August 7, 2014 12:00 am JST

Malcolm Hanney: Myanmar needs to press ahead with its 'Big Bang'

Much trepidation surrounded the U.K.'s so-called Big Bang in 1986. The deregulation of financial services was a central pillar of Prime Minister Margaret Thatcher's economic reform program. Now, almost 30 years on, Myanmar's Big Bang is underway, but by comparison it is like starting from Ground Zero.

     Indeed, Myanmar's nascent financial sector is largely unformed. The International Finance Corp. has estimated that less than a fifth of the population even has access to financial services, and only 5% uses formal banking. The insurance market is similarly undeveloped: Of a population of 60 million, only one in 200 people is insured.

     A recent nationwide business survey conducted by multilateral organizations in conjunction with the Union of Myanmar Federation of Chambers of Commerce and Industry, Myanmar's main business body, found that more than 80% of financial resources among respondent companies came from personal savings and loans, and these were mainly secured by property. Another 10% derived from internally generated funds, while only 4% were provided by state and private banks. The survey also revealed that 27% of businesses get by without any banking services at all -- while only half have current accounts.

Wait no longer

With many people distracted by the unprecedented scale of political, economic and social reforms, the very rudimentary financial system provides a bleak backdrop. Myanmar's Big Bang is long overdue and desperately needed.

     We are talking, however, of a work in progress -- and to be fair, some important milestones have already been passed. Most importantly, exchange rates for the kyat, the national currency, have been liberalized through a managed float. The insurance market has been opened up to local private institutions, and the central bank has been granted unprecedented autonomy.

     The next big step is the opening up of the banking sector to foreign banks. Up to 10 foreign banks are expected to garner restricted banking licenses in September. Next year, according to government plans, the Yangon Stock Exchange will open for business -- although initially with just a handful of companies listed.

     This is all to the good because Myanmar can wait no longer. A sound and vibrant financial services sector is not an option. It is a prerequisite for growth in any economy. McKinsey Global Institute estimates $650 billion will be needed by 2030 to support Myanmar's growth potential, including $320 billion for infrastructure. Such a scale of investment is simply unattainable without efficient and effective financial and capital markets.

     There are certainly risks in going too quickly, but Myanmar has not been much exposed to these in recent decades. With so much economic damage to undo, there are arguably greater risks in moving too slowly. The government must therefore gird itself and press on.

     Financial institutions require effective processes supported by legislation. Alongside a firm, reliable regulatory framework, foreign banking licenses should only be granted to the highest quality international banks. Capital requirements need to be rigorous.

     Ultimately, the government and the central bank must ensure that the regulation of financial institutions is objective and subjective. Objectivity must be based on clear risk-capital requirements and international reporting standards. Subjectivity, meanwhile, will derive from regular and open briefings by regulators with detailed understanding of the key risks facing financial institutions and the quality of their management. It is never enough just to look at numbers. This is very much about good people interacting constructively.

     The job of regulation will be made inordinately harder if the government fails to insist on transparency and if corruption is not confronted. For this, international standards of financial reporting are required. These are all "must-dos" for the government if systemic risk is to be tamed.

     Perhaps most importantly, the government must increase its own capacity to manage this demanding agenda. It must learn to live with risk and to prioritize. The learning curve here will be very steep for many senior officials, and they will need ready access to pragmatic, professional and trustworthy advice.

     The international community undoubtedly wants Myanmar to succeed and prosper, and has an obligation to do everything in its power to bring this about. The government should trade on this and not be shy to ask for the assistance it needs. Come the day, we are all in search of a successful big bang -- not a timid whimper.

Malcolm Hanney OBE was a senior banker with HSBC in the lead-up to the U.K.'s Big Bang; he is now a postgraduate researcher at the Asia-Europe Institute (University of Malaya) and recently completed a research internship with the Myanmar Institute for Strategic and International Studies in Yangon.