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Singapore - Myanmar has thrown open the door to foreign banks, but weak credit protection and tight restrictions on lending mean it's not a warm welcome, at least not yet.
Nine banks have been given the first licences to operate in the Southeast Asian nation, but the government is still to lay out a roadmap on more reform, including setting up a bankruptcy law and a stronger legal framework for the financial sector.
For now, the banks must hope their presence in the frontier economy will prove to be a windfall when institutional safeguards emerge and the restrictions on foreign lenders are eased. Myanmar is slowly opening up to foreign investment after decades of military rule, but both political and economic reform have been slower than initially hoped when a quasi-civilian government took over in 2011.
Nevertheless, with growth forecast at an annual 8.5% over the next few years, according to the International Monetary Fund's latest projections, and an economy where bank loans comprise just 19% of GDP, Myanmar represents a huge opportunity for regional and international banks. Comparative numbers in the region are 36 percent in Cambodia and 108% in Vietnam.
Singapore's United Overseas Bank (UOB), which was granted one of the Myanmar licenses, said it plans to use the opportunity to start booking onshore loans to foreign companies but cautioned there are limits to how much it can grow.
"As you know there are limits and constraints on the ground, so it is very important for us to work very closely with local stakeholders, such as the local financial institutions," said Ian Wong, head of international banking at UOB.
He said a number of Asian clients were keen to expand in Myanmar. UOB will work with local banks to help them grow in trade finance and project finance businesses, Wong added.
"We have a pipeline of investments from our regional clients that is going into Myanmar."
Rival Oversea-Chinese Banking Corp published a full-page advertisement in Singapore's Business Times newspaper saying it was planning to use its licence to support Myanmar companies.
The banks awarded the licences last week also include Australia's ANZ and Asian heavyweights such as Japan's Mitsubishi UFJ Financial Group and the Industrial and Commercial Bank of China.
The strict licence terms cap operations to one branch for each bank. Despite having a domestic presence, the licence also limits the newcomers to offer foreign currency loans to only non-Myanmar firms.
The foreign banks will also be allowed to lend to local banking institutions - cooperation which is expected to encourage domestic banks to expand operations.
Myanmar is one of the most under-banked countries in the world - a United Nations study released in May found that only 4 percent of citizens surveyed had savings accounts in their own names, while a 2013 report by the International Finance Corporation estimated that less than 20 percent of the 51 million people have access to financial services.
"We have to get our banking industry to international standards," said Kyaw Myint, an economist and adviser to Myanmar's Myawaddy Bank.
Low loan recovery rates
A 2014 World Bank study showed resolving insolvency in Myanmar can take up to 5 years, against 2.8 years in East Asia and Pacific and 1.7 years in developed countries belonging to the Organisation for Economic Co-operation and Development.
The recovery rate for a loan is 14 cents to a dollar in Myanmar versus 30.7 cents for East Asia Pacific and 70.6% for OECD countries.
Moreover, there is not yet a precedent for a bankruptcy or a foreign firm seeking recourse from an indebted local partner in Myanmar. Myanmar has no specific bankruptcy law.
"The laws regarding recognition of security and enforcement of security are very under-developed in Myanmar," said Jake Robson, a Singapore-based partner at US law firm Morrison & Foerster LLP.
"It is the traditional risk every bank faces when it goes into a frontier market."
For now, according to bankers involved, the foreign lenders will mainly use their Myanmar presence to build ties with the country's local banks and emerging corporate sector while they await more financial reforms.
Credit-hungry Myanmar corporates have to go overseas for foreign currency loans, and have to prove international bona fides to make the cut.
Last week, Yangon-based Pan Asia Majestic Eagle - which is rolling out telecommunications towers in Myanmar - said it had obtained the country's first cross border loan from an offshore consortium. Its sponsors have built a similar network in Indonesia and had an established relationship with the bankers.
A senior executive at ING, which was part of the consortium that lent $85 million to the Myanmar firm, said banks allowed to operate in Myanmar would likely use their onshore presence to develop client relationships that would then lead to businesses for their regional networks.
"I suspect many of the financings may still be structured as cross-border offshore financing to start with, before onshore lending takes off in a big way," said Krishna Suryanarayanan, a managing director for structured finance at ING.
The sectors most likely to benefit from access to services provided by foreign banks are power, infrastructure and real estate, said Edwin Vanderbruggen, a partner at VDB Loi, a law firm with offices in Yangon.
But the restrictions on foreign banks represented a "lost opportunity" for Myanmar as they restrain the ability of these banks to fund new and innovative firms. Easier financing for these firms could lead to better overall growth prospects, he and other experts said.
"The restrictions on foreign banks will block this source of capital," said Sean Turnell, an expert on Myanmar's economy at Australia's Macquarie University.
"They can lend to local banks - but that's back to square one, since locals still need to access these banks and mostly they cannot," he said. "Restrictive regulations, mostly still in place, severely limit banks' ability to engage in normal lending."
