Local banks fret foreign rivals

Domestic banks fear that international lenders opening branch offices in Myanmar will pursue an aggressive strategy and poach the best local clients, but commentators believe this is unlikely to happen, for now.

Between April and September, nine global banks will open branch offices in Yangon, becoming the first foreign institutions to undertake active commercial operations in Myanmar since 1963. In theory they are restricted to servicing the accounts of foreign companies operating in Myanmar.

“They’re only supposed to bank foreign companies. But what’s a foreign company? Legally it’s just somebody with a share held by a foreign shareholder. Any Myanmar corporate worth their salt has a foreign shareholder, which means they can access funding from the international banks,” said an executive at a Myanmar bank.

While barred from serving local businesses, the foreign banks are free to lend to foreign companies doing business in Myanmar. Under the Myanmar Companies Act, any foreign shareholding in an otherwise Myanmar company turns it into a foreign company, making it eligible for lending from foreign banks.

Local banks are concerned that restrictions on their own business activities, including a 13 percent cap on loan interest rates, and a mandate to only offer kyat-denominated loans, will drive these local businesses with some foreign ownership into the arms of foreign banks. The interest rate cap has long been a matter of contention. While the Central Bank of Myanmar has made no official comment, foreign banks confirm that they will not be subject to the same controls when issuing foreign currency loans.

“There is no interest rate cap for foreign currency loans. The interest rates we can offer for US dollar loans are based on individual bank policy. We will be able to offer loans in Singapore dollars, US dollars, Euros and possibly also Thai baht and Malaysian ringgit, though we will need to confirm this,” said Tetsuro Nonaka, chief Myanmar representative at Mizuho Bank.

This will allow international banks much more flexibility than local lenders when pricing risk, allowing them to take on projects that local banks may not be able to, because the local banks cannot lend at higher rates than 13pc in kyat.

To make the playing field even less level, foreign banks will be able to lend in both foreign and local currency, while local banks are restricted to lending only in kyat. This means that Myanmar companies requiring loans in anything other than kyat will require the services of a foreign bank.

The reason for this rule is to discourage foreign banks from lending in US dollars, to prevent the local currency from weakening further, said a senior central bank official. “Foreign banks can lend directly to foreign companies in kyat as we do not want to encourage them to lend in foreign currencies,” he told The Myanmar Times.

Too much hassle

However, while Myanmar companies with existing foreign shareholders may choose this route, lawyers say that local firms are unlikely to go through the hassle of selling a share to a foreigner, just to become eligible for a foreign currency loan.

“As soon as a local company becomes a foreign company it can’t own land, it can’t take a lease for more than a year. If it’s got an MIC [Myanmar Investment Commission] permit under the Myanmar Investment Law, that would be cancelled and it would have to get another one under the Foreign Investment Law,” said a Yangon-based partner at an international law firm.

“It would also have to get over the hurdle of notifying DICA [the Directorate of Investment and Company Administration] that it was transferring a share to an international buyer. Finally, local banks don’t lend to foreign companies, so that funding channel would be closed. For the amount you’d want to borrow to make all of that worthwhile, I don’t think you’re in the territory that local companies are in anyway,” he said.

This may change if reforms to the Myanmar Companies Act are passed, and the definition of a foreign company is changed. According to the new draft law, a foreign company is defined by a threshold, but this threshold is yet to be defined.

But even if local companies choose to go through this process, international banks have no real incentive to offer loans to Myanmar companies. Almost all have made it clear that their initial focus will be on issuing loans to existing overseas clients.

“In many cases we will request a Japanese or international corporate to provide an offshore guarantee. International banks have global policies in terms of risk, so this helps to minimise concerns,” said Mr Nonaka.

Many believe that domestic credits carry too much risk, though Singaporean banks may be more aggressive in lending to local companies due to their existing wealth management relationships with Myanmar clients.

International banks are permitted to lend to local banks, but commentators argue that even this may not happen until local banks are audited to an international standard, allowing foreign branches to accurately assess their credit quality.

Some believe that even issuing foreign currency loans will be troublesome for international banks, particularly as each loan may need to be approved by the central bank.

“The strict regulatory environment and unclear judicial climate are likely to limit lending in practice. For example, it is unclear whether a foreign-owned bank would be able to legally enforce a claim on property,” said research firm Oxford Business Group (OBG) in its 2015 Doing Business Report.

Banking Asia

While business may initially be hampered by the underdeveloped local market, many of the new international banks have big plans for Myanmar. Country manager for UOB Harry Loh previously told The Myanmar Times that the Singaporean bank has a pipeline of loans, not just to its home market, but to businesses from China, Hong Kong and Thailand too.

UOB’s first onshore loan is to Rangoon Excelsior, a French-Myanmar joint venture, to refurbish a Yangon hotel at the corner of Bo Soon Pat and Merchant streets.

A survey by the bank published in April says that one in four Asian businesses plans to expand into Myanmar this year, making Myanmar one of the top investment destinations in the region. One-third of businesses from Hong Kong said they would expand into Myanmar in 2015, followed by 28pc of companies in Thailand, 26pc in China, 25pc in Malaysia and 21pc in Singapore.

“It is expected that the biggest beneficiaries for these foreign banks’ operations are the power, real estate and infrastructure sectors. Undoubtedly, this will improve access to capital and liquidity,” said Melvin Poon, financial services leader at PricewaterhouseCoopers, in a press release.

Furthermore, foreign banks will be able to partner with local banks in areas such as trade finance. They have also provided training programs to help develop a local banking talent base, according to a Business Monitor International report published earlier this month.

“For their part, the government and members of parliament are weighing their interest in nurturing domestic banking groups against their desire for a better capitalised banking sector that would more actively drive economic growth,” according to the OBG report.

“A possible compromise being discussed by the parliament’s banking committee would allow foreign banks to buy stakes in or form joint ventures with local banks.”

To date, the only foreign institution to lay the groundwork to take an equity stake in a local lender is the International Finance Corporation (IFC), which has issued a US$5 million convertible loan to Yoma Bank. The equity component of this deal offers greater security to the IFC than a straight loan would. IFC is reportedly in talks to replicate the deal with CB Bank and Myanmar Oriental Bank.

Source: Myanmar Times

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