Jun 6, 2013

Building a financial ecosystem in Myanmar

The pace of Myanmar’s development will depend in large part on its success in attracting foreign investors to help modernise the country. But setting investment policies to encourage responsible investment, economic growth and inclusive financial markets will be a challenge. Michael Drexler, senior director of Investors Industries for the World Economic Forum, discusses some of the challenges faced by the country in creating a financial and economic ecosystem conducive to development.

It is known that Myanmar's banking system is among the world's most antiquated, crippled by two decades of sanctions and disastrous socialist policies. How long do you think it would take for the country to establish a financial service system? What are the areas to closely look at?

To quote Nobel-winning quantum physicist Niels Bohr, “Prediction is very difficult, especially if it is about the future.” In this spirit, we will not attempt to put precise timelines on the establishment of something as complex as a financial service sector. What can be said, though, is that a healthy financial service system will grow in line with the demands arising from economic growth and increasing prosperity – and this is also what will affect the development of various areas of finance.

In the early days, a lot of the focus will have to be on facilitating transactions, such as via the payments system, providing working capital for companies and giving broad-based access to finance for all actors in the country. The Forum’s work on financial inclusion is very relevant in this space, as economic growth works at its best when a broad base of actors (corporate of all sizes, as well as individual) can participate in the economy from an early stage. Inequality in economic access through the financial system has been universally shown to both stifle growth and create social friction – it is important that Myanmar nurtures a maximally inclusive economy and financial system. Other countries offer insights on how to deliver some of the building blocks, often leapfrogging more established business models; mobile finance in Kenya through the M-Pesa system being a good example.

After the foundations are laid, areas to look at will include the more sophisticated and institutional parts of the financial system that fundamentally allow economic actors to scale and grow to a supra-national importance – this is where capital markets, including local currency credit markets, will come in. There will also be a need to channel the resulting wealth towards investments through the build-up of a savings system. In building out those, lessons from the Asian crisis 15 years ago must be well heeded, for example, the imperative to match liabilities without undue timing and currency exposures.

What are the expected changes with foreign participation in the sector? How is the competition to enter the market between Asian and Western banks?

Like the previous question, it is very difficult to exactly predict the future landscape. What can be learned from other economies is that competition between domestic and foreign finance players (both Asian and Western) will prove beneficial for the local economy. Regulation needs to ensure a level playing field and avoid undue concentration of power in the hands of individual players (be they domestic or foreign). In a well regulated and functioning financial system, players will provide the necessary financial services according to their best competency and expertise, in this way conferring maximal benefit to end consumers.

How would the banks introduce and explain to people in Myanmar, including some of the new to be recruited employees, what an investment bank is?

This is a complex question. We would refer to the generally accepted definition that an investment bank helps companies and individuals to raise capital, issue securities, manage risks, make financial markets and provides advice on matters of corporate finance. As such, investment banks are highly necessary parts of the financial system. Without them, corporations struggle to grow and manage risks. A good example would be an airline that needs to finance its fleet of aircraft as well as mitigate the risk associated with volatility of fuel prices – both areas where they usually call on the services of investment banks. Investment banks also connect locally focused players (e.g. mortgage lenders) with global capital markets and therefore can play a crucial role in ensuring that an economy has access to growth capital. None of this is without its dangers, which are well documented. Yet, it is clear to us that investment banks are a crucial player in the financial ecosystem.

What are the main challenges in building up this sector from scratch?

There will be tension between the legitimate need to open markets and potentially large and dangerous capital inflows. Making sure financial markets pragmatically develop in line with the underlying economy is key to this tension, rather than adhering to dogma. Where restrictions are placed, they need to be transparent and time-bounded in line with historically observed best practice.

Transparency will also be key in how the financial system is run and operated, so that allegations of impropriety can be avoided from the beginning. The World Economic Forum’s Financial Development Report, together with sources from the World Bank and others, can provide some background in this regard.

In addition, there is a big physical infrastructure challenge in a country like Myanmar with regards to telecommunications and IT. Building those out needs to be a priority for a successful financial system; the Forum’s work both on Strategic Infrastructure and Hyperconnectivity can offer useful insights.

Finally, even more so than other economies, Myanmar has a chance to create an investment climate that combines the needs of society with those of investors – avoiding some of the adversity between the two that became apparent in the recent financial crisis. The Forum is very engaged in the topic of impact investing for that reason, and we look forward to progressing this work with the relevant institutions in Myanmar.

Source: Bangkok Post