Vikram Nehru is a former Chief Economist with the World Bank.
He says it will be years before the financial system will be developed enough and foreign investment shouldn't be rushed.
Correspondent: Karon Snowdon
Speaker: Vikram Nehru, Senior Associate and Bakrie Chair in Southeast Asian Studies, Carnegie Endowment for International Peace, Washington
SNOWDON: In the past few years, 35 foreign banks have opened offices in Myanmar, but they aren't allowed to do much or invest directly in local banks. By September some of them might be given licences for limited operations. But while the government is keen to tap into foreign expertise and funds to build a stronger financial sector there are risks.
Former World Bank Chief economist Vikram Nehru says there should be no rush.
NEHRU: There is no low income country that has opened its banking system to foreign direct investment successfully. To have fully owned foreign banks involved in the retail sector that could potentially be destabilising for the domestic bank system and that's why its not recommended.
SNOWDON: So there is a systemic risk to a dominance by foreign banks?
NEHRU: Indeed, there is a systemic risk when there is dominance by foreign banks because that could lead to domestic banks literally going bankrupt because there would be a flight to safety by depositors to the foreign banks. That is to risky at this stage.
SNOWDON: Australia's ANZ Bank was one of the first to get a foothold in Myanmar and sees it as an important part of its Asian expansion. No one from the bank however was available to comment for this story. Nor was a representative of government or the Bank association.
Myanmar isn't short of local banks but they are weak and so is regulation at this stage. The important small business and farming sectors find it hard to get finance from them. The alternative, micro finance has bloomed since the political changes of recent years. And it's now its a crowded sector but problematic, not just because the interest rates are generally higher than banks.
The loan amounts are too small to attract the regular banking sector and it remains outside government supervision.
NEHRU: And this to could potentially be destabilising.
SNOWDON: Vikram Nehru, who is now senior associate in Bakrie Chair in Southeast Asian Studies at the Carnegoie Endowment for International Peace in Washington.
The International Monetary Fund this month raised its growth forecast for this year to 8-and-a half per cent, noting recent economic reforms have helped the country post a healthy rate of growth. But the IMF added without broad reforms that momentum could be at risk. It added an expected rush of foreign banks into the rapidly growing financial sector will add to the strain. Foreign banks could help with technology, improved standards, the development of basic infrastructure, and a stable source of funding.
But again Vikram Nehru says caution is the best policy while Myanmar develops policies and institutions.
NEHRU: Involving foreign banks in Myanmar's banking system is important, but it has to be done gradually and in stages, through joint ventures, due it through technical assistance, due it through strategic partnerships of various kinds. All I'm recommending is at this stage, having fully owned foreign banks and retail banking is not something that will be desirable.
SNOWDON: Foreign banks, of course, are clamouring at Myanmar's door aren't they, are they going to be satisfied with this transitional role?
NEHRU: Well, I hope what the authorities will do is that if they do allow foreign banks in, that they restrict them to providing financial services to the foreign investor community and that indeed is essential. It's just that if they were to then enter retail banking, then that could be something that could potentially be destabilising.
SNOWDON: An international conference next month in Yangon will detail the next moves the government intends to take.
source: Radio Australia