Reform of the banking system tops Myanmar's agenda
Crowded Yangon International Airport is proof of Myanmar's success in attracting large numbers of visitors now that the country has emerged from decades of isolation. But, although Myanmar has become the frontier market for investors and a must-go destination for tourists, one major problem that slows down the huge amount of money that will be spent in the country is the outdated financial system.During the era of sanctions, Myanmar established many commercial banks and set up its own central bank, after the Central Bank of Myanmar Law was enacted in July 1990. However, its banking system could not be connected to the rest of the world at that time, and most transactions with companies in Myanmar had to be done in Singapore.
Moreover, in the past, the country's exchange rate did not meet the international standard, as the official rate was around 6 kyat per US dollar, while the unofficial rate was as high as 800 to 1,000. It was common in the past for tourists to convert their money into local currency at illegal money-changers at Scott Market, which is the most famous place to buy souvenirs in Yangon, the former capital.
When it came to border trade, there was a different method of |payment, with most cross-border commerce and services relying on cash.
According to a vendor who asked not to be named at Mingalazay market, the biggest retail and wholesale market in Yangon, black-market money transfers, known as poi guan, were popular among border traders and migrant labourers who work overseas, though it is not a reliable system. It has arisen as a result of the closed banking system. These are examples of just some of the problems in the banking system, which needs to be reformed quickly.
President Thein Sein has made reform of Myanmar's overall financial and banking system the government's first priority in order to attract more foreign investment in the near future.
Another key factor forcing Myanmar to reform the banking and financial system is the upcoming implementation of the Asean Economic Community in 2015, which provides for the free flow of capital.
"The current banking system is clearly still suffering the consequences of the banking crisis in 2003. The system is still under-regulated and underdeveloped. However, the very positive aspect is that the government has already announced the intention to reform the banking system of Myanmar, and it will be one of the top priorities in 2013," Alessio Polastri, managing partner at law firm P&A Asia said at the recent "New Myanmar Investment Summit 2013".
Major reform steps in the banking system started in April last year when the government decided to float its currency to around 800 kyat per dollar. There was also reform giving the central bank more freedom in managing fiscal policy.
Another important development was the foreign investment law enacted last November. It opened doors for foreign banks to seek joint ventures with local banks by setting up representative offices, as overseas banks are not allowed to operate directly in Myanmar at the moment. The move aims to facilitate foreign investors interested in doing business in the country, and Thai institutions such as Siam Commercial Bank, Kasikornbank, Bangkok Bank and Krung Thai Bank have already opened representative offices in Myanmar.
In January, Western Union together with seven local banking partners announced a joint move to launch people-to-people money transfer services from all over the world to Myanmar. The main targets for the service are labourers working overseas who need to send money back home.
This can be seen as one of the initial steps for development in Myanmar. The question now is how changes in the banking system will promote greater investment in the country. Thai business people interested in investing in the neighbouring country are known to be afraid of financial risks, such as the delay in profit repatriation.
"In the new foreign investment law, it is stated that profits earned from investment can be transferred out of the country, after deductions for tax. In the case of dividends, withholding tax is 10 per cent and business people have to bring the required documents," said Manop Sa-ngiambut, executive vice president and head of international banking business at Siam Commercial Bank.
Stabilisation of the exchange rate is a crucial step for reform of the banking system in Myanmar, he added. Another positive development is that the Myanmar government has implemented a deposit-guarantee scheme to attract more members of the public to use banking services, as well as to support local banks in establishing relationships with foreign banks. This will allow smoother banking transactions when foreign banks are able to operate in the country.
"Myanmar's banking services may have to expand to electronic transactions. The country is now also organising a credit bureau to facilitate credit approvals and encourage more transactions," Manop said. He also suggested that Myanmar should adopt an inter-bank system to enable greater convenience for services in the banking and financing sectors. The country's commercial banks should be able to seek loans from other commercial banks with excess liquidity, he said.
The government's plan is to develop the financial market by the end of 2015, enabling the raising of capital for local companies and foreign businesses investing in the country. However, details have not yet been disclosed.
Meanwhile, International Monetary Fund officials have worked with local banks to improve Myanmar's financial market and its structures.
"Myanmar is expected to liberalise commercial banking for foreigners. The law, rules and regulations are now being discussed. I think a draft law on joint ventures between foreign and local banks has been submitted to parliament for deliberation, and the law is expected to be finalised by the end of this year, or [early] next year," said the Siam Commercial Bank executive.
The main reason Myanmar has not yet allowed foreign banks to operate in the country is that local banks need time to develop their capabilities. In liberalising the financial and banking sectors, the country still needs technology and know-how to improve its products and services.
"The expectation is a massive improvement from an underdeveloped situation to a sophisticated system as in Thailand or Malaysia, for example, or even Singapore, with a banking system that is fully operative and in accordance with the international standard; one that fully supports the private sector in terms of lending and capital needs," said P&A Asia's Polastri.
We will have to see whether all the measures set to be announced within a year or two can build confidence among foreign investors for them to pour in money to help lift the competitiveness of Thailand's emerging neighbour.