Title Financing Small and Medium Enterprises in Myanmar Author(s ...

Myanmar Agriculture Development Bank (MADB). In the banking sector, only MEB,
MICB, and MFTB are allowed to handle foreign exchange operations. However, most of
the foreign bank operations are undertaken by MICB and MFTB. MFTB handles
foreign currency transactions of government organizations, businesses, and individuals.
MICB primarily deals with companies and joint ventures. MEB handles foreign
currency transactions in border trade regions. No private banks are allowed to handle
foreign exchange transactions in Myanmar.
The interest rates in the banking sectors are negative in real term due to high
domestic inflation. Previously, the Central Bank of Myanmar determines interest rates
and allows private banks a 3-percent leeway to set their own rate. For example, the
central bank determines interest rate at 12 percent, then private banks are not allowed
to set less than 9 percent interest rate for deposit. Similarly, private banks cannot set
their lending rate to more than 15 percent. In 2006, the central bank hiked interest rate
for deposit and loan up to 12 percent and 17 percent, respectively. All banks are
required to determine their interest rates according to this new rate.
Inflation rate in Myanmar ranged from20 percent to 40 percent for the past years.
The banking crisis in Myanmar, which occurred in February 2003, was triggered by the
collapse of a series on service firms (so called A-kyoe-saung). These companies normally
started their business as brokerage firms in real estate and automobile. However, they
started conducting informal financing activities (even though this activity was not
legally permissible) to many private businesses that do not have financing from formal
sector or inadequate financing from formal sector. They acquired funds from public
investors by offering very high interest rates of 3 percent to 5 percent per month. Such
returns were vastly excessive than the interest rate that banks offered. The investors
had little chance to know where to invest their money via these service firms. Most of
the service firms lend this money to private businesses with very high interest rate of
about 7 percent to 8 percent per month, but it was still lower than informal sector
interest rate, which ranged from 10 percent to 20 percent. Most of the private
businesses paid the interest and the principal regularly when the business cycle
prospered, but during the economic crisis, they could not pay both interest and principal.
A crisis emerged, and it quickly extended into the country’s emerging private banking
sector. Long lines of people in panic could be seen in front of private banks, waiting for
their turn to withdraw their money. The banks faced liquidity problems and the
required amount of money was partly supplied by the central bank, but was inadequate.
Therefore, some measures to limit the amount and number of withdrawals had to be
made and loans were recalled whether or not they reached maturity, to solve liquidity
problem. The manner of restrictions upon withdrawals and the recall of loans from