BANGKOK - After more than five decades, foreign banks are set to fully return to Myanmar later this year as part of the government’s policy reforms aimed at developing the economy and infrastructure.
The foreign banks will also provide a key source of funding in a country hungry for capital for development.
Foreign banks that were present in Myanmar, also known as Burma, in 1963 were nationalized after the military took power.
Years of isolation from the international community as well as economic and trade sanctions undermined development of the banking sector.
Since Myanmar's political opening in 2011, about 40 international banks have opened representative offices, offering limited advisory services.
Beginning in September
Central Bank of Myanmar Deputy Governor Set Aung said up to 10 foreign banks will be granted licenses and will be open for limited banking services beginning in September.
By July 6, a licensing panel, including the Ministry of Finance, Central Bank, Attorney General's Office, representatives from the International Monetary Fund (IMF), and a German consulting team, will complete a review of applications.
The World Bank recommends the new banks have a paid up capital base of $75 million.
Sean Turnell, a professor of economics at Macquarie University in Australia, said, given the lack of development in Myanmar’s banking sector, foreign banks could play a key role in providing much needed capital and access to international trading links.
"What does Myanmar need? What it needs desperately is capital -- it's got none.
"Essentially the banking system that's there at the moment is smaller than one medium-sized bank in the U.S. [So] you need capital. Where are you going to get it? Well you are going to get it from foreign banks - the local banks firstly at the moment are not big enough," Turnell said.
Burma's banking sector remains vastly underdeveloped.
A United Nations report found just 4 percent of the country’s estimated 61 million people have a banking or savings account.
Many rely on "informal banking," including borrowing from so-called loan sharks, with exorbitant interest payments.
Myanmar is one of the poorest nations in Asia with about 43 percent of people living on less than $2 a day and about 80 percent getting by on $5 a day.
Banking sector development is vital to support the economic reforms but faces challenges due to the lack of progress in recent decades, said Kobsak Pootrakool, an executive vice president at Thailand's Bangkok Bank.
"In the banking sector the main challenges for Myanmar is how to develop their own banking system so they can support the development of its own small medium enterprises (SMEs) and its own local corporate so that later on it will compete with these multinational corporations that are coming into the country," Kobsak said.
Local banks and their supporters tried to derail the reform legislation for fear of competition from the foreign banks. But President Thein Sein resisted the calls, insisting the reforms go ahead.
Macquarie University's Turnell said the local banks are concerned about competing against well-funded international banks, which could also poach their local staff.
But Turnell said the fears are overplayed.
"The local banks talked themselves into a panic about foreign banks. Most foreign bank lending is going to be to the foreign multinationals anyway," Turnell said. "A lack of a functioning financial sector is being really high on their list of why they don't go ahead and invest. So foreign banks in a sense deliver that. But in doing that they deliver something that the local banks don't do anyway. "
The foreign banks will still face restrictions.
The banks are limited to just one branch offering limited services including loans to foreign corporations. To lend to local companies will require cooperation with local banks.