The Current Structure of the Financial System Myanmar’s financial system comprises four state banks, 22 private banks (of which eleven are really semi-government institutions), 35 foreign bank representative offices, one state-owned insurance company, twelve private insurance companies licensed only in 2013, and a nascent capital market (see figure for the details). The latest available data on bank assets (for 2010) show that while the four state banks dominate, the assets of the private banks now significantly exceed those of the state banks (see table 1). Myanmar’s government needs a reform strategy that supports the financial sector’s rapid development while ensuring its stability, efficiency, and accessibility. State Banks The four state banks are the Myanma Economic Bank, the Myanma Foreign Trade Bank (MFTB), the Myanma Agricultural Development Bank (MADB), and the Myanma Investment and Commercial Bank (MICB). The MEB came into being on April 2, 1976, under the Bank Law of 1975, and subsequently assumed a new legal identity under the Financial Institutions Law of 1990, which superseded the Bank Law of 1975. The MEB shoulders several development and social functions on behalf of the government, and it is the principal banking vehicle to lend resources at concessional interest rates to state-owned enterprises, cooperative enterprises, and other state banks and organizations (for example, the MADB; the Myanmar Small Loans Enterprise; and the Government Employees Bank, which provides interest-free housing loans for civil servants). It has increasingly been providing banking services to the private sector as well as foreign exchange and trade-related financial services, but close control by the Ministry of Finance and conservative lending practices (the loan/deposit ratio is low) has meant high losses. The bank also provides treasury functions as part of the Ministry of Finance and Revenue, which accounts for the MEB’s extensive network of 320 branches, the largest in the country. Like the MEB, the government established the MFTB under the Financial Institutions Law of 1990. The MFTB’s mandate is to provide trade finance and foreign exchange related banking to the government, state-owned enterprises, and the members of the international community who reside in the country. The MFTB is also responsible for managing Myanmar’s official foreign currency reserves. Before the recent economic reforms, its monopoly access to foreign exchange and its captive market meant that it did not need to compete for clients, and as a result its service standards were considered very weak even in Myanmar’s uncompetitive banking sector. Now that the CBM will be responsible for managing its own foreign exchange reserves, and that most banks, including private banks, have access to foreign exchange and some have begun financing foreign exchange related activities, the MFTB’s market has started shrinking and it has begun to lose its relevance. Although it currently enjoys a competitive edge through its more than 140 correspondent banking relationships worldwide, its private sector bank competitors are rapidly establishing and expanding their own overseas networks, and it is only a question of time before even this element of the MFTB’s remaining competitive edge evaporates entirely. The MADB is run by the Ministry of Agriculture and provides institutional credit to small-scale farmers in its capacity as a government agency. It was created under the Myanma Agricultural and Rural Development Bank Law of 1990, to provide “banking services” for agriculture, and it was given the specific task of promoting agricultural, livestock, and rural enterprises including processing and production. Legally, it is not obliged to follow the requirements of the Financial Institutions Law of 1990, but it does so in some key areas, including on the structure of interest rates. Clients receive 10 percent interest on their deposits and are allowed to borrow four times their savings at 15 percent interest, provided the funds are used for farm development. The MADB’s loans are of three kinds—short term, which are designed to finance the cultivation of one crop; medium term, which are to be repaid in one to four years; and long term, which have a maturity of up to ten years (but these constitute a negligible share of the overall loan portfolio). Most short-term cultivation loans are offered to farmer groups that are jointly liable for repayment, with peer pressure replacing collateral to encourage repayment. Term loans, conversely, are secured by collateral, which cannot consist of land, given that all land is the property of the state. Loan size is usually small in relation to farmers’ needs, in part because of the limitations imposed by collateral requirements, but also because of the MADB’s somewhat parlous financial condition. Being a part of the Ministry of Agriculture, the MADB encourages farmers to use their loans to purchase seeds, services, fertilizer, and equipment supplied by the ministry, rather than the private sector. The MADB’s rural financing responsibilities require it to run fourteen regional offices, 164 branches, and 48 agency offices, most of which are also co-located with the ministry’s offices and service centers. The MICB was a part of the MEB until 1990, when it became a separate entity under the Foreign Institutions Law of 1990. With branches located mainly in Yangon and Mandalay, its primary focus is to serve the private sector, and its mandate is to provide loans denominated in the domestic currency for commercial, investment, and development activities, and to act as a banking intermediary for foreign investment activities. The capital adequacy requirements for state-owned banks are lower than those for private banks, and state banks are not subject to on-site supervision, as private banks are (although no exceptions are made in regulations or instructions). State banks are not restricted in opening branches, whereas private banks are required to increase their capital each time they open a new branch). Managing directors of three state banks used to be on the Board of Governors of the CBM (together with the governor and one deputy governor)—and their authority occasionally exceeded that of the governor. This made it very difficult for the CBM to properly supervise the state banks. Read More m.ceip.org/2014/06/05/banking-on-myanmar-strategy-for-financial-sector-reform/hcvp&lang=en
Posted on: Fri, 10 Oct 2014 09:52:36 +0000
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