US embassy cable - 03RANGOON30

UNCLAS SECTION 01 OF 02 RANGOON 000030 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
CINCPAC FOR FPA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, BM, Economy 
SUBJECT: DANGERS LURK WITHIN BURMA'S SHADOW BANKS 
 
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). 
 
Comment 
 
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. 
Martinez