Regulatory roadmap needed for banking sector reform
MYANMAR needs to establish a regulatory roadmap for the banking sector. This will give the local banks more clarity on the progress and timing of upcoming regulations, allowing them to gear up for further reform and growth.
“Carrying out regulatory reform at an unmeasured pace can cause trouble,” said Azeem Azimuddin, CFO of Ayeyarwady Bank, during a panel at the 2017 Myanmar Global Investment Forum in Nay Pyi Taw today.
In Myanmar, the speed at which new financial regulations were meted out by the Central Bank since 2013 had been exacerbated by the Global Financial Crisis. That resulted in mistakes that have inhibited growth.
“For example, the Yangon Stock Exchange (YSX) could have easily also been a debt capital exchange or a foreign equity exchange,” said Mr Azimuddin.
Today though, only four companies have listed on the YSX since its launch less than two years ago. Meanwhile, poor trading liquidity and falling share prices have deterred new companies from listing.
The absence of foreign participation on the exchange is one reason for the bourse’s poor performance. However, it is expected that the new Companies’ Act, which is now in the process of being reviewed and approved, will enable foreigners to trade on the exchange.
Of course, regulating the banking sector is necessary to protect consumers. But it is the timing of the regulations that has inhibited growth. “The issue is the timing of the regulations in recent years, not the regulations themselves,” said Mr Azimuddin. “If regulations are implemented when the economy is slowing, it will be deflationary,” he said.
For example, Myanmar’s new Financial Institutions Law, which requires banks to maintain five percent of all deposits as cash reserves and imposes a K20 billion capital requirement on licensees, was enacted in 2015.
The legislation was drafted to meet international standards enacted by the Basel Committee following the 2008 global financial crisis. It was drafted by the previous government with the assistance of the World Bank.
In July, the Central Bank issued the regulations to govern the conduct of the domestic banking sector. They stated that all banks must maintain a liquidity ratio above 20pc. Meanwhile, new rules on large exposure loans will cap lending to a single party at 20pc of shareholder equity. Banks will also be required to keep unsecured large exposure loan portfolios at a cumulative value below total shareholder equity.
That effectively pulled billions out of circulation at a time when businesses needed the funds to expand to meet the growing demands of its economy.
Nevertheless, the banking sector has come a long way since 2015 and after the New Central Bank Law was enacted in 2013. For example, the number of bank accounts and ATMs is rising, while mobile banking is becoming more commonplace.
“We have done a lot of work in overcoming the present regulatory background, but it has not been fast or easy. This is seen by the rest of the market as a lack of reform,” said Mr Azimuddin. “In fact, many of us are doing our best to digitise the sector. But regulatory changes are needed before things can move.”
Hal Bosher, CEO of Yoma Bank, agreed, “A regulatory enabling environment is extremely important for the banks. If you impose restrictions and controls on the sector, then there must also be an opportunity for greater capital formation as well.”
He pointed out that businesses today just need access to funds and are less worried about the cost of funding. “Even at 30pc under the microfinance institutions, people are still borrowing. We need more financial inclusion, which means providing more access to funds for people to borrow,” he said.
A steel cutter manually slices a steel pipe at his workshop in Yangon. Businesses like these are unable to upgrade to machines because access to the capital they need is limited.