Thursday, 19 June 2014

Banking for a democratic economy?

Global media outlets were swift to report earlier this month that the Central Bank of Myanmar will grant foreign banks limited operating licences this year, but they have been deaf so far to questions raised in Myanmar’s business community about who will benefit from this move.

Will those who now pay exorbitant interest rates to domestic banks get a break, or will the crony-dominated banking industry become even stronger, squeezing even more funds from the country’s small- and medium-sized enterprises. SMEs account for the lion’s share of economic activity in the country, and could become the main drivers of a more diverse economy that will be a key component of a genuinely democratic country, economists say.

Local business people responded with hope when the central bank announced late last year that foreign banks would be allowed to operate in the local market. Domestic banks do not offer them long-term or large loans, and the interest rates they charge are far higher than those charged by international banks due to higher operating costs here.

Domestic banks grant short-term loans to borrowers who have property to mortgage, usually up to 30 per cent of the value of the property.

Hopes of an alternative to exorbitant banking costs faded, however, as the big domestic banks with close ties to the government moved swiftly to lobby against foreign competition. Even though they do not represent every business sector in the country, their interests appeared to take precedence, businesspeople said. The entrance of foreign banks might even become an opportunity for those who already control the financial sector to gain greater control of the economy, rather than offer more opportunity to those whose businesses depend upon them, business people say.

A panel will review applications for limited licences by foreign banks by July 6 and award five to 10 licenses by the end of September. Based on a recommendation from the World Bank, each selected foreign bank will be required to have minimum paid-up capital of $75 million.

Set Aung, a vice-governor at the central bank, expressed optimism that allowing foreign banks limited licences would help modernise the banking sector. “Giving the green light to the foreign banks can spur faster development of the financial sector,” he said. He added, however, that there would be strict limits on the financial services they could offer in order to prevent them from damaging domestic banks. They include a ban on retail banking and a limit of one branch. Such limits are similar throughout the region, he said, adding that the foreign banks were satisfied with them.

Set Aung pointed to the Thai example, where foreign banks are limited to five to 10 branches. He described the move as a “win-win-win situation” for all concerned. The foreign banks can expand their business and this will also spur development of the domestic industry, he said.

Economist Dr Aung Ko Ko agrees that limits need to be placed on foreign banks entry into the domestic market, but calls for a more pragmatic, though cautious approach: one that meets the needs of customers rather than the owners of domestic banks. “Foreign banks can provide financial support to local entrepreneurs and local banks, rather than being restricted to assisting large foreign investors,” he said. “Myanmar can learn from the success stories of countries like China and Vietnam, and heed their financial reform process.”

“Most businesses need more capital investments to operate to their full potential,” he explained. “The banking system will be fine only when farmers and other people can easily get the loans they need. Interest rates may be high if they can only get loans from foreign banks through local banks. This will only benefit local banks,” he added.

High-interest rates are crippling those with the lowest incomes, like trishaw drivers and vendors. If local entrepreneurs and workers could borrow directly from foreign banks this will benefit the entire economy by sparking widespread economic growth, he said.

Dr Aung Ko Ko also noted that banks owned by “cronies” are often components of personal business empires, which are dependent on the health of the overall economy, as well as the political and military connections of their owners. International banks, on the other hand, restrict their activities to the banking industry.

Banking on the cronies

Among the 22 private banks in Myanmar, Kanbawza Bank – which had a close relationship with the former junta – is the major player. It has 160 branches across the country, out of a combined total of more than 700 branches for all banks.

Co-operative Bank places second. It has 80 branches and is owned by presidential business advisor Khin Maung Aye.

Asia Green Development Bank has 49 branches. It is owned by owned by tycoon Tay Za.

Myanmar Apex Bank has 42 branches. Adim U Chit Khine, a local business tycoon owns it.

Ayeyarwady Bank has 71 branches. U Zaw Zaw who runs Max Myanmar owns it.

United Amara Bank has 29 branches. Nay Aung, son of Aung Thaung who is the chairman of the Myanmar Banks and Financial Development Committee, owns it.

Innwa and Myawady banks with more than 30 branches each,

Yoma Bank has 33 branches. Tycoon Thein Wai chairs it.

Myanmar Microfinance Bank, in cooperation with Ministry of Cooperatives, is also planning to open branches nation-wide.

The banks with the least number of branches are: Yadanabon Bank, Naypyitaw Development Affairs Bank, Yangon City Bank, Asia Yangon Bank, Myanmar Citizens Bank, First Private Bank, Tun Foundation Bank and Small and Medium Enterprises Development Bank.

State-owned banks such as Myanmar Economic Bank and Myanmar Foreign Trade Bank are currently listed as loss-making state-owned businesses.

Foreign contenders

Forty-two foreign banks have opened representative offices here. Most are from Asian countries, including Japan, China, South Korea, Vietnam, Brunei and India. Banks from Australia and New Zealand also have representative offices. Only one bank from Europe, Britain’s Standard Chartered Bank, has a representative office here. It conducts most of its business from Hong Kong.

Set Aung said recently that the plan is to allow stronger foreign banks rather than a large number into the market, as there are only a few strong private banks operating here. He also added that it is the central bank’s duty to allow foreign banks to operate in Myanmar under current rules and regulations.

He also said Myanmar’s financial sector would see a faster development if foreign banks can operate, as they can offer large, long-term loans.

But Thein Tun, chairman of Myanmar Banks Association, said domestic private banks are concerned about foreign competition because of their lack of capital. Even if they combined all of their assets they could not match the capital of a single foreign bank, he said.

Looking forward

Many significant financial reforms have occurred since the new government assumed office in 2011, following 50 years of economic blindness. Chief among these are making the Central Bank of Myanmar independent, stablising foreign exchange rates, abolishing foreign exchange certificates, allowing private banks to cooperate with foreign banks, and the enactment of the foreign currency management law. Although these moves have not been 100 percent successful, they have benefited the economy.

Externally, two major changes could spur the development of a more democratic economy. The reinstatement of the European Union’s Generalised Scheme of Preferences has resulted in a massive inflow of investments from China, Japan and South Korea into several export sectors, often in the form of joint ventures with domestic SMEs. This investment has been attracted by the opportunity to export everything except arms and ammunition from Myanmar to the EU free from both duties and quotas. Garment exports reached $893 million while sugar exports rose above $48 million last year. The export value of industrial finished products was, however, only $355 million, suggesting there is far more room for growth in this SME-dominated sector.

Another external opportunity is the emergence of the Asean Economic Community, which will see tariffs fall across the region. Unlike the six most developed ASEAN countries, the less developed members of the regional bloc – Myanmar, Vietnam, Cambodia and Laos – will not see the relaxation on tariff and other non-tariff barriers until 2018, three years after they fall for the more developed members. This gives SMEs in Myanmar and other less developed Asean countries an opportunity to prepare for this massive market opportunity. Without a robust, banking system that serves the interests of the most dynamic businesses in the country, Myanmar could fall short of benefiting from this opportunity. The result could be that Myanmar will remain the least developed country in what many economists describe as the world’s most economically dynamic region.

source: Eleven Myanmar
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