Organised by: Myanmar’s Banking Sector in Transition Current Status and Challenges Ahead

Myanmar’s Banking Sector in Transition Current Status and Challenges Ahead 2018 GIZ Banking Report 4th Edition, 2018

Table of Content The GIZ in Myanmar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acknowledgement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7 8 9 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Chapter 1 – Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Chapter 2 – Regulatory and Supervisory Framework. . . . . . . . . . . . . . . . . . . . . . 20 Banking Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central Bank of Myanmar Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Institutions Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign Exchange Management Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anti-Money Laundering Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Reporting and Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 22 23 24 27 27 Chapter 3 – The Myanmar Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Sector Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State-owned Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capacity Building and Supporting Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 36 40 44 46 Chapter 4 – Services of the Banking Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade Finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Card Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mobile Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 60 62 64 66 68 3

List of Figures Figure 1: Financial intermediation (Loans and deposits in % of GDP) . . . . . . . . . . . . . . . . . . . . . Figure 2: Major developments in the Myanmar Banking Sector (1861–2018) . . . . . . . . . . . . . . . . Figure 3: Myanmar Kyat Exchange Rates in 2018 (MMK per USD) . . . . . . . . . . . . . . . . . . . . . . . Figure 4: Domestic credit to private sector – regional comparison. . . . . . . . . . . . . . . . . . . . . . . Figure 5: Domestic credit in Myanmar since 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 6: Banking market of Myanmar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 7: Growth of total bank assets (2012 – 2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 8: Banking sector assets, deposits and loans as of December 2017 . . . . . . . . . . . . . . . . . . Figure 9: Market share (deposits) of private banks in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 10: Private bank loans by sector, December 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 11: Top five skills needed in the banking sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 12: Private bank loans by collateral types (December, 2017) . . . . . . . . . . . . . . . . . . . . . . . Figure 13: Source of financing for SME investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 14: Major bank-led mobile banking services in Myanmar . . . . . . . . . . . . . . . . . . . . . . . . Figure 15: Bank-branded e-banking platforms in Myanmar . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 16: Net interest margins of selected countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 17: Lending-deposit spread (%) in selected countries between 2010 and 2016. . . . . . . . . . . . Figure 18: Loan-deposit ratios (%) in selected countries between 2010 and 2017 . . . . . . . . . . . . . . Figure 19: Cost-Income ratios (%) for selected countries in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . Figure 20: The legislative process in Myanmar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . List of Tables Table 1: Key facts on state-owned banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table 2: Assets and number of branches of 10 largest domestic private banks (as of March 2017) . . List of Boxes Box 1: Myanmar in figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 2: Laws affecting the financial sector of Myanmar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 3: Myanmar’s exchange rate issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 4: Myanmar’s state-owned banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 5: SME sector development by GIZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18 25 32 33 33 34 34 41 43 47 53 55 70 70 74 75 76 77 95 37 42 16 22 24 38 57 5

Acknowledgement This report, now in its fourth edition, was a joint and fruitful effort with valuable contributions from many experts and institutions. In particular, we would like to express our gratitude to the Central Bank of Myanmar, the Yangon University of Economics and the wider Myanmar banking community for their inputs and comments. Furthermore, we want to thank Professor Dr Udo Steffens, retired President and CEO of the Frankfurt School of Finance and Management, who provided his insightful ideas on the future of the Myanmar banking sector in the last chapter of this report. Staff members of the GIZ Banking and Financial Sector Development (BFSD) Program, namely San Thein, Ms Htay Htay Aye, Mr Anthony Deary and Mr Andreas Ruepp conducted thorough research for the report and put their findings into intelligible words. In addition, Mr Linn Kyaw Swar, Ms Ei Ei Phyu, Ms Kyi Tha Maw, Ms Phyu Phyu Baw, Ms Chue Wai Phyo and Ms Katharina Kaeppel who performed much of the supporting analysis for the report. Last but not least our thanks go to the editor of this report, Mr Helmut Grossmann. Myanmar Font for “Thank You” To all of them and those who remain unnamed, working in the background on so many different tasks that must be completed to publish a sound report, we say a big THANK YOU! ေက ်းဇ်းတင္ပးတယင Armin Hofmann, GIZ-BFSD Program Director 7

Abbreviations and Acronyms AAT ABIF ACCA Association of Accounting Technicians ASEAN Banking Integration Framework Association of Chartered Certified Accountants Authorized Dealer Asian Development Bank ASEAN Economic Community ASEAN Financial Integration Framework Asset Liability Management Anti-Money Laundering AD ADB AEC AFIF ALM AML AQAFHE ASEAN Quality Assurance Framework for Higher Education ASEAN Association of Southeast Asian Nations ATM AYA BFRIC Automated Teller Machine Ayeyarwaddy Bank Banking Sector Reporting Standards Implementation Committee Banking and Financial Sector Development Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung (German Federal Ministry for Economic Cooperation and Development) Capital Adequacy Ratio Co-operative Bank Central Bank of Myanmar Central Bank of Myanmar Law Customer Due Diligence Chartered Financial Analyst Combating of the Financing of Terrorism Credit Guarantee Insurance Construction and Housing Development Bank Chartered Public Accountant Central Statistical Organization Euro Financial Action Task Force Financial Institutions of Myanmar Law Financial Institutions Law Financial Institutions Supervision Depart- ment Financial Intelligence Unit Foreign Exchange First Private Bank Financial Regulatory Department BFSD BMZ CAR CB CBM CBML CDD CFA CFT CGI CHDB CPA CSO EUR FATF FIML FIL FISD FIU FOREX FPB FRD FSI GDP GIZ IFC IFRS IMF ISA IT JICA KBZ KfW KYC LCCI LIFT MAB MAC MADB MALI Financial Soundness Indicator Gross Domestic Product Deutsche Gesellschaft für Internatio nale Zusammenarbeit International Finance Corporation International Financial Reporting Stand- ards International Monetary Fund International Standards on Auditing Information Technology Japan International Cooperation Agency Kanbawza Bank Kreditanstalt für Wiederaufbau Know Your Customer London Chamber of Commerce & Industry Livelihoods and Food Security Trust Fund Myanmar Apex Bank Myanmar Accountancy Council Myanma Agricultural Development Bank Ministry of Agriculture, Livestock and Irrigation Making Access Possible Myanmar Banks Association Master of Banking and Finance Myanma Economic Bank Myanmar Financial Reporting Standards Mobile Financial Service MAP MBA MBF MEB MFRS MFS MFSP Mobile Financial Service Provider MFTB Myanma Foreign Trade Bank MI MIB MICB Myanmar Insurance Myanmar Institute of Banking Myanma Investment and Commercial Bank Myanmar Institute of Certified Public Accountants Myanmar Kyat Mobile Network Operator MICPA Myanmar Payment Union Myanmar Standards on Auditing MMK MNO MOPF Ministry of Planning and Finance MPU MSA MSME Micro, Small and Medium Enterprise MSR MWB Myawaddy Bank NGO NIM Non-Government Organization Net Interest Margin Myanmar Survey Research 9

Executive Summary Regulatory and Supervisory Framework The stability of the financial sector is of paramount importance for the well-being of a country and its people. It is the chief responsibility of a central bank to ensure this stability. Myanmar last experienced a severe banking crisis in 2003 when a bank run on private banks led to the collapse of three major financial institutions and resulted in economic hardships for the whole country. It is therefore with good reasons that the financial sector is one of the most heavily regulated sectors in the economy. Since the 2003 banking crisis, Myanmar’s legal framework for regulating the financial sector has been undergoing heavy reforms to bring the country’s banks closer to internationally accepted standards of operation and prepare the country for ASEAN integration. The most formative laws for the contemporary banking sector of Myanmar are the Central Bank of Myanmar Law 2013, the Financial Institutions Law 2016, the Foreign Exchange Management Law 2015 and the Anti- Money Laundering Law 2014. The Financial Institutions Law is the cornerstone of the current government’s banking sector reform. It aims not only to develop and stabilize the financial sector but also to protect the depositor’s interest. Moreover, it tries to meet international best practices in accordance with the Basel Core Principles issued by the Basel Committee on Banking Supervision. The law grants the Central Bank wide-ranging powers to supervise banks and non-bank financial institutions. It encourages the practice of good corporate governance in banks, and promotes transparency and accountability as well as the modernization of the national payment system. Furthermore, it offers clear exit strategies for banks, should they become non-viable. This law and its associated rules and regulations will profoundly re-shape the framework conditions under which banks operate, develop and innovate. In addition, the Financial Institutions Law was the basis for seminal regulation issued by the Central Bank on Mobile Financial Services. Four important prudential regulations emanated from the Financial Institutions Law: Capital Adequacy Regula- tion, Asset Classification and Provisioning Regulation, Large Exposures Regulation, and Liquidity Ratio Require- ment Regulation. In addition, Myanmar has adopted the International Financial Reporting Standards and the International Standards on Auditing in 2009. The new reporting standards will become fully applicable in report- ing systems by the fiscal year 2022–23. The Banking Sector Financial Reporting Standards Implementation Com- mittee (BFRIC) was founded in 2016 to oversee and guide the adoption and implementation of the new standards. Management of foreign exchange is of particular concern for Myanmar’s economy. The new Foreign Exchange Management Law liberalized the foreign exchange market and lifted all restrictions on transactions in the current account of the country’s balance of payments. After the remarkable devaluation of the Myanmar Kyat in August 2018, the CBM initiated various measures to stabilize the exchange rate and revoked the instruction to conduct buying and selling within 0.8% of the CBM reference rate. The Banking Sector of Myanmar For almost five decades the people of Myanmar and the country’s economy lived through an era of harsh restrictions under the rule of a military regime. International sanctions led to the isolation of the country. Since 2010, reform efforts by the Myanmar government and the opening up of the economy have triggered economic 11

The trade financing sector of Myanmar was monopolized by state-owned banks until private banks were allowed to provide trade finance in 2012. Today, local banks provide fee-based services such as letter of credits, bank guarantees, and interest-bearing services including import financing, and pre and post shipment export financing. In December 2017, the Central Bank of Myanmar started allowing foreign banks to conduct export financing, and in August 2018 foreign banks were permitted to start offering import trade financing services. Today private banks dominate the Myanmar deposit market, holding approximately 66% of total bank deposits, while the market share of state-owned banks has decreased sharply over the past few years. Banks offer fixed deposits, call deposits and current accounts. Deposit accounts are often tailored to serve different customers’ needs, for instance, minor deposit account, sailor account, wedding deposit account and foreign currency account. Due to Central Bank instructions and the shortage and volatility of foreign currency in local banks, foreign currency accounts are generally more restricted in terms of depositing and withdrawing than local currency accounts. Domestic and international remittances play a crucial role for Myanmar’s economy and poverty alleviation since people from poor rural areas are increasingly migrating either to big cities or neighbouring countries for work and send back money to their families. Approximately 3 million Myanmar nationals living abroad remitted around USD 3.5 billion in 2015, which was about 5.4% of Myanmar’s GDP in that year. Myanmar banks and specialized remittance service providers offer a wide range of money transfer services. Recently, there have been significant improvements in domestic remittance services by local banks through their e-banking and mobile payment platforms. However, banks face fierce competition from Mobile Financial Service Providers which are only allowed to provide domestic remittance services to the public and from informal remittance channels called hundis which still play a large role. Myanmar was first introduced to offline debit cards in 1996, but the expansion of debit cards and electronic payment services came to an abrupt end due to the 2003 banking crisis. It was not until 2012 that debit cards returned and three years later credit cards were introduced to the country. For many years the Myanmar Payment Union had a monopoly on issuing debit and credit cards, but in January 2017 the government removed restrictions on international payment companies and allowed banks to issue co-branded cards. In recent years, mobile financial services have become an important means for financial inclusion in Myanmar. Currently, there are five major bank-led mobile banking services in Myanmar. Some banks also have their own branded e-banking platforms. In addition, there are three licensed Mobile Financial Services Providers in Myanmar. The Regional Perspective Despite its rapid development, the Myanmar banking sector still remains the smallest market when compared with other Southeast Asian nations. The profitability of Myanmar banks is weak evidenced by low net interest margins and insufficient non-interest income. The fixed interest rate environment adds additional challenges such as the inability to price risk which results in shortfalls in interest income and very low loan-deposit ratios. Moreover, there is a lack of modern banking infrastructure and reporting transparency. This is particularly troublesome when considering the country’s declarations to integrate into the Association of Southeast Asian Nations (ASEAN) community. Myanmar joined ASEAN in 1997. Financial sector integration under the ASEAN Banking Integration Frame- work is scheduled to begin in 2020. In preparation, it is expected that the Central Bank of Myanmar will gradually adjust financial sector regulations. For Myanmar’s local banks, this will herald a new era of tougher competition with foreign banks and probably a painful consolidation process, but at the same time, potential for improved access to capital, banking infrastructure and know-how. 13

Chapter 1 – Introduction Due to its history the fi nancial sector of Myanmar is dominated primarily by commercial banks. The sector struggles to fulfi l its role as a fully-fl edged fi nancial intermediary. In March 2016 the banking sector still held 92% of total fi nancial sector assets (about 42.4 trillion MMK). The remaining 8% was comprised of Insurance, Securities, Finance Compa- nies and Micro Finance Institutions. Banks have grown rapidly in size in the last decade; both deposit and loan as a ratio of GDP increased approximately 3 times within the last 6 years, however the momen- tum of growth is now slowing down. Financial intermediation Loan Deposit 45 40 35 30 25 20 15 10 5 0 2010 / 11 2011 / 12 2012 / 13 2013 / 14 2014 / 15 2015 / 16 2016 / 17 Reference: GIZ (2016), IMF (2018) Figure 1 Financial intermediation (Loans and deposits in % of GDP) Historical Perspective A brief look at the history of the Myanmar banking sector can help to explain the current situation. The modern banking sector of Myanmar went through fi ve distinct phases: the British colonial era until 1948; the post-independence period from 1948 to 1962; the military-socialist regime from 1962 to 1988; the military regime after 1988 with far-reaching economic reforms starting in 2010; and fi nally, the reforms initiated under the new NLD government since November 2015. 7 In the British colonial era from 1826 to 1942, the banking system of Burma, as the country was called then, was entirely shaped by the British rulers. The fi rst central bank emerged in 1939 out of the Ran- goon branch offi ce of the Reserve Bank of India. By the end of the colonial era, a total of 20 banks operated in the country, most of them with head- quarters overseas. 17

Chapter 1 – Introduction The political reforms culminated in the free general elections of November 2015, which saw the opposi- tion party NLD win a large majority in parliament. Since then, the new government accelerated the various reform projects of the previous government. In summary, after almost five decades of harsh restrictions under military rule and stringent inter- national sanctions the former granary of Southeast Asia has become the poorest country of the region. Furthermore, the banking sector of Myanmar, once a front runner during the 1950s, is today the least developed in the ASEAN region. However, the Myanmar government has started to reverse this negative trend. Since 2011, various ambitious finan- cial sector reforms have been kicked off, in particular through the new Financial Institutions Law enacted in 2016. Significant reforms can be found in the Myanmar’s banking sector in 2017. The necessary regulations known as the “four regulations” (capital adequacy, asset classification and provisioning, large exposure and liquidity ratio) were released by the CBM in July 2017. With this effort Myanmar’s Central Bank sets the stage for a Basel II Framework in the banking sector. Myanmar’s currency (the Kyat) has depreciated remarkably since July 2018 due to external effects such as the US-China trade war and internal effects such as trade deficits. In August 2018, the Central Bank announced that it has removed a 0.8 percent trading band around the kyat, thus liberalizing the foreign exchange market. It also announced the liberalization of foreign banks to extend their banking services to local corporates which aims to improve access to funding for local businesses. 2011 Microfinance Business Law 2013 Central Bank of Myanmar Law & Securities and Exchange Law 2016 AEC, Financial Institutions Law, Regulation on Mobile Finan- cial Services 2015 Yangon Stock Exchange 2018 • Removing 0.8% trading band on Foreign Ex- change Market • CBM allows foreign banks to extend services to local companies 2012 Foreign Exchange Management Law (Mana- ged Floating System) Myanmar Payment Union: first debit cards, ATMs) 2014 Anti-money Laundering Law, Counterterro- rism Law, Foreign Exchange Management Regulations, Securities and Exchange Commission of Myanmar formed 2017 Four important regulations (Capital Adequa- cy Regulation, Asset Classifica- tion and Provisi- oning Regulation, Large Exposures Regulation, Liquidity Ratio Requirement Regulation) 19

Chapter 2 – Regulatory and Supervisory Framework respective Departments on behalf of the Governor or the Deputy Governors. In Myanmar sometimes the Governor or the Deputy Governor also sign the directives in more urgent cases. 10 Financial Institutions Law The Financial Institutions Law (FIL), which was passed by parliament on 25 January 2016, is the cornerstone of the current government’s banking sector reform. It aims not only to develop and stabilize the financial sector but also to protect the depositor’s interest. Moreover, it tries to meet best international practices in accordance with the Basel Core Principles issued by the Basel Committee on Banking Supervision. The law grants the CBM wide-ranging powers to supervise banks and non- bank financial institutions. It encourages the practice of good corporate governance in banks, and pro- motes transparency and accountability as well as the modernization of the national payment system. Furthermore, it offers clear exit strategies for banks, should they become non-viable. This law and its associated rules and regulations will profoundly re-shape the framework conditions under which banks operate, develop and innovate. In addition, the FIL was the basis for seminal regulation issued by the CBM on Mobile Financial Services. Under the FIL, financial institutions are classified as Banks, Development Banks, Non-Bank Financial Institutions and Schedule Institutions (such as insurance companies and micro-finance institutions). While the CBM takes over the role as the regulator and supervisor of the banking sector, the Ministry of Planning and Finance (MOPF) has the responsibility to supervise state banks, and regulate and supervise insurance companies and microfinance service providers. The FIL outlines various banking functions that have to be approved by the CBM before becoming effec- tive. The following requirements highlighted in the FIL must be met by all banks, including foreign banks: License – To apply for a banking license under the FIL, the business entity must submit the necessary documents, including evidence of being a com- pany or an entity incorporated under the laws of Myanmar (Myanmar Companies Law). Foreign banks can only apply for a license to conduct banking business through a subsidiary or a branch. They need to submit not only documents that are required for domestic banks but also other documents such as a credit rating report and a statement of their capital position. According to directive No. (2/2017), the license fees for domestic and foreign banks are 0.1% of their paid-up capital, and the fee for establishing one branch is MMK 500,000. The annual fee for a local bank is 0.1% of paid-up capital on the 2nd of April and that of a foreign bank is 0.1% of its minimum paid-up capital (USD 75 million). Banking license holders have to commence operations within one year of licensing, comply with all conditions and the restrictions imposed by the CBM and carry out the activities permitted under FIL. Capital – The minimum paid-up capital is set at MMK 20 billion for domestic banks and USD 75 million for foreign banks. The law defines Core capital or Tier 1 Capital and Supplementary capital or Tier 2 capital. Their minimum ratios are stipulated in various directives of the CBM on capital adequacy ratios, with regulatory capital adequacy ratio being 8% and the minimum Tier I capital ratio 4% (cf. Annex 2). Reserves – For maintenance of a reserve fund, 25% of a bank’s net profits must be transferred to the reserve fund every year until it reaches 100% of the total paid-up capital. Loan Loss Reserve – Banks are required to maintain a general loan loss reserve up to 2% of outstanding loans and advances. Banking Activities – The activities that commer- cial banks are permitted to engage in are subject to any conditions and restrictions in the license. These activities include both, traditional activi- ties like acceptance of deposits and lending, and other activities such as foreign exchange busi- ness, e-banking and mobile banking. Restrictions – The restrictions on large exposures and lending to related parties are outlined in the FIL, while the detail restrictions are shown in the 23

Chapter 2 – Regulatory and Supervisory Framework Law, there are no exchange restrictions on international payment transactions in the current account of the country’s balance payments. The US dollar (USD) dominates the Myanmar payment system. It is normally used to quote both, export and import prices. While the depreciation or appreciation of the local currency, MMK, against the USD does not change the external value of export and import goods and services, Myanmar’s importers and exporters will feel the difference. For example, if the Kyat depreciates from MMK 1,000 per USD to MMK 1,500, the export value of a ton of beans priced at USD 100 will increase by MMK 50,000 for Myanmar exporters. On the other hand, Myanmar importers would have to spend more MMK to get the same amount of imported goods. As Myanmar is still a developing country, a large volume of its imports are capital goods and intermediate goods which are essential for its development. 13 Hence the importance of the exchange rate for Myanmar’s development. The figure below shows the exchange rate movement of the MMK against the USD. After having stabilized for the first six months of 2018 at around MMK 1350 per USD, the local currency started to depreciate in June 2018. It depreciated by 3.7% within one month, mainly due to a USD shortage in the country. Banks are reluctant to sell their USD. Import prices for essential goods such as pharmaceuticals, construction material and fuel rise, which in turn fuels production costs and has an impact on the general price level in the country. The CBM started to intervene in the market on July 26. On 13 August, the exchange rate bands mentioned before were removed. On 23 August, CBM announced measures to solve the exchange rate problem and on November 8, CBM allowed foreign banks in the country to do all banking businesses with local corporates. These are major steps taken by the monetary authority. The positive impact of these measures may be seen in the relatively stable exchange rates after 12 October 2018. 1700 1600 1500 1400 1300 May June July August September October November Reference rate Market rate Source: CBM and Markets Figure 3 Myanmar Kyat Exchange Rates in 2018 (MMK per USD) 25

Chapter 2 – Regulatory and Supervisory Framework Anti-Money Laundering Law Since June 2000, Myanmar had been placed on the list of non-cooperative countries and territories of the Financial Action Task Force (FATF), the world leading body to fight money laundering and combat financing terrorists. 14 In its effort to avoid international sanctions on its financial system, Myanmar enacted The Control of Money Laundering Law (the State Peace and Development Council Law No. 6/ 2002) on 17 June 2002. Although the law created a framework for anti-money laundering measures, there were many FATF’s standard requirements yet to be met. Due to Myanmar’s failure to make adequate progress in implementing the Control of Money Laundering Law with the issuance of necessary by-laws, the FATF decided to apply counter-measures to Myanmar on 3 November 2003. 15 The purpose of these counter- measures is to reduce the vulnerability of the interna- tional financial system and to increase the effective- ness of anti-money laundering measures. During 2003–2005, the Myanmar banking sector faced serious money laundering problems with the US designation of Myanmar and its two local banks, Asia Wealth Bank and Myanmar Mayflower Bank to be of “primary money laundering concern” in November 2003. The consequence can be seen in the revocation of banking licenses from the two named banks in March 2005, and a few months later from the Myanmar Universal Bank. On 14 March 2014, the new Anti-Money Laundering Law (Union Parliament Law No. 11/2014) was enacted in line with international standards (Recommenda- tions of the FATF and Basel Core Principles for effec- tive Banking Supervision). The main objectives are to effectively combat money laundering and terrorist financing in the country; to deter meddling in the country’s management, politics, and social affairs using the money and property obtained by illegal means; to take AML/CFT measures in accordance with the International Convention Agreement; to cooperate with other countries and organizations combating money laundering and terrorist financing; and to issue necessary instructions and directives on AML/CFT to financial institutions. In its Section 68, under the caption of ‘Money launder- ing and the reporting of suspicious transactions’, the Financial Institution Law of 2016 stipulates that the CBM shall make regulations prescribing the specific procedures including reporting requirements under the Anti-money Laundering Law, Counter Terrorism Law and other related laws. As entrusted by Section 69 (C) of the Anti-Money Laundering Law and Section 40 of the Central Bank of Myanmar Law, the CBM has issued instructions on actions to be taken by financial institutions on money laundering and terrorist financing (CBM Directive No. 21/2015 dated October 2, 2015). On January 27, 2015, the CBM issued AML/CFT Risk-based management guidelines. In its manage- ment guidance note, the CBM suggests all banks in the country to develop effective frameworks and proce- dures to manage their money laundering and terrorist financing risks. Financial Reporting and Supervision Apart from the laws and their secondary instruments with regard to corporate financial reporting, the following laws play an important role in the legal and statutory framework: Auditor General of Union Law 2010; Myanmar Accountancy Council Law 2015; and the Myanmar Companies Law 2017. To successfully implement the various laws directed at the banking sector, the CBM releases regulations and directives as secondary instruments. Some of these instruments define prudential requirements in the form of key ratios and limits that have to be met by all banks (cf. Annex 2). The directives based on the FIL and released in 2017 are in line with the Basel I principles, such as capital requirements and risk weighted assets, and generally it can be accepted that Myanmar’s banking sector meets the Basel I principles. In addition, since the CBM has taken the supervisory role, it also fulfils the second pillar of Basel II referring to governance and supervi- sion. However, the compliance of banks with laws and regulations regarding the reporting of data to the CBM has been sluggish due to the banks’ data collection 27

Chapter 3 – The Myanmar Banking Sector As of December 2017, total bank assets amounted to 56.12 trillion MMK. The growth rates since 2012 are impressive but also very volatile, ranging between 176% in 2012-13 to 8% in 2014-15. The latest growth rate between March 2016 and 2017 was 23% (Fig. 5). Domestic Credit to GDP (%), Myanmar series pre-crisis level 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: World Development Indicators Figure 5 Domestic credit in Myanmar since 2000 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. 2. 3. 4. 5. Asia Yangon Bank Ltd Asian Green Development Bank Ltd Ayeyarwady Farmers Development Bank Ayeyarwady Bank Ltd Construction & Housing Development Bank Ltd Co-operative Bank Ltd First Private Bank Ltd Global Treasure Bank Ltd Innwa Bank Ltd 6. 7. 8. 9. 10. Kanbawza Bank Ltd 11. Myanmar Apex Bank Ltd 12. Myanmar Citizens Bank Ltd 13. Myanmar Micro finance Bank Ltd 14. Myanmar Oriental Bank Ltd 15. Myawaddy Bank Ltd Figure 6 Banking market of Myanmar 16. Nay Pyi Taw Sibin Bank Ltd 17. Rural Development Bank Ltd 18. Shwe Rural and Urban Development Bank 19. Small and Medium Industrial Development Bank 20. Tun Commercial Bank Ltd 21. United Amara Bank Ltd 22. Yadanabon Bank Ltd, Mandalay 23. Yangon City Bank Ltd 24. Yoma Bank Ltd 25. Glory Farmer Development Bank Ltd (G Bank) 26. Mineral Development Bank 27. Myanmar Tourism Bank 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) Source: CBM 33

Chapter 3 – The Myanmar Banking Sector After the nationalization of all banks in 1963, Myan- mar’s banking sector was completely state owned until 1990. This explains the important role state- owned banks (SOBs) still play in the market today. For instance, in March 2017 the MEB was Myanmar’s second largest bank in terms of assets and held approximately 16% of total bank deposits. Overview of SOBs as of 28.02.2017, financial data in million MMK MADB MEB* MICB MFTB Total Assets 1,397,940.40 7,576,196.22 3,387,507.02 3,831,914.92 Total Deposits 12,843.52 5,552,789.61 563,386.30 2,893,793.94 Total Loans 1,311,012.96 2,426,834.72 28,278.15 240,361.48 Branches 208 308 2 1 Table 1 Key facts on state-owned banks Source: CBM, Financial Position of Banks, Finance Companies and Foreign Bank Branches (2017) *at 31 March 2017 Yet, SOBs keep losing market share to strongly growing private and foreign banks. Their share in terms of assets has decreased sharply in recent years, from 60% in March 2015 to 34% according to the newest available figures (December 2017). SOBs used to benefit from a lack of public trust in private banks – especially after the bank crisis of 2003 – and held 44% of total deposits in March 2015. However, this number has fallen to 26% as of December 2017. Although the market share of SOBs in Myanmar is still higher than the average in the region, 25 these figures depict a clear trend which is likely to continue with strong growing private banks and foreign banks entering the market. 37

Chapter 3 – The Myanmar Banking Sector Myanmar’s four SOBs still offer most standard banking services, even long after the re-emergence of private banks in 1992. In general, there are two views on state ownership of banks. On the one hand, it can be beneficial in cases where SOBs undertake socially desirable investments and allocate resources to important sectors that would be otherwise under- served by the private sector. In the case of Myanmar, for example, the MADB is the main provider of loans to farmers who are rarely served by commercial banks. On the other hand, state ownership of banks can be inimical for competition and overall financial stability since misallocation of resources, operational inefficiencies and higher rates of defaults are often found within SOBs. 30 SOBs in Myanmar offer highly subsidized loans to selected sectors, especially to the state and the agricultural sector. 31 The latter is of great impor- tance for the economy and Myanmar’s people, accounting for more than 25% of GDP 32 and 50% of employment in 2017. 33 Yet, concerns remain that SOBs distort competition and crowd out private banks’ activities in these areas. 34 For instance, whereas only 14% of all outstanding loans in Decem- ber 2017 were issued by state-owned banks, loans from SOBs accounted for over 90% of all loans to the agricultural sector, excluding foreign banks. 35 In general, SOBs tend to have higher overhead costs and lower interest margins than their private coun- terparts, especially in developing countries. 36 Myanmar is no exception. The four SOBs struggle to keep pace with private banks. Common challenges include a lack of new technologies and modern IT infrastructure, operational inefficiencies, bad cus- tomer service, poor corporate governance, a lack of skills and unclear policy mandates. As of December 2017, the loan-deposit-ratio of SOBs was only 28.4%, compared to 67.4% at private banks. In addition, SOB lending to the private sector is disproportionally small compared to their overall market share. The country’s largest SOB, the MEB, for instance, has been making losses since 1988 37 and continues to be a source of fiscal risk. High operating costs resulting from the bank’s vast branch network and the low conversion of deposits into loans are the major reasons for the bank’s lack of profitability. The MEB lends only about 15% of its deposits to the private sector and has moved a large share of asset holdings to government securities. 38 This adds to the under- supply of the private sector with credit and creates further distortions in the banking sector as private banks directly compete with SOBs for deposits. In addition, SOBs allegedly have high NPL ratios (accurate data are not available). This is a potential threat to the stability of the financial system. 39 Although SOBs officially have to follow the same regulations as their private sector peers and report to the CBM, supervision of SOBs is weak and their performance is often not known to their owner, the MOPF. 40 Strict controls of SOBs on requirements such as NPL and capital ratios would be necessary to track their performance, reduce fiscal risk and strengthen overall financial sector stability. Despite the concerns raised above, SOBs remain important for the Myanmar banking system. They have a good public reputation (especially amongst the older generation), reflected by their large deposit base, and a vast branch network that is conducive to financial inclusion. Policymakers are therefore contemplating a more strategic role for SOBs con- tributing to the Myanmar development agenda. 41 This role should leverage SOBs’ considerable non- financial assets (brand recognition, broad outreach, etc.) and must be based on prudent fiscal manage- ment and sound economic rationale so that SOBs will be able to compete profitably with private banks on a level playing field. Reforming SOBs is stated a priority of the current Myanmar government. The improvement of the operations of state-owned enterprises and their privatization is part of the Economic Policy of the Union of Myanmar published in 2016. The World Bank supports the CBM and the MOPF in developing a policy framework for SOBs and also accompanies the development of restructuring plans for each of the four banks. However, advancement has been slow and much work lies ahead to improve profitability and transparency of SOBs. 42 This reform process will be critical to increase competition in the banking sector, reduce fiscal risk and ensure financial sector stability. 43 39

Chapter 3 – The Myanmar Banking Sector Growth in the private banking sector is impressive. Between March 2012 and March 2017, its assets increased more than six-fold, and between financial year 2015/16 and 2016/17 private bank assets grew by 32%, whereas the amount of assets of SOBs stayed almost the same during that period. Yet, asset con- centration is high, with the three largest banks holding almost two thirds of total private banks’ assets, and the six largest banks of the country account for 82% of assets. Figure 7 shows the market share in terms of deposits of Myanmar’s domestic private banks. This picture changes only slightly when looking at assets or loans. 41% 17% 11% 6% 6% 6% 3% 3% 3% 1% 1% 2% KBZ AYA CB (41%) (17%) (11%) MAB (6%) Yoma (6%) MWB (6%) GTB UAB (3%) (3%) Others* (3%) AGD MOB (2%) (1%) Innwa (1%) Source: CBM *Including all banks with less than 1% market share: Myanmar Citizens Bank Ltd., First Private Bank Ltd., Small and Medium Industry Development Bank Ltd., Tun Commercial Bank Ltd., Shwe Rural and Urban Development Bank, Ayeyarwaddy Farmer Development Bank, Yangon City Bank Ltd., Rural Development Bank Ltd., Myanmar Microfinance bank Ltd., Yadanabon Bank Ltd. Mandalay, Asia Yangon Bank Ltd. Figure 9 Market share (deposits) of private banks in 2017 As of March 2017, private banks in Myanmar oper- ated 1,513 branches, of which 819 were owned by the top three banks. The amount of bank branches in relation to the population is still low in Myanmar, reflecting the low access of people to formal financial services. In 2016, there were 3.41 bank branches per 100,000 people, compared to 3.9 in Vietnam, 8.8 in the Philippines and 11.5 in Malaysia. 44 In addition, 41

Chapter 3 – The Myanmar Banking Sector Apart from the top 10 banks, there are several banks of very small size. Eleven private banks currently operating have a market share below 1%. These banks will likely find it difficult to survive in the market since they usually bear disproportionally high costs to be compliant with regulations and rarely can compete with bigger banks, unless they find a niche market. In a recently published report, international consultancy Roland Berger concludes that only the top three to five banks will shape the market in the short and medium term, together with foreign banks. 45 Total loans of private banks amounted to 18.5 trillion MMK (approx. 13.48 billion USD) in December 2017. Between March 2012 and March 2017, the amount increased almost sevenfold. The trading sector accounts for the largest share of loans from private banks, followed by construction and services (Fig. 8). 18% 37% 14% 12% 12% Trading Construction Services General Production Others* Hire Purchase (37%) (18%) (14%) (12%) (12%) (5%) (2%) 2% 5% Source: CBM Quarterly Financial Statistics Vol. IV 2017 *Others include Transportation, Agriculture, Housing, and SME Loans Figure 10 Private bank loans by sector, December 2017 Since the opening up of the economy in 2010, private banks took advantage of a booming private sector. In 2015, advances to the private sector by private banks accounted for 14% of GDP, while SOBs only contrib- uted 2.5%. 46 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, however, banks cannot price in their risk and hence tend to over-rely on collateral or generally restrict their lending. 47 In December 2017, 88% of collateral used to secure loans in Myanmar were land and buildings. 48 There are two direct consequences resulting from this over- reliance on collateral. Firstly, it makes banks vulner- able to large losses in values of these properties. As banks tend to only lend a maximum 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, high collateral requirements make it especially hard for smaller borrowers that do not own adequate collateral – such as SMEs and private households – to access bank loans. 43

Chapter 3 – The Myanmar Banking Sector As of December 2017, foreign banks’ market share in terms of assets was about 10%. The Industrial and Commercial Bank of China is the largest foreign bank with almost one fourth of foreign banks’ assets (as of March 2017). Foreign banks are still not allowed to offer Kyat fixed deposit accounts but they may accept foreign currency deposits. There is still no decision on whether or not interest may be paid on foreign deposit accounts. To receive a license foreign banks have to deposit a USD 45 million reserve at the CBM, money for which they do not receive any interest. Banking functions of foreign banks are limited. In the past they were not allowed to lend to local businesses unless they partnered with a local bank. However, reform measures are under way. Currently foreign banks are restricted to one branch, but the CBM has indicated that by 2019 they will allow foreign banks to expand their branch network. 49 In the past, foreign banks were only allowed to lend to foreign enterprises in foreign currency, but the recently passed CBM Directive No. (6/2018, November 8) permits foreign banks to lend to domes- tic businesses in Kyat and foreign currency. Interest rates for Kyat loans by foreign banks must abide by the maximum bank lending rate of 13%, however foreign currency loans may be priced at market rates. Other restrictions on foreign banks are in force, such as not being allowed to accept immovable property such as 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. 50 In general, foreign banks are found to be more efficient than local banks 51 and could contribute significantly to the development of the Myanmar banking sector. For instance, they could improve access to capital for undercapitalized local banks. Already, foreign banks account for a disproportionate share of the banking system’s capital. As of Septem- ber 2017, they held 44% of total equity capital. The new Myanmar Companies Act announced in August 2018 52 theoretically allows foreign banks up to 35% stake in local banks, potentially facilitating knowl- edge transfer and international best practices to the domestic banking sector. However, there is a poten- tial risk that domestic banks are not strong enough to withstand competition from foreign banks should they be allowed to operate freely. 53 In view of Myanmar’s integration into ASEAN, the pressure to open up the financial sector for foreign institutions will only increase. Possible effects on the banking industry and implications for individual local banks are discussed later in this report (refer to the last chapter of this report for more information). 45

Chapter 3 – The Myanmar Banking Sector The Myanmar banking sector is developing fast and requires an increasing number of qualifi ed staff to ensure its long-term viability. A recent report by the international consultancy Roland Berger estimates that 120,000 new jobs will be created in the sector until 2025. 54 This fi gure projects a huge increase in demand for education and training of bank employ- ees. In addition, as banks begin to offer more sophis- ticated products and services, the range of skills needed will diversify and international best practices will become more and more relevant. The government acknowledges the need for improvements in education to meet the demands of the fast-growing economy. Together with interna- tional partners, including GIZ, it developed the National Education Strategic Plan 2016-2021 and initiated a number of educational reforms. Public spending on education has increased steadily over the past years. While these efforts will hopefully pay off in the longer term, banks already struggle to fi ll vacancies with adequately qualifi ed employees. A market research conducted by the Myanmar Survey Research (MSR) on behalf of the GIZ fi nds that both, individu- als and banks name very generic skills, like English and IT knowledge, when asked about skills most needed in the banking sector. 55 This indicates a rather low prevailing level of qualifi cations. Interest- ingly, banks consider leadership skills as the most important qualifi cation for the current situation and the future. As for technical skills, respondents emphasize the importance of risk management and fi nancial analysis in the context of lending, including SME lending. 56 Other technical skills considered important by banks and individuals in the study include accounting and fi nancial reporting. Figure 9 summarises the results of the market research conducted by MSR. Skills needed currently Skills needed in future Individuals Organizations English IT skills Leadership Accounting Financial Analysis Risk managment Financial Reporting General Banking 35 % 39 % 35 % 26 % 30 % 43 % 29 % 17 % 23 % 14 % 22 % 19 % 15 % 10 % 13 % 14 % Leadership 56 % 54 % Sales and Marketing IT skills 46 % 32 % 42 % 28 % Accounting 14 % 40 % 40 % 42 % 36 % 52 % 36 % 14 % 30 % 30 % English Risk managment General Banking Financial Analysis Figure 11 Top fi ve perceived skills Source: MSR market research, 2018 47

Chapter 3 – The Myanmar Banking Sector The Myanmar Credit Bureau Limited was granted a license by CBM in May 2018 to become the first credit agency in Myanmar and is expected to begin its operation within one year. It is established as a joint venture between MB Investment Limited, a proxy company for MBA, and Asia Credit Bureau Holding Limited formally known as NSP Holdings Pte Ltd from Singapore, sharing 60:40 stakes respectively. The Credit Bureau will collect credit information of individuals and companies to provide credit ratings. It will sell this data to financial institutions for sound lending decisions. The International Finance Corpo- ration (IFC) has been supporting the bureau’s data collection on credit history and taxation and is assisting to build the required regulatory capacity at CBM. With recent relaxation of collateral require- ments by CBM and banks stepping towards cash-flow based lending, the Myanmar Credit Bureau will help increase access to finance and reduce credit risk to lenders. 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 vice-chairman and secretary functions. In September 2013, for the first time since its inception, the MBA elected a Board of Directors that is independent from the CBM. The current chairman of MBA is also the chairman of CB Bank. The Myanmar Payment Union (MPU) was established by Myanmar banks in the year 2011 to stand as a National Payment Switch for Myanmar, i.e., a system supporting non-cash payments originating from electronic channels such as ATMs, POS terminals, mobile banking, etc. Since 2013, banks and other stakeholders have been working together on expand- ing payment services, including internet and mobile banking. In January 2016, CBM-Net, Myanmar’s first real-time gross settlement (RTGS) was implemented. Large payment transactions can be made through CBM-Net, while the MPU provides the facilities for retail payments. 61 49

Chapter 4 – Services of the Banking Sector Land and Building (88,31%) Personal and Organisation Guarantee General Hire Purchase Fixed Deposit Machine and Merchandise (4,06%) (3,95%) (2,27%) (0,52%) (0,36%) Housing Loans (0,33%) SME Loans Gold Unsecure (0,17%) (0,03%) (0,00%) Source: CBM Quarterly Bulletin, 2017 88,31% 4,06% 3,95% 2,27% 0,52% 0,36% 0,33% 0,17% 0,03% 0,00% Figure 12 Private bank loans by collateral types (December, 2017) SMEs because most of their capital stock is in moveable assets such as receivables, machinery and equipment. To improve movable-asset based lending, IFC is providing support to Myanmar’s government to develop a secured-transactions framework that will encourage banks to accept more immovable assets as collaterals. 63 interest rate and other refinancing and subsidized loans at around 8.5%. Commercial and Consumer Loans Loan Product Development All banks in Myanmar offer similar commercial loans which can be generally categorized into three types. A directive issued by CBM in November 2017 stated that banks are encouraged to develop new loan products assessing client creditworthiness through cash-flow and business cycle analysis. Banks are required to submit the proposed loan products along with the corresponding credit risk analysis to CBM on a no-objection basis. However, CBM procedures for new product approvals are not standardized and the approval period is not yet clearly defined. In addition, banks face limitations on developing new loan products based on a borrower’s cash-flow since CBM has capped annual effective lending interest rates at 13%, which is lower than the perceived market lending interest rate based on credit risks associated with most businesses. Regardless, local banks price regular term-loans at up to 13% annual a b c Term loans with mostly full principal payment at the end of the loan term (usually 1-3 years) and quarterly interest payments with up to 13% annual interest rate; Hire-purchase loans for the financing of vehicles, heavy machineries, etc., where the wholesaler carries major part of the repayment risk; and One-year overdraft facilities where interest is only payable on the actually outstanding loan amount. Commercial loan products usually come with additional services such as cash and liquidity manage- ment and business advisory services. Businesses and 53

Chapter 4 – Services of the Banking Sector mately 120,000 SMEs account for more than 90% of all companies in the country. 67 The Myanmar government already acknowledged the importance of SMEs for the national economy and issued a SME Development Law in April 2015. 68 Despite of this importance, SME loans accounted for less than 0.2% of private bank loans in December 2017. 69 This restricts small enterprises’ ability to grow and most of them have to rely chiefly on their own funds to undertake investments (cf. figure below). 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % Own capital Bank Other formal Friends / Family Other informal Source: MOPF (2018), based on Myanmar MSME 2017 data Figure 13 Source of financing for SME investments SME loans are much smaller in value than normal business loans. To qualify for SME loans, businesses are required to provide a SME recommendation letter and the SME member card from the SME Develop- ment Department under the Industrial Supervision and Inspection Department, along with all other necessary financial documents. Previously, SME registration took up to 6 months depending on whether a firm could provide the required documents, but as of August 2018, firms can register for SME smart cards online, which reduces the processing time to three weeks. SME smart cards are useful for trading within the region as they are certified in ASEAN countries. Business owners with SME smart cards can also have access to technical assistance, business courses, loan and marketing plans, and other facilities. 70 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 Japan International Cooperation Agency (JICA) has been supporting SME lending in Myanmar for several years. During the first phase of its “Two-Step Loan Program” from 2015 until 2017, JICA provided 55

Chapter 4 – Services of the Banking Sector Box 5: SME sector development by GIZ To support local banks in better SME financing, GIZ has been providing selected partner banks with technical assistance, training and capacity building under the Banking and Financial Sector Development Program (BFSD). During the first phase from 2014 to 2016, KBZ, YOMA and SMID bank were selected as pilot banks that were provided technical assistance by GIZ to establish adequate structures, procedures and strategies for SME finance. Several SME finance training modules were developed and more than 100 training sessions with over 2,200 participants were conducted in different SME finance related topics, including financial literacy training for SME owners. The collaboration between the three pilot banks and GIZ in the first phase has resulted in an increase of the combined SME loan portfolios of the pilot banks by a factor of three (in total over 13,000 SMEs were served). between clients and banks, GIZ will also provide training of trainers to more bank employees so that they can, in turn, conduct entrepreneurship and financial literacy training programs to their SME clients. As of August 2018, YOMA bank has established stand- ardized SME lending procedures which are made available to the branches. Dedicated specialist SME staff are being trained and will be located in every branch by the end of 2019. The bank also launched its SME Express Loan, which significantly shortens the loan application process. An innovative unsecured loan product has been developed by YOMA bank, which allows SMEs to use business contracts as alternative security for working capital loans. In the second phase (2017–2019), GIZ continued cooperation with YOMA and KBZ bank to provide more technical support in their SME financing development, while SMID bank continued unsecured cash-flow based lending to SMEs on its own. In collaboration with Wave Money – a joint venture between Telenor and Yoma Bank to provide mobile financial services via a nationwide agent network - YOMA bank is also offering unsecured loans to SMEs who are agents of Wave Money. Within the framework to promote sustainability of the achievements from the previous phase, GIZ is focusing on areas such as improving SME credit risk manage- ment processes and control mechanisms, maintaining SME loan portfolio quality of the pilot banks and training of bank-internal trainers. To close the gap KBZ bank has recently opened the One-Stop SME Banking Centres (OSBC) that provide comprehensive solutions to SMEs ranging from issuing SME certifi- cates, advisory and cash management services to capacity building such as financial literacy and business plan trainings. 57

Chapter 4 – Services of the Banking Sector Trade fi nance liberalization can provide more fi nancing opportunities for Myanmar traders. However, there are still some limitations for both, foreign and local banks. Although foreign banks with their expansive network, experience, capital and technology could easily facilitate Myanmar’s external trade, they face diffi culties in accessing local trade fi rms as many fi rms lack reliable and standardized fi nancial records and statements that foreign banks are accustomed to. Moreover, the lack of credit bureau information makes it diffi cult for foreign banks to assess the creditworthiness of local traders. This issue is also the reason why local banks only extend trade fi nancing facilities to their long-term corporate customers. Therefore, local exporters and importers, especially small and medium sized trading fi rms, fi nd it hard to get local bank fi nancing to promote their businesses in a sustainable way. A few local lenders have estab- lished trade connections with other foreign fi nancial institutions, but low credit ratings of local banks generally limit the amount of business they can underwrite, and many foreign banks still do not accept letter of credits from Myanmar banks. In addition, trade fi nance facilities are new to the local bankers and their limited expertise in trade fi nance, low IT capacities, scarcity of foreign exchange and poor risk management further impede external trade fi nancing to local trade fi rms. Furthermore, exchange rate risks and the lack of modern hedging instru- ments, such as swaps and forward contracts, make it often unattractive for local banks to enter the trade fi nancing business. To support local banks in trade fi nance, the Asian Development Bank (ADB) launched its Trade Finance Program (TFP) in Myanmar. ADB pledged up to USD 12 million in annual guarantees and signed a fi rst agreement with the CB bank in October 2015. In 2016, two more banks – the United Amara Bank (UAB) and YOMA bank – joined the TFP. The UAB receives guarantees worth up to USD 4 million each year for international letters of credit, while YOMA is provided with guarantees of at least 10 million USD annually to support trade, especially for local SMEs. Since ADB has an AAA credit rating, local banks participating in the TFP will be able to fi nance larger trade transactions. They will also be provided with capacity development support in risk management, trade fi nance products and operations, and fraud prevention. 61

Chapter 4 – Services of the Banking Sector Terms for fi xed deposit accounts range from 1 month to 3 years, with annual interest rates offered between 8 and 10 percent, while current accounts and foreign currency accounts generally do not bear any interest payments. Call deposit account interest rates are usually calculated based on the account’s day-end balance. The annual interest rate on call deposits was around 8%, like the rate for fi xed deposits. However, in January 2018 it was lowered to 2% by the Myanmar Bank Association as a coordinated measure among its member banks - although some banks deviate and still offer call deposits at 4% or 6% annual interest rate. Due to CBM instructions and the shortage and volatility of foreign currency in local banks, foreign currency accounts are generally more restricted in terms of depositing and withdrawing than local currency accounts. Foreign currency account holders are required to pay fees up to 2% of the foreign currency deposit amount, and do not have an opportunity to earn interest in accordance with CBM rules. Local banks also have exchange rates higher than regular market rates if the deposit to the foreign currency account is in local currency. Withdrawal fees for foreign currency accounts are either USD 1 or MMK 1000 depending on the bank. According to CBM Directive No. (16/2015), foreign account holders can withdraw USD 5,000 twice a week; government organizations, embassies, international organizations and foreign investment companies may withdraw more than the permitted amounts upon presenting an offi cial management letter with explanation for intended use and approval from the bank branch manager. 63

Chapter 4 – Services of the Banking Sector 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. However, banks face fierce competition from Mobile Financial Service Providers (MFSPs) such as OK Dollar, Wave Money and M-Pitesan, which, under the 2016 Mobile Financial Service Regulations, are only allowed to provide domestic remittance services to the public. MFSP accounts can be easily opened with MFSPs mobile applications without the need to open bank accounts, and retail customers can send up to MMK 500,000 per day between accounts from the same MFSP with no remittance fees charged. Although banks have been recently expanding their own networks through agent banking, convenience store chains and other means for their mobile payment platforms, it still is difficult to compete with the established expansive networks of MFSPs’ agents, ranging from 24/7 convenience stores, mobile phone service shops to various types of retail stores. 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 providers. After 4 years of being active in Myanmar and providing only inward remittances, Western Union, for example, has launched outbound money remittance services in June 2016 – although with a transaction limitation of USD 3,000 per day and maximum USD 10,000 per year and customer. 77 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. 65

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 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 13% per year (as per CBM Directive No. 11/2011) and additional service charges, such as joining fees and annual fees, are imposed. 67

Chapter 4 – Services of the Banking Sector Financial exclusion still is a big challenge for the development of Myanmar, especially in rural areas. In 2017, less than 26% of the Myanmar population aged 15 years or older had an account at a formal financial institution. 79 However, due to the advancement of mobile financial services financial inclusion is increasing. According to the directives and regulations issued by the CBM, there are two models for operating mobile financial services in Myanmar: Bank-led Mobile Banking Services and Mobile Financial Service Providers. Bank-led Mobile Banking Services – CBM directive (No.4/2013) allows banks to operate mobile banking services under a bank-led model. Under this model, banks are required to obtain 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), government post offices and MNOs as their cash points, agents or business partners. CBM allowed banks the following mobile banking services: a b c d e f Domestic remittances and international inward remittances; Debiting and crediting of cash in local currency via agents, bank branches, ATMs and mobile operator branches; Payments from individuals to business and vice versa; Payments from government to individuals and vice versa; Payments between individuals; and Repayment of microfinance loans and other small scale payments like insurance premium payments. For bank-led mobile banking services, the transaction limit is MMK 500,000 per transaction and MMK 1 million per day, with no more than three transactions in a day. 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, as shown in the following figure: AGD Pay (Asia Green Deveopment Bank), CB Pay (Cooperative Bank), KBZ Pay (Kanbawza Bank), AYA mBanking (Ayerwaddy Bank) and MAB Mobile Banking (Myan- mar Apex Bank). These platforms are linked with the respective bank accounts and can provide remittance services, cash in and out services, within bank person-to-person payments, mobile top-up and bill payment services. Mobile Financial Service Providers (MFSPs) – 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 addi- tional cash and liquidity management services for MFSPs. To apply for a MFSP license, the applicant needs to fulfil certain requirements, such as the provision of minimum capital of 3 billion MMK. 80 In December 2017, the CBM raised the maximum amount of a single transaction by level 2 customers from 200,000 Kyats to 500,000 Kyats and changed the cumulative transaction limits per month from 5 million Kyats to 12.5 million Kyats. As of August 2018, there are three licensed MFSPs in Myanmar, namely Wave Money, OK Dollar and M-Pitesan. In October 2016, Wave Money became the first MFSP to acquire a license under the non-bank financial institution licensing regime. As of August 2018, it is owned by four shareholders: Telenor (51%), Yoma Strategic Holdings (34%), First Myanmar Investment (10%) and Yoma bank (5%). Wave Money expanded its agent network from 5,000 in early 2017 69

Chapter 4 – Services of the Banking Sector In addition, Myanmar government agencies are also planning to partner with MFSPs to improve their payment services. With such rapid developments, it is expected that MFSPs will soon be expanding their products to international remittances, loan payments and other forms of fin-tech services. However, until now CBM only allows MFSPs to operate the products listed in the 2016 MFSP regulations, and unlike other countries, Myanmar does not run a regulatory sandbox to test the risks and viability of new fin-tech products before going to market. Moreover, financial inclusion is impeded by a lack of interoperability that would allow transactions between accounts from different MFSPs, although it promotes fierce compe- tition between MFSPs. A new roadmap for financial inclusion (2018–2022) by Making Access Possible (MAP) 82 will be submit- ted to the Myanmar cabinet by the end of 2018. Amongst others, it will propose to create a digital services working group managed by CBM and the Financial Regulatory Department (FRD). This work- ing group will include representatives of private financial institutions, and screen and approve digital financial products case by case. to approximately 33,000 by September 2018. With over 2 million customers it holds the biggest market share among the three MFSPs. OK Dollar, owned by Internet Wallet Limited, operated without a license for more than a year and made headlines in the news for violating initial terms and conditions. However, there was no penalty from the regulators and OK Dollar was finally granted a MFSP license in August 2017. OK dollar currently has approximately 1 million registered users, making it the second largest MFSP out of three. M-Pitesan was launched by Ooredoo in September 2017. Within the first four months of its operation, the platform has already signed up 5,000 agents. MPT, the state-owned Telecom is also in the process of getting a MFSP license and will be launching its own products very soon. MFSPs have proven to be very innovative and rapidly expanded their networks and customer bases. Wave Money garnered a monthly revenue growth of 22% from January 2017 to January 2018, with 30% growth in transfer volume in the same period. 81 It intro- duced payment services for “Grab” drivers (online call taxis) who can take out their commission fees at Wave Money outlets. It has also partnered up with the World Food Programme of the United Nations to distribute monthly stipends to refugee families from the Kachin State border. OK Dollar has recently launched OK Taxi, where customers can request taxis through the OK Taxi app and pay the driver directly from their OK Dollar account. The drivers don’t need to pay any commission fees unlike other Taxi ser- vices, such as Grab and Oway. 71

Chapter 5 – The Regional Perspective Lending-deposit spread (%), 2010–2016 Malaysia Indonesia Thailand Myanmar Vietnam Philippines 7 6 5 4 3 2 1 0 2010 2011 2012 2013 2014 2015 2016 Source: Global Financial Development Database July 2018, World Bank Figure 17 Lending-deposit spread (%) in selected countries between 2010 and 2016 interest payments directly decrease banks’ net interest incomes and therefore also make NIM volatile because banks in Myanmar still rely on cash based accounting, as opposed to accrual based accounting. The loan-deposit-ratio of Myanmar is at a compara- tively low value (below 60%, cf. figure 18), showing the banks’ difficulties or unwillingness to convert deposits into loans. Obviously, a low loan-deposit ratio does not only affect a bank’s profitability but also the opportunity for growth in the private sector as it translates into less funds available for the private sector as long as domestic banks struggle to increase lending. Reliable data on non-performing loans (NPL) in Myanmar is extremely difficult to obtain. Banks are typically under-reporting their NPLs due to the culture of using overdrafts. The nature of overdraft usage in Myanmar means that non-performing assets often don’t get classified according to the CBM’s rules for provisioning (hence prompting the recent CBM directive on overdraft conversion). The status of the banking sector overdraft conversion is also not publicly available, although the first conversion deadline has passed. Large-exposure loans (often also related party loans) are one of the big challenges facing the banking sector in Myanmar. Recovering from these NPLs will be as much a political challenge as a technical one. A decrease in loan default rates and an increase in loan-deposit-ratios would increase the profitability of Myanmar banks. So would potentially also the liberalization of interest rates. In a country where a credit bureau is not yet in operation and financial figures provided by potential borrowers are often inaccurate, lending is per se very risky for banks and the potential profit margins can quickly vanish due 75

Chapter 5 – The Regional Perspective 120 100 80 60 40 20 0 Cambodia Indonesia Lao PDR* Malaysia Myanmar Philippines Thailand Vietnam Source: Global Financial Development Database June 2017, World Bank Figure 19 Cost-Income ratios (%) for selected countries in 2015 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 is also likely the result of high rates of defaults on interest pay- ments 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, the banks’ assets are not efficiently used to generate profit, 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 inefficient branches. 77

Chapter 5 – The Regional Perspective The push for fi nancial integration within the ASEAN framework has been on the political agenda since the Asian fi nancial crisis in 1997. However it took six years until the fi nance ministers of the ASEAN member states made a fi rst concrete step by agreeing on The Roadmap for Monetary and Financial Inte- gration in ASEAN. 86 Four years later, in 2007, the leaders of the ASEAN countries declared their intention to establish the ASEAN Economic Community (AEC) by 2015 in order to facilitate greater trade and investment fl ows in the region. For this purpose, they agreed on the AEC Blueprint, which outlines the liberalisation of trade and services at a regional scale, including fi nancial services. Specifi c goals set out under the AEC Blue- print include the progressive removal of restrictions on intra-regional provision of fi nancial services, harmonisation of regional capital market standards and capacity development support for ASEAN capital markets, mutual recognition of qualifi cations of fi nancial sector professionals, liberalization of capital accounts through the dismantling of account restrictions, and harmonisation of payments and settlements systems. 87 In 2011, the ASEAN Financial Integration Framework (AFIF) was agreed upon as a general approach to the fi nancial sector liberalisation and integration initia- tives under the AEC. This framework aims at having a semi-integrated fi nancial region by 2020, in which each member state would be allowed to defi ne its own milestones to achieve the common end goal of fi nancial integration. 88 As part of the AFIF, central bank governors of ASEAN member states created the ASEAN Banking Integra- tion Framework (ABIF) in December of 2014. 89 The ABIF aims at providing greater fi nancial stability in the region and achieving multilateral liberalisation in the banking sector by 2020. 90 In this context, ASEAN member countries have adopted the scheme of Qualifi ed ASEAN Banks (QAB), in which a bank qualifi ed in one jurisdiction will receive equal treatment in the others. To recognize the different levels of readiness among member states, the ABIF process specifi es two stages: a multilateral stage and a bilateral one. The multilateral stage will establish ASEAN-wide guidelines, while the bilateral stage involves negotiations between individual countries with regard to the admission of QABs in each other’s jurisdictions. Moreover, ABIF will be implemented at two speeds: fi rst among the fi ve larger ASEAN economies (Singapore, Thailand, Malaysia, Indonesia, and Philippines, which are dubbed ASEAN-5), and later including the other fi ve member countries. 91 In this connection, the ASEAN-5 should each have at least one QAB deal with bilateral agreement by 2018, and all other ASEAN countries should have one deal near completion by 2020. 92 Due to the disparity of economic and fi nancial sector development between the ten ASEAN countries, there are some diffi culties in the implementation of ABIF, especially in establishing the necessary precon- ditions for integration. Therefore, a high level committee (the ASEAN Senior Level Committee on Financial Integration, SLC) was established by the central bank governors of the member states to supervise the fi nancial integration implementation plan and the implementation process itself. The SLC agreed on important issues, including the need to form a group of banking experts, comprising the ASEAN Banking/Prudential Directors. This banking expert group serves as a task force which prepares the fi nancial integration goals and undertakes the specifi c and highly technical works, like setting priority actions and negotiating standard criteria for QABs. 93 For successful implementation of the ABIF, the central banks of the ASEAN member states have already made an agreement on four preconditions: (i) harmonising domestic regulations, (ii) building infrastructure to stabilise the fi nancial sectors, (iii) developing the banking capabilities of the so called BCLMV states (Brunei, Cambodia, Laos, Myanmar and Vietnam), and (iv) determining the criteria of QABs allowed to operate in all ASEAN member countries. 94 While fi nancial sector integration within the ABIF context promises obvious advantages for individual banks, customers and national economies – e.g., improved access to foreign markets, more foreign direct investment, stimulation of economic growth, 79

Chapter 5 – The Regional Perspective these meetings are not publicly available; however, it can be inferred that based on Thailand’s regulatory requirements there is a large capital adequacy gap between Myanmar and Thai banks. Until Myanmar banks can achieve the more conservative Thai prudential requirements, it is unlikely that Myanmar banks will be able to operate in Thailand. To penetrate the regional or international markets, the country’s current Basel Framework and level of IFRS compliance become crucial benchmarks for banks. The CBM has been implementing the Basel core principles and capital ratios that are partially in line with Basel II, whereas some ASEAN countries like Indonesia, Singapore, Thailand, Malaysia, and Philippines have fully implemented the Basel II framework and are focusing on Basel III implemen- tation. 100 The financial reporting framework in Myanmar’s banking sector is also in a slow transition. Although the Myanmar Accountancy Council has mandated IFRS compliance by 2022 accounting practices are not consistently applied in the banking sector. There are significant differences between prevailing accounting and prudential regulations in Myanmar’s banking sector and current IFRS. 101 This presents a huge barrier for Myanmar banks to get the QAB status. 81

Chapter 6 – Outlook will happen again in the future. In order to protect the overall stability of Myanmar’s banking system and to avoid contagion rule based measures should be employed to ring-fence any idiosyncratic risk case. Profitability of banks is low as well. Reasons high- lighted in this report are: very low deposit into credit conversion rate, This report provides details about the current banking structure in Myanmar. Large and systemi- cally important state own banks, a few large com- mercial banks, and numerous small private banks are the main pillars of the system. Due to first steps of liberalization a growing number of foreign banks with strong equity bases but restricted scope of operations and a rather small share of total banking assets have entered the market. The total asset to GDP ratio of the Myanmar banking sector is still low, growth is strong though. The domestic credit to GDP ratio is correspondingly very low and additionally indicates that banks hold a high proportion of their assets in cash, especially the state owned banks. These findings correlate with the very low loan to deposit ratio of the banking system. This may indicate uncertainty aspects – banks prefer to have a large share of assets in cash in order to be liquid in a volatile environment and due to the lack of attractive lending opportunities. The strict interest rate regime imposed by the CBM and other non- market oriented restrictions on the credit market still prevail and prevent banks to unfold their full lending potential. Also, worries about inflation and the outside value of the national currency (mainly against the US dollar) induce caution in growing the credit portfolio. However, the overall volume of credit is growing faster than the GDP, showing that banks increasingly fulfill their economic role. Risk adjusted growth and capacity oriented expansion of bank services, especially the provision of credit should have priority above a fast and non-risk adjusted expansion. high non-performing loan ratios, regulated interest rate and overall credit regime resulting in a relatively low net income margin, poor efficiency, especially in state owned banks, and very high dependency on interest related busi- ness (credits) and subsequently a very small revenue stream coming from service fees. All of these factors lead to a cost-income ratio of more than 100%. For several years a global trend in the banking industry is obvious: the post crisis overall low interest rate environment of the leading currencies (US dollar and Euro) has increased the dependency on interest related businesses. Still the level of interest based incomes is under pressure. Other sources of revenue shape the capital markets (e.g., issuing and trading of financial products, mergers and acquisitions, and corporate finance) and provision based services like payments, credit cards or other additional services could not compensate this downturn. Myanmar cannot be an exemption to these global trends, even if its banking industry is only partially integrated in the global finance industry. However, a cost-income ratio of more than 100% is certainly not sustainable and action must be taken to bring that important indicator down. A few private banks already prove that it is possible and may be used as benchmarks for other banks. Globally, after the financial crisis in 2008 banks have been going through a period of adjustment. In mature economies, many financial institutions face low profitability and a decrease of their market capitalization, accompanied by lower employment and decreasing salaries. In Myanmar, the economic and regulatory environment remains challenging. The resulting better profitability of banks would allow for a rise of the equity base and prepare the banks better for national or international shocks from whatever angle they may come. Strong growth of the banking industry as a result of the growing economy of Myanmar and a comparatively low net income margin (measured against the Myanmar risk 85

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Annex Annex 1: The legislative process in Myanmar The process of Government Bills (Public Bills) Step 1 Under Section 100 (a) of the Constitution, the Union level organizations or line ministries have the right to submit the Bills relating to matters they administered. The line ministry initiates a Bill by obtaining opinions of legal and technical experts. As a first step, the ministry prepares the proposed legislation in Burmese and sends the draft bill to the Union Attorney General’s Office for opinions and recommendations. Step 2 The Union Attorney General’s Office reviews the draft Bill prepared by the line ministry and checks its format, wording and usage of legal and technical terms in the draft. Then the draft Bill is sent back to the line ministry with the recommendations of Union Attorney General’s Office. The line ministry rewrites the Bill. Sometimes, the draft Bill has to be rewritten again and again by taking into consideration all relevant facts and recommen- dations of respective stakeholders. After the draft Bill has been finalized, the Ministry concerned submits it to the Cabinet for its consideration and approval. The Cabinet considers it carefully and submits it to the Pyidaungsu Hluttaw (Union Parliament). Step 3 The Speaker of Union Parliament (Pyidaungsu Hluttaw) receives the Bill from the government and decides which house (either Lower House or Upper House) to start debating the draft. If the Pyithu Hluttaw (Lower House) receives the Bill from the Speaker, the Bill Committee of the Lower House makes necessary prepara- tions for submitting the Bill to the plenary session of the parliamentary assembly. First, it organizes meetings of discussion with relevant authorities and stakeholders including international non-government organizations (INGOS) and civil society organizations to consolidate different opinions on the Draft Bill. At this stage, public opinion is sought through public media. The Bill Committee prepares a report on the draft Bill by consolidating different opinion and views from different sectors. Step 4 On a fixed date, the report of the Bill Committee together with the original Bill is submitted to the Pyuthu Hluttaw (Lower House). One of the committee members submits the Bill before the parliamentary session. After submitting the Bill, Members of Parliament, who are willing to make suggestions on the Bill are invited by the Speaker. The Speaker fixes the date for discussion of the Bill. At the scheduled session, the Bill is thor- oughly discussed and resolutions are made on the discussions. Step 5 The Bill passed by the Pyithu Hluttaw (Lower House) is sent to the Amyotha Hluttaw (Upper House) for discus- sion and resolution. At this stage, the Amyotha Hluttaw may agree or disagree with amendments in accord with the resolution of the Pyithu Hluttaw. The Amyotha Hluttaw can make amendments in the Bill. The Bill shall be sent back to the Pyithu Hluttaw with the resolution of the Amyotha Hluttaw. If the Pyithu Hluttaw accepts the amendments of the Amyotha Hluttaw or if both Houses agree on all points in the Bill, the Bill is deemed to be approved by the Pyidaungsu Hluttaw (Union Parliament), which represents both Houses. The Bill is submitted to the Speaker of the Pyidaungsu Hluttaw for further process. 93

Annex PRESIDENT Submit to the President for approval/remarks Feedback from the President with comments within 14 days JOINT BIll COMMITTEE Submit for findings and remarks Disagree m ent betw een L H and U H UNION PARlIAMENT D is a g r e e m Submit to Upper House to discuss d U H w e e n L H a n e n t b e t UPPER HOUSE (Amyotha Hluttaw) Submit to Union Parliament after the Bill has been approved by both Houses to make record lOwER HOUSE (Pyithu Hluttaw) S t a r t t o d is c u s s a t U p p e r H o u s e Submit to Lower House to discuss Start to discuss at Lo w er H ouse SPEAKER OF UNION PARlIAMENT Entitle to submit the Bill Members of Parliament at Union Parliament, Union Government/Union Level Entities, Committees and Commission from Parliament (Hluttaws) Figure 20 The legislative process in Myanmar 95

Annex Liquidity Item Requirement Reference Minimum reserve requirement ≥ 5% of total deposit Directive No. (10/2015) Liquidity ratio (net liquid assets, % of volatile liabilities) ≥ 20% Notification No. (19/2017) Loan-to-deposit ratio 70%–80% of total deposit Directive No. (1/2008) 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 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) Requirement 10% p.a. 8% p.a. 13% p.a. Notification No. (17/2017) Notification No. (17/2017) Directive No. (7/2017) Reference Directive No. 10/2011 Directive No. 11/2011 Within 2% and 6% p.a. (MBA, 2017)* Requirement Reference maximum 50% of forced sale value** - maximum 80% of the assessed value Directive No. (27/2012) Specific provision Overdraft ratio Interest rate Item CBM reference rate Minimum Deposit rate Minimum lending rate Call deposit interest Type of collateral Item Land & Building Treasure bond Saving and Fixed deposit maximum 80% of outstanding savings 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 * this rate was determined by a discussion of the stakeholders of the Myanmar Bank of Association (MBA). ** the banks have already been instructed to make loans with collaterals since 2008 so that land and buildings are taken as securities, and the loan amount may vary among the banks. 97

Annex Directive No. 2/2017 January 26, 2017 License fee, charges and annual fee • License fee - 0.1% of the paid-up capi- tal • Charges for opening branch 500,000 MMK • Annual fees for Local Banks - 0.1% of paid-up capital as at 2nd of April • Annual fees for Foreign Banks - 0.1% of paid-up capital (US$ 75 million) Memorandum Mababa- 1/111(FIS)/216/2017 February 20,2017 Instruction on Loan Interest Rate Collection • Maximum loan interest rate must be 13% p.a. including services charges Directive No. 4/2017 March 7, 2017 Instruction on Credit Risk Ma- nagement • To make the Credit Risk Management Framework covering identification, measuring, assessing, monitoring, reporting and controlling or mitigation • To report policies and procedures of credit risk management to CBM Directive No. 5/2017 March 7, 2017 2017 Directive No.6/2017 March 7, 2017 Dividend Payment • A bank shall only pay dividends if - CAR is maintained 8% in current financial year and last two years - NPL/total loan ratio is less than 5% - meet general provision and specific provision Revaluation of Assets • To revalue the Bank‘s Assets: Notification 5/2017 March 31, 2017 Regulation on establishment of Credit Bureau and Credit Reporting System Notification No. 16/2017 July 7, 2017 Capital Adequacy Ratio (CAR) Regulation - the assets to be revalued should be under the name of the Bank - revaluation can be done by profes- sionals from internationally recog- nized valuation firm - revaluation of assets may be done once in five-year term • Regulation on establishment of Credit Bureau and Credit Reporting System • Regulatory CAR ratio 8% Tire 1 (Core Capital) ≥ 4% Tire 2 (Supplementary Capital) ≤ 4% 99

Directive No. 7/2017 November 24 2017 Implementation of Asset Classification and Provisioning Regulation 2017 Directive no. 8/2017 November 30, 2017 Amendment on Para 17 (c) of Mobile Financial Services Regulation Directive No. 10/2017 December 8, 2017 Amendment of Liquidity Ratio Calculation Annex • Banks can extent overdrafts and loans with maximum maturity of 1 year and 3 years respectively. Additionally, banks are encouraged to develop new lending products that consider the business cycle and cash pattern of the borrowers. • Banks are allowed to convert the outstanding overdrafts into term loans maximum maturity of 3 years. How- ever, they are not allowed to convert non-performing overdrafts into term loans • Overdraft reducing schedule is as follows: (1) as of July 6, 2018 50% of total outstanding loan (2) as of July 6, 2019 30% of total outstanding loan (3) as of July 6, 2020 20 % of total outstanding loan • Operating limit amount amendment in daily and monthly. • 50% of total value of Treasury Bonds with more than one year maturity shall be included in calculation. Permission to foreign banks to expand related banking services for export financing • Foreign banks are allowed to expand related banking services for export financing To perform Foreign Exchange Account Opening in accordance with Law Directive No. 9/2017 December 8, 2017 Directive 2/2016 March 18, 2016 Regulation 01/03-2016 March 30, 2016 Mobile Financial Services Regulation 2016 Directive 3/2016 April 8, 2016 Permission to perform Bilateral Interbank FX transactions • If individual and company of the customers of the bank have overseas FE account, bank statements and balance are needed to report CBM in accordance with Section 14 and 15 for Foreign Exchange Management Law. • See in Mobile Financial Services regu- lation • Bilateral interbank FX transactions such as FX forward and FX SWAP tran- sactions are permitted to perform with 3 currencies up to 1 year. • Settlement can be made through CBM-NET for Myanmar currency transaction and CBM NET or corres- pondent banks for foreign transaction. 101

Directive No.16/2015 May 27, 2015 Foreign Exchange Withdrawal Limit Annex • Instead of withdrawal once in USD 10,000, it is substituted with once in USD 5,000 twice a week. For > 5,000 withdrawal, transfer method can be applied. • For Govt, embassies, UN, NGO, any withdrawal can be made with strong evidence. Directive No. 17/2015 May 27, 2015 Permission to trade foreign currency • Allow to sell and buy two foreign cur- rencies – Ringgit and Baht Mababa-1/111 (FEMD)/ (904/2015) May 28, 2015 2015 To use Myanmar Kyat for Dome- stic Payments/ settlement • To use Myanmar Kyat for buying and selling goods and services of respective Ministries, the governments of States/ Regions Directive No. 18/2015 June 17, 2015 To sell Foreign Currency for im- ports via banks • To sell foreign currency for imports especially oil and edible oil via banks Directive 21/2015 October 2, 2015 Directive No. 22/2015 December 22, 2015 Directives on Due Diligence on Anti-Money Laundering and Counter Financing on Terrorist • See in Directives on Due Diligence on Anti-Money Laundering and Counter Financing on Terrorist To transact Foreign currency for all imported commodities via Foreign Exchange Auction and Interbank Foreign Exchange Market • To transact foreign currency for all im- ported commodities including oil and edible oil via FE Auction and Interbank FE market Regulation No. 1/2014 January 2, 2014 MFI Development Bank Regula- tions • See in MFI Development Bank regula- tions FEMD 1/2014 February 7, 2014 Currency Shipment Regulation No. 2/2014 February 18,2014 Construction and Housing Deve- lopment Bank Regulation CBM February 28, 2014 Appointment of Foreign Profes- sionals 2014 BS: March 10, 2014 Issuance of Bank Guarantee, Bid Bond, etc. BS: April 2, 2014 Margin taken for L/C • Authorized dealer (AD) banks are permitted to make currency shipment individually or collectively upon appro- val from the CBM. • See in Regulation on Construction and Housing Development Bank Regulati- on • Foreigner may be appointed as Advisor or Consultants • As to a permanent staff, foreigner shall be appointed as General Manager, the highest • AD banks may issue the bank guaran- tee, bid bond, etc. for loan and busi- ness. • AD banks may not take 100% margin for L/C opening. It is negotiable with the customer Notification 3/2014 July 30, 2014 Regulation relating to set up Farmer Development Bank • Seen in regulation relating to setup Farmer Development Bank Notification No. 7/2014 September 30, 2014 Foreign Exchange Management Regulation • Regulations on Foreign Exchange Management 103

Directive No. 2/2013 August 2, 2013 Disbursement of short, medium and long-term loans Memorandum Mababha -1/111(953/2013) December 4, 2013 Registration No. 4380/1469-KaKa/2011- 2012 January 13, 2012 BS: 26/2012 March 22, 2012 2013 2012 Directive No.16/2012 April 3, 2012 CBM Reference rate FEMD: 3/2012 May 17, 2012 Holding Foreign Exchange To follow the minimum and ma- ximum interest rate limit Loan disbursement against Land & Building • Bank should not disburse loans against prosecuted or disputed land and buil- dings Interbank Borrowing Annex • Authorized deal banks may engage in borrowing or raising of money and extent the long-term loan with these fund • If AD banks receive long-term depo- sits, long-term loan can be extended accordingly • For extending the long-term loans, AD banks shall obtain the prior permission from the CBM • Financial Institutions shall perform borrowing and raising of money. Based on that, long-term loan can be exten- ded. • If FI receives long-term deposits, long- term loan can be extended accordingly. • Approval from CBM is needed for disbursement of long-term loan. • The maximum lending interest rate shall not exceed 13% per annum inclu- ding all service changes. Borrower Bank • To address the minimum reserve requi- rement and liquidity short fall Lender Bank • Interest rate is negotiable between lending and borrowing bank but not more than the CBM prime rate • Treat as loan • If loan period is more than 14 days, the CBM to be informed • More than 90 days loan period is not allowed • Loan should not be more than 20% of core capital • With collateral or without collateral is depend on BOD’s decision • To conduct buying and selling foreign exchange within plus or minus 0.3% of CBM reference rate • Nationals are allowed to hold legal FE earning maximum US$ 10,000 or equi- valent currencies for 3 months. After 3 months the balance shall be deposited with banks 105

Annex Directive No. 8/2011 December 14, 2011 Paid-up capital with Foreign Exchange • In addition to original paid-up capital in Myanmar Kyat for ADL, USD 5 Mil is set as additional paid-up capital Directive No. 9/2011 December 14, 2011 Directions for Domestic Account Transfer for Foreign Exchange • Directions for internal accounting pro- cess with regards to Foreign Exchange Directive No. 10/2011 December 27, 2011 Setting CBM bank rate 10% p.a.is capped as bank rate of CBM 2011 Directive No. 11/2011 December 27, 2011 Amendment to deposit and len- ding interest rates Directive No. 24/2011 December 27,2011 Loan secured by saving deposits • Savings interest should not be less than 2% of the capped rate. Lending interest should not be more than 13% p.a. • Savings, saving certificates and fixed deposits can be accepted as collateral and loan can be extended up to 80% of the deposit balance. 2010 Directive No. 7/2010 Guidelines on AML/CFT • See in guidelines on AML/CFT May 20,2010 Directive No. 4/2009 June 3,2009 2009 Memorandum June 3, 2009 Additional criteria for STR, Sus- picious Transaction Report, check list • Additional 15 criteria for STR Check list where the former 21 check criteria were under directives number 6/2006 Guideline on Due Diligence on Anti-Money Laundering and Counter Financing on Terrorist • See the guideline 2008 2005 2004 Directive No. 1/2008 December 30,2008 Banking operation instructions for private banks • General reserve – 25% of the net pro- fits and until it reaches to 100% of the total paid-up capital • General provision – 2% of total out- standing loans • Loan to deposit ratio – 70% – 80% Directive No.1/2005 May 26, 2005 Instruction on issuing loans • See in the instruction on issuing loans Memorandum January 30, 2004 To record comprehensive infor- mation of customers • See in memorandum Source: CBM 107

Annex Tier KYC/CDD Level 1 (individuals only) Level 2 (individuals only) Level 3 (for registered businesses only) presentation of ID (the national ID is first priority, driving license is second priority or passport) is required if and when necessary SIM registration or ((the national ID is first priority, driving license is se- cond priority or passport) is required to submit Business registration certificate, iden- tification requirements for opening bank accounts Cumulative Transaction limits Per Day Cumulative Transaction limits Per Month Maximum Balance limit 50,000 Kyat 1 million Kyat 200,000 Kyat 200,000 Kyat 5 million Kyat 1 million Kyat 1 million Kyat 50 million Kyat 10 million Kyat Source: Regulations on Mobile Financial Services (CBM, 2016) 109

Annex • The bank submits to the CBM a list of all overdraft facilities (amounting to at least MMK 5 billion or 10% of core capital, whichever is lower) indicating whether it is NPL or not. If NPL, indicate number of days past due and whether it is a related party lending or not; if related party indicate relationship • The bank submits the loan amortization schedule and a brief assessment of the borrower’s credit worthiness. All banks are required to submit a copy of their Asset-Liability Management Framework and a list of large overdraft facilities. Quarterly progress reports on converted overdrafts shall be submitted to CBM not later than ten days after the end of each reference quarter. Volume of bank’s overdraft facilities in percent of total outstanding loan portfolio shall be reduced in accordance with the following schedule. Deadline (a) as of July 6, 2018 (b) as of July 6, 2019 (c) as of July 6, 2020 as % of total outstanding loan portfolio 50% 30% 20% All loans and overdrafts granted after July 7, 2017, shall strictly follow the Asset Classification and Provisioning Regulation. By issuing the Directive, the monetary authority encourages local banks to develop new lending products with repayment terms that consider the business cycle and cash flow pattern of the borrower. 111

Annex Annex 7: Institutions offering diploma and certified programs Name of Institution Myanmar Institute of Banking Courses offered Diploma in Banking Myanmar Financial Centre (affiliated with the Retail Banking Academy, UK & Project Management Institute) Bridging Program for recent graduates (4 months theory + 3 months internship) Modules include: Ethics in banking, principles of banking, products & channels, bank accoun- ting, central bank regulation and customer service. Certified Retail Banker Certified Cards and Payments Professional Certified Wealth Manager Certified Branch Manager Credit Performance Certified Professional Several individual courses on (SME) lending, marketing, financial analysis and management Strategy First Institute (Affiliated with the Association of Accounting Technicians (AAT), UK) Financial Management Accounting Auditing & Taxation Myanmar Institute of Business (Affiliated with Oxford Brookes University & London School of Business and Finance) Financial Analysis Diploma in (advanced) Accounting and Business STI Myanmar University (Advanced) Diploma in Finance and Banking Career Core Institute (Partnered with Reading College, UK) Diploma in Banking Operation Management Diploma in Financial & Management Accounting Myanmar International Business Academy (Affiliated with Chartered Institute for Securities & Investment, CISI, UK and City of Oxford College) Fundamentals of Financial Services International Introduction to Securities Investment Diploma in Banking & Financial Services Matrix Institute of Professionals (Affiliated with Chartered Institute for Securities & Investment, CISI, UK and ICAEW, UK) CFA Level 1 Certificate in International Trade and Finance Diploma in Corporate Finance Myanmar Institute of Finance (MIF) (Securities & Investment Commission of Myanmar certified; CISI accredited) Nay Lin Aung – Finance and Accountancy Academy (Offers Pearson LCCI and ACCA qualifications) Certificate in Credit Analysis Certificate in Modern Corporate Finance Certificate in Accounting Certificate Risk in Financial services Certificate in Book-keeping and Accounts Diploma in Accounting & Finance (Advanced) Diploma in Accounting & Business Source: Inception Report, Frankfurt School of Finance & Management, 2018 113

Endnotes Endnotes 1 cf. Myanmar country profiles on the websites of 20 World Bank, 2017 World Bank and Asian Development Bank 21 OAG, 2016 2 All data in this box, unless otherwise quoted, are based on the World Development Indicators 2017 (downloaded from World Bank website) 3 http://hdr.undp.org/en/countries/profiles/MMR 4 Global Financial Development Database (World Bank) 22 The February 2003 banking crisis was a major bank run on private banks, triggered by the collapse of small financial enterprises and rumours about liquidity shortages of major private banks. It led to the collapse of three major banks, economic recession and hardship for many people. 5 https://www.adb.org/countries/myanmar/ 23 IMF, 2018 economy#tabs-1-2 24 CBM Quarterly Financial Statistics, Vol. IV 2017 6 https://freecurrencyrates.com/en/exchange-rate- history/USD-MMK/2018 7 GIZ, 2016 8 IMF, 2015 25 IMF, 2017 26 GIZ, 2016 27 Thant, 2017 9 For more information on the legislative process 28 Milken Institute, 2017 refer to Annex 1 10 Information provided by CBM 11 GIZ, 2015 12 Directive No. FE1/452 (August 13, 2018) 13 Capital goods and intermediate goods consti- tuted more than two thirds of the total imports in the financial year 2016–2017 (CSO, 2017) 14 FATF on Money Laundering, 22 June 2001 15 FATF, 2004, p. 11 16 MAC notification 2/2009 17 MAC notification 1/2010 18 MAC Notification 1/2009 19 MAC Notification 3/2010 29 Myanma Alin, 20.10.2018 30 IMF, 2017 31 IMF, 2018 32 CBM, 2018 33 World Bank, 2018 34 World Bank, 2016a 35 CBM, 2018 36 cf. Micco et al., 2007 37 Htut, 2016 38 IMF, 2015 39 Kyaw, 2015a; Kyaw, 2015b 115

Endnotes 75 Myanmar Times, July 2018 92 DBS research, 2016; Cuaresma, 2017 76 World Bank, 2016b 93 Wihardja, 2013 77 Tun, 2016 78 Tanner, 2018 94 Yamanaka, 2013 95 Standard & Poor’s, 2015 79 Global Financial Development Database (World 96 ibid Bank website) 80 cf. annex 4 81 Lynn, 2018 97 IMF, 2015 98 ASEAN Finance Ministers and Central Bank Governors meeting, March 21, 2015 82 In Myanmar, MAP was jointly funded by the 99 Internal CBM discussions, 2017 100 Bank of Indonesia, 2016 101 OAG, 2016 United Nations Capital Development Fund (UNCDF) and the Livelihoods and Food Security Trust Fund (LIFT). Globally, MAP also receives funds from the Partnership Framework on Inclusive Growth and Sustainable Development (PFIS), a partnership framework agreement with the Swedish International Development Coop- eration Agency (Sida). 83 https://datamarket.com/data/set/28lu/bank- noninterest-income-to-total-income#!ds=28lu!2 rqv=p&display=line 84 CBM Financial Bulletin, 2017 85 This includes the five founders, namely Indone- sia, Malaysia, the Philippines, Singapore, and Thailand, and five additional members: Brunei, Vietnam, Cambodia, Laos and Myanmar. 86 ADB, 2013 87 ibid 88 ibid 89 Bank of Indonesia, 2016 90 Wihardja, 2013 91 https://www.bis.org/publ/qtrpdf/r_qt1509z.htm 117