reports Reuters from Yangon

Bank credit to the private sector was up 63.7 percent in the 12 months to March, a recent Economist Intelligence Unit report shows. Overall domestic credit growth was 32 percent in August 2011 from the same month the previous year, it said.

Deposits are up, too, reaching 5.2 trillion kyat in September, more than doubling from the end of 2009, the EIU said. At the end of 2010, outstanding loans, including those to government, equalled about 81 percent of total deposits.

But the EIU raised a red flag over the banking sector's outstanding foreign liabilities, calling then a "cause for concern" at nearly $3.4 billion. That is almost half the country's total foreign exchange reserves, which Upper House lawmaker Aye Maung put at $7.2 billion. The figure is all the more perplexing given Myanmar's ban on foreign currency-denominated assets.

Many businesses, however, remain starved of credit. Consider small and medium enterprises such as Technomation. Founder Htoo Myint Naung says the company commands an 80 percent share of Myanmar's mobile apps market, which could grow as the country's telecommunications sector is reformed.

While such small businesses employ the bulk of the country's workers, most have no access to bank loans. Htoo Myint Naung laughs at the very thought. "Everybody knows you don't go to the bank for a loan. They will refuse," the 24-year-old said. "They may give you money for a laptop, for instance, but not for a business plan."

Lucky businesses turn to family or friends for money, others to underground lenders with prohibitively high interest rates. In rural Myanmar, farmers have turned to local moneylenders for cash to pay for seeds, fertilizer and other materials. That has left a huge portion of the population in debt with double digit interest rates - a cycle that could be broken if more lenders are allowed to give credit to farmers.

Economists say the currency reforms should begin to stabilise the economy and underpin a revival of confidence in the kyat, which, in turn, could see more people open bank accounts. Less than 10 percent have accounts now.

"Reforming the complex exchange rate system is a priority to eliminate constraints on economic growth," the International Monetary Fund's mission chief in Myanmar, Meral Karasulu, sa id after a January visit.

The senior official from the Ministry of Finance and Revenue said the central bank had given permission this year to four private banks to do foreign remittances: Co-operative Bank in Singapore, Kanbawza Bank in Thailand, Asia Green Development Bank in Singapore and Malaysia, and Ayeyarwady Bank in Malaysia.

He said that banking services agreements had been signed with Chinese banks to enable payment in Chinese yuan for border trade, and memoranda of understanding had been signed with banks from Bangladesh and India on border trade cash payments.

Late last year, the central bank also authorised 17 local private banks to open 57 money exchange counters, and licensed 11 to carry out foreign banking services. Many of the exchange counters are open already, but the banks licensed to engage in foreign services were said to still be negotiating counterparty agreements with overseas banks. Some new banks such as the nearly two-year-old Ayeyarwady Bank have big plans.

Its owner, Zaw Zaw, said he has already met executives from several foreign banks in recent weeks including Swiss bank UBS AG, Malayan Banking Bhd (Maybank), CIMB, and Thailand's Siam Commercial Bank. He has hired British and Malaysian consultants, sent staff overseas for training and is preparing for an end to sanctions that analysts expect could come this year. His bank, he said, was already working to install the SWIFT cross-border payments system to initiate correspondence with foreign banks.

"We need to become stronger and stronger. After that, we can compete with others," he told Reuters in an interview. He employs about 970 staff in Ayeyarwady, named after the rice-growing region where he spent his childhood. The bank aims to more than double branches to 45 next year from 20 and hire foreign-educated talent.

But Ayeyarwady Bank and its peers represent a paradox for Myanmar's banking sector.

Ayeyarwady is one of four banks launched after the 2010 privatisation wave that are plotting aggressive expansions that could help modernise the sector.

The emergence of these banks - Ayeyarwady, Asia Green Development Bank, United Amara Bank and Myanma Apex Bank - is credited with boosting sector-wide lending. IMF data showed a 60 percent leap in private-sector lending in the nine months to December 2010, Turnell says.

Yet they are owned by crony businessmen considered close allies of the former ruling junta, all of whom are on international sanctions lists. Other Myanmar banks may not have such obvious potentially toxic liabilities, but finding international business partners will not be easy.

"These aren't banks of eminent reputation," said Rupert Haw, deputy country managing director in Myanmar for the law firm DFDL Mekong. "Local banks would be well advised to prepare themselves for rigorous due diligence."

To understand what role Myanmar's banking system could play, one need look no further than its past, says Turnell. Ravaged by World War Two, post-colonial Burma rebounded spectacularly on the back of effectively deployed credit. By the end of the 1950s, it was the world's biggest rice exporter. Today, the country lags far behind world rice powerhouses Thailand and Vietnam. But that could change. Myanmar "has a high growth potential and could become the next economic frontier in Asia", the IMF's Karasulu says.

But modernising the financial sector will be a critical part of upgrading the economy, she says.

Official data shows $40.4 billion was pledged in foreign direct investment by the end of this February. Of that, about 81 percent was for the power, oil and gas sectors. Mining, manufacturing, hotels and tourism and real estate took 17 percent combined.

Other services, which appears to include finance, was just 0.06 percent.

"All the banks are saying: We need help. We want reforms. We want changes. But how do we go about this?" said Dennis Openshaw, an emerging market bank consultant who is helping Co-operative Bank modernise.

"It all comes down to implementation and they've not got the knowledge and know-how."

Financial Express/Bangladesh/ 4th April 2012