September 04, 2016

Financial Institutions Law for a stable and modern banking system

The grand building of Yangon Stock Exchange being seen. Photo: Ye Htut Tin
The grand building of Yangon Stock Exchange being seen. Photo: Ye Htut Tin

By San Thein
Towards a stable and modern banking system

Emerging out of decades of international economic isolation, Myanmar’s banking sector with its low capability of financial intermediation finds it hard to effectively support the country’s economic development. Its main features such as cash-based payment system, collateralized bank credit, limited financial products and capacity of local bankers, underdeveloped IT system, and low banking habit of general public and their limited trust on banks are dragging down the value of banking system. To be able to effectively support the real sector of the economy, the monetary authority is trying to change the landscape of the banking sector by enacting a new Financial Institutions Law (FIL) on 25 January 2016 (Pyidaugsu Hluttaw Law No. 20). The FIL lays the foundations for promoting a more efficient and stable financial system with added supervisory power of the Central Bank of Myanmar (CBM).
The new and the old law
The new FIL replaced the old Financial Institutions of Myanmar Law enacted in 1990. Compared with the old law, the new law contains detail guidelines for both domestic and foreign financial institutions, covering all essential areas such as responsibilities, powers and objectives of the supervisory authority, and prudential regulations and requirements for all financial institutions.
In effect, the 1990 law was enacted to support the then market-oriented economic policy introduced immediately after the collapse of socialist economic system. The 1990 law paved the way for private participation in the banking sector for the first time since nationalization of all private banks in 1963. However, the main weakness of the law was that it lacked specific programs or remedial measures in dealing with banking crisis. The weakness can be found when there was a liquidity crisis in 2003. Since there were no specific guidelines in the old law, the then military government adopted stringent administrative measures to solve the problem. The bank loans were recalled prematurely, cash withdrawals and fund transfers were severely restricted, effecting real sector production that further eroded reputation of the banking sector. Following the crisis, the monetary authority over-cautiously adopted series of restrictions on banking activities to avoid the re-occurrence of similar crises. Due to these financial restrictions, the banking sector remains in the doldrums and becomes least developed in Southeast Asia.
This time the law is deliberately designed to cover detailed corrective measures for insolvent banks including appointment of administrator and rehabilitation programs for the failing bank (chapters 13 to 16). The new law promotes transparency, accountability and good corporate governance in the system. It is a comprehensive framework for effective implementation of a stable and modern banking system which would be able to support the economy to achieve a sustainable development.
Application of the Law
The law categorizes financial institutions as banks, non-bank financial institutions and scheduled institutions. Banks include commercial banks, development banks and foreign banks’ branches. Non-banks financial institutions are those rendering such services as lending, leasing, factoring, and various kinds of financial services including issuance of credit token. The law applies only to the banks and non-bank financial institutions whereas it does not apply scheduled institutions which are established under their specific laws to in order to cater for specific customers and businesses. Examples of these institutions as mentioned in the law are rural development banks, agricultural banks, microfinance institutions, credit societies and postal savings banks. However, if the Ministry of Planning & Finance upon the recommendation of the Central Bank is convinced that a schedule institution poses a threat to the stability and soundness of the banking system or the financial system as a whole, the whole or any part of the law shall apply to this institution (Section 19). This is in line with the Basel Core Principle 3 of Cooperation and collaboration which provides a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. In this way, the law would prevent the banking sector against the potential impact of the problems occurred in the scheduled institutions. The principle of cooperation and collaboration can also be seen in Section (7), where the Central Bank, for the benefit of the whole financial sector, shall coordinate with domestic and international regulators of financial institutions not governed by the law.
Significant features of the Law
It meets international best practice as embodied in the Basel Core Principles (BCP)
It is observed that the new banking law was carefully drafted to meet the requirements under the Basel Core Principles (BCP) issued by the Basel Committee on Banking Supervision. These principles are framework and minimum standards for sound supervisory practices and are considered universally applicable. These Core Principles can broadly be categorized into two groups: the first group, from Principle 1 to 13, focuses on powers, responsibilities and functions of supervisors, while the second group, Principle 14 to 29, stresses upon the importance of prudential regulations and requirements for banks. Application of these principles to the regulatory framework means that Myanmar’s banking system is committed to internationally well-recognized practice that leads to a stable and sound financial system.
It encourages the practice of good corporate governance at banks
The BCP 14 highlights the importance of corporate governance by giving supervisory authority to determine that banks and banking groups have robust corporate governance policies and processes. As the sound corporate governance underpins effective risk management and public confidence in individual banks in particular and the banking system in general, chapter (10) of the Law mentions procedure for electing board of directors and its responsibilities, which include adoption of risk management procedure and internal control system.  The presence of at least one independent non-executive director at any board meetings to have a quorum, appointment of chief executive, and establishment of various board committees such as Risk Management Committee, Credit Committee, Remuneration Committee, Audit Committee and Assets and Liability Management Committee are essential elements for corporate governance in banks.
It promotes transparency and accountability in the system
The most significant feature of the new law is its emphasis on promotion of transparency and accountability in the system. Chapter (10) outlines duties and responsibilities of the board of directors and chief executive. It suggests forming various board committees and sub-committees for effective supervision of the bank. In Chapter (11), a bank is required to promote its accounting standard to that of internationally accepted one. It has to submit its financial statements, which are certified by its chief executive and chief financial officer, to the Central Bank within three months after the close of financial year. And it has to disclose its financial statements to the public in such a manner prescribed by the Central Bank. These requirements will definitely promote transparency and accountability in the system and hence building public trust in banks.
It offers various options to resolve banks in an orderly manner if they become non-viable
The law is flexible enough to take various options to avoid bank failure. Subject to the prior written approval of the Central Bank, Section (48) of the Law allows a bank to change its ownership by acquiring all or part of business of another bank, relinquishing possession of all or part of its business, or merging with another bank. It is interesting to note that a foreign bank can acquire all or part of the business of a local bank or sell all or part of its own business in Myanmar. Chapter (13) adopts corrective measures for an insolvent bank, Chapter (14) appointment of administrator and Chapter (15) rehabilitation program. While taking these various options, the law mandates the Central Bank to make a proper supervisory approach to identify, assess and address risks emanating from banks and the banking system as a whole.
It promotes modernization of payment system
The two chapters of (18) and (19) dedicate to the development of payment system modernization. The CBM is responsible for issuing necessary regulations and instructions for the establishment of electronic payment system. The objective is to reduce reliance on cash transactions and paper-based processing of payments. Issuance of e-money and credit token is restricted to a bank and a financial institution established for that purpose. Internet banking, mobile banking and other forms of electronic banking shall be established and supervised by the Central Bank. Electronic payment system is part and parcel of payment system modernization. It promotes efficient monetary transactions with a low operational cost. It contributes to the promotion of effective central bank’s monetary management while keeping inflation under control. It also reduces the central bank’s printing costs of paper-money.
Implementation of the law
To be able to effectively implement the FIL, numerous new regulations or instructions are to be issued. The new regulations/instructions should be on acquisition of substantial interest, maximum permissible shareholding, corporate governance, internal control, risk management, etc. A well-sequenced and carefully managed implementation of the law in a level-playing field is essential for the establishment of a stable and modern banking system which supports the economy for achieving a sustainable growth.


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