Myanmar relaxes limits on foreign bank lending, but legal uncertainty persists

By FRONTIER

YANGON — The Central Bank of Myanmar has announced new rules enabling foreign banks to lend to local companies, in a move that should promote greater competition and new opportunities for businesses.

While welcoming the announcement, experts have cautioned that legal grey areas and interest rate restrictions may still limit the willingness of foreign banks to lend.

In an October 8 letter signed by deputy governor U Soe Thein, the Central Bank said that foreign banks could “provide any financing and other banking services to local business entities, in the same manner as local banks” with the objective of providing greater access to finance for local companies.

The rule applies to the 13 foreign banks with a branch office in Myanmar that had previously been restricted to lending to foreign-owned companies and joint ventures.

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Since December 2017 foreign banks have also been able to provide export financing and related banking services. They are still barred from providing banking services to Myanmar individuals.

Foreign banks have in fact already been lending to Myanmar companies through domestic banks, prompting two local bankers to suggest the regulatory change is unlikely to translate into a significant increase in lending.

They said foreign banks have also been lending to local companies by structuring financing through offshore-registered entities and speculated that these loans may now be moved onshore.

Further growth in foreign loans to Myanmar companies is likely to be obstructed by the problem of fixed interest rates, which effectively prohibit lending to those areas of the economy most in need of financing and limit capital access to the largest companies. Access is only likely to improve if the Central Bank proceeds with its plan to introduce a flexible lending rate policy based on risk exposure.

Representatives of foreign banks said today they welcomed the move. Mr Rajesh Ahuja, CEO of Australian lender ANZ Bank’s Myanmar branch told Frontier that the bank was now reviewing the matter internally and would “re-review our business strategy during the next few months”.

Lawyers meanwhile said new financing by foreign banks could hinge on the resolution of legal questions around the creation and execution of securities to secure such financing.

In a client note on November 12, DFDL said the new Myanmar Companies Law allows for the creation of securities and their registration as an exception to the Transfer of Immovable Property (Restrictions) Act of 1987, but said that doubts persist around a provision in the older law that restricts the transfer of immovable property to a foreign-owned company.

While foreign lenders in practice employ the services of local banks to act as security trustees, the model has not yet been tried and tested before a court of law, the note said. The Office of the Registration of Deeds has also been “markedly unwilling” to register a security over immovable property created in favour of foreign lenders, it said.

Lincoln Myanmar said in an email to subscribers that the change was a “a major market access improvement” that would give local businesses “better access to financing and – possibly and hopefully – better banking services in general”.

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