Cablegate: Dangers Lurk Within Burma's Shadow Banks

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

REF: 02 RANGOON 1557

1. (SBU) Summary: The surprisingly large informal banking
sector in Burma has become a major cause of inflation, and a
threat to the stability of the already weakened Burmese
economy. A crackdown combined with a general liberalization
of the official banking sector would be the best course for
the GOB and Burma's economy. Unfortunately, given the
regime's economic track record, that is probably the least
likely scenario of all. End summary.

Gold Bars and Monks' Robes

2. (SBU) There is evidence that the regime is pondering
clamping down on Burma's legally murky, but nonetheless
booming, informal finance sector. This past Fall,
authorities gave the order to shut down two of the roughly 20
extant non-bank financial institutions on charges that the
firms' management was involved in embezzlement and egregious
corruption. (One was caught at the airport trying to flee
with a suitcase stuffed with dollars, the other was arrested
for secretly casting gold bars.) The government has ordered
the two companies to repay all depositors, but this seems
unlikely in the short run. The larger of the two outfits has
said nothing will be forthcoming before May. Even if
repayments do eventually occur, they will likely be pyas on
the kyat.

3. (SBU) The informal banking sector in Burma found its niche
due to the ineffectual and overregulated private banking
sector and the average Burmese person's mistrust of banks
under government scrutiny. Taking advantage of loopholes in
the law, nascent entrepreneurs (and con men) began to take
deposits or investments and to establish non-bank finance
companies under the Cooperatives Law or the Myanmar Company
Act. The attraction was the lack of regulation. Neither
cooperatives nor companies, are supervised by the Ministry of
Finance and Central Bank or subject to normal banking
regulations. Hence, for these institutions at least, there
were no reserve or liquidity requirements, nor any
restriction on lending or borrowing rates.

4. (SBU) Some of these institutions outright offer interest
rates 5 or 6 times the legal deposit rate (e.g., as high as
50 or 60 percent per annum); others offer the same
enticement, but insist that depositors are buying "shares" in
the institution (and its underlying real estate and other
commercial investments) that happen to pay out a 60 percent
rate of return. However, despite the rhetoric, none of these
venture capital outfits are public firms, and none are
scrutinized by the government or a board of directors.

5. (SBU) These institutions generally take the money that is
deposited and immediately invest it, usually in some private
venture benefiting the banks' ownership. Often the funds go
into rapidly appreciating assets, such as real estate,
automobiles, gold, and gems. However, much investment has
also found its way into the industrial sector, funding
ventures in everything from seafood exporting to the
production of monks' robes. The danger to consumers is that
very few of these banks actually keep cash on hand. As a
result, whenever the underlying investments go bad, there is
a risk that either the institutions will go bust or that
promised interest rates or returns on investment will funded
by new deposits -- a classic pyramid scheme.

A Hidden Giant

6. (SBU) Because of total absence of data, financial experts
here are reluctant to estimate the number of depositors or
the value of deposits now lodged with these unofficial
financial institutions. However, they agree that the sector
is booming and that both are likely quite high. One private
banker said he would not be surprised if "non-bank financial
institutions" had as much as 250 billion kyat (about half
what is held in the official banking sector) sloshing through
them. These same experts said these institutions might have
between 100,000 and 200,000 depositors -- including small
savers, business people, and military officers.

7. (SBU) Even if the deposits are only half this estimate,
they represent a massive amount of unsupervised, "illegal"
funds that could well be a major source of the excess money
supply and speculative investment that are driving up
inflation here. Last year, consumer price inflation in the
Rangoon area was about 60 percent, with prices of assets such
as real estate and automobiles rising even higher. The fact
that thousands of depositors, many of them quite small time,
have their money in these schemes also raises the specter of
serious political and economic turmoil should these
institutions suddenly collapse.

Government Crackdown: Stop or We'll Say Stop Again

8. (SBU) The informal banking sector is basically a time bomb
waiting to go off. Left alone, it will inevitably crash,
potentially bringing down asset markets with them.
Consequently, there is no question but that the government
should take action against these firms simply in the interest
of stability. However such actions have downsides. For one,
several banking experts have told us that high-level military
officials are shareholders or major depositors in these
institutions. Second, at this sensitive time, the GOB won't
likely risk the political discontent that could come from
essentially ruining thousands of small depositors who have
deposited billions of kyats in these institutions. Third,
too-rapid government seizure and auctioning of these
companies' assets (to repay depositors) could also place
significant deflationary pressures on asset prices. This
could then undermine the portfolios of legitimate banks and
cause a serious banking crisis (see reftel).


9. (SBU) Despite the risks, it is in the GOB's best interest
to shut down this dangerous network. If it does, the
question is whether it will do so intelligently, by
instituting real banking reform alongside a slow but steady
crackdown on these shadow banks, or not. If legitimate
private banks could set their own deposit and lending rates,
under the supervision of the Central Bank and the Ministry of
Finance, they could attract many small depositors who are now
forced to look to the black market for some real return that
competes with inflation. Funds would move from relatively
high-risk to relatively low-risk institutions, banks would
get the funding and liquidity they now badly need, and asset
market prices would remain basically stable. That sort of
intelligent liberalization, however, is probably the least
likely scenario. If the past is prologue, the GOB will
either let the current bubble build, while doing nothing, or
crack down hard with no accompanying banking reforms. In
either case, the economy (and Burma's small depositors) will
pay the price, either now or later. End comment.

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