Thailand: Banking barriers

The government committed last year to a liberalisation of the banking industry, while Korn Chatikavanij, the finance minister, said in February 2009 that Thailand wanted to create a more competitive environment by strengthening the role of the international banking community.

However, local and foreign experts say Bangkok needs to speed up the process of reform. The need to overhaul the banking industry and open up the market to higher levels of overseas investment is becoming urgent if Thailand wants to stay competitive with neighbours such as Singapore and Malaysia, according to them.

Allowing foreign lenders to operate in the marketplace on an equal footing with local banks would reduce the cost of financial services, says Willem van der Geest, an economist and international trade expert currently leading an EU-sponsored independent research team that is evaluating the Thai finance sector.

Existing regulations in Thailand put greater restrictions on foreign competition than in other regional markets, Van der Geest said on June 25 while presenting his team’s results seminar in Bangkok on a proposed Thailand-EU free trade agreement.

In contrast, the liberalisation of the banking and insurance sectors in Malaysia has seen an easing of restrictions on foreign firms that has resulted in cheaper financial services for consumers and industries alike, added Van der Geest.

The economist also cited the interest rate spread of Thai banks, which averaged more than 7% across the sector in 2009, compared to a less than 4% difference between deposit and lending rates on offer from Malaysian lenders.

The Bank of Thailand plays a positive role in regulating and supervising the banking sector, said Van der Geest, but it has acted too slowly in liberalising the financial market. He recommended granting more licences to foreign banks while lifting restrictions on bringing in overseas banking specialists.

Foreign ownership of Thai banks is currently capped at 49%, while overseas financial experts seeking employment with a Thai bank need to undergo a lengthy permit process.

Nipon Poapongsakorn, president of the Thailand Research Development Institute (TDRI), echoed the calls for increased competition in the domestic banking industry.

The costs of financial services in Thailand are higher than regional rivals and the issuing of more licenses would help to prevent market dominance by a few large lenders while pushing down fees, Nipon told the seminar.

The second phase of the government’s five-year blueprint for reform in the banking industry, titled the Financial Sector Master Plan, was launched last November.

The scheme, which aims to reduce operating costs and promote competitiveness by developing financial infrastructure, introduces a series of measures such as allowing new service providers to enter the market – including foreign entities. It also encourages smaller local banks to merge to broaden their fiscal and customer bases.

However, the programme relies to some degree on the goodwill of existing players, and while it is strong on encouraging, fostering and enhancing cooperation, it does not set out strict objectives or detail how they will be achieved.

While leaving the door ajar for overseas banks to increase their presence in the Thai market, a press release accompanying the November launch said the development plan’s emphasis was on licensing “new service providers with the ability to fill gaps within the system, to enhance the efficiency and stability of the financial institutions system”. It did not mention foreign banks being granted a broader remit.

The second phase is to be concluded by 2015, but there is no exact timetable for the proposed reforms. This means that overseas lenders with an eye on entering the Thai market are likely to remain in the dark for some time over the likelihood and details of such an investment.