On March 25, the CBM again issued instructions covering five directives on banking governance and statistics.

To strengthen the country’s financial sector, Financial Institutions Law was introduced January 2016. CBM has now five detailed directives to banks covering related-party transactions, regulations that bank director shall follow, appropriate standards for bank directors and senior officials, having internationally recognised external auditor, and acquisitions of substantial interests.

“The regulations are included in the Financial Institutions Law, but the law doesn’t stipulate specifically how the regulations are to be followed. That is why we have issued instructions for banks to follow in detail. The purpose is to strengthen banks’ corporate governance,” said Central Bank of Myanmar Deputy Governor 1 U Soe Thein.

As local institutions haven’t had strict guidance before, the country’s banking system has been left behind compared with neighbouring countries and action will be taken to ensure better compliance with regulations, CBM officials said in January.

“If the requirements for directors, having external auditors, and compiling compulsory data are followed, banks will only become stronger,” U Soe Thein said.

The CBM has had reissue the directives as some local banks are still not strictly following the rules in the Financial Institutions Law, said banking expert U Than Lwin.

“For the banks to get stronger, these rules must be followed. In the case of external auditors, some banks have already instituted this, but some smaller banks haven’t yet. The cost is very high to hire external auditor so some banks may have been reluctant to do so. The CBM directive serves as a reminder for the laggards to act,” U Than Lwin said.

However, it might be better if some leeway is given for certain regulations depending on the country’s economy and size of the banks, he said.

“The regulations are good and necessary. But, according to the current economic situation and the costs for acquiring and implementing technology, some banks have seen their bottom lines shrink. So, I think it will be better if some regulations are implemented in sustainable ways,” he said.

Meanwhile, some local entrepreneurs feel the local banking sector’s weakness hampers economic growth and want improvements to the banking industry carried out quickly.

One of the directives issued by CBM is that an independent non-executive director of a bank must holds less than five percent of the voting shares of the bank and is not a related party as defined in the Financial Institutions Law. The term of a director shall be for three years they cannot serve more than three consecutive terms.

The chief executive officer cannot be appointed as chair of the board of directors. According to the conflict of the interest policy, the members of the board of directors and officers must declare the main financial status of banks and all economic interests. As a restriction on directors, they are prohibited from participating in an issue opposing the interests of banks and interfering in daily managements of banks.

Substantial interest is defined as owning, directly or indirectly, 10pc or more of the capital or of the voting rights of a bank or, directly or indirectly, exercising control over the management of the bank.

The directive states that no person, acting alone or in concert, shall acquire a substantial interest in a bank without obtaining the prior approval of the CBM, which may accept or reject the request within 90 days.

With regards to loans to related parties, banks have to follow the rules set by CBM. Related parties are defined as a person who has substantial interest in the bank or the bank has significant interest in the person; a director or officer of the bank or of a body corporate that controls a bank;  a relative of a natural person; an entity that is controlled by a person; a person or class of persons who has been designated by CBM as a related party because of its past or present interest in or relationship with the bank.

According to the rule, excluding being secured by collateral and made on market terms and conditions, a bank shall not lend to any related parties unless such transaction has been approved by a vote of two thirds or more of the board of directors.

“There have been many cases of loans being granted to the relatives of bank staff. Banks haven’t followed the rules strictly enough in this regard. That needs to be changed,” CBM Vice Governor 2 U Bo Bo, Vice Governor said in January.

Directives for appointment of board of external auditors were also included. The directive states that external auditors apply to those who work independently and have required qualifications in auditing. In addition, it states that the external auditors must work in compliance with the best international procedures.

Since 2017, the submission of information to the CBM regarding large loans, amendment to the calculation of liquidity ratios, conversion of issued loans into term loans and  asset classifications and provisioning regulations have also been required.

Source: https://www.mmtimes.com/news/cbm-again-issues-detailed-rules-banks.html