allowed banks to calculate the liquidity ratio with 90% of the total value of treasury bonds having a remaining maturity of over one year, instead of 50%. In addition, the CBM extended the date for meeting the requirements of four key regulations issued in 2017. Hence, the deadline for full compliance 13

Myanmar has decided to adopt the International Financial Reporting Standards (IFRS). In July 2018, the Myanmar Accountancy Council (MAC), the regulatory body for accounting and auditing standards in Myanmar, issued the Notification No. 18/2018 and 19/2018 for the adoption of IFRS and IFRS for SMEs. It is therefore mandatory for all Public Interest Entities and Small and Medium Enterprises to follow the International Financial Reporting Standards (IFRS) by the fiscal year 2022/23. Likewise, all auditors have to follow the International Standard on Auditing (ISA) by that time. While currently facing challenges – such as meeting prudential requirements, high NPL ratios and low profitability – banks can tangibly benefit from a transition to IFRS. For instance, bank data will become more reliable and transparent, and it can support management’s decision-making; also, banks will be in a better position to attract more investments, including international investors. Chapter 3 – The Myanmar Banking Sector Since 2010, the banking sector is one of the key reform areas of the Myanmar government. After 2015, significant reforms have been put on track to be in line with international standards, including account- ing systems, digital banking and financial inclusion for both, SMEs and unbanked people. The develop- ment of the banking system is considered a driving force for economic growth in Myanmar. Although Myanmar’s banking sector has achieved fast growth during the past decade, it remains small both in terms of financial intermediation and inclusion compared to its neighboring countries and other ASEAN member states. For example, credit to the private sector stood at 26% of GDP in 2019, one of the lowest values in the region. Myanmar’s banking sector today consists of four state-owned banks, 27 domestic private banks, 13 foreign bank branches, and 46 representative offices of foreign banks. As of December 2019, total bank assets amounted to 72 trillion MMK. Asset growth rates since 2012 have been impressive but volatile. Private banks account for roughly 60% of total bank assets, 69% of total deposits and 81% of total loans, reflecting their strong growth in recent years and dominant market position. The market share of state-owned banks (SOBs), on the other hand, has decreased sharply over the past years. Nevertheless, SOBs still play an important role: MEB remains strong in SME lending, and MADB is the main provider of farmer loans. One of the strengths of the SOBs is their nation-wide outreach, especially in rural areas. In December 2019, the loans issued by SOBs to the agricultural sector amounted to over 70% of their total loans, while private banks held only about 2% of their outstanding loans in that sector. Despite recent improvements, SOBs urgently need to be reformed to improve their financial perfor- mance and raise their competitiveness. They need to increase their loan-deposit-ratios, reduce NPL and focus on digitalization to make operations more efficient. The lack of skilled employees and poor corporate governance are key impediments to be overcome. The Ministry of Planning, Finance and Industry (MoPFI) is in the process to merge the four SOBs that have similar business scopes to facilitate more loans for micro, small and medium enterprises (MSMEs) and farmers. As a first step, MEB and MADB are going to merge to promote farmers’ access to finance. 15

The supporting infrastructure for Myanmar banks is developing at a fast pace. This includes institutions like the Myanmar Banks Association, the Myanmar Payment Union and the emerging Myanmar Credit Bureau Limited, as well as numerous bank training and education providers such as the Myanmar Institute of Banking (MIB) and the Yangon University of Economics (YUE). The fast growth of the banking sector translates into a huge demand for finance education and bank training. Several private training providers have been established to add to the rather low supply of university degree programs. However, the current supply of training is still not sufficient to meet the future needs of the sector. Moreover, ensuring the quality of offered programs remains a challenge as long as there are no national quality standards set by the respective authorities. Chapter 4 – Services of the Banking Sector The Myanmar banking sector offers an increasing variety of services. In terms of commercial lending, however, it still largely relies on overdrafts and loans secured by land or buildings. In late 2017, the CBM issued a directive that encourages banks to offer unsecured and partially secured credit facilities based on the expected cash-flow of a borrower, with the condition that banks establish proper credit risk management systems. While some progress can be seen in that respect, land and buildings as credit security still accounted for 77% of collateral in December 2019 – coming down from almost 90% in December 2017. In 2017, the CBM instructed private banks to convert overdrafts to maximum three-year term loans and reduce the share of overdrafts in their portfolios to 20% by July 2020. Yet, it is estimated that overdraft facilities still contributed 70% of total private bank loans in December 2018 and there are concerns that many big companies are technically in default on their overdrafts. Furthermore, it must be assumed that the NPL ratio of the Myanmar banking sector is on the rise due to the severe impacts of the COVID-19 crisis. Besides commercial lending Myanmar banks also offer various other loan products. Home loans experienced significant growth in recent years. Some banks started to provide short term as well as medium and long term project finance for companies on government contracts. Several financial institutions now offer invoice financing, also known as distributor finance. The technology companies Kyopay and Shwelan introduced digital invoice discounting platforms to the country. Although the small and medium enterprise (SME) sector is considered the backbone of the Myanmar economy most SMEs still face difficulties to obtain formal financing. While the total SME loan volume of all SOBs and private banks in Myanmar increased from MMK 30 billion in December 2017 to over MMK 1,000 billion in December 2019, SME loans only make up 4.21% of the total loan portfolio of the Myanmar banking sector. Due to the long tradition in collateral-based lending, the transition to risk and cash flow-based lending poses a challenge for the local banks. Large investments in human resources, product development and banking infrastructure are required. Regulatory encouragement from the CBM and financial and technical assistance to the banking sector – such as the JICA Two-Step-Loan (TSL) scheme and the SME lending program of the German KfW Development Bank – will not suffice to make a significant 17

Chapter – Card services and digital finance are rapidly penetrating the market. Since the Myanmar Credit Bureau is still in the process of establishment, banks tend to issue credit cards only to their existing customers. In 2016 the CBM, with the support of JICA, launched the Real Time Gross Settlement (RTGS) system, popularly known as CBM-Net. It provides a platform for large interbank payment transactions, including interbank trading in currencies and securities. It will help shifting from traditional cash- based to electronic cashless payment and settlement system. On November 16, 2020, CBM-Net 2, an updated version of CBM-Net was launched. It can work 24/7 for interbank transaction done in MMK as well as to handle large payrolls and utility bills. Very recently, Myanmar Payment Union (MPU) developed an inter-bank fund transfer (IBFT) service, which facilitates money transfers between banks. Considering the huge unbanked population in Myanmar and the rapidly increasing number of mobile phones in the country, mobile financial services have become an important means for financial inclusion. Many private banks have launched mobile banking services and there are five licensed mobile financial service providers (MFSP), including Wave Money, today’s largest MFSP in the country with more than 604,000 agents connecting to over 27 million customers. MFSPs in Myanmar have proven to be very innovative and rapidly expanded their networks. Mobile financial services are extended to various functions including bill payments, commercial and business payments, e-shopping and donations. MFSPs also have established linkages to banks’ e-banking plat- forms. Moreover, they try to provide their services to the agricultural sector. During the COVID-19 crisis MFSPs play a crucial role in delivering branchless financial services to customers, thereby increasing financial inclusion in the country. However, competition among MFSPs is tough and product differen- tiation becomes increasingly difficult for them. Bancassurance is the latest addition to the financial services spectrum of Myanmar. It is a mutually beneficial partnership between an insurance company and a bank or a Microfinance Institution (MFI). The bank or MFI can earn additional revenue by selling insurance products to its clients while the insurance company gets access to a broader client base and can make sales promotion of its products more effective. Chapter 5 – The Regional Perspective Despite its rapid development, the Myanmar banking sector still remains the smallest market when compared with other Southeast Asian nations. Moreover, the profitability of Myanmar banks is comparatively weak and they face serious competitiveness challenges as foreign banks are gradually welcomed into the local market. The performance and profitability of Myanmar banks is weak, both compared to other countries in the region as well as to other lower middle-income countries in the world. Net Interest Margin (NIM) was 2.91% in 2017; Return on Assets (RoA) averaged 0.36% in the third quarter of 2019; and the average Return on Equity (RoE) in the same time period was only 5.07%. The sector’s low cost efficiency is expressed in a relatively high Cost-Income Ratio (approximately 80% in 2017). 19

establish a proper supply chain for the weaving, knitting, dying and sewing industries, to find ways for alleviating tax and other relief measures for MSMEs, and to provide cheap loans to the businesses affected by the pandemic. The Working Committee is also responsible for the development of the MERRP Monitoring Framework and for regular reporting on progress to the National-Level Central Committee on Prevention, Control and Treatment of COVID-19. On 14 March 2020, a Task Force was formed under the Working Committee to oversee the disbursement of cheap loans to business entities badly hurt by the impact of COVID-19. The government allocated an initial capital of MMK 100 billion for the COVID-19 Fund to provide one-year working capital loans at an annual interest rate of 1.0% to severely affected businesses owned by Myanmar citizens. Garment enterprises, hotel and tourism services and SMEs were designated as priority sectors. The first tranche of the COVID-19 Fund was disbursed to 3,393 enterprises; almost 70% of the funds went to 2,550 restaurants and MSMEs including production and services enterprises, while more than 15% was disbursed to 340 hotels. The second tranche of another MMK 100 billion was disbursed to 2,241 affected businesses engaged in food processing (1,570), livestock breeding (182), import-substitution (153), and various other industries including marine products, exporters, agriculture, overseas job agencies and vocational training schools. According to the CERP, the Central Bank of Myanmar was assigned to take relevant monetary measures to improve the macroeconomic environment through monetary stimulus – a kind of quantitative easing to quickly increase the domestic money supply and spur the economic activities. Significant measures that have an immediate effect on the banking sector are: (1) lowering interest rates , (2) lowering maximum reserve requirement, (3) relaxing the calculation of the liquidity ratio, and (4) postponement of meeting the requirements of four key prudential regulations until 31 August 2023. Realizing the danger of ignoring the regulatory framework, the MERRP puts forward a strategy of strengthening the banking and financial system to promote financial system stability. The CBM shall develop specific and realistic timelines for each bank based on its special conditions to comply with key regulatory requirements. In the MERRP the authorities also consider problems of both low and high inflation in maintaining monetary stability. CBM and MOPFI were assigned as responsible agencies for establishing secondary and REPO markets. In addition, deposit and lending rates shall be gradually liberalized. Furthermore, a state-owned Asset Management Company (AMC) is to be established with the purpose of making temporary investment in bank collaterals (mostly land and landed property) of potentially non-performing loans, thus giving a breathing space to the banks and allowing them to maintain the momentum of credit growth. The World Bank estimates that economic growth of Myanmar will drop from 6.8% in FY 2018/19 to 0.5% in FY 2019/20 due to the corona crisis. In the worst-case scenario, the onslaught of the pandemic and associated stringent measures taken to arrest the impact on the economy could cause not only a declining GDP growth rate, but also rising unemployment, high inflation, volatile exchange rates, and widespread defaults on bank loans. 21

Chapter 1 – Introduction Like other countries all over the world, the Myanmar economy also was and still is severely affected by the COVID-19 pandemic. The World Bank estimates that Myanmar’s GDP growth rate will fall from 6.8 percent in FY 2018/19 to 0.5 percent in FY2019/20 due to the impact of both external and domestic factors 3 . Wholesale and retail trade, tourism-related services, manufacturing and construction suffered the negative effects of the crisis. Low-income households and micro, small and medium enterprises (MSMEs), in particular, are being harmed. The COVID-19 Economic Relief Plan (CERP) was released by the government of Myanmar in April 2020 to mitigate the economic impacts posed by the COVID- 19 crisis. According to the CERP, several changes of regulations in the banking sector have been made and supporting funds allocated to ease the impact of the pandemic on both businesses and banks. These issues are discussed in more detail in the next chapters. While in the year 2019 the inflation rate reached a peak of slightly over 10% in July and August, it has gradually declined since March 2020 and stood at 4.16% in June 2020. The modest inflation resulted from lessening demand due to the negative impact of the COVID-19 pandemic on economic activities. The Myanmar Kyat (MMK) appreciated against the US Dollar and other currencies since the beginning of the COVID-19 outbreak 4 due to the slowing down of the economy and the decreasing local demand for the currency. In an attempt to stabilize the exchange rate, the Central Bank of Myanmar (CBM) has increasingly been purchasing US Dollars. Financial intermediation Financial intermediation Loan Loan Deposit Deposit 45 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 2010 / 11 2010 / 11 2011 / 12 2011 / 12 2012 / 13 2012 / 13 2013 / 14 2013 / 14 2014 / 15 2014 / 15 2015 / 16 2015 / 16 2016 / 17 2016 / 17 2017/ 18 2017/ 18 2018/ 19 2018/ 19 Source: GIZ, 2016 and 2018, and World Bank 2019 Source: GIZ, 2016 and 2018, and World Bank 2019 Figure 1 Financial intermediation (Loans and deposits in % of GDP) 25

Chapter 1 – Introduction resources from Burma. After the defeat of the Japanese, however, the foreign banks returned, and the Union Bank of Burma took over the role of a central bank. In 1948, Burma became independent and the banking sector flourished under the new parliamentary democracy. At that time the banking industry contributed more than one third to Burma’s gross domestic product and the Burmese banking sector was considered to be the most developed in the region. In 1963, one year after the military seized control of the country, all banks were nationalized and soon amalgamated into the Peoples Bank of the Union of Burma. However, the economic policies of the military-socialist regime failed badly and in 1988 the State Law and Order Restoration Council took over power. This military junta chose a more market- oriented approach. With the Financial Institutions of Myanmar Law it started to liberalize the financial sector, resulting in the re-emergence of private banks in 1992. However, after a decade of rapid growth a serious banking crisis hit the country in 2003, resulting in an economic recession. Three major banks collapsed, and the central bank introduced stringent prudential measures to reel in the crisis. After the 2010 election, a quasi-civilian government embarked on a series of political and economic reforms. Prudential regulations were eased, and the central bank was given full autonomy. In January 2016, the new Financial Institutions Law, based on international best practices, was enacted. Several new private banks were granted licenses. 2018 2019 Removing 0.8% trading band on Foreign Ex- change Market, CBM allows foreign banks to extend services to local companies Further opening of the market for foreign banks. Five news directives: Fit and Proper Criteria, Directors of Bank, External Auditors of Banks, Related Parties Directive, Acquisi- tion of Substantial Interest, Review of interest rates 2016 AEC, Financial Institutions Law, Regulation on Mobile Finan- cial Services 2013 Central Bank of Myanmar Law & Securities and Exchange Law 2011 Microfi nance Business Law Government led by USDP 2015 Yangon Stock Exchange Government led by NLD 2012 2014 2017 2020 Foreign Exchange Management Law (Mana- ged Floating System) Myanmar Payment Union: fi rst debit cards, ATMs) Anti-money Laundering Law, Counterterro- rism Law, Foreign Exchange Management Regulations, Securities and Exchange Commission of Myanmar formed Four important regulations (Capital Adequacy Regulation, Asset Classifi cation and Provisioning Regulation, Large Exposures Regu- lation, Liquidity Ratio Require- ment Regulation) Outbreak of COVID-19 pandemic Soft loan program for SMEs CBM cuts key interest rate by 1.5% CBM waives the date for meeting requirements of four regulations CBM grants 7 foreign banks preliminary licenses 27

Chapter 1 – Introduction 29

Chapter 2 – Regulatory and Supervisory Framework Recent CBM regulations and directives In 2019 and 2020 the CBM issued various regulations and directives to further liberalize and develop the banking sector. However, most of the directives released in 2020 intend to mitigate the worst effects of COVID-19 on the economy. Below is a summary of the most important CBM regulations and directives issued in recent times. Interest rates The CBM Directive No. (1/2019) issued on 15 January 2019 amended the lending rate with effect from February 2019. According to this directive, private banks are permitted loan disbursements at a maximum annual interest rate of 16% without collateral or with collaterals other than those defined by the CBM. There are no changes in the CBM rate (10% p.a.) and the maxi- mum lending rate (13% p.a.) for loans with CBM-speci- fied collaterals. The amendment of the interest rate is recognized as a further liberalization in the banking sector to move towards cash-flow based lending. Being a high-risk loan, the interest rate on credit cards was raised from 13% to 20% p.a. in April 2019 7 . The credit card can be considered as a type of interest-free loan within a period of 45 to 50 days depending on the issuing bank, and in the past the interest rate was the same as for collateral-based loans. The problem is that many credit card users make efforts to pay their credit card bills only after issuing announcements to settle their debts 8 . The change of interest rate on credit cards helps banks to hedge the risk of late repayments. Based on the economic relief plan, the CBM issued the Directive No. (1/2020) on 12 March 2020 reducing the key interest rates by 0.5%. According to the directive, the minimum bank deposit rate is lowered from 8% to 7.5%, while the maximum lending rate is lowered from 13% to 12.5% for collateralized loans and from 16% to 15.5% for non-collateralized loans. The CBM Directive No. 2/2020 issued on 13 March 2020 put forward the effective date for the interest rate changes from April 1 to March 16. Since the Myanmar economy has slowed down due to the global pandemic crisis, the interest rate has been reduced by an additional 1% on 24 March 2020 9 . Starting from April 1, the bank rate was fixed at 8.5%, Interest rates in the Myanmar banking sector in September 2020 Unsecured lending Secured lending CBM rate Deposit 0% 2% 4% 6% 8% 10% 12% 14% 16% Figure 3 Interest rates in the Myanmar banking sector in September 2020 Reference: CBM, 2020 33

Chapter 2 – Regulatory and Supervisory Framework attract more foreign direct investments (FDI) and promote exports. However, some people in the banking sector pointed out that there still will be problems like official border trade agreements between the Myanmar government and China, and banking services to facilitate trade despite permitting these currencies for international settlements 16 . On 4 February 2019, the CBM announced that starting on the next day the daily Reference Exchange Rate based on transactions in the foreign exchange market will be published daily on its website at 4:00 pm 17 . This new system replaces the old approach of the CBM, which used the previous working day’s weighted average rate to set the reference rate and therefore caused a misalignment when there were long holidays. Net Open Position To avoid liquidity shortage problem, the CBM issued the directive No. (6/2019) on 11 February 2019. According to the directive, the banks with Authorized Dealer License must maintain not more than 20% of core capital of long or short positions of any foreign currency, and if the position exceeds the CBM’s limit for three consecu- tive days, they need to report on corrective actions. Corporate governance On 25 March 2019 the CBM issued five detailed directives to banks to improve corporate governance in the local banking sector. The directives cover related-party transactions, regulations that bank directors shall follow, appropriate standards for bank directors and senior officials, having internationally recognized external auditors, and the acquisitions of substantial interests. The fit and proper criteria must be met by directors and senior officers of a bank, including external auditors. The criteria apply in the on-going process as well as for initial nominations, appointments or approvals of substantial shareholders, directors and senior officers, while the board of directors has full responsibility for ensuring that all directors and officers are fit and proper. The minimum qualifications being relevant to professional areas – like Director, Chief Executive Officer (CEO), Chief Operating Officer (COO) and so forth – are clarified in detail for assessment. Anti-money laundering and cross-border remittances In their effort to curb money laundering, the CBM issued regulatory guidelines and instructions to enforce the Control of Money Laundering Law (CMLL), enacted on 14 March 2014 (GIZ, 2018). The CBM issued the directive on Customer Due Diligence related to anti-money laundering and counter financing of terrorism to the banks licensed and supervised by the CBM on 15 November, 2019 18 . According to the directive, banks must take precautions with customers with suspicious sources of income and keep the complete data and information on wire and digital transfers including cross-border transfers, and must provide these data upon request of the Myanmar Financial Intelligence Unit or the recipient bank. Moreover, the CBM instructed non-bank institutions, in particular licensed money changers and mobile service providers to follow the directive on Customer Due Diligence related to anti-money laundering and counter financing of terrorism 19 . To reduce illegal money transfers, the CBM issued the Notification No. (21/2019) regarding cross-border remittances on 15 November 2019. Under this regula- tion, the applicant company for a cross-border remit- tance license must have registered in accordance with the Myanmar Companies Act and have placed a certain amount of deposit. They must follow the rules of anti-money laundering and counter financing of terrorism. 35

Chapter 2 – Regulatory and Supervisory Framework Box 4: IFRS Transformation in Banks IFRS adoption for Myanmar banks is not a million miles away from its deadline of the 2022-23 financial year. According to MAC’s notification No.18/2018, all Public Interest Entities have to comply with IFRS regarding financial reporting by the 2022-23 financial year. The Banking Sector Financial Reporting Standards Implementation Committee (BFRIC) together with the technical support of GIZ-BFSD selected and assisted two local private banks (IFRS pilot banks) from 2017 to 2019 to develop IFRS accounting policies, and receive tailor made training and methodological guidelines / tools to be able to prepare their IFRS financial statements. The challenges met and lessons learnt during the full scope transformation of the pilot banks were made accessible in July 2019 via a BFRIC Industry Dissemina- tion event for the whole banking sector to benefit. The representatives from all local and international banks of Myanmar attended this event where the pilot banks presented their achievements and challenges faced with regards to IFRS transformation. In addition to this, the technical guides and illustrative documents that will help the banks in preparing IFRS financial statements were distributed to the Myanmar banking sector. This event also helped raise awareness in the banking sector regarding practical challenges in key areas of IFRS transformation and solutions to tackle these challenges. In April 2019, BFRIC together with the support of GIZ-BFSD conducted a survey amongst thirty local banks and thirteen foreign banks for a better understanding of the status of IFRS implementation in the Myanmar banking sector. The survey was followed by face to face interviews with some banks. The survey and the inter- views covered areas such as the banks’ IFRS transfor- mation team and transformation plan, their budget, IT system, the capacity of human resources (HR), preparation of some specific IFRS and so on. The result of the survey was shared at the board of directors meeting of the Myanmar Banks Association in October 2019. The analysis shows that the senior management of most of the banks are committed to complying with the 2022 IFRS deadline. Due to the strengths and weaknesses of the individual banks, however, the banks are in different positions along their IFRS implementa- tion journey. The major challenges banks face are related to HR (getting qualified and experienced personnel), IT (IFRS modules and IT systems to perform complex IFRS calculations) and high cost for IFRS transformation projects. 37

Chapter 3 – The Myanmar Banking Sector CBM State-owned banks Domestic private banks Foreign banks branches 1. 2. 3. 4. Myanma Agricultural Development Bank Myanma Economic Development Bank Myanma Foreign Trade Bank Myanma Investment and Commercial Bank 1. Asian Green Development Bank Ltd 15. Myanmar Micro fi nance Bank Ltd 4. 2. Ayeyarwady Bank Ltd 3. Ayeyarwady Farmers Development Bank Ltd Construction, Housing & Infrstructure Development Bank Ltd Co-operative Bank Ltd Farmers Development Bank – Mandalay First Private Bank Ltd Global Treasure Bank Ltd Glory Farmer Development Bank Ltd (G Bank) 7. 8. 9. 5. 6. 10. Innwa Bank Ltd 11. Kanbawza Bank Ltd 12. Mineral Development Bank Ltd 13. Myanmar Apex Bank Ltd 14. Myanmar Citizens Bank Ltd 16. Myanmar Oriental Bank Ltd 17. Myanmar Tourism Bank Ltd 18. Myawaddy Bank Ltd 19. Nay Pyi Taw Development Bank Ltd 20. Rural Development Bank Ltd 21. Shwe Rural and Urban Development Bank Ltd 22. SME Development Bank Ltd 23. Tun Commercial Bank Ltd 24. United Amara Bank Ltd 25. Yadanabon Bank Ltd, Mandalay 26. Yangon City Bank Ltd 27. Yoma Bank Ltd ANZ 1. 2. Bangkok Bank 3. Bank of Investment and Development of Vietnam Bank of Tokyo Mitsubishi UFJ 4. 5. E-Sun Bank 6. Industrial and Commercial bank of China (ICBC) Malayan Banking Berhad (May Bank) Mizuho Bank Oversea-Chinese Banking Corporation (OCBC) 7. 8. 9. 10. Shinhan Bank 11. State of India 12. Sumitomo Mitsui Banking Corporation (SMBC) 13. United Overseas Bank (UOB) Preliminary licence 1. Bank of China Hank kong (Branch license) Cathay United Bank (Branch license) Korea Development Bank (Branch license) Mega International Commer- cial Bank (Branch license) Industrial Bank of Korea (Subsidiary license) KB Koomin Bank (Subsidiary license) Siam Commercial Bank (Subsidiary license) 2. 3. 4. 5. 6. 7. Figure 5 Banking market of Myanmar Source: CBM, 2020 Bank of China (Hong Kong), Taiwan’s Cathay United Bank, Mega International Commercial Bank, Industrial Bank of Korea, KB Koomin Bank, Korea Development Bank, and Siam Commercial Bank of Thailand 35 . Among them, three banks were granted subsidiary licenses whereas the other four received branch licenses. Moreover, the CBM granted the approval for an equity participation of Kasikorn Bank in Ayeyarwaddy Farmers Development Bank Limited (A Bank). Since the foreign banks that recently entered the Myanmar banking sector originate from Asian countries that are main trade partners and 43

Chapter 3 – The Myanmar Banking Sector Banking sector fi nancial overview (December 2019) State-owned banks Private Banks Foreign Banks 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0,00 Assets Deposits Loans Source: CBM Quarterly Financial Statistical Bulletin, 2019 Volume III Figure 7 Banking sector financial overview (in million MMK, December 2019) Market shares (assets) of SOBs, Private banks and Foreign banks (%) State-owned banks Private Banks Foreign Banks 100 90 80 70 60 50 40 30 20 10 0 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Source: CBM Quarterly Financial Statistical Bulletin, 2019 volume II, 2018 volume IV, 2017 volume IV, 2016 volume II Figure 8 Market shares (assets) of SOBs, Private banks and Foreign banks (%) 45

Chapter 3 – The Myanmar Banking Sector In the past – especially after the bank crisis of 2003 – SOBs used to benefit from a lack of public trust in private banks (GIZ, 2018). In December 2012, they held almost 60% of total deposits and well over 35% of total loans. Up to December 2019, however, these numbers have fallen to less than 23% of deposits and approximately 12% of total loans. Nevertheless, SOBs’ deposit and loan market shares became more stable on a low level since 2017, and this seems to depict that there is still an important place for them in the Myanmar banking sector (see Figure 9). SOB’s share of deposits and loans in the banking sector (%) Loans Deposits 70,00 60,00 50,00 40,00 30,00 20,00 10,00 0 Figure 9 SOB’s share of deposits and loans in the banking sector (%) Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Source: CBM Quarterly Financial Statistical Bulletin, 2019 volume II, 2018 volume IV 2017 volume IV, 2016 volume II Figure 9 SOB’s share of deposits and loans in the banking sector (%) One of the strengths of the SOBs is their nation-wide outreach. They operate a total of 517 branches and 93 ATMs in the whole country. The four SOBs still offer most standard banking services to key sectors that would be otherwise underserved by the private sector, in particular the agricultural sector. In December 2019, the loans issued by SOBs to the agricultural sector amounted to over 70% of their total loans, while private banks held only about 2% of their outstanding loans in that sector. 36 As of December 2019, the loan-deposit-ratio of SOBs was only 29.4%, compared to 65% at private banks 37 . Moreover, SOB lending to the private sector – except the agricultural sector – is disproportionally small compared to their overall market share. Therefore, SOBs are still struggling to compete profitably with the private banks. Moreover, SOBs face rather high NPL ratios (but accurate data is not available). According to the Union Auditor General’s report for the six months between April and September 2018, the NPL of SOBs totaled 262.9 billion MMK 38 . The amount of MEB’s NPL alone was 133.7 billion MMK, i.e. about 6% of the bank’s loan book, while the NPL ratios for MADB and MICB were more than 9% and 8% respectively. The high NPL at the MADB mainly resulted from problems faced by farmers, such as fluctuations of crop prices and bad weather conditions, weaknesses 47

Chapter 3 – The Myanmar Banking Sector in group insurance and loans, and difficulties in collecting repayments in conflict areas. Proper monitoring and urgent reforms should be under- taken to lessen the NPL problems of SOBs and upgrade the banking sector’s stability (UNCDF, 2018). Furthermore, SOBs need to focus more on digitaliza- tion to make operations more efficient and to catch up with the private banks; however, the lack of skilled employees and poor corporate governance are key impediments to be overcome 39 . Despite the weaknesses observed in SOBs there are remarkable improvements that can help to meet market demands. MEB, for instance, launched mobile pension services in March 2019 partnering with Wave Money, the leading mobile financial services provider in Myanmar. This service gives government pensioners more convenience when withdrawing their pensions and increases the efficiency of the bank 40 . To take another example, MADB started a cooperation with Myanmar Insurance and Sompo Japan Nipponkoa Insurance Inc. in December 2018 to test a weather index-based crop insurance product that protects farmers from losses due to adverse weather conditions 41 . Reforming the SOBs is considered one of the key measures to promote economic growth in Myanmar. Improved operations and greater efficiency of SOBs will increase competition in the banking sector and ensure financial sector stability. The Ministry of Planning, Finance and Industry (MoPFI) therefore plans to merge the four SOBs that have similar business scopes to facilitate more loans for micro, small and medium enterprises (MSMEs) and farmers. This reform project – implemented with guidance from the World Bank – may result in the develop- ment of important economic sectors which still lack access to loans, notably the agricultural sector 42 . As a first step, MEB and MADB are going to merge to promote farmers’ access to finance. 49

Chapter 3 – The Myanmar Banking Sector Deposits and loans of private banks and growth rates from 2012 to 2019 Deposits Loans Deposit growth rate Loan growth rate 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 100 90 80 70 60 50 40 30 20 10 0 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Figure 10 Deposits and loans of private banks (in MMK) and growth rates (%) Source: CBM Quarterly Financial Statistical Bulletin, 2019 volume IV, 2018 volume IV, 2017 volume IV, 2016 volume II Figure 10 Deposits and loans of private banks (in million MMK) and growth rates (%) from 2012 to 2019 Market share (% assets) of private banks in September 2019 KBZ AYA CB MAB YOMA MWD UAB AGD GTB MOB MCB NDB INNWA CHIDB A BANK FPB SHWE BANK SMEDB TCB YCB RDB MMB MT BANK YNDB MD BANK G BANK AYB 0% 5% 10% 15% 20% 25% 30% 35% 40% Reference: CBM’s Annual Report (Provisional) 2018-2019 Figure 11 Market share (% assets) of private banks in September 2019 51

Chapter 3 – The Myanmar Banking Sector Sector distribution of private bank loans, as of December 2019 1% 2% 2% 4% 5% 11% 15% 17% 27% 19% Housing Loans Agriculture Transportation Hire Purchase SME Loans General Production Services Construction Trading (1%) (2%) (2%) (4%) (5%) (11%) (12%) (17%) (19%) (27%) Figure 13 Sector distribution of private bank loans, as of December 2019 Source: CBM Quarterly Financial Statistical Bulletin, 2019 Vol IV Total loans of private banks amounted to 24.42 trillion MMK in December 2019. Between December 2012 and December 2019, the amount increased about eightfold. With 27%, the trading sector accounts for the largest share of loans, followed by construction (19%) and services (17%). Agriculture (2%) and housing (1%) make up the rear (see Figure 13). This situation also depicts the long lasting structure of sectoral distribution in private bank lending. Since the opening up of the economy in 2010, private banks took advantage of a booming private sector. However, a number of restrictions still hinder banks to increase their lending activities. Usually, it is a bank’s task to appraise the risk of potential clients and set the prices accordingly. In a fixed interest rate environment like Myanmar, however, banks cannot price in their risks and hence tend to over-rely on “hard” collateral or generally restrict their lending. Following this logic, nearly 77% of collateral used to secure loans in Myanmar as of December 2019 were land and buildings (see Figure 14). There are two direct consequences resulting from this overreliance on real estate as loan collateral. Firstly, it makes banks vulnerable to large losses in values of these properties. As banks tend to only lend a maxi- mum amount of 50 to 70 percent of the collateral value, this may, however, not be a major concern in the short and medium term. Secondly, prevalent collateral requirements make it especially hard for those that do not own adequate assets to access bank loans – such as most SMEs and private households. Despite high collateral requirements the private banking sector of Myanmar is allegedly plagued by high NPL risk (but accurate data is not available). According to a report of the CBM, the banking sector’s NPL ratio in the 2018-2019 fiscal year will be higher than that of the previous year due to the CBM 53

Chapter 3 – The Myanmar Banking Sector 55

Chapter 3 – The Myanmar Banking Sector Since November 2019 a third round of foreign bank licensing has been ongoing, enabling foreign banks to apply either for a Branch or a Subsidiary License 50 . In April 2020, seven Asian banks were granted preliminary licenses 51 . Among the seven new banks, three banks are from Korea (state-run Korea Development Bank, Industrial Bank of Korea and KB Kookmin Bank), two are from Taiwan (Cathay United Bank and Mega International Commercial Bank), one from Thailand (Siam Commercial Bank), and one from Hong-Kong (Bank of China). Industrial Bank of Korea, KB Kookmin Bank, and Siam Com- mercial Bank have been granted subsidiary licenses, while the others obtained branch licenses. Under a branch license, a range of wholesale banking activi- ties is allowed, whereas under a subsidiary license, both wholesale and onshore retail banking services are allowed from January 2021. As of December 2019, foreign banks held over 11% of total assets, about 8% of total deposits, and 6% of total loans of Myanmar’s banking sector. It is expected that these figures will soon increase as more foreign investments enter the Myanmar banking sector. This will facilitate knowledge transfer and the application of international best practices in the domestic banking sector. However, there is also a potential risk that domestic banks are not strong enough to withstand competition from foreign banks. In the past, foreign banks were only allowed to lend to foreign enterprises in foreign currency, but CBM Directive No. (6/2018) issued in November 2018 permitted foreign banks to lend to domestic busi- nesses in local and foreign currency. Interest rates for Kyat loans by foreign banks abided by the maximum bank lending rate of 13%, while foreign currency loans could be priced at market rates. In the current pandemic crisis, foreign banks also have to imple- ment the directive of interest rate reduction aimed at encouraging low-interest loans to businesses. Other restrictions on foreign banks are still in force, for example, not being allowed to accept immovable property – like land and buildings – as collateral. They are also not allowed to offer retail banking services, such as personal savings accounts, money transfers and card services, as well as fixed deposit accounts in local currency. Foreign banks may accept foreign currency deposits but there is still no decision whether interest may be paid on such accounts. The local market has been opened gradually to foreign banks. In January 2019, the CBM permitted that domestic private banks can accept an equity investment of up to 35% from foreign financial institutions 47 . Accordingly, a significant movement can already be found in the banking sector. IFC, for instance, converted its loan to Yoma Bank to a 5% equity shareholding in June 2019, making Yoma Bank the first private bank in Myanmar with a foreign equity stakeholder 48 . The Ayeyarwaddy Farmers Development Bank (A Bank) was the second bank that received foreign investment, when in April 2020, Kasikorn Bank acquired a 35% equity stake 49 . 57

Chapter 3 – The Myanmar Banking Sector The fast growth of the banking sector translates into a huge demand for finance education and bank training. Several private training providers have been established to add to the rather low supply of univer- sity degree programs. However, the current supply of training is still not sufficient to meet the future needs of the sector. Moreover, ensuring the quality of offered programs remains a challenge as long as there are no national quality standards set by the respective authorities. The Myanmar banking sector is developing fast and requires an increasing number of qualified staff to ensure its long term viability. Banks begin to offer more sophisticated products and services, the range of skills needed will diversify and international best practices will become more and more relevant. In order to close the skill gap and take advantage of a growing market opportunity, numerous private training providers have emerged that offer training courses as well as undergraduate and graduate degrees through partner organizations. Private training institutions such as the Myanmar Institute of Finance, John Partner Academy, PS Business School, the Myanmar Institute of Business and the Strategy First Institute are offering general business training courses also attended by bankers. Some of the private training providers offer internationally recognized certifications such as AAT (Association of Accounting Technicians), ACCA (Association of Chartered Certified Accountants), CFA (Chartered Financial Analyst), and LCCI (London Chamber of Commerce & Industry) through their affiliations with accredited international institutions. However, assessing the quality of courses and certifications provided by local providers is difficult, and the absence of clear national quality standards and quality assurance mechanisms remains a challenge that influences the reputation of these programs. Only three higher education institutions – Yangon University of Economics, Meiktila University of Economics and Monywa University of Economics – offer degrees in Business Administration, Commerce, Economics, Statistics and Public Administration, and only the Yangon University of Economics runs a Master of Banking and Finance program. The state-owned Yangon University of Economics (YUE) has been offering a three-year part-time Master of Banking and Finance (MBF) program since December 2012. Many local bank professionals have attended the MBF program and the demand for the courses far exceeds the available spaces. The GIZ supports YUE in developing the MBF curriculum and for training courses to MBF lecturers and students. In addition, GIZ supports YUE regarding their cooperation with Frankfurt School of Finance and Management to set up a banking education program which will offer certificate courses on various topics, including leadership, SME finance and IFRS-based accounting. Furthermore, an e-learning approach was established in 2020 offering courses of six months duration on four topics (risk management, SME finance, digital finance and agricultural finance). In January 2019, Meiktila University of Economics launched an MBF program in Nay Pyi Taw so that government employees have the opportunity to continue their studies and improve their skills and knowledge regarding banking and finance 52 . The Myanmar Banks Association (MBA) was estab- lished in April 1999 to provide a dialogue and lobbying platform for the domestic banking industry. MBA also cooperates with associations and banks on an international level. It currently has 31 member banks, including all four state-owned banks. Until early 2013, the MBA was chaired by the CBM Gover- nor, while representatives of local banks assumed 59

Chapter 3 – The Myanmar Banking Sector 61

Chapter 4 – Services of the Banking Sector Project finance Being a developing country, Myanmar is highly in need of improving its infrastructure. The govern- ment practices an open tender system to fulfill that need. However, companies that won a public tender will normally receive a first instalment of the agreed budget only after completion of 25% of the project. Hence, most companies require capital to initiate the infrastructure project. Banks, on the other hand, may be keen to provide finance for companies on government projects, assuming a contract-based business between government and private companies to be low risk. The provided project finance can be short term as well as medium or long term depending on the type and size of the project. Hence, project financing creates a lot of opportunities for banks to develop new products and win new customers. There are also obvious benefits for the business sector and the economy at large: easing the financial burden of companies and creating new business and job opportunities. Currently, CB, KBZ, MCB, AYA and some other smaller banks are offering project finance loans (also known as tender financing). Factoring and invoice financing There are various financial products that use com- pany receivables as credit security, known under different terms such as factoring, invoice discounting, receivable finance or invoice financing. According to the Financial Institutions Law (2016), Section 2 (aa), factoring means the business of financing account receivables. It involves three actors: supplier, buyer and financial institution. The latter buys invoices from suppliers at a discounted rate or uses it as credit security. This product is particularly aimed at raw material suppliers and manufacturers that sell their goods to wholesale and retail traders (buyers) but usually do not receive cash immediately upon delivery (due to the agreed payment terms it may take up to three months to settle bills). In the mean- time, the supplier might face a cash flow problem to continue business operations (for example to purchase raw materials or pay wages). In Myanmar, several financial institutions such as KBZ, CB, YOMA, MCB and AYA offer invoice financing, also known as distributor finance. The customers usually have to apply for bank loans by submitting their invoices either in physical or electronic form. The assessment process differs between the banks. The technology companies Kyopay and Shwelan introduced digital invoice discounting platform to Myanmar. In this case, suppliers (mostly SMEs) have to submit their business-to-business invoices or receivables to an internet platform. As soon as the submitted invoices are verified the supplier will receive cash. There are two options here: either the platform operator purchases the invoices at a discounted rate or it disburses an initial advance to the supplier after the invoice is verified and the remaining amount once the buyer made full settle- ment (in this case the invoice is regarded as a reliable collateral). The business models of Kyopay and Shwelan differ slightly. While Kyopay engages directly with funders or investors, Shwelan cooper- ates with financial institutions. Kyopay entered the market in 2018 and has already served over 100 SMEs. SME Finance The small and medium enterprise (SME) sector is the backbone of the Myanmar economy and a crucial driving force behind the country’s recent economic development. Registered small and medium enter- prises accounted for 80% of total registered industrial enterprises in November 2019, and in March 2020 there were 75,452 SMEs listed at the SME Develop- ment Agency under the Industrial Supervision and Inspection Department of the Ministry of Planning, Finance and Industry 58 . While the Myanmar government acknowledges the importance of SMEs for the national economy and 65

Chapter 4 – Services of the Banking Sector Despite obvious challenges the opportunities of a largely untapped SME finance market are luring. Some financial institutions have ventured into SME financing in the expectation of higher profit margins. For example, YOMA Bank designed a wide range of products for SMEs and some are offered digitally. The evolvement of digital finance has the potential to make banks improve their SME services, particularly in terms of loan processing time and credit analysis methods. Regulatory encouragement from the CBM and technical assistance to the banking sector, however, will not suffice to make a significant improvement to SME financing in Myanmar. The capacities and skills of SMEs also need to be improved. Many entrepreneurs lack financial literacy and management skills and therefore cannot provide the documents required by the banks in the process of credit apprais- als, which is one of the major bottlenecks in getting credit 59 . This problem also hampers the implemen- tation of the 100 billion MMK loan fund under the COVID-19 Economic Relief Program (CERP) provided by the Myanmar government. Loan processing is often delayed due to incomplete documents pro- vided by the SMEs and it is suggested that financial management training should be given to them 60 . As SMEs themselves rarely understand how to properly prepare financial statements, they have to pay chartered public accountants (CPA) to meet the banks’ loan requirements. However, the reliability of financial statements prepared by CPAs is also a problem. Thus, this approach puts an extra burden on SMEs without ensuring loan approval. Therefore, banks may have to find new ways to avail the required business data. For instance, they could set up strong IT systems to analyze already available business data and develop industry-wide standard data sets to be applied for faster loan decisions. Alternatively to or in conjunction with a standard- ized data approach, banks may also benefit from strengthening their staff capacities to conduct on-site and off-site business assessments. Although it is still difficult for SMEs to access bank loans, there are more financing opportunities these days, especially through the help of international organizations. The Japanese government agency JICA, for example, has provided concessional refinance to Myanmar to implement its Two-Step-Loan (TSL) scheme since 2015. TSL borrowers spend 80% of the loan amount on fixed capital investments and may use the remaining 20% for working capital. In the first phase more than 57 billion MMK were disbursed to 269 local SMEs. In the second phase, starting in 2018, JICA has committed over 143 billion MMK to MEB which on-lends to 11 selected partner banks: MCB, KBZ, MEB, CB, AYA, FPB, UAB, SMEDB, MOB, MAB and NDB are eligible to disburse loans to SMEs at 8.5% annual interest rate 61 . In August 2020, the third tranche of loans amounting to 15 Billion yen (190 billion MMK) was officially approved by the Parlia- ment. Since the CBM reduced the reference interest rate to 5% p.a. during March and April 2020, the interest rate of JICA’s TSL was also reduced to 5.5% p.a. In response to the COVID-19 crisis, the TSL also offers emergency loans to MSMEs, in addition to normal SME loans. Approximately 64 billion MMK have been earmarked for that purpose. The emergency scheme is scheduled from June 2020 to March 2021. Moreover, JICA has extended its TSL program to rural electrifica- tion by relaxing some credit conditions in early 2020. Large enterprises acting as mini-grid developers are now eligible under the expanded scheme 62 . Apart from JICA’s TSL scheme, there are currently various other SME finance programs in Myanmar. On behalf of the German Federal Government, KfW Development Bank supports selected partner banks in cooperation with the Ministry of Finance in the field of SME finance. In the first phase, CB Bank was selected as the partner and EUR 4.45 million was provided for SME loans. The second phase was started in April 2018, with a fund of EUR 10.85 million. CB Bank and MAB were selected as partner banks and received funds at an annual interest rate of 3.5%, with 12 years grace period and three years repayment period. The banks are permitted to charge 8.5% interest per annum on loans to SMEs 63 . 67

Chapter 4 – Services of the Banking Sector Development Bank (MADB) is the largest agricultural lender of the country. MADB offers two types of loans: seasonal crop production loans (SCPLs) and term loans. SCPLs cover the working capital needs of farmers at the beginning of the agricultural season and are divided into three categories: pre-monsoon, monsoon and winter loans, with monsoon loans constituting the biggest number of loans. SCPLs generally have one-year maturity and farmers are expected to repay the full amount at harvest time. The loan amount is 150,000 MMK per acre for paddy and 100,000 MMK for other 22 crops. Farmers have to pledge a formal land title as loan collateral. In the 2020 monsoon period MADB disbursed almost 1.376 trillion MMK (see Table 1). In addition to MADB, the Japanese government agency JICA and MEB also make available agricultural loans under the TSL scheme at annual interest rates of 5% and 6.5% respectively. According to JICA, farmers can apply for loans to purchase agricultural machinery, up to 50 million MMK as individual loans and up to 500 million MMK for cluster loans, depending on business size and repayment capability. 65 . There are currently various pilot projects in agricul- tural finance. One such project is implemented at Naypyitaw Council area since early April 2020 under the MEB and MADB, providing loans to MSMEs and agri-businesses. A total of 126 million MMK has been disbursed in loans to 13 borrowers. Under this project, the cash flow from the business is assessed, which is different from the traditional lending method that requires a formal land title as loan collateral. The maturity of loans is one to three years, and the interest rate is the same as at commercial banks. The pilot project will be extended to other states and regions and loans will be disbursed to individuals or groups in manufacturing and service industries, including MSMEs and agri-businesses 66 . In 2019, A bank with the cooperation of Myint Myat Taw Win company implemented a large financing initiative for sesame farmers at Magwe Region, known as the oil bowl of Myanmar. The bank cooperated with local NGOs, the Network Activities Group (NAG) established a decade ago focusing on farmers’ develop- ment in the Magway Region and the DaNa Facility. Moreover, the regional government, parliamentary representatives, the General Administration Department, the Department of Agriculture, a private company (merchant) and the Regional Farmers Development Association (RFDA) supported the program’s imple- mentation. 3,471 farmers had applied for loans. The total loan amount disbursed is nearly 1 billion MMK, covering 16,149 acres, which averages 70,000 MMK per acre. Borrowers pay 13% interest p.a. plus 3% service charge, with a maturity of 6 months from April to September. Farmers who do not have a land title to pledge as loan security need to get a recommendation from the Department of Agriculture. Thus, farmers with or without official land ownership record (Form 7) are eligible to receive loans. The project was very successful due to a good production year and farmers fully repaid all their loans after harvesting. In addition, farmers received higher prices for their products due to collective selling and the application of good agricul- tural practices (GAP). This kind of business model could be extended to other crops and geographical areas, particularly to cluster groups. YOMA Bank applies a different business model to serve the agricultural sector. The bank intends to disburse 5% of its total portfolio to this sector and developed many tailor-made products for farmers and agro- enterprises, including equipment finance, seasonal credit facilities for different crops depending on the location, contract finance, post-harvest loans to processors and local and international traders, input finance, payable and receivable finance, agricultural inventory discounting and pledge loans. Crop and livestock insurance schemes are still in the experimental stage in Myanmar. In December 2018, Myanmar Insurance and MADB – with the support of Sompo Japan Nipponkoa Insurance Inc. – started a pilot project to test weather index-based crop insurance to protect paddy farmers from losses due to adverse weather conditions. The trial is implemented in Pyay Township, Bago Region, and Shwebo Township, Sagaing Region 67 . The results of the pilot project have not yet been published. However, the Myanmar Insurance plans to extend its insurance services to other regions and states with the approval of the government after the completion of the pilot project 68 . 69

Chapter 4 – Services of the Banking Sector Although trade finance is not a new function for the local bankers, they still lack local human resources with trade finance skills. Furthermore, there are weaknesses in IT capacities and risk management. Last but not least, there is stiff competition between the banks to attract suitable customers who are running export or import businesses. In Myanmar’s international trade, the volume of imports is always higher than exports so that there is higher demand for import financing than for export financing. Since the beginning of the COVID-19 crisis in March 2020, declining international trade transac- tions and the fluctuations of the oil price have badly affected the banks’ trade financing services. In December 2017, the CBM gave permission to foreign banks to conduct export financing, and in August 2018 foreign banks were also permitted to start offering import trade finance services. Yet, foreign banks still face difficulties in serving local trade firms because these firms rarely have reliable and standardized financial records and statements. Moreover, the lack of credit bureau information makes it difficult for foreign banks to assess the creditworthiness of local traders. Hence, foreign banks usually extend trade financing facilities only to their long term corporate customers. Local exporters and importers, especially small and medium sized trading firms, therefore find it almost impossible to access trade finance facilities from foreign banks. 73

Chapter 4 – Services of the Banking Sector Deposits in the banking sector from 2014/15 to 2019/20 (in million MMK) Saving Deposits Saving certifi cates Time Deposits Other deposits 50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 2014–2015 2015–2016 2016–2017 2017–2018 2018–2019 2019–2020 (October-Janurary) Source: Selected Monthly Economic Indicators (January and March 2020, January 2018, January 2017 Figure 17 Deposits amounts in the banking sector 2014/15 to 2019/20 (in million MMK) Terms for fixed deposit accounts (time deposits) typically range from 1 month to 3 years. Due to the COVID-19 crisis fixed deposit interest rates have been reduced and now range between 6.25% and 8.5%, while current accounts and foreign currency accounts generally do not bear any interest pay- ments. For call deposit accounts banks offer between 2% and 5% interest, based on the account’s day-end balance. The interest rates on savings accounts range between 5% and 7%. In accordance with CBM rules, foreign currency accounts can only be opened for three currencies (USD, EUR or Singapore Dollar) and account holders do not receive interest but are usually required to pay up to 2% of the deposit amount as fees. 75

Chapter 4 – Services of the Banking Sector providers. After four years of being active in Myan- mar and providing only inward remittances, Western Union, for example, has launched outbound money remittance services in June 2016 – although with a transaction limit of USD 3,000 per day and maximum USD 10,000 per year and customer. While there are more options for international remit- tances in Myanmar these days, people still heavily rely on informal channels called ‘hundi’ because migrant workers are often reluctant to go through official remittance channels due to their lack of legal immigration documents; hundi also is relatively cheaper and faster than official remittance channels. Increasingly, banks also face fierce competition from Mobile Financial Service Providers (MFSPs) such as OK Dollar, Wave Money and M-Pitesan, as well as recent market entrants MytelPay and MPT Money which were granted their licenses in 2018 and 2019 respectively. Although under the 2016 Mobile Financial Service Regulations MFSPs are only allowed to provide domestic remittance services to the public, their simplified business model allows them to serve the large unbanked population of Myanmar (see next section for more details on MFSPs). With the aim of reducing unofficial offshore remit- tances and to provide a legal framework for such activities, the CBM issued regulation on Offshore Remittance Business (ORB) licenses in November 2019 71 . The maximum level of funds receivable or transferable by the ORB licensee on behalf of an individual customer at a given time will be USD 1,000, and there is a transaction limit of USD 5,000 per person and month. The CBM expects that the new remittance license system will provide official remittance records. Myanmar banks offer domestic inter-branch and inter-bank remittance services, telegraphic transfer and international fund transfer by SWIFT Code through corresponding banks, and international transfer through third party remittance service providers such as Moneygram, Western Union, Xpress Money, International Money Express, etc. Recently, there have been significant improvements in domestic remittance services by local banks through their e-banking and mobile payment platforms. For international remittances, 21 Myanmar banks have joined the Society for Worldwide Interbank Financial Telecommunication system (SWIFT). Through SWIFT, local banks can make secure, efficient and reliable financial transactions with their foreign correspondent banks. Recent years have also seen some relaxations on outbound remittance restrictions, especially with third party remittance 77

Chapter 4 – Services of the Banking Sector Today, local banks offer prepaid cards, debit cards and credit cards to the public. Credit cards are usually issued only to customers who meet certain monthly income requirements. Since the Myanmar Credit Bureau is still in the process of establishment, credit information on new customers is not available and most banks tend to issue credit cards only to their existing customers. Interest rates on credit cards are capped at 20% per year (as per CBM Directive No. 14/2019) but additional service charges, such as joining fees and annual fees, are generally imposed. Since 2016 the CBM launched the Real Time Gross Settlement (RTGS) system, popularly known as CBM-Net, supported by JICA. It provides a platform for large interbank payment transactions, including interbank trading in currencies and securities. On 16 November 2020, the CBM launched phase 2 of CBM-Net, which includes connecting the core banking systems of banks to facilitate more digital interbank functions as well as RTGS of interbank obligations 72 . Therefore, the CBM-Net now provides interoperability between all types of financial service providers to support more comprehensive digital payment systems . This facilitates the development of a cashless payment system 73 and financial inclusion in Myanmar. Very recently, Myanmar Payment Union (MPU) developed an inter-bank fund transfer (IBFT) service, which facilitates money transfers between banks; currently there are eight participating banks: Yoma Bank, Shwe Bank, CHIDB, MCB, uab, Myawaddy, MFTB and RDB. Myanmar banks are trying to catch up with the fast digitization of financial services. CB is the first bank of the country that introduced a new flagship smart branch during the COVID-19 period. This branch is well-equipped with digitized infrastructure such as: ATMs and Cash Recycling Machines (CRMs); Form Filling Machines (FFMs) that allow customers to open electronic saving accounts and apply for debit and credit cards; Passbook Update Machines (PUMs) where customers can update their savings passbook transactions; Queue Machines (QMs) that issue queue and counter numbers to waiting customers; Smart Teller Machines (STMs); and 3D Hologram Machines where customers can view the bank’s products. The CB smart branch enables customers to operate desired services on their own, with minimal interven tion from bank employees. In addition, customers can remit funds to local and foreign banks in Myanmar via CB Pay. Considering the huge unbanked population in Myanmar 74 and the rapidly increasing number of mobile phones in the country 75 , mobile financial services (MFS) have become an important means for financial inclusion. The CBM therefore issued several regulations on MFS and defined two models for operating MFS in Myanmar: Bank-led Mobile Banking Services and Mobile Financial Service Providers (MFSP). In 2013, CBM allowed Myanmar banks to operate mobile banking services 76 . Under this model, banks are required to obtain a permission from CBM to operate mobile banking services, either on their own or in partnership with a mobile money business, using technological support from Mobile Network Operators (MNOs) and mobile banking solution providers to develop mobile banking products and platforms. Banks may engage with Non-Government Organizations (NGOs), governmental post offices and MNOs as their cash points, agents or business partners. CBM allowed banks to provide mobile banking services such as remittances, debiting and crediting of cash, and payments. Today, most Myan- mar banks already operate mobile banking services and have linkages with Mobile Financial Service Providers (MFSPs). Currently, there are five major bank-led mobile banking services in Myanmar, as shown in the following figure. Some banks also have their own branded e-banking platforms, namely: AGD Pay (Asia Green Development Bank), CB Pay (Cooperative Bank), KBZ Pay (Kanbawza Bank), and City Pay (Yangon City Development Bank). uab Bank started Sai Sai Pay and uabpay+ in 2020. These platforms are linked to customers’ bank accounts and can provide remittances, cash in and out services, person-to-person payments within the bank, mobile top-up and bill payment services. The following figure shows current bank branded e-banking platforms in Myanmar. 79

Chapter 4 – Services of the Banking Sector The regulation on Mobile Financial Services issued by CBM in 2016 laid out the foundation for the licensing and supervision of Mobile Financial Services Providers (MFSPs), which includes non-bank financial institu- tions and Mobile Network Operators (MNOs). MFSPs are required to directly apply for a Mobile Financial Service License from CBM, while in this model banks only serve as deposit taking institutions with additional cash and liquidity management services for MFSPs. As of September 2020, there are five licensed MFSPs in Myanmar, namely Wave Money, OK Dollar, M-Pitesan, MytelPay, and MPT Money. In October 2016, Wave Money became the first MFSP to acquire a license under the non-bank financial institution licensing regime and today is the largest MFSP in the country. Wave Money’s transferred value reached MMK 8 trillion (USD 5.9 billion) with 1.1 million 30-day active users between January and September 2020. As of September 2020, it has 89% coverage among 330 townships in Myanmar with more than 604,000 agents connecting to more than 27 million customers 77 . Wave Money provides safe and convenient mobile financial services via a nationwide agent network or via a Wave account on the customer’s phone. Wave Money has launched its mobile wallet application called ‘WavePay’ in 2018; it allows users to transfer money, top up airtime, pay utility bills, repay loans, buy travel and leisure tickets and make donations. WavePay is linked with Yoma Bank’s SMART account and the mobile banking platforms of banks like KBZ, CB and AYA for cash-in services 78 . OK Dollar was launched in 2017 and today is the second largest MFSP in Myanmar serving 2 million customers through its mobile phone apps and an extensive agent banking network 79 . This MFSP is partnering with various local banks for cash-in and cash-out services and bill payments. M-Pitesan was launched by telecommunication pro- vider Ooredoo in September 2017. By 2020, the network counted more than 2,500 Ooredoo M-pitesan agents in Yangon, Naypyitaw, Mandalay, Bago and Taunggyi. There also is a potential of adding another 8,000 agents from rural areas across Myanmar 80 . The M-Pitesan phone application provides fund transfer services, airtime purchasing and utility payments. Mytelpay was launched in June 2019 by the telecom- munication company Mytel, a joint venture between Vietnam’s military-run Viettel Group and two Myanmar companies – Star High Public Co. Ltd. (a subsidiary of Tatmadaw-owned conglomerate Myanmar Economic Holdings Ltd.) and Myanmar National Telecom Hold- ing Public Ltd. (MNTH) 81 . This platform is providing fund transfer services, cash withdrawal, utility pay- ments and mobile phone airtime top-up. According to information provided by MytelPay on their Facebook page their agent network covers 92% of all townships nationwide. MPT, the state-owned Telecom, launched its digital money service MPT Money in 2020, offering a mobile wallet, money transfer, airtime top-up and data package purchases, bill payments, and cash-in and cash-out. Currently, MPT Money is offering services through its agent network of more than 27,000 agents located in over 280 townships nationwide 82 . MFSPs in Myanmar have proven to be very innovative and rapidly expanded their networks. Mobile financial services are extended to various functions including bill payments, commercial and business payments, e-shopping and donations. MFSPs also have established linkages to banks’ e-banking platforms. Moreover, they try to provide their services to the agricultural sector. For instance, WavePay in partnership with MADB offers farmers access to loans through their digital disburse- ment program, while MTP Money is conducting a pilot project in cooperation with MADB to disburse loans to farmers in Pathein Gyi Township, Mandalay Region 83 . During the COVID-19 crisis MFSPs play a crucial role in delivering branchless financial services to customers, thereby increasing financial inclusion in the country. However, competition among MFSPs is tough and product differentiation becomes increasingly difficult for them. 81

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Chapter 5 – The Regional Perspective Indonesia Cambodia Brunei Darussalam Malaysia Thailand Philippines Singapore Vietnam Lao PDR Myanmar Vietnam Brunei Darussalam Indonesia Malaysia Singapore Philippines Cambodia Myanmar Lao PDR Thailand 0 0.50 1.00 1.50 2.00 2.50 0 5.00 5.00 10.00 15.00 Source: Global Financial Development Database October 2019, World Bank Source: Global Financial Development Database October 2019, World Bank Figure 21 Bank return on assets (%, after tax, 2017) Figure 22 Bank return on equity (%, after tax, 2017) Loan-deposit spreads (%) in the banking sector of selected countries from 2010 to 2019 Philippines Thailand Malaysia Indonesia Myanmar Vietnam 6.00 5.00 4.00 3.00 2.00 1.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Global Financial Development Database October 2019, World Bank Figure 23 Loan-deposit spreads (%) in the banking sector of selected countries from 2010 to 2019 The real reasons for the notably low NIM ratio in Myanmar are likely to be low actually received interest payments and very low loan-deposit ratios. Since the majority of bank loans in Myanmar are still overdrafts and banks often do not collect interest payments on these facilities, the actual received interest payments are very low. Furthermore, defaults on interest payments directly decrease the banks’ net interest incomes and make the NIM ratio volatile since Myanmar banks still apply cash-based account- ing, as opposed to accrual-based accounting. The loan-deposit-ratio of the Myanmar banking industry stood below 60% in 2017 (see Figure 24) showing the banks’ difficulties or unwillingness to convert deposits into loans. This low loan-deposit ratio does not only affect the banks’ profitability but also the economy’s potential for growth as it trans- lates into less funds being available for investment in the private sector. 87

Chapter 5 – The Regional Perspective Cost-income ratios (%) in the banking sector of selected countries in 2017 90 80 70 60 50 40 30 20 10 0 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Source: Global Financial Development Database October 2019, World Bank Figure 25 Cost-income ratios (%) in the banking sector of selected countries in 2017 the banks’ assets are not efficiently used to generate profits, as reflected by a comparably low RoA. Apart from a non-optimal use of deposits to create interest income, the low profitability of Myanmar banks also stems from high operational costs, primarily caused by the banks’ vast networks of partly inefficient branches. To conclude, the performance of Myanmar banks is weak, both compared to other countries in the region as well as to other lower middle-income countries in the world. A fixed interest environment limits the banks’ potential profit margins and hinders them from increasing their lending activities, the latter being further impeded by the focus on collateral for loan securitization. The notably low NIM ratio is also likely the result of high rates of defaults on interest payments which directly reduce net interest income. Under-reporting of NPL is also a significant factor to consider regarding the stability of the overall banking system. Improvements in banks’ risk identification and management might, therefore, be a precondition for interest rate liberalizations to be viable. In general, 89

Chapter 5 – The Regional Perspective Domestic bank credit to private sector , 2010 and 2019 2010 2019 140 120 100 80 60 40 20 0 Vietnam Malaysia Singapore Cambodia Thailand Philippines Brunei Indonesia Myanmar Darussalam Lower middle income Source: World Development Indicators, 2020 Figure 26 Domestic bank credit to private sector (% of GDP), 2010 and 2019 According to the World Bank report ‘Ease of Doing Business 2020’, Myanmar improved its international standing from rank 171 in 2018 to rank 165 in 2020. Myanmar is recognized as among the top 20 improv- ers in the World Bank’s Ease of Doing Business Index 2020. The improvement is due to the progress of five sub-indices, namely starting a business, construction permits, registering property, enforcing contracts and protecting investors 87 . The indices ‘trading across borders’ and ‘resolving insolvencies’ remained Borrowers from commercial banks per 1,000 adults 2013 2018 Singapore Thailand Brunei Darussalam Malaysia Indonesia Lao PDR Myanmar Lower middle income 0 200 400 600 800 1000 1200 Source: World Development Indicators, 2020 Figure 27 Borrowers from commercial banks per 1,000 adults in 2013 and 2018 91

Chapter 5 – The Regional Perspective Financial development index of ASEAN countries in 2010 and 2018 2010 2018 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0 Singap ore T hailan d M alaysia Vietna m In d o nesia P hilip pines Bru nei D arussala m Lao P D R C a m bo dia M yan m ar Source: IMF fi nancial development index database, 2020 Figure 29 Financial development index of ASEAN countries 93

Chapter 6 – Myanmar and the COVID-19 crisis The main purpose of forming the Working Committee is to alleviate the impact of COVID-19 on the trade and tourism sectors, to create new jobs for workers laid off due to the closure of factories and to provide them with vocational training, to find ways of procuring raw materials for the CMP (garment) industry not only from China but also from other sources, to cooperate with the private sector to establish a proper supply chain for the weaving, knitting, dying and sewing industries, to find ways for alleviating tax and other relief measures for MSMEs, and to provide cheap loans to the businesses affected by the pandemic. The Working Committee is also responsible for the devel- opment of MERRP Monitoring Framework and for regular reporting on progress to the National-Level Central Committee on Prevention, Control and Treatment of COVID-19. A Task Force was formed on 14 March 2020 under the Working Committee to effectively implement the task of providing financial assistance to severely hurt businesses. The deputy mayor of the Naypyitaw City Development Council is the chair of the Task Force, while Director Generals of important government departments are members. The main responsibility of the Task Force is to oversee the disbursement of cheap loans to business entities badly hurt by the impact of COVID-19 under the economic stimulus package and to coordinate with relevant organizations, departments and officials to contain the impact on the economy. In the CERP, the action plans assigned to the Task Force to implement in coordination with the MoPFI and CBM are as follows: Action Plan 2.1.1 (a): to provide MMK 100 billion for one-year working capital loans to improve working capital of affected MSMEs, with a focus on MSMEs in the CMP and hotel and tourism sectors at 1 percent interest rate per annum; Action Plan 2.1.1 (c): to increase the fund size to MMK 200-500 billion depending on market response; and Action Plan 2.4.1 (a): to establish an MMK 100 billion fund to designated commercial banks to promote trade financing of any products. 99

Chapter 6 – Myanmar and the COVID-19 crisis CMP enterprises, hotel and tourism services and SMEs were designated as priority sectors to receive cheap loans in the first batch. Apart from ownership, other loan eligibility criteria include (1) a running enterprise temporarily halted due to the pandemic; which (2) must have a work permit received before 31 March 2018; (3) must have an annual income during the previous two years; (4) must be able to repay the loan; (5) must use the loan money in paying salaries; and (6) if it is an enterprise, it must have paid due taxes. Failure to pay back the loan shall be met with legal procedures in accordance with the existing laws 90 . Loan applications were made available at the offices of the Chamber of Commerce and Industry (CCI), the Directorate of Investment and Company Administra- tion (DICA), the Directorate of Industrial Supervision and Inspection (DISI), and the Directorate of Hotels and Tourism (DHT) in states and regions as well as from respective internet websites. The applications were assessed and evaluated in coordination with the mentioned organizations and departments together with the Myanmar Institute of Certified Public Accountants (MICPA). The disbursement of the first tranche was made in April 2020 through the Myanma Economic Bank (MEB). The following table shows how the first tranche of the COVID-19 Fund was disbursed to the enterprises badly affected by the pandemic 91 . Type of business No. of businesses Loan Amount (MMK million) Percent of Total CMP (Garment enterprise) CMP (Other) Hotel Travel Companies Restaurants 45 2 340 236 220 6,312.00 6.24% 75.00 0.07% 15,720.74 15.55% 3,757.46 3.72% 5,182.00 5.12% MSMEs including production and services enterprises 2550 70,081.10 69.30% Total 3393 101,128.30 100.00% Table 2 Loan disbursement of the first tranche of the Covid-19 Fund Source: MIFER, 2020 101

Chapter 6 – Myanmar and the COVID-19 crisis 103

Chapter 6 – Myanmar and the COVID-19 crisis As for implementing Goal 1 of the CERP, i.e. to improve the macroeconomic environment through monetary stimulus, the CBM has taken various kinds of libera- lization measures in its monetary management – a kind of quantitative easing to quickly increase the domestic money supply and spur the economic activities. Significant measures that have an immediate effect on the banking sector are: (1) lowering interest rates 93 , (2) lowering maximum reserve requirement 94 , (3) relaxing the calculation of the liquidity ratio 95 and (4) postponement of meeting the requirements of the four prudential regulations until 31 August 2023 96 . Other monetary stimulus measures included in the CERP are: Credit auctions to be conducted to inject more liquidity into the banking and financial sector (Action Plan 1.1.3) Central Bank’s financing of fiscal deficit to be allowed as a one-off measure (Action Plan 1.1.4) Treasury Bonds and Bills auctions to be reduced temporarily (Action Plan 1.1.5) Credit Guarantee Schemes for working capital to be established (Action Plan 2.1.2) An Asset Management Company (AMC) to be established as soon as practicable; through AMC potential NPLs held by banks could be set aside for 5-7 years allowing banks some breathing space and contributing towards credit growth (Action Plan 2.2.2) These unconventional measures of monetary manage- ment were urgently launched during this unprecedented period of COVID-19 to arrest the impact of the pan- demic on the economy at the expense of banking sector transformation. Responding to the emergency policy guidelines of adopting flexible prudential controls on banks, the moratorium on the transfor- mation process was extended until September 2023; essential international banking standards such as capital adequacy requirements, maintenance of adequate provisions and reserves, dealing with concentration of risks and keeping large exposures under acceptable limits as well as the maintenance of liquidity requirements are put on hold. This relaxation on the application of prudential regulations could slow down the transformation process towards modernization of the banking sector and the under- lying problems associated with non-performing loans and related party lending could continue to threaten the stability of the banking sector in the post- COVID-19 period. Realizing the danger of ignoring the regulatory framework, the MERRP puts forward Strategy 14 of strengthening the banking and financial system to promote financial system stability. The CBM shall develop specific and realistic timelines for each bank based on its special conditions to comply with key regulatory requirements. In this regard, some phasing and sequencing should be considered in upgrading local banks to be in line with international standards and requirements. To check the looming danger of NPLs, action plan 14.4 of the MERRP assigns CBM to make sure that the banks continue reporting their exact NPL positions calculated as per the CBM’s Asset Classification and Provisioning Regulation 17/2017. In the MERRP the authorities consider problems of both low and high inflation in maintaining monetary stability. A central bank usually uses its tools of mon- etary policy in managing inflation and maintaining stability. These tools include discount rate, reserve requirement, selective credit control and open market operation (OMO). However, CBM has its limitations in using its tools of monetary policy. As righty men- tioned in the MSDP, the country lacks a well-function- ing OMO, an active secondary bond market and REPO market. Once the open market operation and its necessary institutions are in place, other mechanism for controlling inflation such as interest rate and reserve money targeting can be deployed (MSDP Strategy 2.2). In its Strategy 1 of managing inflation and maintaining monetary stability, the functions of OMO were mentioned and CBM and MOPFI were assigned as responsible agencies for establishing secondary and REPO markets. 105

Chapter 6 – Myanmar and the COVID-19 crisis 107

Chapter 6 – Myanmar and the COVID-19 crisis In the worst-case scenario, the onslaught of the pandemic and associated stringent measures taken to arrest the impact on the economy could produce: Declining / low GDP growth rate due mainly to paralysis of many business entities Rising rural and urban unemployment due to closure of businesses and returnees from abroad High inflation – may be double digit inflation due to cheap loans, lax restriction on loans, possible central bank’s financing of budget deficits Volatile exchange rates with over-valuation of national currency due to low domestic demand and low business activities Widespread defaults on bank loans due to lax credit risk management and weak loan monitoring In its recent Myanmar Economic Monitor (MEM) report released in June 2020, the World Bank points out that stringent preventive measures taken by the Myanmar government have suppressed economic activity, undermining aggregate demand, disrupting value chains, and reducing household incomes. Reflecting the onslaught of the pandemic crisis since March 2020 in the country and subsequent measures taken by the authorities together with lowering energy prices have resulted in weak domestic demand: the country’s year-on-year inflation rate has sharply declined from 8.36% in February 2020 to 1.84% in August. At the same time, the local currency has been appreciating against its trading currencies. The follow- ing figure shows while the inflation rate was declining the real effective exchange rate (REER), the weighted average of the Myanmar Kyat relative to an index of its major trading currencies adjusted for the effects of inflation was increasing – a tendency towards losing competitiveness in the country’s export markets. Infl ation Rate (%) and Real Effective Exchange Rate in Myanmar from December 2019 to July 2020 Infl ation (Y-o-Y) REER 10,00 8,00 6,00 4,00 2,00 0,00 Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Source: CSO and CBM Figure 30 Inflation Rate (%) and Real Effective Exchange Rate (Index: July 2012 = 100) in Myanmar from December 2019 to July 2020 The trend of both inflation and REER indicates over- valuation of the local currency against major trading currencies, which would have an adverse effect on exports’ competitiveness in the long run. The following figure shows appreciation of MMK against both US Dollar and the EURO. During the last two years, the Myanmar Kyat appreciated by 17% against the EURO and 22% against the US Dollar. 109

Chapter 6 – Myanmar and the COVID-19 crisis 111

The number of borrowers from commercial banks needs to increase – as a first step – from a very low level of only 4 per 1,000 adults to at least 70 borrowers which constitutes the average for lower middle income countries. Another major effort will be required to catch up with the majority of ASEAN countries with a range of 300 to 400 borrowers per 1,000 adults. Major investments will be required to install automated teller machines (ATM), with the number of ATM per 100,000 adults expanding from cur- rently 5 to over 40 like in most ASEAN countries. Expand bank lending to SMEs. SMEs are regarded the backbone of the economy but they are highly under- served by commercial banks. SME loans account for only 4% of the total loan portfolio of the Myanmar banking sector. Banks are generally reluctant to lend to SMEs and frequently need technical assistance and incentives, e.g. credit guarantees, to get acquainted with SME customers, and sometimes a “push”. The regula- tory authorities in Indonesia, for example, imposed a portfolio target of 20% for SME lending in its early stage of financial systems development. Furthermore, a secured transaction framework with a movable collateral registry constitutes another important component in support of SME lending. Expand bank services to semi-urban and rural areas. Bank outlets and services are highly concentrated in Yangon and Mandalay where most (formal and larger) businesses are located. Rural areas where 70% of the country’s population lives are effectively not served by the banking sector. However, expanding the traditional banking network and brick and mortar infrastructure into rural areas is costly, hence, the development of mobile and digital financial services is crucial for financial deepening into remote rural areas. Develop inroads to agricultural finance through and innovations and incentives. Financing agriculture and agribusiness is another area that urgently needs to be developed in Myanmar. Commercial banks – especially private ones – are traditionally reluctant to venture into agricultural finance due to inherent production Chapter 7 – Outlook and price risks but also heavy government interven- tions. Innovations such as a weather index-based crop insurance can help to manage the (often only per- ceived) high risks associated with agriculture. Further- more, value chain finance offers a number of innova- tive instruments to make lending to agriculture and agribusiness a relatively secure proposition. It is encouraging that some private banks have ventured into the agri-business sector experimenting with contract finance, post-harvest loans for processors, agricultural inventory discounting and other innova- tive approaches. Incentives can potentially propel these initiatives, e.g. through risk-sharing arrangements. Despite these inroads by private banks, however, the role of state-owned banks like MADB – today the largest agricultural lender – and MEB will remain the crucial source of short and longer term finance for millions of farmers. The recently announced merger of the two state-owned banks will likely strengthen the financial service offer to the agricultural sector. Promote mobile banking and digital financial services. Myanmar has experienced a remarkable development of mobile banking and digital finance. Chapter 4 of this report provides a comprehensive overview of mobile service providers and e-banking platforms which have emerged in recent years. Already now but even more so in the future, these providers will play a crucial role in reaching out to remote customers in rural areas at low cost, thereby fostering financial inclusion. The wide- spread use of smartphones and the digital affinity of the young population in Myanmar, coupled with a condu- cive regulatory framework, provide a ready basis for digital finance and for the emergence of fintech compa- nies and digital financial service providers. If prudently regulated and managed, this will enable Myanmar to leapfrog in many areas and will accelerate financial deepening at a pace unthinkable a few years ago. 115

Chapter 7 – Outlook Delicate balancing act: Access to finance and stability must go hand in hand Financial systems development must pursue a dual objective at the same time, namely financial inclusion and stability. The choice is not a trade-off, rather must both objectives go hand in hand and be carefully calibrated. An over-emphasis of stability concerns may choke off access to finance, and vice versa, pushing the financial inclusion frontier too hard may lead to instability of single banks and the sector as a whole. Policy makers and regulators are confronted with a delicate balancing act of finding the right equilibrium, and this is perhaps more an art than a science. Competition is a driving force for increase in efficiency. The entry of foreign banks is exerting considerable pressure on domestic banks to improve performance. Gradually liberalize interest rates. The fixed interest rate environment and a narrow spread between lending and deposit rates are often cited as major obstacles for banks’ profitability. Moreover, regulated interest rates often do not reflect true market conditions, thus leading to distortions in the allocation of capital. It is encouraging to note that the deposit and lending rates shall be gradually liberalized as a strategic component under the MERRP. This will allow banks to introduce risk-based pricing and differentiate interest rates across different client segments. The pricing-in of higher transaction costs for certain clients, e.g. in remote rural areas, will enable commercial banks to push the outreach frontier in a profitable way. Reduce concentration risk in the banking sector. The concentration in Myanmar’s banking sector is not healthy and bears considerable risks. The three largest banks hold almost two thirds of total private banks’ assets. Needless to say that a failure of one these banks would have severe repercussions on stability of the entire financial system. The notion of being “too big to fail” may foster an attitude of complacency and resistance towards reform among these large banks. A greater diversification of the banking landscape is warranted, and a level-playing field with a good dozen of sound and solid private banks, some with foreign partnership. 117

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Annex Liquidity Item Minimum reserve requirement Requirement Reference ≥ 3.5% of total deposit (temporarily changed) Directive No. (6/2020) Liquidity ratio (net liquid assets, % of volatile liabilities) ≥ 20% Notification No. (19/2017) Statutory reserve 25% of net profit, up to equal to 100% of the paid-up capital FIL 35(a) and Directive No. (1/2008) General provision 2% of outstanding loans and advances Specific provision Overdraft ratio (% of total loan portfolio) Standard (30 days past due) 0% Watch (31 to 60 days past due) 5% Substandard (61 to 90 days past due) 25% Doubtful (91 to 180 days past due) 50% Loss (over 180 days past due) 100% Not more than 50% (6-7-2018) Not more than 30% (6-7-2019) Not more than 20% (6-7-2020) Notification No. (17/2017) Notification No. (17/2017) Directive No. (7/2017) Reference Directive No. 8/2020 Directive No. 8/2020 Directive No. 8/2020 Directive No. 8/2020 Requirement 7% p.a. 5% p.a. 10% p.a. 14.5% p.a. Interest rate Item CBM reference rate Minimum deposit rate Minimum lending rate Unsecured lending rate Type of collateral Item* Treasury bonds Requirement Reference maximum 80% of the assessed value Directive No. (27/2012) Saving and Fixed deposits maximum 80% of outstanding value Directive No. (24/2011) Gold maximum 75% of assessed value for only 1-year term Directive No. (22/2011) Machines and Crops maximum 60% of the assessed value Directive No. (25/2011) Source: GIZ -BFSD collection * Bank Supervisory Committee’s Directive No. (1/2008) instructed banks to extend loans by taking strong collaterals in December 2018. In this regard, most of the banks take land and buildings as collateral, which are determined by market price and forced-sale-value (FSV). The banks normally lend out 30% to 50% of the FSV. The percentage depends on the internal policy of the banks. 125

Annex • All directors and candidates for the board of directors need to meet the fit and proper criteria, and the term of a director shall be 3 years and they have no chance to serve more than 3 consecutive times. • Both the member of the board of di- rectors and officers must comply with the conflicts-of-interests policy writ- ten formally by the board of directors of the bank. A suitable external auditor must be ap- pointed during the bank’s annual general meeting to audit the annual financial statements of the bank. Directive No. 10/2019, March 25, 2019 Directive on External Auditors of Banks Directive on Related Parties • A bank shall not lend to any related Directive No. 11/2019, March 25, 2019 2019 parties and shareholders holding more than 5 % of the voting shares of the bank unless such transaction has been approved by a vote of two thirds or more of the board of directors. • The amount of the credit facility gran- ted to a related party must be deduc- ted from its Tier 1 capital if such credit facilities remain outstanding whether the credit facility is on or off balance sheet. • Such all credit facilities shall be disc- losed in the financial statements for that financial year and each subse- quent financial year till full repay- ments. • No person, acting alone or in concert, shall acquire a substantial interest in a bank without obtaining the prior approval of the CBM. • A person who wants to obtain an ap- proval must apply to the CBM. • The CBM can approve or reject within 90 days of receipt of the application. Directive No. 12/2019, March 25, 2019 Directive on Acquisition of Subs- tantial Interest Directive No. 14/2019, April 24,2 019 Interest rate on credit card The maximum interest rate on credit cards is fixed at 20% p.a. 127

Directive No. 6/2020, April 9, 2020 Minimum reserve requirement ratio fixed temporarily at 3.5% Directive No.7/2020, April 9, 2020 Temporary change of the calcula- tion formula for liquidity ratio MaBhaBa/MP/FIR (145/2020), April 22, 2020 Extension of deadlines for certain regulations 2020 Directive No. 8/2020, April 27, 2020 Reducing interest rate by 1.5% Notification 9/2020, May 15, 2020 To prevent risk resulting from using and trading of digital cur- rency Directive No.10/2020, September 22, 2020 Extension of the period of the minimum reserve requirement ratio fixed temporarily Directive No.11/2020, September 23, 2020 Extension of the period for the temporary change of the calcula- tion formula for the liquidity ratio Annex • Maximum lending rate: 11.5% • Unsecured lending rate: 14.5% Effective date – April 1, 2020 To support the liquidity of the banks during the COVID-19 crisis the minimum requirement ratio is cut temporarily from 5% to 3.5% of total deposits. The valid period is until 30 September 2020. 90% of the value of treasury bonds with a remaining maturity of more than one year shall be included in the liquidity ratio calcu- lation from 20 April to 30 September 2020. To ease the burden on banks during and after the COVID-19 crisis the CBM extends the deadline of certain regulati- ons to 31 August 2023: Notification No. (16/2017) Capital Adequacy Regulation, Notification No. (17/2017) Asset Clas- sification and Provisioning Regulations, Notification No. (18/2017) Large Expo- sures Regulation, and Notification No. (19/2017) Liquidity Ration Requirement Regulation. To support the economic development during the COVID-19 crisis the interest rates are further reduced: • Bank rate: 7% • Minimum deposit rate: 5% • Maximum lending rate: 10% • Unsecured lending rate: 14.5% • Cryptocurrencies are not recognized as an official currency • Financial institutions are not allowed to trade digital currencies (BTC, LTC, ETH, PM, etc.) Buying, selling or exchange of digital currency can lead to losses on the consumer’s side • To support the liquidity of banks during the COVID-19 crisis the period of the minimum reserve requirement ratio fixed temporarily is extended from 1 October 2020 to 31 March 2021. To relieve the impact of COVID-19 the period of temporary change of the calculation formula for the liquidity ratio is extended from 1 October 2020 to 31 March 2021. Source: CBM 129

Annex 41 Soe, M. and Khant, K. (2018) 60 Second-time K100bln COVID fund focuses 42 Thant, H., 2020 43 Brain Riley, 2019 44 IMF Financial survey: https://data.imf. org/?sk=E5DCAB7E-A5CA-4892-A6EA- 598B5463A34C 45 CBM’ Annual Report (provisional) 2018–2019 46 Talaengsatya, S., November 2019 priority sectors, The Global New Light of Myanmar, July 15, 2020 61 Notification of JICA (OD) SME Two-Step Loan, The Global New Light of Myanmar, January 4, 2020 62 MEB’s Memorandum No. Ba Kha (Supervision) / MY-P 23/086 2109-2020, January 16, 2020 63 The Global New Light of Myanmar, April 25, 2018 64 Informal financial service providers mean money 47 CBM order No. MaBaMa/Bank Scrutiny/1 lenders, traders and village-based credit groups, etc. (1/2019), January 29, 2019 48 Yoma Bank website https://www.yomabank.com/ en/who-we-are/news/50 66 Myanmar Alinn newspaper, April 3, 2020 65 Myanmar Alinn newspaper, 17 October 2018 49 CBM’s announcement, April 9, 2020 67 Soe, M. and Khant, K. (2018) 50 CBM’s announcement, November 7, 2019 68 Eleven Media, 10 July 2019 51 CBM’s announcement, April 9, 2020 69 Hein, Z., 2019 52 The Global New Light of Myanmar, 70 World Development Indicators, 2020 January 14, 2019 53 CBM Directive No. (7/2017) November 27, 2017 November 15, 2019 71 CBM Notification No. (21/2019), 54 CBM Quarterly Financial Statistical Bulletin, 72 UNCDF, 2018 Volume IV 2019 55 Talaengsatya, S., (2019) November 17, 2020 73 The Global New Light of Myanmar, 56 Global New Light of Myanmar, 74 Less than 26% of the Myanmar population aged December 30, 2017 57 The Global New Light of Myanmar, September 6, 2020 15 years or older had an account at a formal financial institution in 2017 75 126 mobile phone connections per 100 inhabitants in January 2020 (digital 2020, Myanmar) 58 Myanmar SME Development Agency’s website, https://www.msme.gov.mm/en 76 CBM Directive No. (4/2013) 59 Nyein, N., 2019 77 Wave Money press release, October 2020 131