Myanmar: Frontier Banking

Courtesy of The Financial Times, a report on Myanmar’s nascent banking sector.  As the article notes:

For all the hoopla surrounding Myanmar as the new Wild West following its half-century of isolation, a truly frontier market is its banking sector – ATMs became available just two months ago. But one bank has picked up the challenge.

Standard Chartered, the British bank, was the first lender to openly express interest in returning to Myanmar, having been the first foreign bank to set up shop in 1862 when the country was a British colony.

“We used to be in Burma for a long time, and we’ll be very happy to get back there,” Jaspal Bindra, the bank’s chief executive officer for Asia, said last week. “If I was a betting man, I would say in 2012 Burma will be off the [EU and US-led] sanctions list.”

A lifting of sanctions and political freedom would boost the economy and its reputation among investors as the next Laos or Vietnam, analysts say.

“Eventually this would indeed be a good idea, both for Burma and Standard Chartered,” Sean Turnell, editor of Burma Economic Watch and associate professor at Macquarie University in Sydney, told beyondbrics. “The former desperately needs the expertise that I suspect only foreign banks can at this stage deliver – the latter since it returns the bank to its origins, at a time when Burma is very much a greenfield site.”

Analysts however warn that expecting rapid change is too optimistic. Only five to ten per cent of the population has bank deposits and very few companies have access to domestic lenders. Foreign banks are banned and lenders are prohibited from holding assets denominated in foreign currencies.

“Most larger firms rely on group cash, most smaller firms on friends, relatives, moneylenders. There are all sorts of regulations on banks in Burma that make getting a loan for commercial enterprise very difficult,” said Turnell. Some cumbersome rules stipulate that loan terms must not exceed one year, banks cannot lend without collateral to a greater value than the loans, and obtaining land and other property titles is difficult.

The current banking landscape is dominated by four government banks: the Myanma Agriculture & Development Bank, Myanma Economic Bank, Myanma Foreign Trade Bank and Myanma Investment & Commercial Bank. Around 20 lenders are private, four of which opened recently. There are about 10 representative offices of foreign banks, down from about 30 a decade ago.

However data provided by the IMF and the Economist Intelligence Unit show that half of commercial loans are funneled towards the government, which has been on a spending spree in recent years, mostly in infrastructure projects. Loans doubled in just two years, standing at Kt2.2bn as of the second quarter of 2011.

Interestingly though, despite an apparent ban on foreign currency-denominated assets, commercial banks have ratcheted up foreign liabilities of some $3.4bn outstanding in the second quarter of 2011, according to a recent report by the EIU. Although it is unknown how or why the banks have accumulated the assets, the sheer size could destabilise the nascent banking system in the case of a currency depreciation as that would make debt repayments expensive.

Another major risk is the rapid growth in credit that, accompanied by substandard risk management practices, exposes the sector to bank runs and crises in confidence, according to the EIU.

The outstanding stock of private-sector credit soared by 58 per cent year-on-year as of June 2011, most likely driven by the addition of four new banks.

“Such massive growth in credit is one big question mark for investors. There’s no knowing really what the non-performing loans in the banking sector will be,” Danny Richards, Burma expert at the EIU, told beyondbrics.

And as the EIU’s report says:

Weaknesses in the regulatory environment continue to cause concern, and money-laundering (linked to the trade in illegal narcotics) remains a problem, despite recent progress in tackling this activity. Licences have recently been granted for four new private commercial banks, but these are all owned by local businessmen who have extensive links with the military’s leaders, and this has reinforced concerns over corrup­tion in the banking sector.

For overseas banks to get into Myanmar early, it will be something of a leap in the dark.

This entry was posted on Friday, January 13th, 2012 at 6:30 am and is filed under Myanmar.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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