Banks will be permitted to charge up to 16pc to loan money if borrowers pledge other forms of collateral or are not able to provide collateral.
Collaterals listed by the CBM are land and buildings, gold, diamonds and precious stones, savings certificates, government treasury bonds, fixed deposits, credit certifications and credit guarantees.
The new maximum interest rate of 16pc is all-inclusive of other charges such as management fees and applies for both installments and one-off repayments. Interest rates above 16pc are not permitted.
The Central Bank rate will remain unchanged at 10pc, while the maximum lending rate for loans based on CBM-specified collateral will remain at 13pc. The minimum deposit rate will also remain at 8pc.
The move comes after CBM vice governor U Soe Thein hinted at interest rate liberalisation during the signing ceremony to start Myanmar’s first credit bureau in December 2018.
Liberalisation will result in more headroom for small and medium enterprises (SMEs) that are unable to comply with the CBM’s collateral requirements to qualify for loans. Meanwhile, local banks will also have the option of extending riskier loans in exchange for a higher interest rate.
"Although the banks want to support the SMEs, there is more risk involved due to the absence of collateral. Now, banks can charge more for lend to riskier borrowers. Although the maximum interest rate is 16pc, the banks can offer a spread between 13pc and 16pc. This will still be cheaper than outside loans and represents a new type of loan for SMEs," said Dr Aung Thein, secretary of the Union of Myanmar Federation of Chambers of Commerce and Industry.
Currently, local banks offer several types of SME loans other than the standard loan. The interest rates are 8.5pc per annum for the Japan International Cooperation Agency and KfW's two step loan, 9pc per annum for loans by State-owned Myanma Economic Bank, 14pc per annum for overdrafts and 2 to 3pc interest rates for loans backed by Credit Guarantee Insurance.
Meanwhile, non-bank institutions are offering interest rates of between 24pc and 36pc per year for loans without collateral.
The move to make lending and borrowing more flexible for banks and businesses comes after a series of developments to open up the Myanmar capital market.
After six years, foreign insurance providers on January 1 were given the green light to operate in Myanmar. According to the Ministry of Planning and Finance, foreign firms wishing “to operate the business of insurance, underwriting agency or insurance broking with foreign investment” are now permitted to open for business in the country.
Under Notification 6/2018, issued on November 8, 2018, foreign banks are now also able to lend to domestic firms in the local currency at the standard lending rate of 13pc. Foreign banks are free to set their own interest rates if the loans are in foreign currencies. They will also be permitted to provide the full suite of trade financing services and expand, the CBM said.