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Ongoing financial reforms in Myanmar strengthen oversight of financial sector

MyanmarFinancial Services
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In the wake of sweeping reforms undertaken since 2011, Myanmars banking sector has been advancing
at a rapid pace to become safer, sounder and better regulated. The majority of banking institutions are
rising to the challenge by adopting international best practices, especially in terms of accountancy, and
investing in systems that promise to transform the way they operate (see analysis). The push at the banks
is for International Financial Reporting Standards (IFRS) core banking systems and IFRS, Neville
Daw, director of financial institutions and strategy of Amara Investment Securities, told OBG.
Until recently banking in Myanmar was a highly controlled, state-centric, ledger-entry affair. However,
after undergoing a process of modernisation, it has become one of great opportunity. Indeed, thanks to
significant expansion into underbanked corners of the economy, growing international interest and a
series of large-scale reforms, the sector may also be one of the most promising in the world.
History
Banking began in Myanmar with the arrival of several Indian institutions early in the 19th century.
Western banks soon entered the market as well, including the Chartered Bank of India, Australia and
China in 1862 and the Hongkong and Shanghai Banking Corporation (now HSBC) in 1891.
In 1935 a central bank was formed, and for years the sector flourished. By the 1960s the country had 24
banks, of which 14 were foreign.
Then, following Myanmars adoption of a socialist economic system in 1962 all the banks in the country
were nationalised and in 1967 a single, monolithic institution was created, called the Peoples Bank of the
Union of Burma. Following a series of reforms in the 1970s the bank was split into four separate entities
the Union of Burma Bank, the Myanmar Economic Bank, the Myanmar Foreign Trade Bank and the
Myanmar Agriculture Bank. In 1990, when Myanmar began to move towards a market-based economy, a
new central bank law and a financial institutions law were passed, and private banking licences were
issued. While many banks were subsequently established, the sector faced difficulties over the next two
decades. The Asian financial crisis of 1997 and a local banking crisis in 2003, which led to bank runs and
the collapse of some institutions, slowed progress.
Sweeping reforms began again after 2011. Banks were allowed to trade in foreign currency, ATMs and
bank cards were again permitted, a payments system was developed and, most importantly, a new central
bank law was passed. Through it, the Central Bank of Myanmar (CBM) was made autonomous under the
Ministry of Finance. At last, in 2015 foreign banks were licensed to do business in the country, for the
first time since 1963. In the span of five years, therefore, the banking sector has undergone a transition as
dramatic as the countrys political one.
Improved Regulation
Reform has continued into 2016, further strengthening the sector. In January of that year, Parliament
passed the Banks and Financial Institutions Law. Under the law, minimum capital is set at MMK20bn
($16.2m), while foreign institutions are required to have capital of $75m. A total of 5% of customer
deposits must be kept in an account at the CBM, which is a reduction from the 10% previously required,
but in the past 75% could be held in Treasury bonds. A large number of the commercial banks are well
within the capital limits. For example, a report in 2015 put the capital of Kanbawza Bank (KBZ Bank) at
MMK130bn ($105.6m). However, some banks are falling short of the threshold, with smaller institutions
particularly affected.
Rules on risk management, Basel III compliance and anti-money laundering are also outlined in the law,
as well as the duties and the powers of the CBM, the process of applying for a banking licence, permitted
activities, governance, rehabilitation, electronic banking, credit information and dormant accounts.
Getting Off The Lists
Considerable progress has been made in normalising the sectors relationship with the international
community. In June 2016 Myanmar was removed from the inter-governmental Financial Action Task
Forces so-called grey list, which is a record of countries which have few or no protections in place to
guard against money laundering and the financing of terrorism. According to the Myanmar Times, the
move came after the task force conducted an on-site visit to assess Myanmars progress in its rollout of
safeguarding reforms.
This initial assessment will be followed by a more comprehensive review in 2017, the first to be carried
out since 2008. According to the Myanmar Times, ongoing reforms needed for Myanmar to be
permanently removed from the list include efforts related to the criminalisation of terrorist financing, the
freezing of suspected terrorist assets and the independence of the countrys financial intelligence unit.
Since 2012 financial exports to Myanmar have been permitted by the US government under Burma
General License 16. However, transactions with a number of banks continued to be restricted. As a result,
US banks would generally refuse to do business with any Myanmar financial institution without a US
Office of Foreign Assets Control licence. However, the US authorities have now removed almost all the
restrictions on Myanmar banks, with the US presidents October 7 Executive Order of 2016 completing
the process. Certain restrictions imposed by the Financial Crimes Enforcement Network remain, but they
have been lifted by administrative exemption.
Untapped Market
As of early 2016 the sector had 24 private banks 14 of which were permitted to deal in foreign exchange
nine foreign bank branches and 48 foreign representative offices.
Despite the high number of institutions, large segments of the economy are poorly served or not served at
all. Very few people have bank accounts, with only an estimated 20% of the population connected to
formal financial services. That number is almost 80% in Thailand. According to a study by consultancy
firm Roland Berger entitled Myanmar Banking Sector 2025: The Way Forward, the countrys banking
assets to GDP ratio was only 49% in 2014, compared with 98% in Cambodia, 128% in Thailand and
204% in Malaysia. Myanmar has far fewer banks than its regional peers. At 3.135 commercial branches
per 100,000 people it is behind Thailand (12.67), Malaysia (10.71), Vietnam (3.83), Indonesia (10.98) and
Mongolia (71.74), according to World Bank data. The world average is 13.46. Myanmar is ahead of just a
handful of other countries around the world, including Sudan, Burundi, Uganda and Afghanistan.
Geography plays a role, as much of the country is poorly connected to the urban centres. History is
relevant too. Past nationalisations and demonetisations have eroded trust in formal institutions. While it
has been decades since the government has taken confiscatory actions, confidence is weak. People
generally avoid banks, even making large purchases in cash.
For many locals, bank runs are still fresh in the memory. A few institutions have since started
liberalisation, though quick support has restored confidence. Deposit insurance is not yet a reality, and
business is similarly off the financial grid. An estimated 55% of the countrys economic activity takes
place in the informal sector, while small and medium-sized enterprises account for more than 99% of all
business entities in the country. Most of these enterprises are outside the banking system.
Myanmar is said to be both underbanked and overbanked. Plenty of options exist in the centre of urban
areas, and the market can actually be crowded in certain areas, but for those in rural areas or with
fluctuating incomes, banks are simply not a part of life. A significant opportunity therefore exists for
those who can meet the needs of the people in terms of attracting their deposits and finding ways to make
loans to them. The market is so big, Kim Chawsu, managing partner of Katalysts Investment Group,
told OBG. There are a great many opportunities.
Consolidation
The market continues to attract new participants. In 2016 four additional foreign banks received licences
to operate in Myanmar namely, Vietnams Bank for Investment and Development, E Sun Commercial
Bank of Taiwan, Koreas Shinhan Bank and the State Bank of India, bringing the total number of foreign
banks in the country up to 13. In April 2015 Tokyo-Mitsubishi UFJ became the first foreign bank in
decades to open a branch in the country. Observers say that combinations are inevitable as competition
heats up and regulatory pressures bear down. Capital requirements are putting many banks under stress,
while the costs of upgrading systems will also compel institutions to seek partners. As yet, it is unclear
what direction the sector is going in, but many analysts think the number of institutions is certain to
decrease. Many of the banks will have to merge, Jean-Pierre Verbiest, economics and finance expert on
Myanmar, of the Asian Development Bank (ADB), told OBG. The system will consolidate.
Sector Players
KBZ is by far the largest non-state bank in the country, holding MMK8.693trn ($7.1bn) in private
banking assets as of April 2016, according to the latest data from German international development firm
GIZ. The rest of the top 10 was made up by AYA Bank, with MMK2.913trn ($2.4bn), CB Bank
(MMK2.061trn, $1.7bn), Myawaddy Bank (MMK1.305trn, $1.1bn), Myanmar Apex Bank
(MMK1.194trn, $969.9m), Yoma Bank (MMK1.191trn, $967.4m), United Amara Bank (MMK662bn,
$537.7m), Global Treasure Bank (MMK657bn, $533.7m), Asia Green Development Bank (MMK448bn,
$363.9m) and Myanmar Oriental Bank (MMK320bn, $259.9m).
The core of the banking system has historically been the countrys state banks. Some are directly
controlled by the government and its entities, and others are indirectly controlled through local
governments and other official bodies. Those under direct control emerged as a result of the break-up in
1975 of the Peoples Bank of the Union of Burma to create the Union of Burma Bank which later
became the CBM Myanma Economic Bank (MEB), Myanma Foreign Trade Bank (MFTB) and
Myanma Agricultural Bank which is now known as the Myanma Agricultural Development Bank
(MADB).
MEB has traditionally provided concessional lending to state-owned and related enterprises as well as
banking services to the Ministry of Finance. It has also attempted to lend more to the private sector but
was proven to be not very competitive. An MEB spin-off the Myanma Investment & Commercial Bank
entered the market in 1990 and is primarily focused on the markets in Yangon and Mandalay.
MFTB, which traces its roots back to the Foreign Department of the State Commercial Bank, had the
mandate for many years to provide foreign exchange services for government entities and to foreign
companies doing business in the country. The bank also historically managed the countrys foreign
exchange reserves, though that role has since been taken over by the CBM. MFTBs main asset is the
large number of international correspondent bank relationships it developed before liberalisation.
MADB, meanwhile, makes 5% loans to the agricultural sector. Farmers can borrow up to MMK100,000
($81.23) per acre if they are growing sugar cane or rice. The maximum loan covers 10 acres per farmer. It
is expected that in the future the cap will increase to MMK150,000 ($122) per acre. MADB, which is
reported to be making slim profits, has been facing difficulties in recent years, as farmers have struggled
in the face of natural disasters, particularly following the floods of 2015. The structuring of the loans is
also said to be a problem, with disbursement happening too late, pushing the farmers into the informal
sector for borrowing. In addition, repayment is required at harvest, when prices are at their lowest.
Indirect Connections
In addition to the pure state banks, the sector also contains a number of banks indirectly related to the
government. The Myanmar Citizens Bank was the first bank to be formed following the passage of the
Financial Institutions Law of 1990. While considered a private bank, it is government-owned and
controlled by the Ministry of Commerce. It started trading on the new Yangon Stock Exchange (YSX) in
2016.
Another bank with state connections is Myawaddy Bank. Formed in 1993, it is controlled by the military
through the Union of Myanmar Economic Holdings, which is itself directly owned by the military, retired
military personnel and veterans associations. Myawaddy is one of the top 10 taxpayers in Myanmar.
Other banks leading that list are KBZ, Global Treasure Bank and AYA Bank, according to press reports.
Private Institutions Arise
The first truly non-government bank to receive a banking licence was the First Private Bank, which was
permitted to start operations on May 25, 1992. It has always been a unique institution, due to its large
number of shareholders. No single entity or individual has control over the bank. This prevents conflicts
of interest and allows for the quick raising of capital. It is also considering a public listing on the YSX.
One of the next private banks to receive a licence was Yoma Bank, founded in 1993. For much of its
existence, Yoma was limited to domestic remittances as a result of failures during the banking crisis in the
country in 2003. Its full banking licence was reinstated in 2012. First Myanmar Investment (FMI), which
owns a 51% stake in Yoma, was the first company to list on the YSX. It is also considered one of the
more transparent entities in the country and is rated number one in the Myanmar Centre for Business
Responsibility 2016 report. According to local press reports, in May 2016 FMI increased its capital
contribution to Yoma Bank from MMK48bn ($39m) to MMK67bn ($54.4m).
KBZ Bank also arrived on the first wave of private institutions. Founded in Shan State in 1994, it moved
its headquarters to Yangon in 2000. The bank is the leader in terms of branch numbers. In July 2016 it
opened its 400th branch, up from 300 in 2014, and now has 16,000 employees in total.
KBZ is notable for its innovations and aggressive business strategy. In May 2016 it opened a
representative office in Thailand, becoming the first Myanmar bank to have an overseas presence, and is
also in the process of opening a representative office in Singapore. The bank believes that the office in
Singapore is strategically important because so much investment is flowing through that country to
Myanmar. In 2016 KBZ was chosen to handle cash settlement on the YSX. Six banks in the country
competed for the contract but KBZ won out, primarily due to its capacity for digital integration and
extensive network, according to local press reports.
A number of other private banks were established before the recent round of liberalisations. Myanmar
Oriental Bank, founded in 1993, has strong ties to the Chinese community in the country, while the Tun
Foundation Bank, which currently has 20 branches, was established in 1994, and Asia Yangon
International Bank was formed in 1993.
Generation 2010
Four banks were launched immediately following the most recent round of liberalisations, all on the same
date July 2, 2010. The first of these, AYA Bank, has also expanded rapidly over the past six years. By
March 2016 it had 150 branches, and by December of that year it had 200. AYA Bank became IFRS
compliant with effect from March 2015. It is also heavily focused on IT development, and has
implemented a highly sophisticated core banking system. U Zaw Zaw, the banks chairman, also told
the Myanmar Times in 2015 that the banks strategy would include a focus on expanding internet and
electronic banking services. In August 2015 AYA Bank signed an agreement with Japans Mizuho Bank
that involves cooperation in areas such as trade services and cash management.
The second 2010 entry is United Amara Bank (UAB). Owned by the IGE Group, UAB has 57 branches
and is aiming for 100 by the end of 2017. In 2016 it signed a trade finance deal with the ADB. The
international organisation will be insuring trade finance transactions conducted by the bank up to $4m
apiece.
Bank Run
In 2014 the bank faced a run as the US Treasury placed U Aung Thaung, the father of the banks majority
owner U Nay Aung, on its blacklist. While the bank itself was not sanctioned, the listing shook
confidence and resulted in rapid withdrawals from accounts, according to the Myanmar Times. In July
2016 rumours spread on the internet that the bank was on the brink of collapse and that it would stop
allowing withdrawals. Claims were also made that one party had taken out MMK7bn ($5.7m) in a single
day. The bank vigorously denied the rumours In a statement issued the following November and said that
it was operating normally.
The third of the banks formed in 2010 was the Asia Green Development (AGD) Bank, which currently
has 53 branches in the country. The bank is owned by the Htoo Group, though reports in 2016 said that
the group had sold its ownership of the bank. AGD was the first bank in the country to offer EMV chip
ATM cards. It has also said that it is planning an initial public offering in order to increase its capital. In
the 2014/15 fiscal year the bank saw a downturn, as its net profits fell from MMK9.6bn ($7.8m) to
MMK112.6m ($91,465), according to local press reports. The bank attributed this in part to intense
competition in the sector and responded by raising its deposit rates and lowering its charges for
remittance. Rates for deposit accounts increased from 8% to 8.25%, while the CBM continues to cap loan
rates. Remittance rates were taken down from 0.15% to 0.05%. The banks rapid expansion of branches
and fixed assets were also identified as a cause for the drop in profits.
The fourth bank Myanmar Apex Bank opened its first branch in Naypyidaw. The institution has
focused on differentiating itself from the competition through developing technology-related services,
including an app for remittances and an e-wallet. It is also specialising in agricultural lending, providing
loans backed by agricultural land as security.
Specialty Banks
There are a number of speciality banks in Myanmar. The first is the Small & Medium Industrial
Development Bank, founded in 1996 by the Myanmar Industrial Development Council.
The bank is privately owned but managed by the government. In 2015 it announced that it would be
opening five new branches in FY 2015/16 and three additional locations in FY 2016/17, bringing its total
number of branches up to 23. The bank offers subsidised loans to small businesses.
Second is the Cooperative Bank (CB Bank), which was formed in 2004 from the merger of three existing
banks CB Bank, the Cooperative Farmers Bank and the Cooperative Promoters Bank. In late 2015 CB
Bank started offering trade finance directly to exporters, a first in the country. Under the service,
companies selling products overseas will be able to borrow money based on their signed trade. Letters of
credit will also be offered. According to the Myanmar Times, the majority of trade to date has been
conducted without financing. In the past, when extended, credit of this type required traders to deposit
100% collateral with the bank.
CB Banks trade finance programme is being supported by the ADB under a $12m programme signed in
2015. Under the scheme the ADB provides technical assistance and guarantees the trade finance facilities.
Bank of Tokyo Mitsubishi signed an agreement to act as the technical adviser to CB Bank in 2013.
Third is the Global Treasure Bank, which started out as the Myanma Livestock & Fisheries Development
Bank and was rebranded in 2013. It currently has more than 100 branches, up from 60 branches in 2013.
The bank was formed in 1996. In 1999 it was transferred to the Ministry of Livestock and Fisheries from
the Ministry of Trade, according to local press reports. It undertook the name change to avoid confusion,
as the public may have believed that only people in the livestock and fisheries business could work with
the institution. Since its rebranding, the bank has worked hard to become a private, competitive
institution. It has set a target of 150 branches and is investing in technology and staff. Global Treasure
Bank has faced falling margins as remittance fees have dropped and competition for deposits has heated
up.
The fourth specialty bank, the Construction and Housing Development Bank (CHDB), received a licence
in 2013. The bank was established to provide mortgage financing, but it has had trouble getting long-term
funding, thus limiting its ability to make longer-term loans. In its first two years of operation, it was only
able to make loans to larger, more secure commercial customers, with applications from individuals still
being evaluated. As of late 2015 it was considering the extension of longer-term loans, with payback
periods of up to 20 years. Given the interest rates and the cost of housing, most people in Myanmar do not
have the capacity to service a housing loan. In 2015 CHDB had branches in Yangon, Naypyitaw and
Mandalay, and has said that it plans to expand in cities where there is significant housing development.
The target locations include Magway, Mandalay, Ayeyarwaddy and Sagain.
A few other new banks have been created in recent years. For example, the Naypyitaw Sibin Bank was
established in 2013 and the Shwe Rural and Urban Development Bank was founded in 2014. More may
be on the way. Plans have been disclosed for the Myanmar Tourism Federation to open its own bank,
though the actual implementation of the project has been put on hold. As of late 2014 it had registered
with the Directorate of Investment and Company Administration and was awaiting its licence to operate.
A bank under the Myanmar Gems and Jewellery Entrepreneurs Association is also being considered,
according to local press reports.
Bottlenecks
While the country has many institutions, which are competing heavily along existing lines, in some areas
development has been slow, with many products and services essential to the market still lacking.
Mortgages are for all intents and purposes non-existent, and bankers are generally of the opinion that it
will be some time before this type of financing is available. Without true mortgages, the sector is missing
an offering that is essential not only to its development but to the wider economy. Condominiums, for
example, are difficult to sell without mortgages. Developers have been funding their projects through
presales, but in many cases the buyers are unable to keep up with their payments. As a result, developers
have been restructuring payments and showing leniency towards defaulting buyers.
Work has been ongoing since 2012 to develop a credit bureau, but the process has been delayed by a
debate about how much foreign participation should be allowed in the entity. By 2016 a joint venture with
NSP Holdings, a Singaporean firm, had been agreed upon, though the launch of the bureau was pending
the introduction of the new Financial Institutions Law and the implementation of regulations governing
the bureaus operating framework by the CBM. According to local press reports, the bureau is expected to
be up and running before the end of 2017.
Meanwhile, the Myanmar Rice Federation is pushing to get farmland accepted as collateral, but the
process of foreclosure is a stumbling block. Under a 2013 law, farmers land is protected from seizure.
That makes it difficult to use the property as security. Even so, MADB and Myanmar Apex Bank have
started to accept farmland as collateral on a limited basis.
Most worrying for the sector is the fixing of deposit and loan rates. The minimum deposit rate is 8%,
while the maximum loan rate is 13%. Because of this, it is somewhat difficult for banks to make a profit,
and hard for them to take on risks beyond the lowest. You dont get paid to take risk, Daw Khin Mu Mu
Myint, chief business officer of Yoma Bank, told OBG.
Banks must therefore confine themselves to only the most creditworthy of customers, although some
flexibility is possible when revolving credit is extended as the associated fees and the repayment structure
result in higher effective rates.
Nevertheless, the rest of the market remains constrained by the tight spread limit. Profitability is not only
about what we do but also about the interest spread the regulators allow, Azeem Azimuddin, chief
financial officer and adviser to the chairman at AYA Bank, told OBG. When deregulation happens, and
we believe it is not a question of if but when, we are preparing to be ready.
Structural Issues
The IMF has noted other underlying issues. In a 2015 Article IV consultation it found that banks in
Myanmar were generally under-capitalised and poorly provisioned against possible losses. The fund
issued several recommendations for the sector, including better supervision and additional liberalisations.
It also called for foreign bank branches to be permitted to buy government securities, and for the CBM to
allow the use of swaps and forward contracts so that financial institutions can hedge their risks in the
foreign exchange markets.
While the CBM is an autonomous institution, critics argue that it is not yet as effective as it should be
because the CBM does not regulate the state banks, thus limiting its area of responsibility. Capacity at the
CBM is also considered insufficient, and it is seen by some as overly restrictive for the institutions it does
regulate. In addition to fixing rates, the CBM sets strict limits on how loans are extended and under what
terms. The bank still lives in the shadow of the 2003 crisis, and is reluctant to let the sector operate too
freely for fear that institutions are not yet up to the task. While the CBM has been praised for its
achievements, including for example the reunification of the exchange rate, it remains very conservative.
State Bank Reforms
Of the greatest concern to the sector are the state banks, which are in substantial need of reform. MEB, for
example, has been running a loss since 1990, according to GIZ. The bank makes subsidised loans and
losses are covered by the CBM. Meanwhile, MADB reported some of its worst losses ever in 2015,
blaming low rates and late payments. Occurrences such as these are not only potentially disruptive to the
market but also put the whole financial system under stress.
The liberalisation of the sector in recent years has seen customers move away from the state banks in
favour of the new private institutions, which are seen as more competitive. Private banks have been
quickly increasing market share and now own more than 60% of total assets. As the IMF notes in its 2015
Article IV consultation, the state-owned banks have not taken advantage of the rapid growth in loans over
the past few years, preferring to park their funds in government securities. The fund also expressed
concern about the creation of policy banks.
As part of the new 100-day plan initiated by the finance ministry in 2016, the state banks have been asked
to improve their services, with MFTB already taking a number of steps, including opening an information
counter at its only branch, streamlining the approval process for requests, and introducing its first ATM,
at Yangon International Airport.
In addition to encouraging the reform of these institutions and recommending the consolidation of the
subsector into one or two major policy banks, the IMF also advocates for the creation of better
governance structures. Local press reports suggest reform will be difficult, noting that the country has
other, more pressing priorities, such as dealing with the illegal trade of gems and solving existing short
falls in staffing, capacity and budgets. The state banks themselves have commented that privatisation
would be complicated, as it would involve the rewriting of laws and the approval of several ministries.
Kyat Conundrum
Because of the weakness of the kyat, the authorities have been forced to take steps to restrict currency
trading. This has involved intervention in the financial markets. Some of the moves made were
incremental, with the bank encouraging the use of card payments to prevent individuals from avoiding the
local currency. Other measures were more dramatic: in late 2015 it was reported that the non-bank money
changers would be closed and that people holding dollars could be prosecuted. In response to criticism the
CBM told the Myanmar Times in December 2016 that its aim behind the move was to increase the use of
the local currency in the economy in line with international practices, and that the rule permitting an
individual to hold $10,000 without penalty would remain unchanged.
In October 2015 the CBM revoked permissions to hold foreign currency issued before the money changer
and authorised dealer licences. The list of those shut out from the market included airlines, tour
companies, hotels, hospitals, freight forwarders, supermarkets and duty-free and souvenir shops,
according to local press reports. These companies had been allowed to deal in foreign currencies under
the Foreign Exchange Management Law of 2012. But an update of the law published in 2015 made it
illegal to trade in the currency markets without a formal licence. Dealers can now hold a maximum of
$50,000 and must renew their licences every five years at the cost of MMK100,000 ($81.20).
Some complaints have emerged that the state banks are not participating in the interbank market as they
should, according to the local press. Competitors also say that the rule limiting foreign currency exposure
to 30% of paid-up capital is not enforced when it comes to the state banks. It is hoped that the new
Financial Institutions Law will ensure equal treatment for both public and private banks.
Outlook
While the sector is still in the early stages of development, all the right pieces are in place for future
growth. A wide range of institutions are vying for business, while the regulatory environment is solid.
However, some gaps in regulation still need to be addressed, and those rules which are regarded as too
restrictive require loosening. As for the institutions themselves, there is a short-term need to improve
capitalisation and implement the current version of IFRS. Consolidation looks inevitable, but barring any
unforeseen events, the sector has the potential to become one of the regions most promising.

Myanmar's banks invest in technology to modernise operations

Not only are Myanmar institutions improving in safety, soundness and accountancy, they are also
expanding their use of technology. Several banks are adopting the latest systems in an effort to become
modern financial services companies, while more generally the country is developing its digital strategy
to allow for channels that enhance the banking system.
The hope is that the sector will be able to make the leap from traditional paper-based banking to
institutions which run sophisticated integrated platforms. Participants emphasise that what some banks are
trying to achieve is more than just the use of technology to improve efficiency. They say that they are
working instead to utilise technology to completely change they way they operate and how customers
relate to them. We are not just looking at changing the core banking system, we also see it as an
opportunity to redefine our operating model and to lead the coming leapfrog, Azeem Azimuddin, chief
financial officer and adviser to the chairman at AYA Bank, told OBG.
Laying The Groundwork
A core banking system was developed for the Central Bank of Myanmar (CBM) by NTT Data in 2014.
This was followed a year later by a real-time gross settlement (RTGS) system which allows transfers to
be made between the bank and its customers online and an accounting system, developed for the CBM
by Fujitsu in 2016, which migrated many of the tasks previously done manually onto a cloud-based
platform.
While cheques have traditionally been cleared manually, they will now be handled without human
intervention under the RTGS system. This has raised some concerns about whether the banks will have
the capacity to fully utilise the system, as some do not have the necessary core systems in place, and
whether the cheques used by the banks can be standardised. It is hoped that in the future the RTGS
system, which is currently employed in the main by the CBM solely for its transactions with other banks,
will also be employed for transactions between other banks which do not involve the CBM and with
customers.
In addition to the innovations carried out by AYA Bank, a large number of institutions are also making
investments in modern banking systems. Myanmar Oriental Bank (MOB) and the Cooperative Bank (CB
Bank) have both contracted with Swiss company Temenos to develop banking software, and in mid-2016
MOB signed a service agreement with US-based VMW are for cloud solutions which improve customer
experience and the security of accounts, according to local press reports. Elsewhere, The Infosys Finacle
system is being deployed at Asia Green Development Bank, while Yoma Bank is using the
FusionBanking Essence platform from Misys, which is a UK company. Kanbawza (KBZ) Bank,
meanwhile, has opted to employ Oracles Flexcube platform.
Payment Services
The Myanmar Payment Union (MPU), an ATM and point-of-sale network founded in 2011, currently has
23 member banks. As of early 2016, 1.8m of its cards were in circulation in the country, according to the
local press. In order to expand further, the system has signed a series of international agreements. First, in
2015 it partnered with JCB International to allow for the issuing of JCB cards to Myanmar residents. Two
MPU members AYA Bank and Cooperative Bank have already agreed to issue JCB cards. The cards
will be co-branded JCB/MPU. JCB has had a branch in Yangon since early 2016.
Then in June 2015 MPU and its Singaporean partner 2C2P introduced the countrys first online bill
payment service. Known as EasyBills, it can be used to pay Myanmar Posts and Telecommunications;
telecoms operators, including MECT el, Telenor and Ooredoo; utilities bills; and internet-based services,
such as Skype, Google Play and iTunes. Tax payments are expected to be added to the service in the
future.
Lastly, in early 2016 MPU and Koreas KEB Hana Card signed a memorandum of understanding
allowing MPU customers to access their accounts through the Hana Card network, while Hana Card users
will be given reciprocal privileges in Myanmar.
Credit Cards
The issuing of credit cards was banned by the CBM in 2003, when the country faced a major banking
crisis. Since that ban was lifted in 2012 about 2m secured cards have been issued, mostly by KBZ Bank,
although these operate more like debit cards, with some requiring funds in an account and others working
within a prepayment system.
In June 2016 CB Bank launched a card for international use. It is backed by the MPU and UnionPay, and
can be used overseas anywhere that UnionPay is accepted. Prior to this, in March 2016 CB Bank started
offering contactless prepaid mastercards. The product is also geared towards overseas travel.
Only a few thousand true credit cards, in which a loan facility is created, are in the market, according to
the Myanmar Times. They are offered by MOB, AYA Bank and CB Bank. In the past, the absence of a
centralised credit bureau made it difficult to offer true credit cards. However, with a bureau now under
development, future potential in this market is huge. According to Bloomberg, Myanmar is one of the last
major growth locations for credit card firms.
Digital Financial Services
The area of greatest opportunity is mobile financial services. While the regulatory environment in this
market has been characterised by some uncertainty in the past, most of the barriers to growth have now
been resolved, and it is expected that this element of the digital transformation will develop quickly in the
future.
In 2013 the CBM laid out the framework for mobile banking operations though the issuance of Directive
4-2013. The directive employed a bank-led model in which commercial banks are the base institutions
while mobile operators are service providers acting for the banks. However, the legislation was seen as
incomplete. According to a 2015 report by the Japan International Cooperation Agency, the directive did
not clearly lay out the responsibilities and scope of power of the mobile operators.
In 2013 several digital financial services initiatives were in the planning stages, including Myanmar
Mobile Money, which was developed by Innwa Bank, Oberthur Technologies and Mobilemate
Telecommunications; MyKyat, a Frontier Payment Technologies and First Private Bank initiative;
MYWALLET plus, a partnership between CB Bank, Leo Tech and MCC Group; Wave Money, a joint
venture between Telenor and Yoma Bank; and an Ooredoo service.
Despite the lack of a full legal foundation, a large number of these players had launched by 2015.
MyKyat, for example, was introduced to the market in late 2014. The service offers cash in and cash out,
a wide variety of remittance services and a number of value-added features. The company now has a
network of agents and merchants, and the service works on almost any type of phone.
Enhancing Clarity
The CBMs issuance of the Regulation on Mobile Financial Services in March 2016 served to enhance
the legal underpinning of the subsector. Under the new rules, a mobile financial services company must
have MMK3bn ($2.4m) in capital, pay an application fee of MMK3m ($2440) and be a non-bank
financial company or a network operator. The mobile financial services companies are permitted to use
agents, but they cannot have exclusive arrangements with agents. All fees must be disclosed to customers
and placed on display. In addition, only kyat transactions are allowed. The transactions are limited to the
following: cash in, cash out, money transfers between mobile financial services accounts, and domestic
payments between individuals, between individuals and businesses, and between individuals and the
government. Daily transaction limits are set depending on the type of customer making the transaction
and the type of registration done for the customer. The highest transaction limit is MMK1m ($812) a day.
The maximum possible balance is MMK50m ($40,615).
In a further development, in April 2016 the CBM said that mobile companies could apply for mobile
financial services licences. A license was subsequently issued to the Yoma Bank and Telenor joint
venture. The product, Wave Money, allows for the storage and transfer of funds and the utilisation of
those funds at so-called Wave Shops. Customers of the joint venture would be kept separate from those of
the bank. This type of service is seen as a good way of increasing financial services penetration, as more
people have access to SIM cards than bank branches.
Questions Remain
The Myanmar digital financial services subsector still faces significant challenges. There are concerns
that the lack of trust in the banking system could spill over into the digital side of the sector, while the
majority of people in the country still prefer to carry cash. In addition, existing institutions, such as the
post office, already offer cheap and convenient methods of sending money to others.

U Kyaw Kyaw Maung, Governor, Central Bank of Myanmar (CBM): Interview

Interview: U Kyaw Kyaw Maung

When will the credit rating bureau be established, and how will it strengthen Myanmars financial sector
and consumer discipline?
U KYAW KYAW MAUNG: Section 75 of the CBM Law, enacted in 2013, established the Credit Bureau
and the credit referencing system (CRS) in Myanmar. With the assistance of the International Finance
Corporation, regulations for the CRS are being drafted and are set to be issued in FY 2015/16. Based on
the regulatory framework and the establishment of the credit bureau, credit reporting service providers
will make information related to the economic and financial obligations of a customer, including
guarantees, payment history and publicly available information on credit decisions, available to financial
supervisory authorities. This information assists in supervision and improves the soundness of Myanmars
financial system. To strengthen consumer discipline, consumer rights and consumer rights procedures are
proposed in the regulations of the CRS. The Myanmar Banks Association and NSP Holdings of
Singapore have signed a memorandum of understanding to set up a credit bureau, which will be the first
such institution in the country. Credit bureaux will enable lenders to access borrowers credit histories and
benefit consumers and small and medium-sized enterprises (SMEs) by making financing more available.
They will also strengthen financial stability throughout the country by reducing instances of multiple
borrowing and by limiting over-indebtedness. The scheme will hopefully allow banks to offer more loans,
which will extend coverage for set-up capital for local industry. Establishing a credit bureau is essential
for the banks to operate autonomously. As the economy grows, the size of projects in various sectors are
also growing at unprecedented rates. The CBM aims to facilitate the growth of new large-scale
investments that are vital for sustainable economic development.
How will sharing credit information improve consumer and SME lending?
MAUNG: Governments around the world have formed credit bureaux to review the backgrounds of small
enterprises. The establishment of a credit bureau will improve the ability to measure financial capabilities
of SME and will encourage companies to keep more consistent records of their transactions. In the
regulations for the CRS, consumer rights and procedures are described. Also, the CRS extends its credit
information to all participants and stakeholders. This information may affect SME lending and the credit
decision making of financial supervisory authorities.
One of the biggest problems limiting the ability of SMEs around the world to obtain adequate external
financing for productive activities is information asymmetry. Creditors assess the creditworthiness of
credit or loan applicants based on two criteria: their financial capacity to repay a loan, and their
willingness to repay the loan. Credit reporting is extremely valuable to creditors in making enhanced,
fact-based credit risk assessments, and in this sense it is a tool to facilitate SMEs access to financing.

What measures is the CBM taking to further strengthen Myanmars banking infrastructure?
MAUNG: The CBMs approach is to gradually build a sound and sustainable foundation for the banking
sector. In the first phase, the CBM will focus on finalising the legal and regulatory framework for the
banking system; introducing modern payment and settlement systems; strengthening the CMBs capacity
for supervision; and preparing for the establishment of other financial infrastructure. The second phase
will involve deepening the banking sector by enabling a wider range of financial markets, instruments and
services, and implementing the ASEAN banking integration framework.

Azeem Azimuddin, CFO and Advisor to Chairman, Aya Bank; Antony Picon, Managing Director,

Colliers International; Kim Chawsu, Managing Partner, Katalysts Investment Group; and Hal Bosher,

CEO Yoma Bank: Intervie

Interveiw: Azeem Azimuddin, Antony Picon, Kim Chawsu, and Hal Bosher

Can you discuss the main challenges that banks might encounter in their efforts to drive a profitable
mortgage market here in Myanmar?
AZEEM AZIMUDDIN: There are structural issues and there are operational issues. On the operational
side, there is no central land registry. There are also difficulties concerning inheritance and similar legal
challenges relating to perfection of security and foreclosure. On the financial services side there is the
problem of the inability of banks to refinance themselves. Wherever you have a developed mortgage
market you also have well-developed mechanisms in place for a bank to refinance itself. For this type of
environment, you need the interest rate system to be structured to allow banks to go through the separate
layers of transactions that make money. In the environment we have now, all loans, irrespective of their
classification, must pay 13% and all deposits must pay 8%. This means there is no incentive for banks to
diversify products as there is no financial benefit. However, regulations are in place that allow for loans
that are twice the capital allocation, so that incentive is there, but the interest spread remains a major
challenge.
Assuming Myanmar is able to get past potential challenges, is the banking sector in a position to take on a
mortgage market?
HAL BOSHER: First of all, thats a big assumption. If theres one thing the financial services sector in
Myanmar has done a lot of, its assuming. I believe expectations need to be managed.
In the end, I do not think that banks are well-positioned. In order for banks to accommodate a large
number of low-value mortgages, banks need to have a system in place. Most banks are not structured to
handle high volumes of mortgages. You need an efficient processing system to get the volumes necessary
to make the business sustainable.

Another thing to keep in mind is that, to a large extent, all the banks credit books are backed by land and
buildings. In other words, the banks are already large buyers of land and mortgages. By law, when banks
lend, they must lend by backing it with land. You can imagine the challenges caused by this, for example
when a bank buys a building but its price is positively affected by the historic value of the building rather
than its commercial value. I think that this is something to think about when considering if banks are
getting into property exposure. Currently banks have huge levels of property exposure already.

What impact would a Myanmar-based credit bureau have on the creation of a more transparent and open
housing market?
KIM CHAWSU: Of course, one of the main reasons for the creation of a credit bureau would be to allow
credit information to be shared among all the countrys banks in a clear and open way. Considering only
10% of the population of Myanmar have a bank account, sharing information is crucially important.
However, there are many concerns about how the information will be kept confidential, as well as about
how to verify its accuracy.
When it comes to the formation of the credit bureau, the government has a duty to legally ensure the
privacy of the collected data, and we as banks have a responsibility to ensure that the collected data is
indeed accurate. When you have a credit bureau, the line between receiving and not receiving a mortgage
can become very thin, and when you have this high degree of information sharing, for the sake of the
client it is critical that this information is accurate.

This is the same for small to medium-sized enterprise owners who are also applying for loans. Accuracy
of information is critical. Therefore, as a bank, we need to work hand-in-hand with the government in
order to maintain the highest standards of privacy laws and data collection methods.

The relationship between affordability and a healthy mortgage market is widely known. How would you
define affordability in Myanmar?
ANTHONY PICON: That is a very challenging question and one faced by every country. It must be
understood that in Myanmar this question has vastly different answers. Many segments of the population
are fighting just to have shelter. There are others who are seeking to improve their quality of shelter, and
then there are those who are looking to move out of the homes owned by their extended family, although
this latter group is not as urgent.
When you look at the lower end of the segment, affordable can mean many things. We would probably
put the lowest end of the market at about $10,000 per unit, and thats often financed by extended families.
The next stage, which is in a very nascent stage, is what we have seen happen in Thailand. It occurs
especially in commercial areas, where properties are priced at approximately $30,000 and are occupied by
a typical office worker earning $1000 a month. However, weve come to realise the critical importance of
factors like location and available transport to the success of affordable housing projects. Of course, you
could go ahead and build affordable housing here similar to the housing that is found in Thailand, but the
equivalent transport network does not exist here.

In Thailand, you can take a moto-taxi to the Bangkok Mass Transit System (BTS) station and take the
BTS to your office and be there in 45 minutes to an hour. Here, in Myanmar, you can build this type of
affordable housing, but because of the lack of existing transportation infrastructure, it would be very
difficult to encourage people to live there.

The second problem is parking regulations: under existing regulations, condominiums must have 1.2
parking spaces per unit. I think thats unreasonable every country in South-east Asia has a lower ratio of
parking spaces, which in turn allows them to develop smaller unit sizes. The problem is, when you have
this restriction, its very difficult to make any housing project feasible with smaller units. In Thailand,
affordable housing units are typically about 30 sq metres and the typical size in Myanmar is about 50 sq
metres. So determining what is affordable is not as much of an issue as ensuring the feasibility of
affordable housing developments.
What concerns are there, if any, of a housing bubble forming here in Myanmar?
PICON: One of the pertinent examples here is that of Vietnam. The housing market saw a bubble forming
because houses were being flipped. This was caused by a large amount of secondary buyers who would
buy a house and sell it in a short amount of time for a nice profit. In Myanmar, I dont see much of a
secondary buyers market currently. As I mentioned before, the cost of affordable housing or housing
for the majority of the population is around $10,000 or so. As such, at this level, I really dont think the
incentive is there for the secondary buyer, because the margins for flipping would be too small. So I dont
think that there is a worry that a housing bubble will form in Myanmar.
BOSHER: For lenders, despite the fact that we think our credit is going to be part of the solution, we all
recognise that theres interest in leveraging our credit and jumping into the banking sector. There may be
ways that we as a bank are exposed without our knowledge. There are those that have assets and pledge
those assets as a way to receive credit. I think this underscores that buildings and land are simply crucial
to the overall credit market in the country. Issues around access to land, land titles and land inheritance all
contribute to land becoming a very sensitive commodity.
Furthermore, there may be questions over how land is assessed and what value is attributed to it. I know
that there are current government reforms looking at the issue of land titles and this is something that we
are monitoring closely.

AZIMUDDIN: I think that it is important to step back and look at the imperatives for the new
government. I think that one of these imperatives is the question of quality of life and how it pertains to
the home. Of course, as a government, it is important to look at various ways of not only guaranteeing the
population a basic home, but also progressing to better and better homes.
I may not agree that banks do not have the capacity to handle a large volume of affordable housing
mortgages. One of the ways that we are utilising our resources is through project finance or residential
finance products. That being said, the main challenge we face in creating a healthy mortgage market is
not having the capability to do long-term 15- or 20-year mortgages.

Weve recently heard concerns about the regulators deregulating interest rates and how this might affect
pensioners and savings schemes, and the possibility of interest rates going down. However, these
concerns may have been overstated: countries around the world have developed schemes that protect
specific pensions and savings. I think the issue is more to do with the regulation or deregulation of the
finance and property sectors.

Can foreign banks play a role in the creation of a healthy mortgage market in Myanmar?
KIM CHAWSU: I believe we need to get to the point where a bank is free to structure the interest rate at a
level that creates an appetite for the bank to lend. Another factor is education. Customers need to
understand that mortgages are a commitment and not something that happens overnight. Mortgages
require commitment.
In the past we had issues with the launch of credit cards, when customers didnt understand how credit
cards were supposed to work and didnt understand that they would ultimately be required to pay back the
debts they had accrued. As a result, in the aftermath of that period a lot of banks ended up having to write
off much of this debt.

How appropriate have other governments roles been in the creation of mortgage markets in more
developed countries?
BOSHER: In a certain segment of the market its entirely appropriate. Otherwise, government in general
has not always proven to be that efficient in allocating capital. A great example of this is what has
happened in the US with speculation and property bubbles. I think that markets tend to orient themselves
correctly provided that there are not too many market distortions. It is my opinion that in most cases, the
government should get out of the way. This is with the caveat that in certain market segments, there
should be government assistance to ensure affordable housing to its population not just in Yangon, but
throughout the country.
Furthermore, I believe that there is far more capital in Myanmar than the statistics suggest. There is
buying capacity in various forms, such as gems or gold. I think future development is contingent upon the
ability of banks and governments to unlock that capital and allow it to enter the market. Rapid change is
possible, as we saw with the rapid transition from the horse and cart to the car. In that respect, theres a
large engine of wealth to be put to use. Moreover, theres a lack of documentation of deals because people
dont want to pay taxes.

Myanmar strengthens regulations and begins exchange trading as authorities look to the future

The successful development of the capital markets in Myanmar amid a period of sweeping reforms is a
significant achievement. After decades without a full exchange and years with little more than over-the-
counter (OTC) trading, the country now has a robust platform for fundraising and trading in the Yangon
Stock Exchange (YSE). It also has the market infrastructure in place to support it.
Amid the widespread economic and political changes over the past several years, including the historic
election of 2015, Myanmar has continued to advance the development of its markets. The launch of the
YSE in December 2015 is highly significant because of what it means for the country going forward. It
stands to help in the achievement of further reforms, such as the privatisation of state-owned enterprises,
and help to fund rapid growth as the economy recovers from its long period of isolation.

Building The Market


Trading began in the 1930s on the Rangoon Stock Exchange, an informal OTC market where shares of
foreign-owned companies changed hands. Stocks on the Indian markets were quoted in Yangon as well.
The local exchange folded with the advent of World War II. Unofficial OTC trading of joint-venture
companies started in the 1950s, but the activity again ceased with the nationalisation of the economy in
the early 1960s. A market for treasury bonds never developed despite the securities being available since
shortly after independence.
The country began to look into creating a securities exchange in 1991, seeking the assistance of the IMF,
the UN and the International Finance Corporation. A committee was established the next year, and
seminars were held in 1994 with financial services firm KPMG, economic and financial capital markets
think tank Daiwa Institute of Research, and the UN Development Programme. A memorandum of
understanding between Daiwa and Myanma Economic Bank (MEB) to form a market was then signed in
1995.
The Myanmar Securities Exchange Centre (MSEC) was established in 1996 as a joint venture equally
owned by local and Japanese interests. It was hoped that some companies formed under a privatisations
programme would populate the market. But the MSEC never developed beyond the initial stages. In 2015
it had just two companies listed, namely, Myanmar Citizens Bank (MCB) and Forest Products Joint
Venture. Trading was almost non-existent. The exchange still exists, but now acts as mainly an
underwriter and a broker, trading shares on the YSX, bonds and the Forest Products Joint Venture on an
OTC basis.
A Real Exchange
The YSX has been in discussion for some years, though serious preparations only started in 2012. The
exchange is jointly owned by the Japan Exchange Group (JEX), the Daiwa Securities Group and MEB.
The local partner owns 51% of the exchange and the two Japanese entities share the rest, with Daiwa
holding 30.25% and JEX 18.75%.
Six companies were initially slated for listing on the exchange: First Myanmar Investment (FMI), MCB,
Myanmar Thilawa SEZ Holdings (MTSH), Myanmar Agribusiness, First Private Bank and Great Hor
Kham. Trading commenced on the YSX in March 2016, when the shares of FMI started to change hands.
The company did not sell stock in an offering, instead transferring already-issued equity to the public
listing.
By the end of 2016 a total of three companies had listed. The first, FMI, was founded in 1992. It is an
investment group with core holdings in the sectors of financial services, real estate and health care. FMIs
companies include Yoma Bank, founded 1993, and Pun Hlaing Siloam Hospital, which opened in 2005 as
the countrys first ISO-certified hospital. It is also an investor in the airline FMI Air.
While FMIs revenues more than tripled to hit MMK110bn ($89.3m) for fiscal year 2015/16, according to
the groups financial results, net profit declined from MMK73.1bn ($59.4m) to MMK8.9bn ($7.2m). The
group said that the increase in revenue was due to the financial consolidation of Yoma Bank and Pun
Hlaing Siloam Hospital, and attributed the decline in profit to a weak property market.
MTSH, the second listing on the YSX, came to market in May 2016. According to its YSX company
profile, MTSH, which was founded in 2013, is primarily involved in the development of Thilawa Special
Economic Zone (SEZ), a development that is backed by the Myanmar and Japanese governments.
Specifically, MTSH is an investor in Myanmar Japan Thilawa Development (MJTD), has marketing and
management contracts with MJTD and is an investor in Thilawa Property Development, which will be
involved in residential and commercial development in Zone A of Thilawa SEZ as well as other projects
related to the zone, as they present themselves. MTSH was founded by nine shareholders, including FMI.
MTSH had an advantage in that it was formed with an eye to listing and was thus organised to meet
exchange requirements. Many other companies in the country are not so well prepared, according to local
press reports. Their structures are often complex, involving holdings companies and a web of subsidiaries,
while restructuring can be complicated and expensive, due in part to the tax implications.
Brokers have been particularly positive about MTSH, saying that it is in an ideal position. The firm will
be able to market assets without having to make major capital expenditures, as much of the infrastructure
at the SEZ is being built by other parties. Some concerns have also been raised regarding the companys
many major shareholders, who could start to cash out as the stock price rises, leading to a rise in the
supply of equity and a cap on gains. According to MTSHs results for fiscal year 2015/16 the company
saw a rise in comprehensive income from MMK16.2bn ($13m) to MMK21bn ($17.1m). Per share
earnings also rose from MMK4612 ($3.75) to MMK5317 ($4.32).
MCB was the third company and the first bank to list on the exchange. It completed its prospectus and
sent it to the regulators in June 2016. Trading in the shares began on the YSX the following August. As
with the other companies, no new stock was issued. The bank was originally controlled by the Ministry of
Commerce, but ownership by the ministry was down to 10% by the time of listing, according to the press.
Listing Rules Outlined
The market is guided by a wide range of regulations issued by several bodies. Listing rules were
published by the stock exchange in 2015, covering management, governance, compliance, disclosure,
insider trading and internal controls.
For companies applying to list on the exchange, a two-year history of profit is required, as is MMK500m
($406,150) of capital. The candidate must have 100 shareholders, but no minimum float requirement is
mentioned in the rules. Companies seeking a listing must also provide evidence that they are tax
compliant. Neither the entity nor any of its owners or directors may be on any blacklists.
According to the listing rules, the total number of shares after the listing should be at least 5000, and
accounts should be prepared according to Myanmar Financial Reporting Standards. The shares of the
company must also be free of any restriction on their transfer. In the case where new shares have been
issued within six months of the listing, these shares will have a lock-up period of three months. Firms can
be delisted for a number of reasons, including bankruptcy or restrictions placed on share transfer.
According to YSX guidelines, a charge of MMK1.5m ($1218) is payable for the initial listing
examination. An additional 0.05% of the market capitalisation is also payable (unless the offering is of
existing shares, in which case it is 0.01%). An annual fee of 0.005% is payable to maintain the listing.
Trading participants must pay an examination fee of MMK1m ($812) and an admission fee of MMK10m
($8123). They must also pay a monthly fee of MMK900,000 ($731) plus 0.2% of their trading carried out
by value. The fees have been discounted through 2017. Shareholders must pay a registration fee of
MMK1000 ($0.81).
Trading Rules
Normally, all stock transfers must be done on the exchange. Off-exchange trading is not allowed, through
some transfers may be done directly in special situations. For example, shareholders may trade with
themselves without actually conducting an on-market transaction. Special procedures nevertheless have to
be followed, including notification being sent to the exchange.
Both market orders and limit orders are allowed. Price limits for stock movements have been set, and
these limits vary depending on the price of the security. For shares trading between MMK10,000 ($8.12)
and 20,000 ($16.25), the daily limit is MMK2500 ($2.03). For shares trading between MMK20,000
($16.25) and MMK40,000 ($30.75), the limit is MMK5,000 ($3.84). For those between MMK40,000
($32.49) and MMK100,000 ($81.23), the limit is MMK10,000 ($8.12). For shares trading between
MMK100,000 ($81.23) and MMK200,000 ($162.46), the limit is MMK25,000 ($20.31). The minimum
tick, or minimum stock price movement, ranges from MMK500 ($0.41) for shares trading between
MMK10,000 ($8.12) and MKK40,000 ($32.49), and MMK5000 ($4.06) for shares trading between
MMK100,000 ($81.23) and MMK400,000 ($324.92).
Securities & Exchange
The Securities Exchange Law, published in 2013, called for the establishment of the Securities and
Exchange Commission of Myanmar (SECM), with the YSX laying out the framework for regulation. The
commission has the power to regulate public companies, securities companies, OTC markets, stock
exchanges and anyone who acts as a responsible person for regulated entities.
The 2013 law outlines the various licences that are available, including a permit for securities dealing, in
which a company buys and sells for its own account; securities brokerage, in which a company buys and
sells on behalf of its clients; securities investment advisory, in which investment advice is provided for a
charge; and securities deposit and clearing, in which a company receives, holds and delivers securities on
behalf of its customers, and assists customers in exercising their rights of ownership.
According to a client note issued by the law firm VDP Loi Myanmar, underwriters which can provide
all services must have MMK15bn ($12.2m) of capital, securities dealers MMK10bn ($8.1m), brokers
MMK7bn ($5.7m) and advisors MMK300m ($244,000). A security deposit must also be made, which is
equal to 10% of the capital requirement.
In addition to the law, the SECM has also issued a number of notifications, which have covered a wide
range of issues. It has published rules for securities companies opening branch offices, procedures for
reducing capital, information on the amount that needs to be put aside for a reserve fund (2.5% of annual
net profits), rules for the use of shares for collateral and guidelines for advertising.
Notifications
A notification on initial public offerings (IPOs) was issued in September 2015. In the notice, the SECM
said that a company seeking to make an IPO must submit a prospectus that includes an offering plan,
details about the shares being sold, information about the issuer, company history and structure, details
about the business and an outline of the investment plan. Information about shareholders and the
management structure are also required, as are basic corporation documents, such as the Articles of
Association and copies of the minutes authorising the offering. The company must also provide two years
of audited financial statements.
In June 2016 templates were issued for prospectuses. For small companies in which the shares will be
offered to 100 or fewer people, and the total equity value on offer is under MMK500m ($406,000), Form
A should be used. Companies using Form A need to provide the standard items required under the law as
well as a simplified balance sheet and an income statement. Larger companies need to use to Form B,
which requires more detail, including precise information about the offering timetable (opening date,
closing date, notification date and listing date), more granular financials and more information about the
underwriters, directors and shareholders.
In early 2016 a notification was issued on continuous disclosure. In the notification the SECM said that
all listed companies, public companies trading OTC and public companies with more than 100
shareholders must submit yearly and half-yearly reports. They must also issue reports if significant events
occur, such as a change of ownership, a major change of shareholders, a disaster which affects the
company, the filing of a lawsuit against the company or changes made to management or the auditor.
The dematerialisation of shares is covered under a notification issued in December 2015. According to the
notification, the stock exchange is authorised to provide book-entry ownership records for shares, while
an account for each securities company must be opened. The notice adds that no share certificates will be
issued for stock listed on the exchange and that any share certificates presented will become void and be
replaced by a book entry.
In October 2015 the SECM issued rules regarding the fees to be charged by securities companies.
Transactions involving less than MMK500,000 ($406) will attract a fee of MMK5000 ($4.06), while a
commission of 1% of the amount traded will be charged for transactions between MMK500,000 ($406)
and MMK1m ($812). For transactions ranging from MMK1m ($812) to MMK10m ($8123), the fee will
be 0.8%, and between MMK10m ($8123) and MMK100m ($81,230), the commission will be 0.6%. For
transactions above MMK100m ($81,230), the fee will be 0.5%.
Safeguarding
Instructions were also published on anti-money laundering (AML). In them, the SECM calls for securities
companies to develop AML practices to be used both at the time of account opening and at the time of an
order. Suspicious transactions include those conducted by a person on a blacklist, those involving over
MMK10m ($8123), a large number of smaller transactions or those in which the customer forces the
securities company to accept cash.
In addition to requiring basic identifying information from customers, securities companies are instructed
to deny an application from a foreigner, check whether the customer has access to insider information and
assess the clients investment objectives. Insider trading instructions prohibit securities company
employees from trading in shares they underwrite, and the companies should have internal policies
regarding insider trading. Specific attention must be paid to accounts owned by listed company directors,
directors of the parent company of a listed entity, government officials with access to information about
listed companies and immediate family members of these people. In January 2016 the SECM set criteria
for a securities representative licence. Candidates must be 22 years of age, have a university degree, be
recommended by a securities company, be of good character and pass an examination covering the capital
markets, regulation and the YSX. The twoyear licence costs MMK5000 ($4.06) and the examination fee
is MMK15,000 ($12.18).
Market Infrastructure
In late 2015 a list of 10 underwriters was published. The provisional licences were dependent upon
registering a subsidiary with the Directorate of Investment and Company Administration. By late 2016 a
total of six firms were on the YSXs official list of trading participants. These were MSEC, KBZ Stirling
Coleman Securities, CB Securities, AYA Trust Securities, KTZ Ruby Hill Securities and Amara
Investment Securities.
Foreign brokers are allowed to own up to 50% of a securities company, but control must be kept in the
hands of the local partner. KTZ Ruby Hill is a joint venture between KT ZMICO, a Thai securities
company, and Myanmars Loi Hein Group. KBZ Stirling Coleman, which received its licence in October
2015, is a joint venture between Kanbawza Group and Stirling Coleman, which is a Singapore-based
corporate advisory company founded in 2001. Market infrastructure is fast developing. In April 2015
Kanbawza Bank was chosen to build a settlement and clearing system for the exchange. One more bank
may also receive permission to operate as a settlement institution if the market is in need of a second
player to offer those services. Settlements on the market take three business days after the trade date and
are conducted using the delivery versus payment system. The minimum order is one share. The YSX acts
as the Central Counter Party, and it nets out obligations between securities companies. Trading may be
suspended by the exchange for any number of reasons, including market-sensitive news, irregular trading
and problems with the trading system.
The exchange has issued rules regarding settlement, including the times and methods of payment, the
rules for the use of due bills in the case of non-payment, the use of settlement collateral, the conditions
under which settlement can be delayed and the procedures to be used in the case of default.
According to the settlement rules, a special clearing charge can be issued against all the trading
participants in the event of a failed trade if other sources of funds such as collateral from the defaulting
participant and clearing funds of the defaulting participant are not available for use.
Three Issues, Low Volume
Share trading has dropped off since the initial frenzy, and observers say that it will take some time for the
market to develop. In March 2016, when only one company was listed, the share volume reached
670,000. In August this dropped to 150,000 shares, and the following October a total of 126,000 shares
changed hands for a total value of MMK4bn ($3.2m).
The Myanmar Stock Price Index (MYANPIX) was introduced on March 25, 2016 with a base value of
1000. It is capitalisation-weighted and includes all companies trading on the market. MYANPIX peaked
at around 1300 at the end of March before dropping to about 561 by the close of the year.
Concerns have been raised about the lack of institutional investors in the market, and a lack of education
among the retail investors. So far, trading tends to be seen as a form of gambling, with buying and selling
largely based on sentiment and trends. Sector executives say that it is important to encourage investors to
understand and analyse companies. Market manipulation has also been observed, with large orders being
placed in an apparent attempt to move stock prices, according to press reports. In early June 2016 YSX
issued a warning covering this practice. It said that brokers should not be making large orders and then
cancelling them, as this sort of activity can lead to a rapid change in sentiment among the retail investors.
Market manipulation is punishable by up to 10 years in jail and a fine. In mid-2016 rumours spread that
YSX shares would be opened to foreign investors. This was seen as having potential to boost sentiment.
However, the exchange said that investment of this sort would not be possible until the Companies Act is
amended which, according to the Myanmar Times, is expected to happen in 2017.
Delays & Governance
The market has expressed some concern about capacity at the regulatory level. MTSHs listing was much
slower than FMIs, though the exchange noted that this was in part a result of official holidays and the
larger number of shareholders at MTSH (each shareholder must be registered with a broker). The rules
themselves have also been brought into question. According to legal experts quoted in the local press,
despite the volume of regulation and notifications, they are very basic in content and unclear in certain
areas.
However, the main challenge facing the market is the fact that the transactions undertaken have been
simple and straightforward, involving the listing rather than the sale of shares, with no real IPO carried
out. The sense is that more work is needed before the market, the regulators and the issuers are ready for a
real offering. Taking a private company public and selling new shares is likely to take time and may be
beyond the current capacity of the relevant players, according to observers. An IPO will take 18 months
to two years, Neville Daw, director of financial institutions and strategy, of Amara Investment
Securities, told OBG. We really are starting from basics.
Government Bonds
In mid-2015 the country began taking steps to secure a credit rating so that an international bond can be
sold. In early 2016 a workshop was held in cooperation with the Asian Development Bank and the Asian
Bond Market Initiative to promote the competitive auction process. No secondary trading in government
bonds has taken place as yet, but the Central Bank of Myanmar (CBM) is hopeful that the new Real Time
Gross Settlement System, which is known as CBM-NET, will help facilitate this sort of activity and aid in
collateral management. If we can get a government market up and running and a government rating, that
would make a substantial difference, Neville Daw told OBG.
Outlook
The YSX is a good platform on which to build an effective capital market. While currently under-utilised,
once IPOs are conducted volumes will increase and the exchange will become an important part of the
fundraising ecosystem. Over time the market will mature, as retail players gain experience, and
institutional investors develop and purchase equity.

U Yin Zaw Myo, Managing Director, Yangon Stock Exchange (YSX): Interview

Interview: U Yin Zaw Myo

How far has the YSX progressed, and what milestones do you want to reach in the medium term?
U YIN ZAW MYO: Within the first eight months of YSX starting stock trading, three companies were
listed on the exchange, and we hope to add more during the 2016 fiscal year. To date, we have a total
trading volume of over 1.5m shares in the market, worth around MMK59bn ($53.1m) overall. This is a
significant amount for a market this small, especially when compared to the Lao Securities Exchange,
which started in 2011, and the Cambodia Securities Exchange, which began operations in 2012. We
believe there are many potential firms preparing to list on the YSX, receiving sophisticated advice from
domestic and foreign advisors, and we hope there will be dozens more by the end of the 2017 financial
year.
The YSX is now taking its very first steps. We have a lot to do to develop the market in terms of hard and
soft infrastructure. The milestones that we wish to achieve in the medium term include raising the number
of listed companies, increasing the size and diversity of the investors, and setting up clear market
regulations and procedures together with regulatory bodies. We prefer to maintain a certain level of
liquidity for our investors and ensure that the procedure for raising capital for listed companies is
transparent and has a good disclosure scheme.

What steps need to be taken to encourage institutional investors to participate on the exchange?
YIN ZAW MYO: We recognise that the role of institutional investors in the YSX is very important to
develop and stabilise the market. On the demand side, Myanmar doesnt have a sufficient number of
institutional investors due to lack of capital and to regulations restricting investments made on their
behalf. We do not have a private pension fund or central provident fund for people working in the private
sector. Even though Myanmar has 12 private insurance companies and 23 private banks at present, their
cash reserves and premium incomes are only allowed to be invested in government bonds and deposited
in savings accounts held by banks. The government should encourage more institutional investors and
gradually liberalise state and private financial institutions to invest in capital markets for the long term.

On the supply side, the capacity and liquidity of the capital markets are essential to encourage
institutional investors to invest long-term. We should continue to increase the number of listed companies
and investors joining this market. However, a small number of stocks is not enough to diversify investors
portfolio risk. The insurance sector and banks could be valuable corporate investors when the YSX has
enough listed stocks to diversify the risk. So the next step for the YSX is to attract as many listed
companies as possible. There are, aside from institutional investors in the traditional context, certain
religious trust funds, social welfare funds, social foundations and welfare organisations, and this is unique
to Myanmar. If there is a sufficient number of stocks and bonds traded in the capital markets, they might
be interested in investing in such assets to utilise their reserve funds in an environment of relatively high
inflation rates.

Considering the strict listing requirements of the YSX, how prepared are companies in terms of proper
corporate governance (CG)?
YIN ZAW MYO: CG is very important, not only for YSX-listed companies but for all companies.
Without sound CG guidelines, firms cannot build trust in their investors. Companies should recognise not
only the definitions of CG but also the essential meaning of it. According to the YSXs Securities Listing
Business Regulations, all candidate companies for listing must submit concrete CG procedures to the
YSX, whose listing department examines whether the firm can conduct their business in line with those
guidelines.
Anchor text:
U Yin Zaw Myo

Quach Hung Hiep, Senior Executive Vice-President, Bank for Investment and Development of Vietnam

(BIDV): Interview

Interview: Quach Hung Hiep

What were the factors behind the decision to apply for an operating licence for Myanmar?
QUACH HUNG HIEP: We see great potential in the Myanmar market. Once a closed economy,
Myanmar is now transforming, and integrating its market with the ASEAN region and the world. In
recent years, we have witnessed a rapid increase in commerce and investment activities from Vietnamese
corporates, with most of them being BIDVs customers. At the same time, we believe that Myanmar and
its 55m-person market have a geographic advantage, as they connect three major markets: India, China
and mainland South-east Asia.
These were the factors that motivated our decision to establish a representative office in Myanmar in
2010, a microfinance company in 2015 and our first foreign branch in Yangon in 2016. BIDV has also
launched subsidiary and joint-venture operations in Laos and Cambodia, and with the establishment of
our Yangon branch, we have a competitive advantage, as we provide financial products to corporates
from the Cambodia, Laos, Myanmar and Vietnam bloc. This has become even more vital since the
ASEAN Economic Community was established on December 31, 2015.

What impact do you expect the granting of operating licences to foreign banks to have on the financial
services industry?
HIEP: Along with the rapid process of economic liberalisation and integration, without a doubt the entry
of major foreign financial institutions will not only offer modern banking products and technologies, but
will also significantly boost Myanmars financial markets through an increase in foreign capital flows to
corporates. Competitive dynamics, strong and diversified development, and improved financial products
would follow. In addition, Myanmars talented youth will benefit from career opportunities at foreign
banks and also from the broadening of domestic corporates. At the moment, foreign banks must still
operate under certain business restrictions, but we believe that these will gradually be lifted.
In your opinion, what opportunities exist for local and foreign banks to collaborate on a greater scale in
terms of cross-border trade?
HIEP: Our experiences in Vietnam, Laos and Cambodia proved that opportunities exist for domestic and
foreign banks to collaborate. Local banks have the advantage of existing customers, widespread networks
and market expertise, while foreign banks benefit from foreign capital, technology, modern banking
products and major international clients. Collaboration between local and foreign banks also helps
partnerships to develop between local and foreign corporates. Many firms from Vietnam, Laos,
Cambodia, Japan, South Korea, Taiwan and so on, have come to us seeking opportunities to cooperate
with Myanmar enterprises. Also, by broadening international payment channels and offering trade finance
and derivatives products, Myanmar corporates will be supported in expanding their businesses.
What role will BIDV play in the development of the talent pool in Myanmar?
HIEP: Just like other foreign banks, BIDV pays special attention to the detection and development of
Myanmars talented youth. We consider this an essential resource to ensure success in the countrys
market. For the last five years, even before we established the Yangon Branch, BIDV has been providing
annual scholarships for outstanding students from Yangon University of Economics, while also
sponsoring many social security programmes to develop Myanmars education. In the near term, BIDV
has set out plans to recruit young Myanmar staff and provide them with training opportunities to develop
their careers. One of these strategies involves training young staff to eventually hold senior branch
management positions.

Investors see great potential in Myanmar

Recent liberalisations are set to transform the insurance sector in Myanmar, and the potential for future
growth is remarkable. For almost half a century, business lay entirely in the hands of the state. That fact,
plus economic isolation and slow growth, mean that the country is presently the least insured in the
ASEAN region, with penetration at 0.05%. Now, the licensing of private insurers and the opening of the
market to foreign players are expected to lead to major growth in this untapped market. According to
insurance firm MetLife, the life side of the business could grow from $1m of premiums in 2012 to $1bn
in 2028.

Historic Opening

At one point, as many as 100 companies sold insurance in Myanmar. However, following independence,
the state began to take over. By the 1960s the sector was consolidated, with all foreign insurers
nationalised in 1963.

Liberalisation began slowly and was marked by false starts. When the Insurance Business Supervisory
Board (IBSB) was introduced in 1996, the law which established the regulator allowed foreign insurers to
enter the market. But for decades, international activity was all but non-existent, the exceptions being one
joint venture that was formed in the 1990s and policies sold through Myanma Insurance the monopoly
provider via fronting.

Liberalisation came quickly after the political reforms began in 2010. In 2012 a total of 12 new insurance
licences were issued. Of these, nine were for general and life, and three were for life only. IKBZ
Insurance, part of the KBZ Group, was the first private insurer to register, and it offers a wide range of
products. In the life insurance subcategory, this includes group life, snake bite insurance, and sportsman
life and health insurance. In non-life, the company sells fire, comprehensive motor, cash-in-transit, cash-
in-safe, cargo and travel insurance.

The other domestic insurance companies are First National Insurance, Aung Thitsar Oo Insurance, Young
Insurance Global, Ayeyar Myanmar Insurance, Global World Insurance, Pillar of Truth Insurance, Aung
Myint Moh Min Insurance, Excellent Fortune Insurance, Capital Life Insurance, Grand Guardian
Insurance and Citizen Business Insurance.

A total of 24 foreign representative offices have been opened in the country, including AIA, Prudential
Holdings and Manulife. Three Japanese companies Tokio Marine & Nichido Fire, Mitsui Sumitomo
Insurance and Sompo Japan Nipponkoa Insurance have been granted licences to operate, but only
within Thilawa Special Economic Zone (SEZ).

According to the local press, in October 2015 the companies operating in Thilawa SEZ were given
permission to offer liability insurance. Previously, they had been limited to fire, life and vehicle products.
In early 2016 Sompo Japan Nipponkoa became the first international firm to offer auto insurance policies,
though these were restricted to Thilawa.

Ongoing Reforms

Previously, the local private companies were limited to six of a possible 48 lines, with only Myanma
Insurance permitted to sell all lines. Since then, in line with ongoing reforms, two more lines have been
added to the private providers portfolio: health insurance and marine cargo insurance. The Treasury is
currently considering the liberalisation of investment restrictions on the insurers.

In early 2016 the IBSB said that it would be allowing some European insurers to apply for licences to
operate in Thilawa SEZ. To qualify, the companies must have had a representative office open in
Myanmar for three years, 30 or more years of experience in the business and at least two years operating
in ASEAN. According to the local press, the licences will cost $30,000 initially and an additional $10,000
per year. The government may also allow foreign firms to join with local companies and open domestic
branches.

The IBSB falls under the auspices of the Ministry of Finance and Revenue, and is responsible for
licensing insurers, underwriting agents and insurance brokers. The minimum capital required for private
insurers in the Myanmar market is MMK6bn ($4.9m) for life insurers, MMK40bn ($32.5m) for non-life
companies and MMK46bn ($37.4m) for entities doing both, according to international law firm Norton
Rose Fullbright. A deposit equal to 10% of capital must be placed with the central bank, while Treasury
bonds worth a total of 30% of capital must be purchased.

Despite having been liberalised for just a short time, overall performance has been good. Pent-up demand
has been significant. According to local press reports, at the end of 2015 the sector had expanded by 40%
since new entrants started arriving in 2013, with the annual growth rate averaging more than 12% during
this period. The current government is supportive of the insurance sector and is encouraging its
development. As part of its 12-point economic plan, the opening of insurance to international players is
on the list of proposed financial reforms.
Into The Pool

Observers say that further reforms are needed, especially in terms of governance. The work of the IBSB
has so far mainly been carried out by Myanma Insurance, and a clearer separation of duties is needed to
make the regulator truly independent. This process is now under way. Myanma Insurance was officially
separated from the board in 2016, while the Financial Regulatory Department under the Ministry of
Finance is eventually expected to take over responsibility for oversight of the insurance sector. The
insurance sector is still in its infancy stages, U Ba Tun, managing director of Aung Thitsa Oo, told OBG.
For the industry to grow to its full potential there needs to be more liberalisation and an easing of
restriction by the regulator on individual operators, especially in terms of products and pricing.

Overall, regulations are considered highly restrictive. Insurers are still limited as to the total risk they can
take on. After a point, they are required to place business with a coinsurance pool, formed by all the
operators, which for all intents and purposes means ceding the business to Myanma Insurance, as only the
former monopoly has the capacity to take on the risk. According to US-Myanmar Relations: The Next
Phase a report from the US Chamber of Commerce in the past the pool has been largely unprofitable.

Fire insurance risk is currently limited to MMK500m ($406,000) per insurer, while auto insurance is
limited to MMK300m ($244,000), according to the Myanmar Times. Insurers have also said that the
capital burden is high, especially since 40% of the total is unavailable to them due to mandatory reserves
held in Treasury bonds and at the central bank, and are of the opinion that they should at least be able to
deposit the money with private banks to generate interest.
Lack Of Competition

Not only is risk capped, but the policies themselves are dictated by the regulator. Wording is standardised
across the sector. Insurers have also said that the mandated insurance forms are poorly designed, while
many of the policies the authorities do allow them to sell are not receiving much interest from the public.
Price competition is also not yet permitted, with premiums fixed. Everyone sells the same policies, this
is the main issue, U Sein Min, a consultant to Taiyo Life Insurance and former Myanma Insurance
executive, told OBG.

Other concerns hang over the sector. While the penetration rate is very low, growth may not be as fast as
originally hoped. Awareness is still very limited, while few people have the additional income needed to
pay the premiums. Because of the lack of a robust regulatory framework, public interest in insurance is
likely to remain weak, according to the US Chamber of Commerce report. The sector also faces
underinvestment in terms of IT and a shortage of skilled professionals. As U Myo Naung, managing
director of Grand Guardian Insurance, told OBG, One of the hurdles to development of the sector is the
lack of capable insurance professionals, such as actuaries.

Further Liberalisation

The chamber has recommended that the country allow more foreign participation in the sector. It has also
suggested that Myanmar adopt some of the regulations in use in neighbouring countries, such as Thailand
and Malaysia. This would allow for more rapid development and increase confidence on the part of
foreign insurers.
Concerns about the ability of the insurers, including Myanma Insurance, to stand up to competition
remain, and because of that further liberalisation is likely to take time. They must open the market step
by step, U Sein Min told OBG. The local companies cannot yet compete. The prevailing sentiment is
that the regulators should also go slow when it comes to the liberalisation of premiums. Capacity and
experience are very limited at the insurer level, and the country has no actuaries. If the new insurers were
allowed to set their own rates, the fear is that they would begin to aggressively reduce their prices, leading
to instability in the market.

Micro-Insurance

One subsector with significant potential is micro-insurance. Low-cost, innovative products that cover
essential risks are much needed, and will likely be taken up quickly as they are developed and offered.
While challenges exist, these can be overcome if policies are well designed, and if the distribution
channels are effective and efficient.

As of late 2016 the micro space was virtually empty. Neither Myanma Insurance nor the new private
insurers offer policies of this type. Some credit-linked products from microfinance institutions and
cooperatives are available in the market, but not much else. Microfinance in general is better established.
It has been in the country in one form or another for decades, and a formal legal framework was published
in 2011 allowing for local and foreign investment in microfinance institutions. However, no framework
has been developed specifically for the subsector.

Once the right sort of laws and regulations are in place, micro-insurance will also need to tackle a number
of barriers to growth. Affordability, even for low-cost products, is an issue, with GDP per capita at $1200.
Levels of understanding are also very low. Potential customers tend to have trouble distinguishing
between insurance and investment, believing that they will make a profit from a policy they buy, and are
unable to appreciate the risk mitigation aspects of the products. The distances involved in reaching
potential customers also stands to make sales difficulty, as the industry has very few physical branches.

On The Demand Side

Despite these issues, one factor buoying the outlook of micro-insurance growth is the substantial demand
for such products. Because incomes in Myanmar are generally low, unexpected costs can be devastating.
Unforeseen events are not uncommon either, especially those related to the climate and other natural
disasters, such as earthquakes. The lack of insurance products has resulted in less-than-ideal ways of
covering the cost of potentially insurable events. For example, when faced with medical expenses 47% of
people in the country take out loans to pay the bills, 27% sell assets and 22% use savings, according to
local press reports.

In a 2014 survey by BC Finance, a local microfinance firm, it was found that many of its customers had
significant concerns regarding the costs related to the death of an individual. That was followed by
concerns about health care, and fire and accident expenses. Only 3% of the people surveyed said that theft
was a worry. When asked if they would buy micro-insurance products to protect themselves from these
risks, 83% said they would. More than a third said that they would be able to increase their investments in
business if more of their risks were covered.
Increased Support

Support for micro-insurance has been growing in both the private and public sectors. In late 2016 the
World Bank said that it would be providing $100m to Myanmar to aid the development of the financial
sector. In part, the funds will go towards efforts related to micro-insurance.

In December 2016 the local press reported that XL Innovate, a US-based venture capital company would
be investing $4m in Stonestep, a Swiss-based company that is working to offer a micro-insurance as a
service product. The main focus at the outset will be Myanmar. Stonestep is also active in the
Philippines.

The basic concept is to use existing distribution channels, such as those established by mobile phone
companies and financial services firms, to get products to individuals at a relatively low cost. This
strategy also allows insurers to access locations that might be difficult to reach with the traditional brick-
and-mortar-broker-agent model.

Agriculture

With half of the adult population involved in farming, the largest market for micro-insurance is the
agricultural sector. Farmers are also the biggest users of credit and face many risks, including drought,
pests, hail, plant diseases, floods and excessive rainfall. The right sort of insurance products have yet to
be developed for the sector, while regulation covering agricultural policies is weak. The farmers
themselves are accepting of the idea of insurance. Around 50% of individuals involved in agriculture have
both an interest in the product and enough available cash to make the purchase. The main task is
convincing them that buying a policy is the best use of funds.

The government has expressed considerable interest in supporting the development of relevant products.
Crop insurance has become a priority for the new administration. The most promising solutions for
agriculture are those linked to the weather, especially storms and droughts, and are seen as more efficient
and equitable than simple credit-linked products.

Some large-scale insurers have taken an interest in offering weather-linked policies. Sompo Japan
Nipponkoa plans to start selling a product tied to rainfall. It will at first be made available through partner
companies, as the Japanese insurer does not yet have permission to deal directly with local customers.
The target market will be the drier regions in the centre of the country. Satellite imagery will be utilised to
determine whether rainfall has been lower than predetermined benchmarks, and payouts will be made to
farmers in the affected areas.

Technology

The key for the distribution of insurance, especially micro products, will be financial technology. The
mobile sector has been liberalised since 2013, and as a result ownership and use of cell phones have
increased rapidly. Many more people have handsets than have contact with financial institutions. The
mobile penetration rate is an estimated 90%, according to local press reports, with actual phone
ownership placed at 40%. Handsets allow insurers to reach customers who are far from a branch or costly
to visit in person. The use of them makes sense, especially if the product has a low premium.
In 2016 the government passed the Regulation on Mobile Financial Services. While not directly
addressing insurance, it does establish a robust framework for related institutions and solutions (see
Banking analysis). The regulation will enable the growth and development of distribution channels and
payment methods. Initiatives like Wave Money hope to offer relevant financial products through
handsets, while in early 2016 IKBZ became the first licensed insurer to offer products via mobile devices.
KBZ is planning to list its insurance subsidiary in 2017 on the Yangon Stock Exchange. The company is
also looking for a partner to develop financial technology solutions.

Outlook

The insurance sector in Myanmar is set for significant and sustained growth. The question now is how
quickly further reforms will be implemented. While the initial liberalisations came rapidly, caution seems
to be the guiding principle going forwards. It is likely that the real opportunities for foreign insurers will
come after the regulators are comfortable that the domestic insurers are competitive. The insurance
industry can act as a natural stabiliser for the financial industry as a whole, U Thaung Han, managing
director of CB Insurance, told OBG. To achieve this the sector needs more market freedom.

The other domestic insurance companies are First National Insurance, Aung Thitsar Oo Insurance, Young
Insurance Global, Ayeyar Myanmar Insurance, Global World Insurance, Pillar of Truth Insurance, Aung
Myint Moh Min Insurance, Excellent Fortune Insurance, Capital Life Insurance, Grand Guardian
Insurance and Citizen Business Insurance.

A total of 24 foreign representative offices have been opened in the country, including AIA, Prudential
Holdings and Manulife. Three Japanese companies Tokio Marine & Nichido Fire, Mitsui Sumitomo
Insurance and Sompo Japan Nipponkoa Insurance have been granted licences to operate, but only
within Thilawa Special Economic Zone (SEZ).

According to the local press, in October 2015 the companies operating in Thilawa SEZ were given
permission to offer liability insurance. Previously, they had been limited to fire, life and vehicle products.
In early 2016 Sompo Japan Nipponkoa became the first international firm to offer auto insurance policies,
though these were restricted to Thilawa.

Ongoing Reforms

Previously, the local private companies were limited to six of a possible 48 lines, with only Myanma
Insurance permitted to sell all lines. Since then, in line with ongoing reforms, two more lines have been
added to the private providers portfolio: health insurance and marine cargo insurance. The Treasury is
currently considering the liberalisation of investment restrictions on the insurers.

In early 2016 the IBSB said that it would be allowing some European insurers to apply for licences to
operate in Thilawa SEZ. To qualify, the companies must have had a representative office open in
Myanmar for three years, 30 or more years of experience in the business and at least two years operating
in ASEAN. According to the local press, the licences will cost $30,000 initially and an additional $10,000
per year. The government may also allow foreign firms to join with local companies and open domestic
branches.
The IBSB falls under the auspices of the Ministry of Finance and Revenue, and is responsible for
licensing insurers, underwriting agents and insurance brokers. The minimum capital required for private
insurers in the Myanmar market is MMK6bn ($4.9m) for life insurers, MMK40bn ($32.5m) for non-life
companies and MMK46bn ($37.4m) for entities doing both, according to international law firm Norton
Rose Fullbright. A deposit equal to 10% of capital must be placed with the central bank, while Treasury
bonds worth a total of 30% of capital must be purchased.

Despite having been liberalised for just a short time, overall performance has been good. Pent-up demand
has been significant. According to local press reports, at the end of 2015 the sector had expanded by 40%
since new entrants started arriving in 2013, with the annual growth rate averaging more than 12% during
this period. The current government is supportive of the insurance sector and is encouraging its
development. As part of its 12-point economic plan, the opening of insurance to international players is
on the list of proposed financial reforms.

Into The Pool

Observers say that further reforms are needed, especially in terms of governance. The work of the IBSB
has so far mainly been carried out by Myanma Insurance, and a clearer separation of duties is needed to
make the regulator truly independent. This process is now under way. Myanma Insurance was officially
separated from the board in 2016, while the Financial Regulatory Department under the Ministry of
Finance is eventually expected to take over responsibility for oversight of the insurance sector. The
insurance sector is still in its infancy stages, U Ba Tun, managing director of Aung Thitsa Oo, told OBG.
For the industry to grow to its full potential there needs to be more liberalisation and an easing of
restriction by the regulator on individual operators, especially in terms of products and pricing.

Overall, regulations are considered highly restrictive. Insurers are still limited as to the total risk they can
take on. After a point, they are required to place business with a coinsurance pool, formed by all the
operators, which for all intents and purposes means ceding the business to Myanma Insurance, as only the
former monopoly has the capacity to take on the risk. According to US-Myanmar Relations: The Next
Phase a report from the US Chamber of Commerce in the past the pool has been largely unprofitable.

Fire insurance risk is currently limited to MMK500m ($406,000) per insurer, while auto insurance is
limited to MMK300m ($244,000), according to the Myanmar Times. Insurers have also said that the
capital burden is high, especially since 40% of the total is unavailable to them due to mandatory reserves
held in Treasury bonds and at the central bank, and are of the opinion that they should at least be able to
deposit the money with private banks to generate interest.
Lack Of Competition

Not only is risk capped, but the policies themselves are dictated by the regulator. Wording is standardised
across the sector. Insurers have also said that the mandated insurance forms are poorly designed, while
many of the policies the authorities do allow them to sell are not receiving much interest from the public.
Price competition is also not yet permitted, with premiums fixed. Everyone sells the same policies, this
is the main issue, U Sein Min, a consultant to Taiyo Life Insurance and former Myanma Insurance
executive, told OBG.

Other concerns hang over the sector. While the penetration rate is very low, growth may not be as fast as
originally hoped. Awareness is still very limited, while few people have the additional income needed to
pay the premiums. Because of the lack of a robust regulatory framework, public interest in insurance is
likely to remain weak, according to the US Chamber of Commerce report. The sector also faces
underinvestment in terms of IT and a shortage of skilled professionals. As U Myo Naung, managing
director of Grand Guardian Insurance, told OBG, One of the hurdles to development of the sector is the
lack of capable insurance professionals, such as actuaries.

Further Liberalisation

The chamber has recommended that the country allow more foreign participation in the sector. It has also
suggested that Myanmar adopt some of the regulations in use in neighbouring countries, such as Thailand
and Malaysia. This would allow for more rapid development and increase confidence on the part of
foreign insurers.

Concerns about the ability of the insurers, including Myanma Insurance, to stand up to competition
remain, and because of that further liberalisation is likely to take time. They must open the market step
by step, U Sein Min told OBG. The local companies cannot yet compete. The prevailing sentiment is
that the regulators should also go slow when it comes to the liberalisation of premiums. Capacity and
experience are very limited at the insurer level, and the country has no actuaries. If the new insurers were
allowed to set their own rates, the fear is that they would begin to aggressively reduce their prices, leading
to instability in the market.

Micro-Insurance

One subsector with significant potential is micro-insurance. Low-cost, innovative products that cover
essential risks are much needed, and will likely be taken up quickly as they are developed and offered.
While challenges exist, these can be overcome if policies are well designed, and if the distribution
channels are effective and efficient.

As of late 2016 the micro space was virtually empty. Neither Myanma Insurance nor the new private
insurers offer policies of this type. Some credit-linked products from microfinance institutions and
cooperatives are available in the market, but not much else. Microfinance in general is better established.
It has been in the country in one form or another for decades, and a formal legal framework was published
in 2011 allowing for local and foreign investment in microfinance institutions. However, no framework
has been developed specifically for the subsector.

Once the right sort of laws and regulations are in place, micro-insurance will also need to tackle a number
of barriers to growth. Affordability, even for low-cost products, is an issue, with GDP per capita at $1200.
Levels of understanding are also very low. Potential customers tend to have trouble distinguishing
between insurance and investment, believing that they will make a profit from a policy they buy, and are
unable to appreciate the risk mitigation aspects of the products. The distances involved in reaching
potential customers also stands to make sales difficulty, as the industry has very few physical branches.

On The Demand Side

Despite these issues, one factor buoying the outlook of micro-insurance growth is the substantial demand
for such products. Because incomes in Myanmar are generally low, unexpected costs can be devastating.
Unforeseen events are not uncommon either, especially those related to the climate and other natural
disasters, such as earthquakes. The lack of insurance products has resulted in less-than-ideal ways of
covering the cost of potentially insurable events. For example, when faced with medical expenses 47% of
people in the country take out loans to pay the bills, 27% sell assets and 22% use savings, according to
local press reports.

In a 2014 survey by BC Finance, a local microfinance firm, it was found that many of its customers had
significant concerns regarding the costs related to the death of an individual. That was followed by
concerns about health care, and fire and accident expenses. Only 3% of the people surveyed said that theft
was a worry. When asked if they would buy micro-insurance products to protect themselves from these
risks, 83% said they would. More than a third said that they would be able to increase their investments in
business if more of their risks were covered.

Increased Support

Support for micro-insurance has been growing in both the private and public sectors. In late 2016 the
World Bank said that it would be providing $100m to Myanmar to aid the development of the financial
sector. In part, the funds will go towards efforts related to micro-insurance.

In December 2016 the local press reported that XL Innovate, a US-based venture capital company would
be investing $4m in Stonestep, a Swiss-based company that is working to offer a micro-insurance as a
service product. The main focus at the outset will be Myanmar. Stonestep is also active in the
Philippines.

The basic concept is to use existing distribution channels, such as those established by mobile phone
companies and financial services firms, to get products to individuals at a relatively low cost. This
strategy also allows insurers to access locations that might be difficult to reach with the traditional brick-
and-mortar-broker-agent model.

Agriculture

With half of the adult population involved in farming, the largest market for micro-insurance is the
agricultural sector. Farmers are also the biggest users of credit and face many risks, including drought,
pests, hail, plant diseases, floods and excessive rainfall. The right sort of insurance products have yet to
be developed for the sector, while regulation covering agricultural policies is weak. The farmers
themselves are accepting of the idea of insurance. Around 50% of individuals involved in agriculture have
both an interest in the product and enough available cash to make the purchase. The main task is
convincing them that buying a policy is the best use of funds.

The government has expressed considerable interest in supporting the development of relevant products.
Crop insurance has become a priority for the new administration. The most promising solutions for
agriculture are those linked to the weather, especially storms and droughts, and are seen as more efficient
and equitable than simple credit-linked products.

Some large-scale insurers have taken an interest in offering weather-linked policies. Sompo Japan
Nipponkoa plans to start selling a product tied to rainfall. It will at first be made available through partner
companies, as the Japanese insurer does not yet have permission to deal directly with local customers.
The target market will be the drier regions in the centre of the country. Satellite imagery will be utilised to
determine whether rainfall has been lower than predetermined benchmarks, and payouts will be made to
farmers in the affected areas.

Technology

The key for the distribution of insurance, especially micro products, will be financial technology. The
mobile sector has been liberalised since 2013, and as a result ownership and use of cell phones have
increased rapidly. Many more people have handsets than have contact with financial institutions. The
mobile penetration rate is an estimated 90%, according to local press reports, with actual phone
ownership placed at 40%. Handsets allow insurers to reach customers who are far from a branch or costly
to visit in person. The use of them makes sense, especially if the product has a low premium.

In 2016 the government passed the Regulation on Mobile Financial Services. While not directly
addressing insurance, it does establish a robust framework for related institutions and solutions (see
Banking analysis). The regulation will enable the growth and development of distribution channels and
payment methods. Initiatives like Wave Money hope to offer relevant financial products through
handsets, while in early 2016 IKBZ became the first licensed insurer to offer products via mobile devices.
KBZ is planning to list its insurance subsidiary in 2017 on the Yangon Stock Exchange. The company is
also looking for a partner to develop financial technology solutions.

Outlook

The insurance sector in Myanmar is set for significant and sustained growth. The question now is how
quickly further reforms will be implemented. While the initial liberalisations came rapidly, caution seems
to be the guiding principle going forwards. It is likely that the real opportunities for foreign insurers will
come after the regulators are comfortable that the domestic insurers are competitive. The insurance
industry can act as a natural stabiliser for the financial industry as a whole, U Thaung Han, managing
director of CB Insurance, told OBG. To achieve this the sector needs more market freedom.

Simeon Preston, Group COO, AIA Group: Interview

Interview: Simeon Preston

What steps can the insurance industry take to improve penetration and density levels?
SIMEON PRESTON: In the initial phase of market development, customers will need strong
inducements and incentives to participate in long-term savings and protection. On the supply side, product
offerings must be simple and clear, with propositions ensuring full customer understanding at the time of
purchase and an appreciation of the value of what is being purchased. On the demand side, there must be
some positive financial incentive to invest precious cash savings in a long-term savings product. To this
end, Asian legislators have typically granted income tax deductions to life policyholders on their
contributions to long-term savings and protection schemes.
Explaining those insurance products to consumers is equally important. Asian markets are host to a
variety of distribution models, which tend to evolve in tandem with the development of the financial
system and evolving consumer sophistication.
What further measures need to be taken so the insurance industry can act as a natural stabiliser to the
banking segment?
PRESTON: For many individuals in Asia, life insurance is the first financial product that they purchase.
With limited access to bank branches, or the means to qualify for credit, people take out small life
insurance policies that allow them to begin saving regularly in a disciplined manner. This remains true in
much of emerging Asia today. In many rural regions in markets such as China, India and Indonesia, the
local life insurance agent is often the main or even sole source of financial expertise and advice. In
addition, in some instances, life insurance offers the opportunity to participate in capital markets growth
through equity-based investment portfolios and real estate. As well as long-term savings, any plan for
insurance industry development needs to consider protection insurance. Rising affluence creates a desire
among individuals to protect personal assets already accumulated, and encourages people to begin
providing for dependents as well as for themselves.
In many parts of Asia dependents include ageing parents and extended family members, as well as
children and grandchildren, so the financial responsibility on any one breadwinner can be considerable.
Privately purchased insurance offers an alternative safety net for individuals able to purchase some basic
level of protection alongside their savings. As the insurance sector expands, the potential strain on state
welfare systems is considerably reduced particularly for health care and support for the elderly.

How can regulators work to further encourage the growth of small and medium-sized enterprises (SMEs)
in Myanmar?
PRESTON: Life insurers offer positive net flows, depth and stability to financial markets, and thus
complement the short-term nature of bank lending. The long-term nature of the investment process,
through the action of the capital markets, benefits the local economy, which in Myanmar is dominated by
SMEs. Thus, life insurers become a leading source of capital for local companies looking to raise equity
or debt. The life segment plays a significant underwriting role in the issuance of primary funds and also
has the liquidity from positive net premium flows to support secondary offerings. Moreover, life funds
assets and liabilities are held in local currency, eliminating the dependence on foreign currency-
denominated borrowing. This has been a very common feature of capital raising for less-developed
markets and was a contributing cause of the 1997-98 Asian financial crisis. Companies are able to make
use of long-term financing from life insurers to invest in fixed-asset projects well into the future because
of the long-term payback expected from life insurance financing.