Economy can be ‘game changer’ for region
Economy can be ‘game changer’ for region
The opening of the Myanmar economy is seen by many as a “game changer” in the region. With its large domestic economy, rich endowment of resources and dynamic workforce, Myanmar stands a good chance of realising its full economic potential and joining the ranks of other dynamic and high income Asian economies within a relatively short period of time. A strong and prosperous Myanmar will in turn bring huge benefits to its neighbours.
In the short and medium term, however, Myanmar faces various challenges in implementing policies needed for sustained economic growth and development. Lack of institutional capacity poses a severe constraint to policy makers. The absence of an efficient banking sector that could help channel savings from households and foreign capital into productive investments could be particularly straining to the growth process. As the old saying goes, if the economy is likened to the human body, the banking system would be the heart and bank credit the blood that circulates through the organs. Without a strong heart and smooth blood circulation, it would be difficult for the body to stay healthy, let alone grow.
The banking sector in Myanmar remains in a rudimentary stage. Presently, there are 19 commercial and state-owned banks with a combined paid up capital of less than US$300 million. These banks have about 330 branches implying that on average, each bank branch serves about 180,000 people. In contrast, there are about 6300 bank branches in Thailand (from 19 commercial banks), meaning each bank serves about 11,000 people. The Asian Development Bank estimates that Myanmar’s total private credit (lending to firms and households) amounts to only about 25 percent of its gross domestic product in 2010, which pales in comparison with the ratios of 120pc and 135pc in Vietnam and Malaysia respectively. The heart of the Myanmar economy – the banking system – is simply not pumping sufficient blood into the body.
Myanmar would urgently need to put in place a modern and efficient banking system to help mobilise savings, evaluate investment risks and allocate capital efficiently. This requires, at the broad policy level, the presence of a sturdy central bank with a strong regulatory and supervisory framework. Furthermore, there is a need to strengthen and consolidate the existing commercial banks to allow them to perform their intermediation role more effectively. Capacity building for a wide range of technical, organisational and management skills is urgently needed too.
Another major challenge facing the banking industry is the lack of confidence that depositors have in the system. The memory of the banking crisis in 2003, which was triggered by the failure of the informal financial institutions, and the losses that depositors suffered as a result is still fresh in the minds of many. Measures are needed to help restore the confidence of depositors quickly so that the banks can have a steady source of funds to carry out the basic banking function of maturity transformation.
Like its neighbouring countries and other successful emerging market economies before it, Myanmar could tap the expertise of foreign banks and financial institutions to help accelerate the pace of banking sector development. Indeed, Myanmar could draw many useful lessons from the vast experiences of other East Asian economies that have experienced both the joys of rapid economic growth and the pains of financial instability in the past few decades. The banking sectors of these East Asian countries have gone through many reforms following various crises – reforms that have helped contribute to their resilience during the recent global financial crisis. The governments of these countries understand the importance of having a stable and efficient banking system as a pre-condition for sustained economic growth. They also understand how an unsound or a mismanaged banking system could wreak havoc in an economy and derail the whole economic growth process.
The East Asian experiences could also serve a guide for Myanmar as it navigates through the process of opening the banking sector to foreign banks and financial institutions. The East Asian countries provide a wide array of models on balancing the need to protect the interests of the local banks on the one hand, and the need to accelerate the upgrading of the whole banking sector on the other. Whichever approach is adopted – whether it entails joint ventures between foreign and domestic banks or a segmentation of the domestic market based on product lines or other modalities – the outcome must be win-win for both local and foreign banks. Most importantly, it must benefit the economy as a whole.
While the modalities and the speed at which they opened their banking sectors to foreign institutions varied widely among the East Asian economies, there is little doubt that the presence of foreign banks helped to significantly improve the financial intermediation and resource allocation process in these economies. The foreign players contributed strongly to the robust economic growth within East Asian nations in the past few decades. Having foreign banks participate in the banking system is like adding dietary supplements to the body: they help to strengthen the heart and improve blood circulation. However, having a balanced diet is crucial: Picking the wrong nutrients and taking too much of any one vitamin, or choosing the wrong supplement, could cause an imbalance that in extreme cases could lead to a heart attack.
Ultimately, Myanmar’s approach to banking sector liberalisation will be determined by its own political and economic objectives. At the operational level, the ASEAN countries as well as China are converging towards international best practices such as those advocated by the Bank for International Settlements. Myanmar banks would have to calibrate and pace their moves towards such best practices. Too rapid a change could weaken local banks unnecessarily and lead to some instability in the system. Too slow a change could delay much-needed economic growth and development. In this regard, the banking sector liberalisation process should be guided by a well thought-out strategy and roadmap, with guide-posts at various stages of the process for review and perform mid-course corrections as needed.
Professors Lau Sim Yee and Tan Kim Song are directors at Myanmar Economic Resources International (MERI), a private think tank based in Yangon. Supported by Maybank from Malaysia, MERI has in recent months undertaken a number of capacity building projects aimed at facilitating exchange of experiences between banks and regulators in Myanmar and their East Asian counterparts. In this article they explore reform of the banking sector in Myanmar
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