Despite the issuing of licences to nine foreign banks, the extent of their involvement remains unclear

The central bank’s decision to award bank licences to nine foreign groups in October 2014 was widely hailed as a major breakthrough in bringing Myanmar’s underdeveloped financial sector into the modern era. But the really big decisions over how much foreign involvement will be allowed still lie ahead.

The move gives foreign banks a foot in the door, allowing them to carve out a small niche market servicing the local foreign currency operations of foreign investors in Myanmar. It also increases the comfort and convenience level for foreign investors by allowing them to bank in Myanmar with a bank from their home country, or at least with a major Asia-Pacific bank.

Questions Remain

But a bigger issue remains to be settled: to what extent will international banks be able to channel financing to the wider Myanmar economy? Decision makers are both eager to bring in more capital and afraid of losing control of the domestic banking sector to foreign groups. Some also worry that an overly rapid opening could lead to a bubble-and-bust scenario. The new foreign banks were offered very limited licences, which restrict them to servicing foreign investors and require them to partner with local banks to handle their clients’ operations in local currency. The foreign banks will be allowed to lend in foreign currency to foreign-owned companies and joint ventures in Myanmar. In essence, this means that international banks will be able to handle the mechanics of bringing capital into Myanmar on behalf of foreign investors, who previously needed to borrow outside of Myanmar and bring the capital in by themselves.

But it remains to be seen how much lending international banks will actually do from their Myanmar branches, as it is not clear when onerous restrictions on bank lending within Myanmar will be liberalised or whether foreign-owned banks will be able to obtain enforceable security interests on Myanmar property.

Nonetheless, foreign banks competed hotly for the licences, with 25 submitting applications despite an expensive entry cost in the form of a $75m minimum paid-in capital per new licensed bank. Japan’s three largest banks, Tokyo-Mitsubishi UFJ, Sumitomo Mitsui and Mizuho, all received licences, as did two Singaporean banks, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank. Additionally, Thailand’s Bangkok Bank, Malaysia’s Maybank, the Industrial Commercial Bank of China, and the Australia and New Zealand Banking Group all received licences.

Some local banks are opposed to the change and have asked authorities to hold the international banks back to allow local banks more time to grow. However, U Tin Maung Htay, managing director of Small & Medium Industrial Development Bank (SMIDB), is not as concerned. “Foreign banks will face certain restrictions such as only dealing in foreign currency; therefore, I do not expect their arrival to take excessive business away from local banks,” he told OBG.

For Joe Barker-Bennett, consultant at Tun Foundation Bank, it is a question about the future. “In the long term, does Myanmar want foreigners in control of its banking sector, or locals in control? I would argue that what you need are strong local banks with strong ties to the local economy. If you look back at the 1997-98 Asian crisis, around the region, a lot of the international banks just shut down their lending, which can destroy local businesses. In Thailand, where they had a large banking industry, the government, along with IMF and World Bank support, unshackled the local banks and allowed them to keep lending,” he told OBG.

Next Move Uncertain

Indeed, it is hard to imagine that nine groups would have committed $75m each to divvy up such a limited portion of Myanmar’s banking market unless they expected their licences to eventually be expanded and banking regulation to be liberalised. There are two possible routes authorities might take to open up greater access for foreign banks. One option, which was discussed in parliament during debates on general banking regulation reforms, would be to allow foreign banks to acquire minority stakes in domestic banks. Such partly foreign-owned banks would be entirely separate institutions from the newly licensed fully foreign-owned banks. Currently, foreigners are not allowed to own shares of locally owned banks.

The second option on the cards would be to allow the fully foreign-owned banks to lend to locally owned companies in partnership with local banks, while at the same time remaining legally separate entities. That would essentially be similar to a provision of the foreign banks’ initial licences, which allows them to lend in local currency to foreign-owned companies but only in partnership with a local bank.

Daw Khin Mu Mu Myint, the chief business officer at Yoma Bank, told OBG she thought foreign banks would gain access to the broader banking market but only in partnership with local banks.

“We are confident that the central bank will be looking after the local banks. Otherwise they would be setting us up for failure,” she told OBG. The requirement that foreign banks work with a local bank partner to handle the local currency transactions of foreign investors protects the international banking departments of local banks, which cater to foreign investors and had feared they could be made redundant by the licensing of foreign banks.

Daw Kim Chawsu, the managing director of Kanbawza Bank’s international banking division, explained that foreign investors naturally prefer to borrow from foreign banks because they can offer foreign currency loans at interest rates that are often less than 5%, whereas local banks charge about 13% interest on local currency loans. Foreign investors currently borrow abroad and utilise Myanmar banks to bring the money into Myanmar, convert to kyat and handle their kyat deposits and transactions.

“If foreign banks were allowed to work in local currency independently, it would take that entire money flow and give it to local branches of foreign banks. Local banks would lose a lot of business,” she said.

Potential Allies

Local bankers do not see the arrival of foreign banks only as a competitive threat. The biggest hope of most local banks is that the foreign banks can be strong lobbying allies in pushing for reforms to liberalise banking regulations.

As Kanbawza’s Daw Kim Chawsu told OBG, “Our biggest hope for foreign banks is that they will actually feel our pain. If they find the same issues that we’ve been facing, and they start sending the same messages about the need for reforms that we’ve been giving, that could really help us out. There is a long and hard road ahead. We could grow together.”

She added that there would also be a natural tendency for local and foreign banks to pursue different types of business. Local banks will always be better able to assess the peculiarities of local risks, while foreign banks will always be constrained by their need to report to international headquarters and to the main regulator of their parent banking group.

Other Ways In

There are other routes that international banks could theoretically use to channel funds into Myanmar, which are also mostly blocked. International bank loans to Myanmar banks or companies are rare due to the difficulty of obtaining an enforceable security interest on local assets.

Foreigners cannot acquire long-term leases of property except through foreign investment projects approved by the Myanmar Investment Commission or the governing board of a special economic zone, and foreigners are not allowed to acquire locally owned companies or privately owned land.

So far only a few international bank loans into Myanmar have been made. The largest was an $85m loan in September 2014 to Pan Asia Majestic Eagle Ltd (PAMEL), a foreign-owned Myanmar company investing in mobile telecoms towers. The financing was arranged in Singapore and came from five banks: OCBC, the Development Bank of Singapore, Sumitomo Mitsui, ING and Standard Chartered. PAMEL’s managing director is also a director at Protelindo, a foreign investor in mobile telecoms towers in Indonesia that has raised larger sums from regional banks and capital markets.

Also in September 2014 the International Financial Corporation (IFC), part of the World Bank Group, made a $5m loan to Yoma Bank, which the IFC said could be expanded to an investment of up to $30m “in the coming years”. The $5m was intended to support lending to small and medium-sized enterprises (SMEs). In June 2014 Vietnam’s state-owned Bank for Investment and Development announced it would lend $30m to SMIDB, also to support lending to SMEs. “As it stands the central bank only allows collateral-based lending, which is holding back the development of Myanmar’s SMEs. Cash-based lending will enable local entrepreneurs to grow their businesses,” U Tin Maung Htay said.

Some of the major domestic business groups have made cross-border financing arrangements with Singaporean banks, although those loans were made to the Myanmar groups’ affiliated companies based in Singapore. Bankers and business executives told OBG such loans are generally only possible for investors who have well-established relationships with Singaporean banks and whose assets are located outside Myanmar.