Local banks may have trouble due to the new financial institutions law

Local banks may have trouble meeting stricter controls to be brought in with the new financial institutions law, sources say.

The law is to raise paid-up capital requirements as well as introduce a statutory reserve which cannot be lent out, in addition to a tightened reserve requirement.

Experts say it will make the whole industry safer, though the requirements will onerous to meet.

U Mya Than, chair of Myanmar Oriental Bank, said the Central Bank has been giving instructions to the banks of what the law will contain, though the law is not yet passed.

“This move seems to be advantageous for the whole banking sector, though there will be difficulties initially in the banks,” he said.

The minimum paid-up capital is set to rise to K20 billion (US$17 million) from much lower at present. The law will also require a statutory reserve worth 50 percent of paid-up capital, or another K10 billion, which cannot be lent out. This statutory reserve is in addition to the reserve requirement held at the Central Bank.

Banks will have to funnel 50pc of their annual profits into this until they meet the minimum amount.

“It sounds serious that 50pc of profits must be used as reserves, but this trend of tightening policy in the financial markets is not unique to Myanmar. It is happening worldwide after the 2008 crisis,” said U Mya Than.

The 2008 financial crisis began in the US when subprime mortgage defaults led to a banking crisis. The US government had to bailout several major financial institutions, and the impact spread to Europe and then to Asia, resulting in a re-think of global financial policy.

U Kyaw Lwin, director of Global Treasure Bank, said that public banks will need to reduce expenses and try to earn more in order to remain in line with the new policies. In 2013, the bank was privatised through a share sale – it was formerly part of the Ministry of Livestock and Fisheries and Rural Development.

“Our dividend payouts to shareholders will fall, and we will reduce expenses at the same time,” he said. “We will need to try to set up more modern banking products, rather than simply opening more branches,” he said.

Meanwhile, parliament’s Banks and Monetary Affairs Development Committee has transferred the draft of the financial institution law to the Bill Committee and is waiting for approval from the parliamentary chair.

The Myanmar Banks Association, state-owned banks and experts including the German Agency for International Cooperation (GIZ) have already discussed the law, said committee secretary U Win Myint. “We will amend it if is not appropriate for the industry. No law is perfect,” he said.

​