Monetary management: U Kyaw Kyaw Maung, Governor, Central Bank of Myanmar (CBM), on liquidity and the growth of the domestic banking sector

In terms of liquidity management, how is the CBM maintaining stability in the market?

KYAW KYAW MAUNG: To achieve the objective of maintaining price stability, the CBM has been implementing a reserve money-targeting monetary policy framework. Under the reserve money-targeting framework, the CBM controls the liquidity position by using monetary operations such as deposit auctions to draw in excess liquidity when there is excess liquidity in the economy, and the credit auction to inject liquidity when the economy needs more. Since September 2012 the CBM has been conducting deposit auctions twice a month as needed to absorb the excess liquidity. The CBM set the reserve requirement ratio at 5%, with the aim of reducing credit creation by commercial banks. The minimum reserve requirement will be increased or decreased to manage liquidity in the economy. In future, the CBM will put its best efforts into introducing indirect monetary instruments such as repo operations, the outright sale/purchase of government bills, short-term borrowing, or issuing a central bank bill rather than deposit and credit auctions, which is consistent with financial or interbank market development practices.

How has the entry of foreign banks affected the banking sector thus far?

KYAW KYAW MAUNG: The entry of foreign banks is rapidly changing the landscape of Myanmar’s banking sector. Some 13 foreign banks have started their branch operations in Myanmar, and with combined regulatory capital of about MMK1.6trn ($1.3bn), the entry of these foreign banks will almost triple the capital size of the banking system and also increase the number of banks by about one-third. This will introduce competition between domestic and foreign banks, although operations by foreign bank branches will initially be limited to wholesale banking. They will operate as a branch that is permitted to serve only foreign corporations and domestic banks, and will take deposits and extend loans in both foreign currency and in kyat. Each foreign bank branch requires a minimum paid-in assigned capital of $75m, of which $40m is to be deposited at the CBM. In the future, the permitted scope of operations of the new foreign bank branches may be expanded to include conducting business with domestic corporations.

The authorities expect foreign banks to contribute to the development of the domestic banking sector. Foreign banks are required under their licensing commitments to participate in the interbank market, including by lending to domestic banks to support their financing of domestic firms and engaging in foreign exchange businesses. They are also expected to increase the availability of banking products, such as cash management and trade finance. Moreover, foreign banks are expected to transfer modern banking techniques and practices, and increase competition in the banking sector, which would help increase the operational efficiency of local banks, benefit their customers and support economic activity.

The entry of foreign banks provides an unprecedented opportunity to develop a modern banking sector through the introduction of new financial products and risk management techniques, and lending by foreign banks could become an important source of funding for the private sector.

Foreign banks are also expected to support Myanmar’s export-oriented development strategy. The authorities value the role of foreign banks in better serving the needs of foreign investors and facilitating their operations in Myanmar by providing funds. From a strategic perspective, reputable regional and global banks can also bring their trade and investment networks, and know-how, greatly helping Myanmar gain access to global financial markets. Foreign bank branches, even with restricted banking activities, are serving Myanmar well at the current juncture.