But to protect domestic banks, recipients of the coveted licenses will be limited to banking for foreign corporations and foreign-exchange services, according to people close to the licensing process.
Foreign banks, they said, will be limited to one branch, won't be permitted to operate a retail-banking business, and will be allowed to lend only in foreign exchange, and not in the local currency, the kyat.
"We are trying not to introduce a severe competitive environment for the local banks," Set Aung, deputy governor of Myanmar's central bank, told The Wall Street Journal. "We cannot afford to have them totally maligned."
Winners of the licenses will be announced in September, though awarded next month. Myanmar recently shortlisted 25 of the 30 foreign banks that applied for a license. Only the 42 foreign banks that had previously established a representative office in Myanmar were allowed to apply for a license, which will give foreign banks their first real presence in the country that has been economically isolated and subject to sanctions for years.
Among the shortlisted banks are Australia & New Zealand Banking Group,ANZ.AU +0.24% Industrial & Commercial Bank of China Ltd. 601398.SH +0.58% and Japan's three biggest banks— Mitsubishi UFJ Financial Group Inc., 8306.TO -0.19%Sumitomo Mitsui Financial Group Inc. 8316.TO -0.16% and Mizuho Financial Group Inc.8411.TO -0.20%
Conspicuously absent was U.K.-based Standard Chartered STAN.LN +0.91% PLC, which is focused on emerging markets, particularly in Asia, and is the only "Western" bank registered in Myanmar apart from ANZ. A Standard Chartered spokesman said the bank decided not to "apply for an onshore branch license at this time for commercial reasons. We remain focused on growing our presence in Myanmar through our representative office."
For foreign lenders—particularly those from Japan, Singapore and China—the payoff is potentially high, as companies from their countries pour money into Myanmar. China had $14 billion of approved investments in Myanmar at the end of June, while Singapore pledged $1.58 billion in new investments between April 2013 and January 2014 alone. Companies from Japan, which is leading the development of a 2,400-acre special economic zone south of Yangon, have invested $332 million in Myanmar.
An MUFG spokesman said in an emailed response to questions that "Myanmar is one of the countries where we would like to do business aggressively given its economic potential growth and its rich resources."
A spokesman for SMFG said his bank sees Myanmar as a promising market given its economic overhauls.
Still, the restrictions on foreign bank licenses will stymie what could be a landmark breakthrough for the country's laggard banking sector. Local enterprises are "starved of capital," said Sean Turnell, an expert on Myanmar's economy at Sydney's Macquarie University.
"If there was a worry that Myanmar would move from a military dictatorship to a system where oligarchs control everything, the [unrestricted] entry of foreign banks could really help that," Mr. Turnell said.
The restrictions are likely driven by a desire to protect local banks, most of which are owned by cronies of the previous military government, analysts said. Myanmar came under military rule in the 1960s and nationalized the banking sector, only opening it up to private ownership in the 1990s. It now has four state-owned banks and 22 privately owned lenders, the biggest of which is Kanbawza Bank Ltd.
Privately owned banks such as Asia Green Development Bank and Ayeyarwady Bank are controlled by rich businessmen who, along with their banks, are the targets of U.S. sanctions because of their close links to the military regime.
For their part, local banks have urged parliamentarians to vote against further banking overhauls.
"Foreign banks are giants, but we are still very small," said Sein Maung, chairman of Myanmar First Private Bank and vice chairman of the Myanmar Banking Association. "We are not ready to compete with them, not in terms of technology or experience."
Analysts say, however, that with few immediate profits to be made, the go-slow approach of Western banks into Myanmar wasn't surprising.
"Everybody is becoming very cautious as to the nature of counterparties they are dealing with and really understanding who those people are," said Keith Pogson, Hong Kong-based financial-services managing partner for Asia Pacific at Ernst & Young. "The general view of the banking opportunities in Myanmar is that the hype is ahead of the reality."
— Myo Myo in Yangon and Atsuko Fukase in Tokyo contributed to this article.