Wednesday, August 22, 2012

Burmese banks need upgrade before foreign investment

Wednesday, 22 August 2012 15:50 Than Htike Oo

(Interview) – The Burmese Central Bank Deputy Governor Maung Maung Win was interviewed in the bank’s Rangoon office on August 10. He discussed the bank’s stance on liberalization of the financial markets, the opening of foreign commercial banks, the exchange rate unification and interest rates, among other topics.

Maung Maung Win, right, a deputy governor of the Central Bank of Myanmar. Photo: GRG Banking

Question: Can you first describe the process of financial market liberalization that Burma is going through in order to become a member of Asean Economic Community and a signatory of International Monetary Fund (IMF)?

Answer: According to Article VIII of the IMF, the Foreign Exchange Market Restriction is to be liberalized but the process will be done gradually step by step. According to the procedure, the draft of the Foreign Exchange Management Law is submitted to Parliament to be approved. After the approval, there will be more foreign exchange market liberalization to follow. Eventually, the restrictions on financial markets will be lifted just like other members of Asean countries.

Q: Foreign banks have opened offices in Burma. Can domestic banks compete with foreign banks, if they open offices here? And what are the possibilities of joint venture opportunities for local and foreign banks?
A: It is natural that the customers will go to the banks where they can get better services and loans. The banks can compete on services. We are still considering the possibility of joint ventures for local and foreign banks. We haven’t decided anything yet. The private banks in our country do not have the capacity to compete with foreign banks in terms of capital and skills. So, the capability of local private bank should be raised before allowing the foreign banks to do business in the country. Only after a long period would foreign banking business be allowed, in order to safeguard the welfare of the local private banks.

Q: A Burmese stock exchange market will be established in 2015. Will foreign investors be allowed to invest in the Burmese stock market?

A: First, the stock exchange market must be established. Local public companies will be encouraged to list their companies in the market. The stock market will be created based on trading of stock shares, and stocks and bonds valued based on the capability and profit of a company. Cross-border [foreign] investment will be considered in the stock exchange market only after the procedures of the local stock exchange market have been stabilized. It also depends on the Foreign Investment Law.

Q: When do you expect the market to open?

A: The stock exchange market is expected to be established in 2015. It’s hard to know the exact time frame in the process. Some stock exchange markets do not function well after being established. For example, the stock exchange markets in Laos and Cambodia are not functioning well. So, there should be sufficient preparation. It will go better after it gets momentum.

Q: Local authorized private banks are now allowed to buy and sell foreign currencies in local markets. Are the local private banks also allowed to trade in the international currency exchange markets?

A: The local private banks are allowed to open local customers’ foreign currency accounts that were previously allowed to operate in state-owned banks. The private banks trading foreign currencies in the country also need to expand their business outside the country, but they are not capable yet. It is expected that they would be ready to do so after a period of growth.

Q: In an IMF working paper in 2008 about Burma’s multiple exchange rates, it said that the kyat exchange rate should be around 600 to one dollar. Now, the exchange rate is around 870 to one dollar. What do you think the price will be in another year?
A: There are many formulas to calculate currency exchange rates. Therefore, it is difficult to say exactly what the exchange rates should be or should not be. So, we have to accept the market prices based on what people are buying and selling. Today's price of 870 kyat to one dollar is the price set by the market. If the market rate is set at 900 to a dollar, there will be a lot of sellers. When there are a lot of sellers, the price will be decreased again. The exchange rate they mentioned in 2008 was 600 to one dollar, and that might be the rate of that time. Today, some people say it should be 950 or 1000 to one dollar. They argue that the current price does not favor exporters. If we make it 950 or 1000 to a dollar, there will be a lot of sellers. Even foreign business players may enter the market.

Q: While the central bank of Myanmar is working to unify multiple exchange rates in the market, there is a big hundi (nongovernment money transfer) market. How do you plan to handle the hundi market?

A: When our private authorized banks can provide remittance services, the hundi market will go extinct. Previously, banks could not provide the service. Now, four private banks, AGD, KBZ, CB and Ayeyawaddy banks, are allowed to do remittance services. They are doing remittance service from Thailand, Singapore and Malaysia. Remittance service through private banks is more reliable than the service in a black market.

Q: So, will other private companies be officially allowed to do remittance service? Will only authorized banks be allowed?

A: At first, only authorized banks will be allowed. Granting permission to other private companies will be considered later.

Q: The Central Bank has reduced interest rates for bank loans from 17 per cent to 13 per cent. Some see it as a way to drive economic development. But some argue that the country is going to experience inflation, according to an IMF report.

Interest rates are a tool of monetary policy that central banks can use. When money circulation is high, interest rates are increased. And money comes into banks. When money circulation is low, the interest rate is reduced. Then, people don't put their money in banks. They will be more interested in investing their money in other businesses. The central bank of usually decides whether to increase or reduce the interest rate based on that. The central bank will reduce the interest rate if it is necessary. Similarly, it will increase if necessary.

Q: Recently, KBZ and AGD banks could not reduce the remittance fee due to the positions of other private banks. What is your opinion on that?
A: The Central Bank of Myanmar can decide and monitor private bank service charges including the remittance fees. Banking business is not like other sectors. Stability of currency value is necessary. One cannot expand as it wishes. Individual merit seeking opportunities should not be allowed. Therefore, we have to negotiate. The KBZ can reduce the charges because it is a big bank. However, smaller banks cannot reduce the charges. So, smaller banks will have problems. It sounds like trying to monopolize the market. Competition is competition. However, what is the consequence of competition? It is not much of a problem for a big bank to reduce the remittance fee. Customers will go to the bank that is cheaper. So, the customers of other banks, which cannot reduce the fee, will go to that big bank. Therefore, if banks want to reduce the remittance fees or charges, they have to obtain the permission or agreement of the Central Bank first.

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