Myanmar risk: Alert – Banking reform begins to take shape

Myanmar risk: Alert – Banking reform begins to take shape

January 28th 2014

FROM THE ECONOMIST INTELLIGENCE UNIT

Progress is being made toward opening up the country’s banking sector to foreign involvement, a reform that was first announced last year. However, it will be a challenging process, and one that will prove a tricky balancing act in order to ensure that the local banking system is also adequately developed.

According to recent press reports, the government is working with the International Monetary Fund (IMF) and World Bank to develop the reform programme. Banking in Myanmar is considered to be a ‘restricted’ sector, which ensures that foreign banks only enjoy representational rights, placing them in a position of being able to offer advice to clients. However, the reforms will see this role being extended to allow them to operate limited services.

At this stage details remain unclear. Reports suggest that these steps on the road to banking – and with it – wider financial reform will begin this year, but a more specific time frame has not, as yet, been set. It is also unclear how many banks will be involved. When news of impending banking reform first emerged, it was suggested that this number would be anywhere between six and ten banks.

Reform of the sector is not a new concept in Myanmar. A plan that is at least two decades old would allow international banks to form joint ventures with local counterparts and, eventually, independent branches. The reform discussions that are currently underway with the IMF and the World Bank will supersede and update this framework.

Balancing act

The reform process will be a cautious one: the government, working on advice from both international financial institutions, is likely to want foreign players to enjoy only limited space in the sector. This would allow the domestic banks to learn from their foreign counterparts, update their own practices in line with global standards, and carve out a stronger footing in the local market. Domestic capacity in the banking sector is weak, and it is feared that, if too much foreign competition were introduced too soon, the domestic sector would collapse. By limiting the role of foreign banks, the economy should enjoy some protection from financial crises, and thus limit the risk of capital outflows. Finally, given that the government only has limited supervisory services, a more cautious approach is sensible until oversight is strengthened.

Key needs

The banking sector is in poor shape, having suffered years of mismanagement as well as little interaction with the global economy. As a result, it is outdated, inspires little confidence, is under-developed and fails to offer the facilities required for a modern economy. It is estimated that less than 10% of the population has a bank account, and approximately one person in every 1,000 has access to the credit market.

Credit availability is a particular issue that needs addressing; by strengthening the domestic sector through reform, the expectation is that Myanmar’s banks will ultimately be able to provide this service to both domestic and international investors. In the interim, however, it is likely to be foreign banks that provide financing to corporate clients. Such moves are expected to support wider economic development.

Looking ahead

The reform drive indicates that the government is looking to the private sector to help drive growth, as reflected in legislation that has already been passed. In addition to a new foreign investment law passed in late 2012, the Central Bank Law of Myanmar, enacted in July 2013, separates the central bank from the finance and revenue ministry. In addition to introducing much-needed autonomy for the bank, this piece of legislation calls on the central bank to oversee capital market development.

The government needs to get its financial reform programme right. In this respect, Myanmar’s relationship with organisations like the IMF is important. The IMF’s head, Christine Lagarde, has dealt personally with the matter, meeting with Central Bank of Myanmar officials in December to discuss the issue. The government must understand exactly what is required domestically, both within the banking sector and in the wider economy, and determine which reforms will deliver this. It will, however, be a delicate balance to strike, between involving foreign banks and keeping them engaged, while also boosting local banks’ capacity