In January 2003, Myanmar began to experience what has become a prolonged financial crisis. Triggered by the collapse of a series of informal finance companies (the so-called A-kyoe-saung lou-ngan), the crisis quickly extended into the country's emerging private banking sector. Subsequent "runs" on the banks denuded them of reserves and prompted the adoption of measures to restrict withdrawals. In the panic, a flight to cash led to a shortage of Myanmar's currency, the kyat, and a liquidity crisis. Liquidity support, had it been rapidly and appropriately supplied by the Central Bank of Myanmar (CBM), should have limited the contagion. Such liquidity support from the CBM, however, never arrived. To exacerbate matters, its orders endorsing restrictions upon withdrawals and the recalling of loans from borrowers greatly impaired trust, the indispensable ingredient of financial stability. Myanmar's private banks, which superficially had appeared to be performing strongly before the crisis, have been irreparably damaged.
Of course, financial crises are not new to Myanmar. What distinguishes this latest drama, however, was that its genesis lay in the private sector. This meant that while its immediate impact upon the greater populace was perhaps not as great as the government-inspired disasters of yore, its longer term effects, not least in sowing distrust in the market economy, could be great indeed.
The purpose of this paper is to examine this latest financial crisis in Myanmar and to provide an analysis of the policy responses to it. The time period examined is limited to that of the "crisis" phase, the "runs" on the banks and the immediate official reaction. The broader effects of the crisis are yet to be played out, and the longer-term task of what needs to be done to reconstruct Myanmar's financial system is beyond the scope of what is possible here. Nevertheless, from bank runs, much can be learned.
The narrative proceeds as follows. Section II of the paper presents an outline of Myanmar's banking system immediately before the crisis. Section III takes up the narrative of the crisis as it unfolded chronologically. Determining the precise order of events in banking crises is difficult in any circumstances, but in the opaque world of Myanmar's political economy, the task is even more necessary, though difficult. Section IV outlines what might be regarded as international "best practice" responses to banking crises--and how the efforts of Myanmar's monetary authorities fell far short of this ideal. Section V concludes.
II. Myanmar's Banking Sector
Myanmar's banking system immediately before the crisis could be described as being in a state of superficial, and stalled, transition. A system that had been long dominated by state institutions, it was only in 1990 that private banks were allowed to form. By 2002, there were twenty private banks, competing against five state-owned banks of various types. Most of the new private banks were extremely small by world standards but five, namely, the Asia Wealth Bank, Yoma Bank, Kambawza Bank, Mayflower Bank and the Myanmar Oriental Bank, dominated. The growth of the private banks prior to the crisis had been strong and they accounted for by far the largest part of the growth of the sector as a whole since 1992, the year that the first private banks were established. By 2000 the private banks accounted for almost two-thirds of savings in Myanmar, up from a mere 10 per cent in 1994 (EIU 2003a, p. 17). The largest state-owned bank, the Myanmar Economic Bank, still had the most branches, but in all other respects the private banks had moved into a dominant position. (1)
Yet, notwithstanding this rapid growth, there was reason to be sceptical as to the extent to which the private banks truly performed an intermediation function in Myanmar. Partly this was the result of a system that, while partly liberalized in terms of market entry, remained largely hidebound in the regulations of an earlier era. …