Myanmar: Banks open up

As part of the rapid liberalisation of Myanmar’s economy, the banking sector is now opening up to foreign participation. The government is enacting reforms to promote foreign participation in the sector, while the US has recently lifted restrictions on four local banks. With the economy both fast-growing and underbanked, and with foreign investment on the rise, the opportunities for international institutions could be considerable.

On February 22 the US Treasury Department (USTD) eased sanctions on four major banks, granting general licences to the Myanma Economic Bank, Myanma Investment and Commercial Bank, Ayeyarwady Bank and Asia Green Development Bank, which will give them access to the US financial system and strengthen ties between the two countries.

The licence issues are the latest move by the US to open up commercial relations with Myanmar. In July 2012 the USTD issued similar general licences permitting US companies to invest and provide financial services in Myanmar, provided they supply detailed disclosures about their activities. Several countries have similarly loosened sanctions over the past two years.

The Myanma government is also attempting to promote greater foreign participation in the system. In February the international press reported that, as part of a third wave of reforms by President Thein Sein, foreign banks could be permitted to take majority stakes in joint ventures with local lenders as early as next month. The latest phase of liberalisation was kick-started by a cabinet reshuffle in September 2012 that saw governmental bodies, such as the Ministry of Finance, restructured.

While the overarching framework for foreign investment was codified in a new law passed in 2012, reforms specific to the financial sector are currently being drafted. They will allow foreign banks to own up to 80% of joint ventures with local institutions, according to the Myanmar Investment Commission, an official body overseeing investment. Foreign banks could be permitted to establish 100% ownership within two years, allowing them to expand full branch networks.

Currently, foreign banks are allowed only to have representative offices. Pro-business groups say the changes are likely to reinforce the notion that the private sector will be at the heart of Myanmar’s growth over the coming years.

Once the changes are implemented, they are likely to lead to increased activity by international financial institutions. There are already more than 20 representative offices of foreign banks in the country, including Standard Chartered, which re-established its presence in February, following a gap of several years. The bank is particularly prominent in Asia and has a history in Myanmar dating back to the 19th-century.

Many of the representative offices are Asian, such as China-based ICBC and Thailand-based Siam Commercial Bank. Japanese banks are also expected to take increasing interest in the market, as Japan is the largest bilateral lender to Myanmar, and Japanese companies and institutions have a steadily growing presence, including in the capital-intensive infrastructure sector.

Growing foreign penetration could be a shot in the arm for the banking sector, which is antiquated and has been creaking under the pressure of rapid economic growth. Internationally linked ATMs are relatively new to the country, and large parts of the economy have little access to formal lending, though microcredit is on the rise in rural areas.

Joint ventures give local institutions the chance to benefit from capital, technology and skills transfers, while foreign banks may be thorough with due diligence before forming partnerships, given the questionable financial health – and political ties – of some institutions.

In a 2012 report on Myanmar, the IMF stressed both the importance of further financial system modernisation and the construction of a robust regulatory framework to support it. The report noted that “modernising the financial system is essential to promoting growth”, going on to say that IMF directors “welcomed the steps already taken to ease administrative controls on banks, and called for further liberalisation of bank operations and interest rates”. The IMF’s directors underscored that financial reforms must be complemented by strengthened supervision and regulation.

For the time being, international institutions that do come to Myanmar are likely to focus on multinational companies – including existing clients – and retail lending to the wealthiest people. However, their presence could bring an infusion of capital, experience and dynamism to the sector, and the economy as a whole.