Rethinking Myanmar’s state-owned banks

The country’s four state-owned banks account for more than 60 percent of total banking assets, but have not kept up with the reforms and growth at their private counterparts since the sector was liberalised in 2011.

Members of parliament have urged the Ministry of Finance to reduce the size of state banks, particularly Myanma Economic Bank (MEB), saying that they should become smaller as private banks become stronger and financial inclusion levels grow.

MEB is the largest bank in the country in terms of reach, with 307 branches. It offers rural banking services, but also acts on behalf of the finance ministry to issue highly subsidised loans to other banks including state-owned Myanma Agricultural Development Bank (MADB).

Because of this, MEB has been operating at a loss since 1990, according to German development agency GIZ. Deficits are funded through the Central Bank of Myanmar.

An official from the International Monetary Fund previously told The Myanmar Times that MEB and the other three state banks – MADB, Myanma Foreign Trade Bank (MFTB), and Myanma Investment and Commercial Bank (MICB) should be reformed to help economic development.

The IMF and the World Bank are advising the government on how to modernise state and policy banks.

An MEB manager in Nay Pyi Taw confirmed that the World Bank has presented a number of options including policy reform and mergers with one or more of the other banks.

“They offer advice about reform, but are unable to solve our current problem. It’s complicated,” he said.

Restructuring or corporatisation will take time, and will require changes to banking laws and regulations. It will also depend on the budget and finance ministry approval, he said.

Excluding loans to MADB, MEB’s loan-to-deposit ratio is only around 20pc to 30pc, compared to 80pc at commercial banks. While MEB has recently started buying treasury bills to soak up liquidity, this has not solved the problem, according to the IMF.

MEB offers lower interest rates on deposits than other banks – around 8pc compared to 8.25pc to 10pc at commercial banks – but has a secure deposit base partly comprising state-owned accounts. It benefits from a lack of public trust in the private banking sector – depositors would rather place their money in a government-backed bank, even at lower interest rates.

The problem is that MEB earns just 4pc interest on its agriculture exposure and 8pc on loans to small-and- medium sized enterprises, through other policy banks.

State banks report to the Central Bank of Myanmar, but operate under the Ministry of Finance, with the exception of MADB, which is under the Ministry of Agriculture and Irrigation.

As a result, they are not subject to the same strict controls as commercial banks on several requirements including non-performing loan ratios, loan-to-deposit ratios and capital ratios.

Once a draft law is enacted requiring every bank to have at least K20 billion in capital reserves, state banks will need to reconsider their business models to help raise their capital levels. This will prove an enormous challenge, said the MEB manager.

“The government provides for us every year, but this cannot be a solution if we are to operate commercially,” he said. “But if we try take the bank public, nobody will buy our shares as they know we are not making a profit.”

Another big challenge for MEB is to upgrade its customer care and technical services. “It will take time to become efficient with new products, as we are unfamiliar with modern banking systems,” said the manager.

MEB should lend money directly to SMEs and issue development finance loans, at a higher interest rate, said U Mya Than, chair of Myanmar Oriental Bank and former managing director of MICB. The government and the finance ministry should also ease restrictions on state banks’ loan policies to give them more operational freedom, he said.

“They need to be restructured to become profitable,” he said. “They need experts who are proficient in banking and they need to abolish bribery and corruption which have become a habit in state enterprises.”

MICB was once a leader in both domestic and foreign banking and it needs to develop if its role is to be maintained, said U Mya Than. “For example, we hope they begin to participate and to help develop the domestic market,” he said.

MICB and MFTB specialise in international banking – they have one branch between them, an MICB office in Mandalay. Government departments, state firms and some individuals have forex accounts at MFTB.

Earlier this year, it was rumoured that MICB would be privatised or restructured as an export-import bank, but no plans have yet been announced.

An MICB manager said there were no plans to reform the bank, but declined to discuss the matter further saying that the decision-making official had moved to MEB.

Source: Myanmar Times

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