Identifier
Created
Classification
Origin
05RANGOON1387
2005-12-15 01:22:00
CONFIDENTIAL
Embassy Rangoon
Cable title:  

BURMA'S PRIVATE BANKS WAITING IN THE WINGS

Tags:  ECON EFIN PGOV BM 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 001387 

SIPDIS

STATE FOR EAP/MLS; PACOM FOR FPA; TREASURY FOR OASIA:AJEWELL

E.O. 12958: DECL: 12/04/2015
TAGS: ECON EFIN PGOV BM
SUBJECT: BURMA'S PRIVATE BANKS WAITING IN THE WINGS

Classified By: Econoff TLManlowe for Reasons 1.4 (b,d)

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 001387

SIPDIS

STATE FOR EAP/MLS; PACOM FOR FPA; TREASURY FOR OASIA:AJEWELL

E.O. 12958: DECL: 12/04/2015
TAGS: ECON EFIN PGOV BM
SUBJECT: BURMA'S PRIVATE BANKS WAITING IN THE WINGS

Classified By: Econoff TLManlowe for Reasons 1.4 (b,d)


1. (SBU) Summary: Burma's six private banks, while offering
an alternative to its highly inefficient state financial
institutions, continue to suffer from the country's 2003
banking crisis. Operating under onerous restrictions,
arbitrary interventions and a bleak investment climate
results in slim profit margins. The private sector, however,
is where much of the country's economic sense resides.
Economic sense, however, does not enter into the regime's
policy making. Thus, the banking system declines along with
the economy as a whole. End summary.


2. (C) Without an independent Central Bank, regime leaders
with little or no economic background have run the banking
system in Burma into the ground over the last forty years.
From the late General Ne Win, who said the kyat (Burma's
currency, currently trading at 1150/$1 on the black market),
would devalue "over my dead body," to former PM Khin Nyunt,
who told an economist from the Central Bank, "you don't even
have to give the briefing, I know when the proper time to
devalue the kyat will be," to former Finance Minister Khin
Maung Thein, who arrested moneychangers to stop an informal
kyat depreciation, Burmese leaders have repeatedly ignored
good advice from their economists. In some unusually frank
meetings, a former Deputy Governor of the Central Bank and
other members of the small private banking community told
econoff how uninformed economic decisions have ruined the
economy and caused difficulties for private banks.

Crash Survivors Tightly Controlled
--------------

3. (C) Three large state banks, nine quasi-government
institutions, and six totally private banks make up Burma's
banking sector. The biggest state bank, Myanmar Economic
Bank, has 400 billion kyat ($348 million at the market rate)
in deposits. The largest quasi-government bank, Myawaddi
(owned by active and retired military members of Myanmar
Economic Holdings Limited),holds about 81 Billion kyat in
deposits (approximately $70.5 million). The second largest
quasi-government bank, Inwa Bank, is owned by the Ministry of

Defense. In comparison, the largest fully private bank holds
about 67 billion kyat (about $58 million) in deposits. Total
banking system deposits in 2004 were 736.4 billion kyat ($826
million at average 2004 market exchange rates),according to
IMF estimates. Of Burma's eighteen banks, only the six
private banks must comply with the severe restrictions that
the GOB imposed after its banking crisis in 2003. Most
significantly, private banks can only accept deposits not
exceeding seven times the amount of paid-in capital. This
greatly restricts their capacity to loan, invest, or expand.
The state also dictates maximum interest rates, which, since
the year 2000, have been stuck at 10% for deposits (also the
Central Bank discount rate) and 15% for loans. Based on
embassy surveys, we estimate annual inflation at 25-30%.


4. (C) According to IMF estimates, in 2004, overall banking
system lending reached 2.250 trillion kyat ($2.52 billion at
the average 2004 informal exchange rate),with less than 20%
of loans going to the private sector. State banks support
the public sector, while most private bank loans go to the
private sector, according to bank sources. The "private
sector", however, includes crony businessmen like Te Za, the
son-in-law of Senior General Than Shwe. Te Za has borrowed
extensively from both state (Myanmar Economic Bank) and
private banks, according to sources in those banks. Since
the 2003 crisis, the more fiscally conservative private banks
hold relatively small portfolios of non-performing loans.
Some private banks, however, are not so prudent or cannot
manage to evade financing demands from regime leaders, but
they can avoid Central Bank scrutiny. For example, Yoma Bank
(a private bank) has never technically received a permit to
operate after the 2003 crisis. Yet it continues to offer
services, and accepts deposits, even, according to one
banker, well above the state-imposed 7:1 ratio. "The owner
must know someone," he concluded.


5. (U) Private banks offer clients an alternative to highly
inefficient state banks, which discourage most large
depositors through slow, unfriendly service and closer
scrutiny of transactions. Private banks cannot deal in
foreign currency, but can offer personal or commercial loans,
trade facilities and consumer banking services. No banks
offer credit cards or ATMs, mainly because of difficulties
caused by international sanctions on financial transactions.
Private banks primarily provide trade facilitation, domestic
remittance services and working capital loans. Given limits
on business they can accept, private banks develop
relationships with a small number of reliable clients. As
confidence in the client grows, the banks extend more credit
on longer terms to the same clients, rather than seek new
customers. Since the private banks have reached their
deposit limits, many Burmese now build safes in their houses
to store large amounts of cash, the bankers said.

Hard Currency is Hard to Capture
--------------

6. (U) Only two state banks can deal in foreign currencies.
Remittances from overseas workers and payments from foreign
importers are taxed at 10%. Payments from overseas for
tourism services are taxed at 7%. To avoid this tax, workers
and others sending hard currency into the country use the
"hundi" system of informal remittances. Also, much
undeclared cash is hand-carried across the borders. These
practices keep most of the privately-earned hard currency out
of the banking system entirely. Also, foreign banks can only
open representative offices to provide information and
assistance. Branch offices are prohibited.

Burmese "Bankers' Hours"
--------------

7. (C) In sessions they jokingly referred to as "Morning
School," the managers of the biggest private banks must go
every workday morning to the Finance Minister's office to
brief him on current conditions, providing information used
in the Minister's briefing for Senior General Than Shwe.
Every night, these same bankers go to "Night School," which
sometimes lasts until midnight, where they report their day's
activities to the Central Bank. The Central Bankers manually
transcribe the day's banking activities from the private
banks' computer printouts.


8. (SBU) The GOB is clearly printing more money, as there has
been an influx of new 1000 kyat notes in circulation recently
(in a new smaller size similar to the US dollar). Since no
kyat have been withdrawn from the economy, the new money adds
to inflation pressure. The market value of the kyat
depreciated 30% from November 2004 to November 2005,
according to Embassy surveys of moneylenders. Despite the
tight government restrictions and rising inflation, bank
contacts manage to operate with a slim profit margin from
lending and relending on short terms the same restricted pool
of money, and from fees on remittance and trade facilitation
services. Banks also earn 8.5% interest on treasury bonds
they buy from the Central Bank. They do not fear competition
because the sector does not attract new investors. The near
term outlook for the economy remains negative, they say, with
fewer customers requesting loans for start-ups or expansions.

Comment: Saving For the Future
--------------

9. (SBU) Although the majority of bank assets still lie
firmly in the hands of the regime, private banks play a vital
role in supporting private sector activity. They cannot
realize their potential to finance growth of a strong private
sector because restrictions keep their client base small.
Entrepreneurs, businesspeople without an existing strong
banking relationship, and new entrants into the business
world have nowhere to go for fast, reliable service. They
are faced with surly state banks or informal support from
friends and relatives. Prevented from expanding to meet
demand, some bankers appeared to want to get out of the
business, but are reluctant to lose their existing
investment. The bankers we spoke to recognize the economic
damage done by regime policies. Unfortunately the regime,
unwilling to hear bad news, has driven sound economic and
financial advisors away. Thus the private banks have gotten
caught up in the downward spiral of the economy, and nation,
in general. End comment.
VILLAROSA