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. 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.
· 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'. 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.
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. 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. 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'. 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.
· 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.
· 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. 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.
· 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. 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.
· 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.
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.
· 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. 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. 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.
 A description of typical 'Ponzi' schemes is contained in Kyi May Kaung (2003).
 'Finance minister investigated' by Kyaw Zwa Moe, The Irrawaddy (online edition), 4 March 2003.
 'S1 reassures public that private banks are safe', Win Kyaw Oo and Moe Zaw Myint, Myanmar Times (online edition), 28 February 2003.
 February 6 was the day when Western diplomats began noticing lines forming outside the banks.
 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>.
 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.
 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.
 See, amongst a number of reports outlining these events, 'Myanmar mired in worst financial crisis' by Harish Mehta, The Business Times, 21 February 2003.
 'Finance minister investigated' by Kyaw Zwa Moe, The Irrawaddy (online edition), 4 March 2003.
 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.
 '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>.
 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.
 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.
 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.
 Likewise cited in ibid.