Author: Samuel Lim, WG ’14, W’13, SEAS ’13, Fels ’13,
December 17th 2013 marked a milestone for Myanmar as it joined the Multilateral Investment Guarantee Agency (MIGA), gaining eligibility for investment guarantees on its inward direct foreign investments. In the words of Keiko Honda, MIGA’s Executive Vice President, “support for investments that provide critical infrastructure will help Myanmar realize the benefits of its historic transition.” This article echoes the cautious bullishness on Myanmar’s long term growth prospects and the indispensable role that financial infrastructure plays in driving these, with an eye on the concomitant challenges that development entails.
Myanmar is endowed with numerous natural advantages, including a large workforce, proximity to rapidly growing markets in East Asia, and an abundance of natural resources. However, it is considered a laggard amongst Asian economies, hamstrung by a combination of foreign trade restrictions and low levels of development spending. 2011 saw Myanmar averaging only 4.5% GDP growth, with one of the highest poverty incidences in Asia at 32%. Economists contend that the binding constraint on Myanmar’s growth is its financial sector, which is in dire need of transparent reforms.
An Under-Developed Financial Sector
A robust financial system wields a lasting, benign influence on broad based growth given its extensive networks to companies which transcend sectoral boundaries. Unfortunately, the Burmese financial sector remains in a developmental phase since the 2003 crisis, wherein the collapse of a series of informal finance companies precipitated a liquidity crisis. This led the Central Bank of Myanmar to impose restrictions on withdrawals and recall loans from borrowers, severely diminishing public trust in the banking system.
Myanmar’s financial infrastructure is still in a nascent stage following the crisis. 2013 IFC reports estimate that only 5% of the population utilizes formal banking services, which trail regional averages significantly. Branch network outreach is low with less than 2 branches per 100,000 Burmese, paling in comparison to neighboring countries such as Thailand (11.2 branches per 100,000 people) and Laos (2.6 branches per 100,000 people). These indicators confirm that Myanmar has some way to go before attaining parity with its peers. State-owned banks still constitute the bulk of the banking sector and account for up to 66% of its assets.
The challenges confronting the sector as a whole can be understood along two primary dimensions. An immediate concern revolves around the governance of state-owned banks, which will supply a significant source of developmental finance in the foreseeable future. These organizations lack clear ownership policies or performance targets, but consistently generate risky exposure accruing to the government due to the presence of implicit state guarantees and the absence of minimum capital requirements. This is further compounded by the fact that the only available enforcement mechanism does not fall under the jurisdiction of the Central Bank of Myanmar, which has the requisite experience and appropriate mandate to regulate these banks.
The manifold capital restraints imposed on financing also induce unwarranted hostility toward local enterprises. Under the current system, access to finance in terms of loans, deposit services, and remittance services is highly limited. The limits on loan interest rates curtail lending to SMEs and rural borrowers for many private banks. Deposit services are unattractive to the public because of their low interest rates and service charges on deposits. These culminate in a dearth of capital available for investments in high growth projects.
The Way Forward
The pace of reform in the financial sector has been nothing short of encouraging. Most notably, the Central Bank of Myanmar Law, enacted on July 11th 2013, sets the Bank on a trajectory toward a more autonomous future. Through receiving operational independence in designating monetary policy and regulating the financial sector, the mandate of the Bank to act in an unbiased fashion independent of political machinations has been enhanced considerably. This is especially critical in the domain of establishing strong institutional foundations for the banking system, which will instill confidence in current stakeholders and prospective investors alike.
The passage of the Securities Exchange Law and proposed amendment to the Financial Institutions Law address long term concerns regarding the capacity of the sector, and seek to broaden the spectrum of financing options available to local enterprises. These set aside concrete provisions for the establishment of a modern stock exchange by 2015, facilitating fundraising efforts from companies that wish to pursue equity driven growth, and assist with the structuring of rules and regulations for joint ventures between local and foreign banks, which will enhance the quality and access of capital inflows available to local companies.
Recent economic indicators bode encouragingly for the implementation of financial reform efforts in Myanmar. The World Bank recently raised economic forecasts to 6.9 percent in the medium term, buoyed by favorable reforms instituted in broader financial sector, which have translated into positive spillover effects in providing liquidity to fast growing industries such as gas production, agriculture and commodity exports. With sustained momentum toward a comprehensive removal of inefficiencies plaguing the sector, the growth outlook for Myanmar remains immeasurably upbeat.
 The World Bank. “MIGA Welcomes Myanmar as a New Member Country.” MIGA Welcomes Myanmar as a New Member Country. http://www.worldbank.org/en/news/press-release/2013/12/17/miga-myanmar-member-country (accessed June 19, 2014).
 International Monetary Fund, Myanmar: Staff Report for the 2010 Article IV Consultation, March 1, 2011.
 Nehru, Vikram. “Banking on Myanmar: A Strategy for Financial Sector Reform.” Carnegie Endowment for International Peace. http://carnegieendowment.org/2014/06/05/banking-on-myanmar-strategy-for-financial-sector-reform/hcvo (accessed June 19, 2014).
 Turnell, Sean. “Myanmar’s Banking Crisis.” ASEAN Economic Bulletin 20: 272-282. http://www.jstor.org/discover/10.2307/25773787?uid=374966101&uid=3739936&uid=2&uid=3&uid=26456&uid=67&uid=62&uid=3739256&uid=5912280&sid=21104165593947 (accessed June 19, 2014).
 GIZ. “Myanmar’s Financial Sector: A Challenging Environment for Banks”. http://www.microfinancegateway.org/gm/document-1.1.20754/Myanmar%C2%B4s%20Financial%20Sector%20-%20A%20Challenging%20Environment%20for%20Banks.pdf (accessed June 19, 2014).
 Building Financial Sector Development (FSD) in Myanmar Concept Note
 Polastri Wint and Partners. “Securities Exchange Certificate Transaction Law .” . http://www.pwplegal.com/documents/documents/68272-Security-Exchange-Certificate-Transaction-Law.pdf (accessed June 19, 2014).
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