Myanmar: Traders expect better business on wider trade financing options

Now that the Central Bank of Myanmar (CBM) has allowed a total of seven foreign banks to provide trade financing services in Myanmar, traders are anticipating much better business in the months ahead.

Last December, the CBM permitted 13 foreign banks to apply for approval to offer trade financing services in the country. Since then, seven out of the 13 have submitted applications and received approval to do so. The remaining five banks are expected to receive the necessary approvals soon and all 13 banks will be able to provide trade financing within the year.

“All foreign banks will be approved to offer trade financing. Right now, the remaining banks are not yet approved as they still need to complete the application process. After they’ve completed those processes, the remaining banks will be given approval,” said CBM Vice-Governor U Soe Thein.

The CBM has allowed the seven approved banks to offer trade financing services not only to the export sector, but to the trade sector as a whole, said U Soe Thein.

Breakthrough for business

The move is expected to come as a breakthrough for business in the trading industry. “Many things will change now that approvals have been granted as some of the trade financing services and functions offered by the foreign banks cannot be offered by the local banks,” said U Nay Lin Zin, a rice exporter.

Although local banks are able to provide trade remittance services, trade financing services are still unavailable. “As we’ve opened bank accounts in other countries, we are aware of the trade financing services available out there. If the foreign banks are able to offer similar services here, there will be many improvements to business,” U Nay Lin Zin said.

For example, foreign banks can help the buyer, or importer of goods by providing a letter of credit (LC) to the seller, or exporter, providing for payment upon presentation of documents detailing a list of the goods that have been shipped. The banks can also provide loans at low interest rates to the exporters to cover for periods of tight cash flows between shipping on the basis of an export contract.

Currently, local banks are not able to provide services in the form of LCs and most trading businesses are only able to receive funds through telegraphic transfer (TT). However, by selling in this manner, buyers, or importers of Myanmar goods, are forced to pay for the goods on a Free on Board (FOB) basis, as this reduces the risk for the seller.

FOB contracts relieve the seller of responsibility once the goods are shipped. After the goods are loaded and leave the Myanmar ports, they become the liability of the buyer. In return, buyers negotiate a cheaper price for the freight and insurance with a forwarder of his or her choice.

“Currently, there is no LC system here and the exporters can sell only with FOB contracts, which limits our customers overseas,” said beans exporter U Min Ko Oo.

“Most countries don’t like TT. They want to go with LC. But as we can’t get many services or support from the local banks, we are forced to trade FOB, which is less attractive to buyers compared to goods sold under Cost, Insurance and Freight (CIF) contracts.

Under CIF, the seller uses a forwarder of his choice, and is thus able to charge the buyer more in order to increase the profit on the transaction. Even though the buyer may have to pay additional fees at the port, such as docking fees and customs clearance fees, before the goods can be cleared, the CIF option eliminates inconvenience for the buyer.

Yet, as exporters have so far only been able sell goods on an FOB basis, business has not been optimal, given that exporters are able to charge better prices under CIF. That inability has lowered Myanmar’s share of global trade, exporters said.

Still some skepticism

Now though, the industry is hoping things will improve. But some traders are still cautious. “Even though the CBM has permitted foreign banks to offer trade financing, if there are still restrictions, things won’t get that much better. We have to wait and see what type of services are available first. If the foreign bank branches can provide the services efficiently, the trade sector will be much better,” said U Min Ko Oo.

“What we are hoping for is lower interest rates on trade financing loans.If the foreign banks are forced to operate under strict interest rate stipulations, we can’t hope for much.,” U Kyaw Kyaw Win, a local timber businessman.

“The CBM has made no restriction on the interest rate and loan amounts under trade financing. The foreign banks are just instructed to follow banking regulations,” U Soe Thein told The Myanmar Times.

On balance, the development is viewed as a positive one for the Myanmar trade sector. Indeed, the fact that foreign bank are now able to provide international-standard trade financing services in the country is a big step forward for both the Myanmar banking and trading sectors.

The 13 foreign banks expected to provide trade financing in Myanmar include: 

Bank of Tokyo-Mitsubishi UFJ

Oversea-Chinese Banking Corporation

Sumitomo Mitsui Banking Corporation

United Overseas Bank

Bangkok Bank Public Company

Industrial and Commercial Bank of China

Malayan Banking Berhad (Maybank)

Mizuho Bank

Australia and New Zeland Banking Group

The Joint Stock Commercial Bank for Investment and Development of

Vietnam (BIDV)

Shinhan Bank,

E.Sun Commercial Bank

State Bank of India.