September 17, 2016

Building an Inclusive Financial Sector in Myanmar: The Road Ahead

By Alexandra Drees-Gross and Nagavalli Annamalai

Myanmar’s financial sector is undergoing a historic transition. It has witnessed a number of reforms and liberalizations since 2012: private banks have expanded their operations rapidly; more than 1.4 million debit cards have been issued for the first time; thousands of ATMs have been set up; and credit to the private sector has grown steadily, albeit from a low base.
The financial sector’s growth has been driven in large part by the increase in demand for financial services from the private sector. In Myanmar’s largest cities, stores are opening in shiny new malls and selling imported goods, clothing and electronics. Hotels and guest houses are bursting with tourists from all over the world, raising the demand for services, restaurants, tour guides, and handicrafts. All of these businesses and entrepreneurs need a range of financial services to operate, conduct trade and invest.
However, Myanmar’s financial sector remains inefficient, uneven, and concentrated in urban areas.  The majority of financial transactions is still conducted in cash. According to the World Bank’s FINDEX global database, approximately 95 percent of adults, including teachers and nurses, receive their salaries in cash, which is the highest ratio in the ASEAN region. One ill consequence of this is that large transactions often incur additional costs related to securely transporting bundles of cash.
The lack of an effective payments system takes its toll on many people.  For example, Daw Moe Tun, a real estate agent in Yangon, says that interbank payments often take many days to process. In fact, interbank payments are naturally only available to those who have access to the formal financial system.  Only an estimated 21 percent of Myanmar adults had a bank account in 2014, making up just a handful of Daw Moe Tun’s clients. Compared to nearly 80 percent in neighboring Malaysia or Thailand and 50 percent across the ASEAN region, Myanmar still has some of the lowest levels of financial access in the world.
Firms overwhelmingly identify a lack of access to financial services as the top obstacle to doing business; this affects all major sub-sectors, namely manufacturing, retail, and services. The result is that, no less than individuals, firms too rely heavily on money lenders, family or informal sources of credit — typically paying higher rates for access to loans and for shorter tenors.
What are potential policy options to build an inclusive financial sector?
Fortunately, there are many lessons to draw from both regionally and internationally. Thailand and Malaysia, for example, faced similar transitions and challenges in building robust and stable financial systems following the Asian Financial Crisis in 1997-1998. Both have achieved success in increasing financial access to very high levels by international standards.
In Thailand, the financial system incurred massive costs as a result of the crisis in terms of a drop in asset quality and profitability; this prompted a comprehensive emergency restructuring plan. Although Myanmar’s financial system is not in crisis, elements of the Thai restructuring experience — special audits of weak banks, followed by recapitalization, debt restructuring and corporate governance reforms — provide useful lessons. After containing the immediate crisis, the Thai authorities aggressively pursued financial regulation and supervision reforms. These reform efforts were coordinated under a Financial Sector Master Plan Phase I, running from 2004–08, which aimed to improve the financial system’s efficiency, broaden access to finance, and improve consumer protection.
Malaysia’s post-Asian Financial Crisis experience also offers good lessons in devising clear and well implemented financial sector reform plans. A Financial Sector Master Plan covering 2001–2010, led by the Bank Negara Malaysia, and a parallel Capital Market Masterplan led by the Securities Commission, supported a restructuring and consolidation of the financial sector. These master plans were underpinned by a strong regulatory and supervisory framework. Implementation of these two strategic plans enabled Malaysia to diversify and modernize its financial sector, establish a stable financial system, strengthen regulatory capacity and increase financial inclusion (access to and usage of tailored financial services).  At 92 percent, Malaysia now has achieved one of the highest levels of financial inclusion in the world.
The Government of Myanmar, together with the private sector, industry and stakeholders has recently laid the groundwork for continued modernization of its financial sector with the launch of two strategic documents, namely, the Financial Inclusion Roadmap 2015-2020 and the Myanmar Financial Sector Development Strategy (FSDS). The strategy includes a broad vision and strategic plan for building a large, more efficient and more competitive financial system over the coming years, with three broad priorities:
Strengthening financial sector legal, regulatory, and supervisory framework. The new Financial Institutions Law enacted by Parliament in January 2016 represents a major milestone in terms of strengthening the overall financial sector legal, regulatory and supervisory framework. This will certainly help to increase stability of the financial system and certainty for private sector participants while fostering competition. Amongst other things, the new Financial Institutions Law installs a comprehensive framework for the implementation of the Basel Core Principles, which are international standards for effective banking supervision; and improving soundness of the banking sector. The law also helps to level the playing field between private and state owned banks; provide adequate provisions relating to consumer protection in internet and mobile banking and e-money activities; and promote the transparency of the financial sector. Implementation of the law and strengthening banking and non-bank supervision also remains a top priority going forward. At the same time, improvements in the law in the areas of governance, insolvency procedures and non-bank financial institutions resolution will be important.
Modernizing financial sector infrastructure. Modernizing the financial sector infrastructure by reducing manual, paper-based processes, and high levels of cash transaction could help reduce costs, risks and inefficiencies as noted above. The Central Bank of Myanmar has already taken important steps in establishing the regulatory framework for mobile financial services. Globally, banks, microfinance institutions, mobile network operators, and other providers are increasingly using mobile phones and point-of-sale devices, along with networks of small-scale agents, to offer basic financial services at greater convenience and lower cost than traditional banks. This presents an important opportunity in Myanmar given that 70 percent of the poor live in rural areas, largely unserved by existing banks.
Reforming state-owned banks. Government ownership of financial institutions is typically associated with lower financial development, more financial instability, and slower economic growth. Myanmar is dominated by state-owned banks, many of which lack financial sustainability. The Government has already indicated its interest in reforming these major state-banks. In the next phase of reform, it will be important to clarify policy mandates and the objectives of state-ownership.  There are many models from which to draw, as more than 96 countries worldwide have sizable ownership stakes in financial systems as of 2013 according to the Global Financial Development Report. In Indonesia, for example, government efforts to improve corporate governance of the state-owned banks have contributed to improved financial stability since the Asian Financial Crisis.
Access to financial services is vital to reducing poverty and boosting prosperity. Financial inclusion will be central for Myanmar to succeed in its historic transformation for the benefit of its people.


Alexandra Drees-Gross is a Senior Financial Specialist and Nagavalli Annamalai is Lead Counsel at the World Bank. This op-ed is based on the World Bank Group’s policy note “Financing the Future: Building an open, modern and inclusive financial system,” prepared by Alexandra Drees-Gross, Nagavalli Annamalai, Sau Ngan Wong, Nang Htay Htay, Nataliya Mylenko, Jose de Luna Martinez, Kiyotaka Tanaka, Balakrishnan Mahadevan and Ivan Mortimer-Schutts.


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