BURMA
ECONOMIC WATCH
6
March 2003
__________________________________________________________________
Burma's
Banking Crisis: A Commentary
By Sean Turnell and Alison Vicary*
As most readers of this note
will be all to well aware, Burma is currently undergoing one of its periodic
monetary and financial crises. Unusually, however, this time the crisis is not
a characteristic de-monetisation episode, but a failure of confidence in the
country's nascent private banking sector. In this sense the current crisis is
probably less immediately destructive of the 'wealth' of ordinary Burmese than
previous dramas (as shall be examined below), but its longer-term damage to
Burma's economy and to key institutions is likely to be severe indeed. Trust is
the foundation of banking and the key ingredient of a country's social capital.
There must be little of this (already scarce) commodity in Burma today.
The following is an attempt
to make sense of some of the developments that have been taking place in
Burma's banking sector in recent weeks. It suffers from the usual information
difficulties that come with attempting real-time commentary on the opaque world
of Burma's political economy. It is hoped, nevertheless, that it might prove
useful in at least shining a dim light into some very dark corners. It is not a
comprehensive account of individual events either, but it arguably provides a
sufficient outline upon which to begin a process of analysis. Extensive use is
made throughout of a more detailed examination of the structure of Burma's banking system contained in Turnell (2002). We
have made wide-spread use of many other sources, where possible indicated
below. Finally, comments and suggestions would be greatly welcomed.
Beginnings
of the crisis
Upon this there are a great
many rumours and swirling innuendo, but within this maelstrom the following are
noteworthy:
·
As indicated by Zaw Oo (2003), Kyi May Kaung (2003)
and others, the penultimate trigger is likely to have been the collapse through
the second-half of 2002 of what are sometimes called 'private service
companies' (other titles include 'general service enterprise companies',
'unofficial finance companies' - and a host of other pseudonyms). Whatever
their title, these companies took in deposits, sold shares and conducted other
financial activities with the promise of very high returns to investors.
Typically, though much of their activity is illegal (they are not, for example,
authorised deposit-taking institutions under the Financial Institutions of
Myanmar Law, 1990), a blind-eye seems to have been turned by the regulators
until very late. Some commentators have suggested that the failure of these
companies is due to reverses in investments they made in real estate and other
lending, but we agree with Kyi May Kaung (2003) that these firms are in
actuality little more than 'Ponzi' or 'Pyramid' schemes.[1]
As such, they would have eventually failed of their own accord once the well of
gullible investors had dried up.
·
Exacerbating the uncertainty surrounding the private
service companies was the (related) sacking on 1 February of the Finance and
Revenue Minister, U Khin Maung Thein. His replacement, Brig. Gen. Hla Tun, is a
former head of Military Ordinance with no known expertise in financial matters.
In early March it was reported that Khin Maung Thein was being investigated by
military intelligence.[2]
·
Some reports suggest that Burma's 20 private banks
were financially impaired by the collapse of the private service companies via
direct exposure to them in the form of lending and share investments. We have
not been able to confirm this. In any case, it is likely that far greater
damage in this respect has occurred from the simple contagion effect the loss
of deposits brings - no matter that the location of this loss began in the unauthorised sector.
·
The immediate
trigger to the 'run' on the banks has been the rumours that have surrounded
what is arguably Burma's biggest private bank, the Asia Wealth Bank (AWB). As
with all other aspects of the current drama, details differ, but one of the
allegations is that the AWB's Vice-Chairman and effective CEO, U Aik Tun
(accompanied by the aforementioned former Finance and Revenue Minister, Khin
Maung Thein), lost $US 4 million whilst on a gambling trip to Macau. According
to the NCGUB, the pair arranged for the AWB to secure the foreign exchange to
extinguish the debt. Though it is not said the AWB paid the debt, the price it
(fraudulently?) charged the pair for the foreign exchange greatly advantaged
them, but at some loss to the bank. Insiders aware of the deal (said to be
largely friends and associates of U Aik Tun) became concerned, and withdrawals
followed.
Other reports,
whilst not inconsistent with the story above, tell of failed lending by the AWB
in China. Zaw Oo (2003) rightly wonders as to what the AWB was doing
transferring scarce Burmese capital to China - very likely (depending on the
nature of the supposed transaction) in transgression of the Financial
Institutions of Myanmar Law (1990), and a number of Central Bank of Myanmar
(CBM) directives.
In early March
reports circulated that military intelligence was investigating individuals who
allegedly took out large loans immediately prior to the crisis in the banks. The Irrawaddy on 4 March cited reports
that '[b]ank owners…lent large sums of money to close friends, including
members of the military, despite their lack of involvement in legitimate
business dealing'. Anonymous analysts were also cited as suggesting that this
lending 'might be one reason for the banks' lack of liquidity'.[3]
On 28 February the Myanmar Times quoted
Brig. Gen David Abel, Minister for the Office of the Chairman of the SPDC, as
saying that some private banks had been found 'to be not operating in line with
the Financial Institutions Law' in their lending practices.[4]
Manifestation
of the Crisis to Date
·
In the light of the above, in early-February
customers of Burma's banks attempted to withdraw their money.[5]
Though the lines of anxious depositors formed first outside the branches of the
AWB, the panic quickly spread to the other private banks and (according to one
report) even to the principal state-owned bank, the Myanmar Economic Bank.
·
Interestingly, the panic seems to have been most
intense with regard to the four dominant, and most entrepreneurial banks - AWB,
Yoma Bank (which sometimes vies with AWB for the title of Burma's largest
bank), Mayflower Bank and Kanbawza Bank.
·
Initially the banks responded in a varying and ad
hoc fashion - not only vis-à-vis each other, but even between their own
branches.[6]
For the most part, however, some attempt to 'delay' or restrict withdrawals was
the usual practice.
·
The initial response of the CBM and the SPDC to the
crisis was no more assured. On 11 February the CBM's Chairman, Kyaw Kyaw Maung,
attempted to assuage depositors with a statement that '[a]ll 20 private banks
established according to the Financial Institutions laws have firm financial
standing and have the backing of the Central Bank of Burma'.[7]
It was a necessary, but not sufficient, move to stem the tide.
Characteristically, the broader response of the SPDC was to blame Burmese
dissidents for spreading false rumours.
Around the same
time as these statements were being issued, the AWB reportedly approached the
CBM with a request that it be allowed to access 52 billion in kyat from its
reserves at the central bank. Under Article 58 of the Central Bank of Myanmar
Law (1990), Burma's private banks are required to hold reserves totalling 10%
of demand deposits and 5% of time deposits, 75% of which must be lodged at the
CBM, while the remainder may be held as cash. Based on our estimates
(information as to the exact size of AWB's deposit base at the outset of the
crisis is not publicly available), an amount of 52 billion would be at the
upper end of such reserves. This was apparently granted, but days later the AWB
was back at the CBM requesting a further 30 billion. According to reports cited
in Zaw Oo (2003), the CBM rejected this but was willing to 'lend' (against
lodged collateral) some 12 billion kyat.
That the AWB has
been so short of liquidity is indicative to us of the extent of the crisis
surrounding the bank. In past years the AWB has maintained very high levels of
liquidity - vastly in excess of the required reserves that must be held at the
CBM (above), but also with respect to the liquidity requirement that banks hold
a ratio of liquid assets (to eligible liabilities) of at least 20 percent. This 'general' liquidity requirement is also
stipulated under Article 58 of the Central Bank of Myanmar Law (1990). In its
most recent published financial statements, AWB claimed a 36% liquidity ratio
under this criteria.[8]
·
An attempt at a coordinated approach to withdrawal
limits emerged in mid-February when the
CBM ordered restrictions (applying to all banks) on the amount any single
customer could withdraw from their account in any one week. The initial limit
was set at 500,000 Kyat, but this was subsequently revised downwards to 200,000
and then 100,000 Kyat.[9]
·
Notwithstanding this effort, in early March reports
still told of wide variations between different institutions and locations. On
March 4, The Irrawaddy reported that
the Universal Bank limited withdrawals to only 50,000 Kyat per week and that
other (unnamed) banks were applying limits to the number of customers they would see in a day.[10]
In a variation of the latter device, other bank branches issued a limited
number of 'tokens' which had to be presented by account holders before they
would be allowed to withdraw the prescribed weekly maxima.[11]
·
The CBM was strangely slow in providing liquidity to
the banking system. A most fundamental first order response to a financial
crisis (more of which below, but recall the efforts of central banks around the
world following the 1987 stock-market crash), the CBM seems not to have ensured
adequate supplies of cash to the banks until 19 February. On this day a number
of reports emerged telling of trucks laden with newly-printed kyats leaving the
Wazi Security Printing Works, and heading for Rangoon. According to The Business Times of Singapore, these deliveries comprised an initial
25 billion kyat which was distributed to the AWB, Yoma Bank and Kanbawza Bank.[12]
Other deliveries to other banks, and in other locales, reportedly followed in
subsequent days.
·
On 26 February the CBM ordered that banks stop all
'account transfer transactions'. It's not entirely clear what is meant by this
directive, but it is likely that it prohibits both the issuing of cheques by
the banks to customers, as well as facilities allowing the movement of funds
between the banks themselves. Of course, cheques and other payment instructions
still require a bank in order to access cash, so this directive was probably
issued to stop the flight of funds from institutions 'perceived' as being weak,
to those regarded as (relatively) strong.
·
Prior to what seems to be the outright prohibition
against writing cheques, doubts as to whether pre-existing instruments would be
honoured resulted in the creation of 'secondary' markets in which cheques were
bought and sold (for cash) at a discount from face value.[13]
·
In a most extraordinary move, in mid-February it was
reported that the CBM had announced that loan recipients from the private banks
repay 25% (20% in some reports) of their outstanding loans. On 25 February it
was reported that this notice to repay was raised to 50%. Earlier reports had
noted that individual banks and branches had been applying pressure on
borrowers to this end. As noted below, however, this is a most eccentric official move (unique in our
experience), and perhaps the most damaging of the responses to the crisis by
the authorities.
·
The directive on loan repayments has brought with it
a number of peculiar (and surely unintended) consequences, including a situation
in which borrowers have attempted to make repayments in (no longer honoured)
cheques. The problems in this context that also arise from drawing upon
illiquid assets, as well as loans to the government itself and to state-owned
enterprises, are noted below.
Preliminary
Assessment
Financial crises and bank
runs are usually damaging to the institutional fabric of the societies in which
they occur. No society is immune from them, but the key as to how damaging they
will be is largely within the power of the relevant authorities of that
society. If the authorities respond in an appropriate way the costs of banking
crises can be minimised. Indeed, depending on the nature of the crisis, it is
even possible that such events can be beneficial in the long run if their
effect is to 'weed out' institutions that have no place undertaking banking
business.
Over the years various
'rules of the game' have accordingly developed that attempt to ensure systemic stability while allowing for
the failure of particular institutions. In a nutshell, these 'rules' suggest
that the relevant authorities; should provide liquidity to support 'illiquid'
but not insolvent banks; protect the interests of depositors; react speedily to
a crisis lest it spiral out of control; ensure there is clarity of
responsibility and authority amongst relevant government agencies; and ensure
that the public is aware of the principles and conditions under which
intervention might take place. The last rule is important so as to both dampen
false expectations, as well as perceptions that actions are being undertaken in
a capricious manner, or one that favours certain interests.
The response of the relevant
authorities in Burma to this latest banking crisis breaches many of these
rules. Indeed the expression 'relevant authorities' is itself a moot point. The
Central Bank of Myanmar Law (1990), and the Financial Institutions of Myanmar
Law (1990), vest legal authority for financial sector supervision - licensing,
inspecting, supervising, regulating - solely with the CBM. Notwithstanding
this, and as indicated above, the present crisis has been marked by conflicting
statements and unsure directions from right across the authority mosaic. Most
especially egregious have been the contradictory statements emerging from the
CBM and the ultimate authority in Burma, the SPDC. Many instances come to mind,
but indicative of the situation were the statements of the Minister of the
Office of Chairman of the SPDC, David Abel (cited above), suggesting certain banks
(unnamed, therefore ensuring maximum uncertainty) had not been operating
according to the law. In this context, the complaint noted by Zaw Oo (2003) and
Turnell (2002), that the CBM is neither perceived (nor is in fact) independent
of the SPDC, has particular cogency.
Some specific points:
·
The CBM has failed to protect the interests of
depositors. One of the CBM's first steps, as we have seen, was to support the
banks in restricting the access of depositors to their money. As such an early
signal was sent to depositors that their money was not theirs to command, and
would assuredly be caught up in the dramas to follow. An important point to
note here is that the CBM restrictions were general
and not specific to certain institutions. Restrictions on accessing deposits to
the latter are sometimes defensible, but restrictions upon the banking system
as a whole is certain to lead to
systemic instability. In Turnell (2002) we wondered why anyone would deposit
money in a bank in Burma. Back then we were primarily referring to the low
rates of return (in fact, certain losses) vis-à-vis the prevailing rate of
inflation. Now we have the spectre of capital, rather than simply income,
losses. Banking is an activity like no other when it comes to trust. It is difficult to see how
Burma's banking system can recover in the medium term from this aspect of the
crisis.
·
The CBM, probably caught up in the internecine
struggles between it and (within) the SPDC, was extraordinarily tardy in its
response to the crisis. Based on our analysis of the unfolding events, it was
at least two weeks before the onset of the crisis and the first efforts of the
CBM to provide liquidity support. There even seems to have been problems in the
physical supply of kyat in the early days. This is remarkable when it is
remembered that (because of Burma's enormous and unfunded budget deficits)
Burma's printing presses are never silent. If this perception is correct, it
suggests a new set of (unexpected) victims of Burma's chronic infrastructure problems.
·
There has clearly been a gross failure of bank
supervision by the CBM. Under the Central Bank of Myanmar Law, banks are
required to submit to the CBM weekly
statements of their reserves position and liquidity ratios; a monthly balance sheet, income and
expenditure statement and capital adequacy ratio; and quarterly returns on non-performing loans. These reporting
requirements are consistent with best international practice - which only goes
to highlight that, when considering Burma, it is always critical to consider
the implementation of laws, rather than what face they present to the outside.
It is inconceivable to us (as former bank supervisors) that the CBM's reporting
requirements would not have picked up what now seems to be very real and large
problems in some of the banks - especially with regard to their liquidity
position and, perhaps, the extent of impaired loans. Of course, all sorts of
prudential ratios look unhealthy once a crisis gets going, but recognisable
early warning signs should have been picked up.[14]
·
The decision of the CBM to instruct borrowers to
repay large proportions of their loans (seemingly at very short notice) is both
bizarre and immensely damaging. As noted by Zaw Oo (2003), to the extent that
Burma's banks lend at all to the country's struggling private sector, it is
usually for the purpose of securing fixed assets of some form - land,
buildings, capital equipment, and so on. Such assets are highly illiquid, of
course, which leads one to reasonably speculate where such borrowers might get
the money to meet these repayment instructions. Attempts to liquify the assets
by selling them raises the spectre of asset-price deflation (already prevalent
in real estate in Rangoon and elsewhere) and begs a further question - where will
buyers be found? Not surprisingly, many reports are circulating as to the angst
this is causing legitimate business in Burma.
Of course adding
to the surreal nature of this order is the fact (noted in Turnell 2002) that a
great proportion of the lending of Burma's banks goes to the State in some
form. Burma's banks are (with the CBM itself) the biggest buyers of government
bonds, and the biggest suppliers of credit to state-owned enterprises (SOEs).
One source of liquidity available to the banks then is surely the sale of government bonds. With no capital market to
speak of, however, the only buyer of these securities will be the government.
Yet, as Zaw Oo (2003) notes, the government will not be able to afford its
existing liquidity support to the banks without resorting to the printing
presses, much less turn its vast stock of bonds into cash. A period of rapid
money supply growth - and with it growing inflation and a collapse in the
purchasing power of the kyat - can be expected.
With regard to
the SOEs - these are already economically unviable for the most part and they
rely on bank lending (from private and the state-owned banks) to survive. It is
difficult to see how they could meet a 50% call on their outstanding loans
without massive state intervention - and a further exacerbation of the monetary
chaos noted above.
·
Notwithstanding all of these issues, a terrible
irony of the state of Burma's economy is that this latest banking crisis is
less-damaging than it could have been. The issue here is simply that, unlike
past demonetisation episodes, the crisis in the banks will not immediately
consume the wealth (however thin this might be) of the average citizen in
Burma. Demonetisation has historically been so unsettling, economically but
especially politically, since almost
everyone holds kyat in some form. Not many people in Burma, especially outside
of Rangoon and the metropolitan centres, hold deposits in the banks. Of those
that do most (with the possible exception of those using the banks to launder
money from the narcotics trade) use them essentially for transaction purposes.
Given inflation in Burma it is risky (more risky than holding funds in the
banks?) to carry large amounts of currency about the country. As such, many
traders (note that these have been the most vociferous in protesting the
current crisis) keep rolling trading accounts with the banks which can be
easily used for remittance purposes. The important fact to note, however, is
that even these groups do not use the banks as the vehicles in which to hold
their wealth. Performing this
function has been (as always) gold, precious stones, foreign currencies and
other reliable stores of value. The current situation therefore hurts - but in
the short term not to the extent, and
perhaps not to the intensity, of past crises that were primarily
currency-based.
·
The
authorities in Burma have got matters terribly wrong in this current banking
crisis, but it has to be said (despite their good intentions), so have many
commentators and critics. There is, for example, an undue suspicion in much of
the current commentary of what are simply the 'normal' business practices of
banks. Such practices include lending many multiples of capital, maintaining
reserves and liquidity vastly below that necessary if all depositors were to
demand their funds at once, and the
possession of very liquid liabilities but very illiquid assets. These
practices, however, are common to all banks wherever they are. They are what
banks 'do'. They are the practices that make banking 'special', and they are
the practices that make it a sector of the economy accordingly requiring
'special' regulation and 'special' agencies (such as central banks) to
supervise them.
In this context
quite a few commentators have cited an article by a Dr Ko Ko from the magazine Living Colour which unfavourably notes
that AWB has loans out to 50 times its capital, Yoma Bank to 30 times capital
and Kanbawza Bank to 8 times capital.[15]
This article apparently goes on to note that Thai banks that 'lent more than
twenty times their capital have crashed'. Well, this might be true, and
certainly AWB's multiples are very high (if accurate), but one can make no
judgement as to the prudence of these loans-to-capital multiples without
knowing something about the borrowers concerned. Loans are the primary assets
of a bank and they are only a problem to the extent they are impaired.
A further
citation that has been 'doing the rounds' have been comments by Dr Sein Maung,
President of the First Private Bank (a competitor to the banks above), and
deriving from that Bank's most recent annual report.[16]
In this Dr Maung apparently states that 'it is unhealthy if loans exceed ten
times [a bank's] capital'. He also states that First Private has loans out to a
mere three times capital.
The impression Dr
Maung makes in these statements is a misleading one. The 'ten times' multiple
he refers to is not a ratio of capital to loans (assets), but the CBM directive
that capital should be maintained at a ratio of at least 10% to risk-weighted assets (amongst which will
be loans). This directive is just a (more stringent) variation of the
international norm established in this context by the Basle Committee on Bank
Supervision (in association with the 'central bank for central banks', the Bank
for International Settlements). What this means, however, is that it is
possible for banks to have multiples of loans-to-capital that are very high but
are entirely prudent as long as these loans enjoy low 'risk weights'. In a
normal country this would include government securities, an asset item that
would appear prominently on the books of banks like AWB, Yoma and so on. Of
course, we would not regard Burmese government securities as 'low risk', but
more information regarding the balance sheets of individual banks is necessary
before they could be condemned using simple multiples. Our objection here is
not then to the assessment that Burma's banks are in trouble - they clearly
are, and in more ways than suggested by the commentators - but to the
employment of potentially misleading criteria. Finally, it has to be said that
if First Private Bank truly does have a loans-to-capital ratio of 'three', then
it is a bank that is barely functioning - and certainly not one that would be
generating much of a return for its investors.
·
An unusual twist to the banking crisis has been the
appreciation of the (unofficial) exchange rate of the kyat. In most countries a
financial crisis - or even the scent of one - is sufficient to precipitate a
fall in the value of their currencies. The reason for the kyats rise? Simply
that there are certain (domestic) transactions which have to be settled in
kyat. Prior to the crisis a growing proportion of these were conducted via
cheques, debit cards and other non-cash payment instruments. With these now
prohibited the demand for kyat - in its physical form - has risen according, as
has its 'price'. This will be a short-term phenomenon.
·
Much mystery remains regarding this latest financial
crisis in Burma. Amongst the many questions that come to mind are;
-
the extent to which the practice of money laundering
by Burma's banks has coloured events
-
(perhaps relatedly) the exact nature of the events
precipitating the crisis at AWB
-
the extent to which the interests of various members
of the SPDC in certain banks fashioned the official response to the crisis
-
who really has lost money in the banks? Legitimate
traders who use the banks for remittance purposes are clearly one group, but
which groups have lost wealth (and is it a concern if they have?)
-
what was the purpose (if the reports are accurate)
of the slew of loans made by the banks to connected interests immediately
before the crisis? Is it conceivable that such groups would be especially
desirous of loans in kyat?
We would welcome
any thoughts on the above, or on any of the many other riddles that remain.
·
Finally, where to now for Burma's banks? It's
difficult to tell, but it is impossible to be optimistic. The question would
not matter if, in the long term, the banks were not important for Burma's
development. The trouble is that they are. In reasonably functioning
economies banks create the means of
exchange, allocate and mobilise financial resources, manage risks, protect
people from economic fluctuations, allow access to foreign exchange - and a
myriad of other tasks essential to the efficient coordination of economic
activity. In Turnell (2002) we noted that Burma's banks were scarcely
fulfilling any of these functions. Now matters are worse.
* Economics Department, Macquarie University, Sydney, Australia. We can be contacted at sturnell@efs.mq.edu.au.
[1] A description of typical 'Ponzi' schemes is contained in Kyi May Kaung (2003).
[2] 'Finance minister investigated' by Kyaw Zwa Moe, The Irrawaddy (online edition), 4 March 2003.
[3] Ibid.
[4] 'S1 reassures public that private banks are safe', Win Kyaw Oo and Moe Zaw Myint, Myanmar Times (online edition), 28 February 2003.
[5] February 6 was the day when Western diplomats began noticing lines forming outside the banks.
[6] For examples of these widely varying approaches, see the report from the Democratic Voice of Burma (DVB) on 20 February at <http:www.communique.no/dvb/scoop/2003/feb/20030220.html>.
[7] Note the contradiction between this statement and the one subsequently made (above) by the Minister for the Office of the Chairman of the SPDC, David Abel, on 28 February.
[8] These financial statements were ruled off at the conclusion of the 2001 financial year, and were available on the AWB's website, http://www.awb.com.mm/. At some point during the current crisis the AWB closed off web-access to its financial reports. As at 6 March access remains denied.
[9] See, amongst a number of reports outlining these events, 'Myanmar mired in worst financial crisis' by Harish Mehta, The Business Times, 21 February 2003.
[10] 'Finance minister investigated' by Kyaw Zwa Moe, The Irrawaddy (online edition), 4 March 2003.
[11] DVB report, 20 February, op.cit. According to this same report, differential treatment seems to be being meted out according to the size of a customer's deposit. The report provides an anecdote from U Aung Myint who asserted that a particular (unnamed) bank allowed individuals with deposits in excess 2 million kyats to withdraw 100,000 kyat, people with 2 million to 500,000 in deposits, 50,000 Kyats, and people with less than 500,000, a maximum of 10,000 kyats.
[12] 'Myanmar mired in worst financial crisis', by Harish Meht, The Business Times, 21 February 2003, available online at < http://business-times.asia1.com.sg/sub/premiumstory/0,4574,73306,00.html>.
[13] In an e-mail circular issued on 26 February, the NCGUB reported that cheques were being bought and sold at around 90% of face value.
[14] In this context it's important to remember that the institutions under the focus here are banks - by far the most regulated financial institutions and the basis of all countries' payments and capital allocation systems. As such, possible comparisons with financial crashes in other places (Enron and related scandals in the United States come to mind) are both facile and inappropriate.
[15] Dr Ko Ko's views in Living Colour were cited in a number of places, including the NCGUB's statement, 'Banks in a Predicament', issued on 2 March.
[16] Likewise cited in ibid.