VZCZCXRO5144
RR RUEHCHI RUEHDT RUEHHM RUEHNH RUEHTRO
DE RUEHGO #0197/01 0741112
ZNR UUUUU ZZH
R 141112Z MAR 08
FM AMEMBASSY RANGOON
TO RUEHC/SECSTATE WASHDC 7300
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHGG/UN SECURITY COUNCIL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1784
RUEHBY/AMEMBASSY CANBERRA 0999
RUEHKA/AMEMBASSY DHAKA 4796
RUEHNE/AMEMBASSY NEW DELHI 4551
RUEHUL/AMEMBASSY SEOUL 8090
RUEHKO/AMEMBASSY TOKYO 5651
RUEHCN/AMCONSUL CHENGDU 1390
RUEHCHI/AMCONSUL CHIANG MAI 1461
RUEHCI/AMCONSUL KOLKATA 0248
RUEATRS/DEPT OF TREASURY WASHDC
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHGV/USMISSION GENEVA 3574
RHEHNSC/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1414
RUEKJCS/SECDEF WASHDC
RUEHBS/USEU BRUSSELS
RUEKJCS/JOINT STAFF WASHDC

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 
 
RANGOON 00000197  001.2 OF 003 
 
 
¶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. 
 
--------------------------------------------- ------- 
           Private Banks Operating in Burma 
--------------------------------------------- ------- 
Name                        Type of         No. of 
                            Bank            Branches 
--------------------------------------------- ------- 
Asian Yangon Intl Bank      Private              1 
 
RANGOON 00000197  002.2 OF 003 
 
 
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 
 
RANGOON 00000197  003.2 OF 003 
 
 
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