REGIME FAVORS STATE-OWNED BANKS OVER PRIVATE BANKS

UNCLAS SECTION 01 OF 03 RANGOON 000197

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, EEB/IFD/ODF
PACOM FOR FPA
TREASURY FOR OASIA:SCHUN

E.O. 12958:N/A
TAGS: ECON EFIN PREL BM
SUBJECT: REGIME FAVORS STATE-OWNED BANKS OVER PRIVATE BANKS

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1. (SBU) Summary. Although the Burmese banking sector has
regained its footing since the 2003 banking crisis, the government
continues to limit the ability of Burmese private banks to act as
banks. According to bankers, the Central Bank of Burma closely
monitors the financial transactions of the 14 private banks, limits
the amount that banks can loan and thus earn in profits, and
controls the number of branches a private bank can operate. Four
state-owned banks account for more than 60 percent of deposits,
operate the majority of bank branches throughout the country,
provide funding for government programs, and are the only banks that
can hold foreign currency. Despite the disadvantages, private banks
continue to operate in Burma, providing financial transfer services
for Burmese people, many of whom continue to distrust the banking
system. End Summary.

2003 Banking Crisis
--------------


2. (SBU) Historically, state-owned banks have dominated Burma's
banking sector, although the government opened the financial sector
to private bank competition in 1992. Between 1992 and 2003,
private bank operations grew dramatically, with more than 500
branches throughout the country receiving more than 60 percent of
total deposits. In early 2003, twenty private banks operated in
Burma and ten foreign banks had opened marketing offices in Rangoon.
However, the February 2003 banking crisis, which occurred because of
liquidity concerns surrounding Asia World Bank (Burma's largest
private bank) and the collapse of illegal financial firms' pyramid
schemes, brought the growth of private banks to a screeching halt.
Most Burmese immediately lost confidence in the banking sector,
running to their banks to withdraw savings until the authorities
limited withdrawal amounts. Within a month of the crisis, private
banks had lost more than 40 percent of their deposits, resulting in
a severe liquidity crisis. By September 2003, the Central Bank
closed many private bank branches outside of Rangoon and instructed
private banks to suspend credit services, and limited withdrawals
and bank account transfers. The GOB also assisted private banks
with a 25 billion kyat ($25 million) bailout.

Limited Bank Operations
--------------


3. (SBU) Since the crisis, private banks have slowly recovered and
the public has gained more confidence in the financial sector,
bankers tell us. In the past five years, due to both the crisis and
unrelated money laundering cases, two private banks (Asia World Bank
and Mayflower Bank) closed and three banks merged. There are
currently 18 banks operating in Burma, four of which are state-owned
-- Myanmar Economic Bank, Myanmar Foreign Trade Bank, Myanmar
Agricultural Bank, and Myanmar Investment and Commercial Bank. The
total number of bank branches throughout the country is
approximately 600 - up 25 percent since 2003. However, state-owned
banks account for almost 70 percent of branches, while the 14
private banks, which include military and semi-government banks, run
only 186 branches. In 2006-2007, the GOB approved the opening of
six new branches of private banks - a step in the right direction,
but still only a small fraction of bank branch opening requests,
bankers declared. Several banks, including Kanbawza, Yoma, and
First Private Banks, have plans to open new branches in 2008,
pending government approval.

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Private Banks Operating in Burma
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Name Type of No. of
Bank Branches
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Asian Yangon Intl Bank Private 1

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Cooperative Bank Semi-Government 14
First Private Bank Private 16
Innwa Bank Military 28
Kanbawza Bank Private 26
Myanmar Citizens Bank Semi-Government 3
Myanmar Industrial Bank Semi-Government 3
Myanmar Livestock, Breeding
And Fisheries Dev. Bank Semi-Government 18
Myanmar Oriental Bank Private 18
Myawaddy Bank Semi-Government 10
Sibin Tharyar Yay Bank Semi-Government 2
Tun Foundation Bank Private 2
Yangon City Bank Private 2
Yoma Bank Private 43
-------------- --------------
Total Number of Private Bank Branches 186
-------------- --------------


4. (SBU) The Central Bank strictly regulates private banking
operations, limiting their ability to earn a profit, First Private
Bank President U Sein Maung told us. In addition to closely
monitoring their financial situation, the Central Bank also requires
private banks to maintain 10 percent of total deposits as minimum
reserves, sets limits on loans, controls the number of branches a
private bank can open, and prohibits them from holding foreign
exchange. As a result of these regulations, private banks are
unable to function as real banks should, U Sein Maung lamented.


5. (SBU) Bank officials at Kanbawza, First Private, and Yoma bank
told us that while bank business has improved since 2003, banks have
limited ability to make a profit. The majority of bank transactions
consist of financial transfers between headquarters and branch
offices, payment transfers to outside businesses, and the issuance
of small loans. Private banks charge a minimal rate for financial
transfers, only 50 pyas per 100 kyats transferred($0.0004 per every
$0.10) Interest rates on loans are capped at 12 percent, but due to
high minimum reserve rates, the amount that banks can loan and earn
in profits is limited, Kanbawza Bank Consultant U Than Lwin
explained. According to Central Bank figures, in mid-2007, the 18
banks held total assets of 1.5 trillion kyats (approximately $14.2
million),although the four state-owned banks held 55 percent of the
assets.

Favoring State-Owned Banks
--------------


6. (SBU) According to U Than Lwin, GOB regulations clearly favor
state-owned banks over private banks. For example, any business
that needs access to foreign currency for import/export purposes
must have a bank account with the Myanmar Foreign Trade Bank (MFTB),
one of three state-owned banks that deal in foreign exchange. This
regulation allows MFTB to profit from high fees on foreign exchange
transactions. Additionally, U Than Lwin noted, state-owned banks
may open new bank branches without experiencing the same delays as
private banks. In 2007, Kanbawza Bank petitioned the Ministry of
Finance for permission to open five new bank branches in Shan State,
Kachin State, and Mandalay Division. Aung Ko Win, owner of Kanbawza
Bank and close friend of General Maung Aye, told us that the
Ministry of Finance has yet to make a decision on his petition, but
noted that Myanmar Economic Bank opened six new branches last year.


7. (SBU) State-owned banks often act outside their mandates and are
not subject to Central Bank scrutiny, U Than Lwin explained. These
banks often act as arms of the government, providing financing for
government agriculture and trade projects. Central Bank regulations
for government banks are not made public, but private bankers agree
that state-owned banks do not face the same minimum reserve or
capital adequacy restrictions as private banks. Although official

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figures are unavailable, U Than Lwin estimated that approximately 20
percent of loans granted by the four state-owned banks are
nonperforming, compared to 3 percent for the 14 private banks.

Comment
--------------


8. (SBU) The 2003 banking crisis provided the impetus for the
government to once again take control of the banking sector. By
favoring the state state-owned banks, the government manipulates the
system so that the regime earns profits instead of private banks.
But the state-owned banks lack the fiscal discipline necessary to be
financially sound banks, shown by their high rate of nonperforming
loans. It is no wonder that the public continues to distrust banks,
instead using alternate financial services, such as the hundi system
to transfer money or microcredit programs for small loans. Burma
needs a healthy banking sector, which requires prudential bank
supervision rather than government interference, more competition,
and the ability to loan, in order to spur sustainable economic
growth. To have that, the government must implement financial
reforms and level the playing field between state-owned and private
banks. The senior generals have no intention of doing so as long as
they believe that tight controls over the banks best ensures their
continued grip on the economy.

VILLAROSA