Finance sector needs more training, technology, tax incentives, smart regulation and international assistance, says former Central Bank of Myanmar official
Central to Myanmar’s economic development is the reform of its finance sector and specifically its banking sector. Banks play a fundamental role in the transformation of market economies.
Recently the government has enacted a series of laws intended to reform and strengthen its banking institutions to restore investors’ confidence and to make capital more accessible.
For a better understanding of Myanmar’s banking sector, Global New Light of Myanmar interviewed U Than Lwin, former deputy-governor of the Central Bank of Myanmar. U Than Lwin was also a technical assistant to executive director of the International Monetary Fund and currently serves as a senior consultant to Kanbawza Bank Ltd.
Q: Please clarify the current situation of banking businesses operating in Myanmar?
The banking industry is the backbone of a country’s economy. The sector is like the brain of a country’s economy.
Myanmar had a vibrant banking sector before 1962. At that time, there were 14 foreign banks, 10 privately-run local banks and a state-owned bank that supported the country’s economy. Nationalization of the banks stifled development of the sector.
After 2011, this kind of service business has been promoted in the country. The government has prioritized reform of this sector. The government amended existing financial laws and enacted new laws including the Foreign Exchange Management Law and the Financial Institutions Law. The significant thing is that the Central Bank became an independent financial institution after enacting the new Central Bank of Myanmar Law.
Myanmar can fix foreign currency exchange rates and the CBM reduced restrictions for private banks. It is hard to compete with foreign banks in the country even though the country developed strong financial laws for the sector.
Banking services including mobile banking, ATMs and other card systems are available but 50 years late. It is hard to make the sector to become stronger within a short time.
Q: What are the weaknesses in the banking sector? How can we reform?
The main point is that there is a lot of demand for skilled workers. To develop the country’s banking sector, employees need better training.
Another point is that banks make money by lending money. Banks use real estate as collateral for loans, but the real estate market is cooling due to increased property taxes, so this has caused banks to reduce their real estate exposure and their willingness to provide loans.
The country needs to develop a new tax system to reduce tax evasion.
The third point is that we need to expand bank branches, from local to regional branches, step by step. Local banks need to cooperate with international banks to acquire technology and experience.
The last point is that advisory services play an important role in making correct decisions.
Q: How can the government help the sector? What kinds of supports does the sector need?
To develop the country’s banking industry, the sector needs government support. For example, currently, local banks cannot grant long-term loans to those wishing to buy a low-cost apartment as the banks mostly receive short-term deposits from their clients. Local banks need government help to get international loans. We want the government to seek loans from foreign lenders. The private sector can also take loans from foreign bankers but the interest rates are too high. We definitely need government’s support and protection if it grants foreign banks further business opportunities as the sector cannot compete with foreign banks right now.
The government should consider other ways to attract foreign investors. It needs to reduce tax rates to support local businesses providing financing. If banking businesses cannot survive for a long term, it will directly impact finance companies and surely affect Myanmar’s economic growth.
Communications is needed between the CBM, private banks and the state-run banks. It is necessary to meet frequently to discuss the real situation at the grassroots. The main point is to raise the capacity of the central bank.
Q: Foreign banks have already been allowed to run banking businesses in the country. Please explain the state of competition in the industry.
The government issued operating licenses to 13 foreign banks. These international bank branches are allowed to lend money to foreign investment companies. They are also allowed to lend money to local companies through local banks. They are restricted from providing retail banking and lending directly to Myanmar citizens in Myanmar kyats. Also, to lend to local companies, they will have to work with Myanmar banks.
This kind of license allows foreign bankers to open a branch in the country. Foreign banks’ advantage is in paying interest on foreign currency deposits under CBM rules, while domestic banks are not allowed to pay interest on foreign currency deposits. This has results in some clients taking their foreign currency to foreign banks.
Local banks have been allowed to open many branches nationwide. This is local banks’ advantage.
Q: What is the impact of foreign banks on the performance of domestic banks and the country’s economy?
No foreign bank enters without benefits. Myanmar, as the last frontier economy, has great opportunities for investment and growth. As a developing nation, there are lots of needs in every sector. The country receives financial assistance from the World Bank and the Asia Development Bank as well as other financial institutions. The financial sector will also be developed in the country. It will attract foreign lenders. The financial sector will promote the country’s economy. There is evidence that a strong financial sector will improve the economy of neighbouring China.
The CBM plays an important role in regulating foreign banks. Currently, the CBM is weak in technology and human resources. It needs to develop its data infrastructures.
Q: Please explain the role of monetary system.
There are three main pillars in the monetary system. The first pillar includes banking, insurance and gold. The second pillar covers capital markets like the stock exchange. And the third pillar is the commodity market. Myanmar does not yet have a commodity market.
The country needs to develop those three pillars to meet development targets. The county’s banking system is still poor and has seen a little progress. To improve the country’s banking system, it is necessary for the Central Bank to issue appropriate policies and to communicate with private bankers, getting ground truth information and determine solutions through negotiations and by seeking foreign assistance. This is how weaknesses in the domestic banking industry will be reduced.
It is essential to invite our skilled citizens to repatriate and support our national interests and to relax rules for permanent residence. India provides her citizens with dual citizenship, welcoming overseas citizens to come back to the country and stay as long as they can, while restricting their voting rights. There are many qualified Myanmar employees in international countries. Some of them have returned to motherland. The country can acquire technology and experience from them.
Q: Please discuss the foreign exchange rate.
A healthy banking industry can strengthen Myanmar’s foreign exchange. It directly affects the exchange rate. Dollar prices will decrease when the value of Myanmar kyats rise in the market. The CBM cannot interfere in the exchange rate in the market as it doesn’t have enough currency reserves as in other countries. The crucial thing is to grow the Myanmar’s economy, its monetary sector and banking sector. This is the only way to develop the economy. People are suffering from high commodity prices due to the increasing value of dollars. The way to stabilize foreign exchange is to establish a tax incentive program to attract investors and encourage individuals and businesses to spend money in Myanmar.
May Thet Hnin