Foreign banks are about to make a return to Myanmar after an absence of more than 50 years, in a move that is intended to support foreign direct investment (FDI) and improve existing services.
At the beginning of October, Myanmar announced it was granting preliminary approval for nine foreign banks to commence limited operations in 2015, marking a resumption of such services for the first time since the 1962 coup, albeit in a more restricted capacity. All nine were chosen from a pool of more than 40 lenders with representative offices in the country, more than half of which opened within the past three years, an indication of enthusiasm from foreign banks for the Myanmar market.
The banks, all from the Asia-Pacific region, have been given 12 months to launch. However, as laid out, the scope for their business will be limited, posing little threat initially to the business interests of Myanmar’s existing 26 domestic lenders.
Foreign currency only
Under the terms, the new entrants will be able to offer only wholesale banking products and services to foreign firms and local banks. Kyat-denominated loans to domestic companies can be offered, but via a partnership arrangement with a Myanmar registered lender, with interest rates set by the central bank.
While they will be authorised to accept deposits and make loans in US dollars and the euro, the banks will not be able to engage in normal retail banking, a restriction seen as limiting their possible impact on monetary movements.
The focus of foreign banking operations towards business activity - especially that of overseas firms operating in Myanmar - is seen as a measure to promote foreign investment in the country by facilitating financial services for those companies as well as creating a banking environment with an international basis.
While the opening up of the banking sector has generally been welcomed, there are some concerns indigenous lenders could be swamped by their better resourced and more developed international competitors, especially if they are granted full access to the market too quickly. Joe Barker-Bennett, a consultant with the privately owned Tun Foundation Bank, said the early entry of foreign lenders into the marketplace could overwhelm local banks if they are not given time to prepare for increased levels of competition.
“If you allow foreign banks in too early it will cripple local banks,” he told OBG. “It will be like fighting Muhammad Ali in his prime with your arms tied behind your back.”
However, the increased competition could also prompt some Myanmar banks to step up their game and improve services: “There will be winners and losers among local banks. There will be those that modernise their systems and those that get left behind,” said Barker-Bennett.
Strong growth potential
Local banks see opportunities for expansion through growing their client bases and an improving broader economy, which the International Monetary Fund (IMF) forecast in October would expand by 8.5% in 2015. Retail banking also offers opportunities, with data from the International Finance Corporation (IFC), an arm of the World Bank, showing only some 20% of Myanmar’s citizens have access to formal financial services.
Any growth in the personal banking segment may take time to develop. A joint UN Capital Development Fund-UN Development Programme report issued earlier this year estimated that 95% of the adult population earned less than $10 a day, while only 5% had bank accounts.
The report adds that the majority of the country’s 60m population would benefit from the spread of microfinance services at grassroots level, rather than large-scale banking. Myanmar’s rural regions, where some 70% of adults live and work, are especially under-banked. Domestic banks may look to increase their profile in non-urban areas. With government targets set at reducing poverty levels from the 2013 rate of 26% to 16% by the end of 2015, potential for a solid rise in incomes and demand for financial services in regions beyond the major cities exists.
Lenders also need to work hard to change the perception of the banking industry among the citizens of Myanmar, Aung Thin Win, vice chairman of the Asia Green Development (AGD) Bank, a smaller domestic bank, told OBG. “The banking crisis of 2003 reduced peoples’ confidence in the banking sector. It is up to the banks to reinstall their confidence,” he added.