Photo: Shwedagon Pagoda, the holiest Buddhist site in Burma, has been decked out with ATMs from the country’s major banks since their re-introduction in March 2012 (Alex Bookbinder).
Myanmar’s financial modernisation is crucial, and far from complete
The chaotic scene at the headquarters of KBZ Bank in Yangon is repeated at bank branches across Myanmar: bushels of Kyat banknotes piled high behind the counter, with automated money counters whirring, furiously counting out 1,000 kyat (US$1) notes. The sheer volume needed to conduct even small transactions means customers withdraw and deposit sums in bricks of 100, which are often then packed into disused rice sacks.
Welcome to banking in Myanmar.
Nearly five decades of gross mismanagement has left Myanmar with banks badly in need of modernisation, and a financial system that will have to be built from the ground up. But the government is making a concerted effort to bring Myanmar’s financial infrastructure into the 21st century, a crucial task if it is to attract desperately needed foreign investment.
“In general, we’re very complementary of the [reforms] the government has taken,” Tina Singhsacha, the country head for Standard Chartered Bank in Myanmar, told The Edge Review. Although Standard Chartered, like all other foreign banks, is not allowed to provide onshore banking services in Myanmar, it operates a representative office in Yangon primarily to assist local customers with offshore banking. “We’re back here to support Myanmar’s reintegration with the international community,” she said. “We recognise that for Myanmar to reintegrate, they need players like us.”
Although there’s still a lot of work to do, banking in Myanmar has become easier since the start of major economic reforms two years ago. While there’s still no national payment system to facilitate interbank deposits and the use of cheques is rare – hence the continued reliance on massive sacks filled with cash – cross-border transfers are now possible, and a new debit card network – the Myanmar Payment Union – is in use at ATMs around the country, which were themselves only introduced in early 2012.
But even though the infrastructure is developing, there’s a big problem: people in Myanmar don’t trust banks. In 2003, a number of Ponzi-like private investment schemes exploded, with the contagion soon spreading to private banks. As a result, faith in private banks was irrevocably shaken.
This means that businesses in Myanmar have continued to rely on informal channels for financing, while high-net-worth individuals put their money into tangible assets like property, gems and jade rather than into interest-bearing accounts or securities.
Much of the money withdrawn from the formal banking system in 2003 after the failed Ponzi schemes has stayed out, but that may be changing. David Proctor, a Yangon-based financial consultant who previously held senior positions at Standard Chartered and Bank of America in emerging markets, sees confidence in the private banks increasing. “On the positive side, you’re seeing an increase in deposits, which is good,” he said. “What’s hard to assess is if that’s just a reflection of increased wealth generally, or whether the 50 per cent of money that’s circulating outside of the banking system is gradually beginning to move back into the banking system.”
The Foreign Waiting Game
A draft bill to replace the Financial Institutions of Myanmar Law, dating to 1990, is expected to be sent to parliament soon. For foreign banks interested in doing business in Myanmar, the revised guidelines can’t come soon enough. “If you ask any foreign bank today, they’d say their end objective is to have a retail business in Myanmar 100 per cent owned, with their own full branching rights,” Proctor said.
While allowing foreign banks to conduct personal and commercial lending might seem like a good way to improve access to capital across the board, Proctor warns that letting foreign banks in too quickly isn’t a good idea.
A number of studies sponsored by the International Monetary Fund (IMF) on foreign bank entry into poor countries have found that – due to an inability to assess credit risk – foreign banks are generally only willing to offer financing to large businesses. The small- and medium-enterprise (SME) sector would have to continue to rely on local banks for financing, and with foreign banks poaching the biggest clients, financing costs for SMEs will increase to make up for lost revenue.
But foreign banks are already starting to extend financing to local banks in Myanmar in a way that should clear a middle path between pure protectionism and the excesses of unfettered foreign entry. “In effect, if there’s a letter of credit issued by a local bank, then – selectively – the foreign banks are beginning to accept those,” said Proctor.
There are other barriers to financing that new legislation will need to address. “The biggest barrier for SMEs in this country is that all loans are fully collateralised, and they’re short-term lending – no more than one year,” said Singhsacha. “Credit, as a percentage of GDP, is only about 3 per cent…. It’s very conservative here; there’s basically no risk-taking by banks whatsoever. The biggest hurdle will be for the central bank to allow local banks to do more.”
Foreign banks are already free to enter into joint ventures with local partners, but there has been little interest on the part of local banks to negotiate such arrangements, said U Than Lwin, the deputy chairman of KBZ Bank, Myanmar’s largest private bank, and a former deputy governor of the Central Bank of Myanmar. Joint ventures in Myanmar entail the creation of an entirely new corporate entity, and the future of such arrangements would be thrown into limbo if foreign banks were to be allowed to establish full branches. “What’s going to happen to the joint ventures? Are you going to dismantle them?” he said. “Before you give the green light to JVs, you have to map out the exit strategy for JVs, both for the local side and foreign side. You have to be very careful.”
Central Bank Blues
In early July, a new law governing Myanmar’s Central Bank was put into effect following consultations with the IMF, and is intended to grant it independence and modernise its functions. While the new law has been widely hailed as a cautious step in the right direction, U Than Lwin claims there are still big problems both with its contents and how it will be implemented. “They say the central bank is independent, but I don’t see how they’re independent,” he said. “There are no checks and balances there.”
He said the fact that there’s still only one board of directors is of particular concern. He offered as an alternative the example of the Bank of Thailand, which has three other boards – aside from the executive board – that govern monetary policy, supervise financial institutions and administer payment systems. There’s no way the Central Bank of Myanmar’s one board can oversee all of these areas, he argued, especially since it meets only once a month.
He also cites a fundamental lack of technical expertise at the Central Bank as a big problem. “They have a new team in the Central Bank, but before the governor was a military professional, not a banking professional. Now, they want to have a new team without the military’s involvement,” he said. “But they don’t have any qualified people, so they had to recall the old governor [U Kyaw Kyaw Maung], who retired eight years ago.” Despite the purge of military officials from the Board of Directors, there’s still a big knowledge and experience gap. “I didn’t see any banking professionals or legal experts. But that may change,” he said.
Although it’s an important piece of legislation, the Central Bank Law doesn’t reform laws on Myanmar’s state-run and private banks, or provide a regulatory framework for the modernised capital markets the government wants to develop. Drafts of many of these laws are expected to arrive when parliament resumes, so it is difficult to gauge the significance of the Central Bank Law in isolation from the complementary legislation that will round out Myanmar’s financial reform package.
“I think, as ever, in these developing markets, you can write whatever you like, but it’s really the practical execution of it that’s key,” Proctor said. “And that’s what everyone’s waiting to see.”
Sidebar: Myanmar edges toward modern equity trading
When is a public company not a public company? In Myanmar, the lines are blurry. New rules passed in October 2012 made going public and issuing shares much easier, but because Myanmar lacks modern capital markets, shares are generally traded only among small groups of insiders. In a few instances, shares in public companies have been sold from booths set up at malls, giving the term “initial public offering” an entirely new meaning.
Also, a lack of transparency among Myanmar companies makes it difficult to value them accurately. It’s not uncommon, for example, for companies to have two or three sets of books in a bid to avoid taxes. Thura Swiss, a local financial research firm, has begun to issue equity research reports on local public companies, but so far has only assessed Myanmar’s largest and most transparent firms. Whether more public companies can be persuaded to become more transparent to attract investors remains to be seen.
Myanmar has had a bourse since 1996, but it only trades shares in two public companies and does so the old-fashioned way, without the aid of computers. A new, computerised stock exchange – which will be established with technical assistance provided by two Tokyo-based firms, Japan Exchange Group and Daiwa Securities Group – was set to go online in 2015. But a representative from Japan Exchange told Bloomberg News in September that delays to Myanmar’s Securities Exchange Law have pushed back operations by “about a year.” The law – passed in July – does not specify if foreigners will be allowed to trade on the new exchange.
The requirements for listing on the new exchange will also be insurmountable for most of Myanmar’s public companies. In order to list, they must have a minimum capitalization of 500 million Kyats (US$5.3 million) and two years of proven profitability. Thura Swiss CEO Aung Thura anticipates that just five to 10 companies will initially be listed on the new bourse, most of those being banks.