The Central Bank of Myanmar (“CBM”) has invited foreign banks with representative offices in Myanmar to apply for a foreign banking licence in a move to liberalise the banking sector which has previously been closed to foreign investment. The result of the tender could see as many as ten foreign banks being granted a foreign banking licence to open a branch office and participate in previously restricted services in Myanmar, including providing loans to foreign companies as well as domestic banks.

Background

At present the banking sector in Myanmar is closed to foreign investment and foreign banks and other financial institutions are limited to opening representative offices only, and are not permitted to open branches or participate in joint ventures with, or invest capital in, local banks in Myanmar. The activities which a representative office can carry out are limited to marketing and business development activities. As a result the Myanmar financial sector and markets remain under-developed, local banks operate on a largely manual basis and are thinly capitalised. It is thought that only 10% of Myanmar citizens and 40% of local Myanmar businesses have a bank account which significantly affects the ability for economic growth and development.

The Foreign Investment Law (“FIL”) issued in November 2012 and easing of international sanctions have resulted in an increased interest in both operation and investment in Myanmar, across all sectors. The banking sector in particular has seen banks establish representative offices; we understand from the CBM that there are now approximately 42 international banks with a representative office in Myanmar.

Initial Reform Proposal

The Myanmar government has recognised the need for reform and modernisation of the banking and finance sector for some time. This included the need for the involvement of foreign banks and significant foreign investment to help implement modernisation of the current practices and systems within the sector. However, the government is also concerned with protecting the local banking sector, which is not in a position to compete with international banks. As a result any reform will be a gradual process.

The government's initial plan indicated that they were looking at a “three stage plan” for the sector, to include:

  • The establishment of representative offices by foreign banks in Myanmar;
  • Entry by foreign banks into joint venture agreements with local banks; and
  • Issuance of licences to foreign banks to open branches in Myanmar.

It is understood that the Ministry of Finance has been working closely with the International Monetary Fund and the World Bank since early 2013 to draft new law and implementing regulations providing a framework for foreign participation in the sector. It was initially expected that the new law would be finalised and issued by July/August 2013, however competing interests and the strong influence of the local banking sector delayed finalisation or publication of any new law, and to date no new financial institution law has been issued.

Current Reform Proposal

The Myanmar government has now moved away from the above three step plan for foreign involvement in the banking sector and we understand has sent out an official invitation to a number of shortlisted foreign banks with representative offices in Myanmar to apply for a limited operating licence, with 100% foreign ownership.

We understand that the government plans to issue a minimum of 5 and maximum of 10 foreign banking licences which would allow foreign banks to open a branch office in Myanmar and which would be licensed to grant loans to foreign companies and domestic banks only.

Of particular interest is, we understand, a requirement that foreign banks will be expected to participate in the local bank market – by lending to domestic banks in order to support their financing of domestic corporates. It remains to be seen how this will play out in practice and whether this will, in fact, assist local companies in raising finance at an affordable price.

We understand the process is currently underway and will run over a period of 2 months.

The consulting firm Roland Berger is overseeing the process.

Conclusion

Notwithstanding the impetus indicated by the suggested timeline, there is some likelihood that the process will be met with a degree of opposition from the domestic banks. This is largely due to concerns that the existing banks remain too underdeveloped to cope with any robust foreign competition.

However, this does represent a significant step in the government’s plans to bolster its domestic systems and develop its financial markets as part of a more developed country.