By Stephen Brookes • Asia Times • January 30, 1996
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Myanmar's banking sector has -- theoretically, at least -- been under wide-ranging reform since 1990, when private banks were allowed to do business for the first time since 1962. Foreign banks are being encouraged to set up joint ventures with local banks, many banks are allowed to deal in foreign exchange, and innovations like credit cards and automatic teller machines are making their first appearance.

But banking has never quite recovered from the nationalizations of 1962, and a huge amount of private borrowing and lending -- as much as 80 percent, by some estimates -- takes place in the illegal but widely tolerated black market.

"Nobody in Myanmar really trusts the banks," said one investment advisor in Yangon. "They don't offer good service, they ask a lot of questions, and they don't make it easy for people to borrow money, or even to get their own money out. Anyone who wants to borrow money has to put their house up as collateral, even for a relatively small amount."

Those kinds of obstacles have created a market where people are willing to pay interest rates as high as 10 percent a month to Myanmar's extensive network of black market bankers. Lending on a combination of trust and collateral (usually jewelry), the bankers mobilize the savings of Myanmar's middle class and funnel them out to entrepreneurs who otherwise would have limited access to capital.

"Most of my clients are people with small businesses, who want to expand," said one black market banker in Yangon. "That was how this started, after 1962. Women were setting up little businesses in their homes, making shirts, things like that. They couldn't get bank loans, so other women started lending money to them. And it just grew after that. "

The banker, an upper middle-class woman in her 40's who runs a profitable gem business, is fairly typical of the underground lenders. Like her, many are women. Like her, most lend money to people they know, and charge fixed interest on a monthly basis. And like her, most have other businesses which provide the bulk of their income, and they lend money only as a sideline.

But it can be a very profitable sideline, indeed. The banker interviewed by Asia Times, for example, currently has eight loans out, each an average of about 300,000 kyats (about $2,400). She borrows the funds from her friends at three percent a month, and lends at between five and ten percent a month, depending on how much collateral the borrower can provide -- or how well she knows them.

"Ten percent is for the big risk borrowers," she said. "And if I don't trust someone, I won't lend them money, even if they offer more than that."

According to some analysts, the underground banking system thrives on the strict restrictions the government imposes on legal banks. Banks are forbidden from lending at more than six percentage points over the Central Bank rate, currently 12.5 percent per annum, which thus limits the rate they can profitably offer to savers. Moreover, potential borrowers must put up as collateral fixed assets worth 200 percent of the loan, and loans are limited to a single year.


Money lender in YangonBlack market bankers can -- and do -- offer more market-oriented rates and flexible terms, and are widely acknowledged to be siphoning off a substantial slice of the legal banking business.

"Most people with money keep it as far away from the banks as they can," explained one Western economist in Yangon. "With inflation running over 20 percent, you'll lose money in a regular savings account. And why settle for 10 percent a year when you can get three or four times that, with probably the same amount of risk, in the private money market?"

And while it's cheaper to borrow from a legal bank, say observers, it's not at all easy. "You have to have property to get the loan approved," said the black market banker, "and then you have to pay something so they'll lend the money -- not a bribe, more like a gift."

Many of the underground bankers also "compete" with the legal banks on certain services, like transferring money from one part of the country to another, which legal banks have been unable to do until recently.

"Oh, underground banking -- in China they call that 'flying money'," said U Kyaw Kyaw Maung, Deputy Governor of the Central Bank of Myanmar. "But now we have allowed the emergence of private banks, and easy transfer of funds between branches and head offices, so people won't use the underground banking system anymore."

But the underground banking network continues to meet a wide range of capital needs. Private pawn shops, mostly Chinese-owned, are springing up in Yangon, and many of the city's gem dealers also dabble in lending, as do businessmen, real estate agents and brokers of every kind.

One of the most prevalent (and exorbitant) kinds of lending is known as ne pyan toh -- one-day lending. "Every market has a woman who lends money out to the vegetable- and meat-sellers," explained the black market banker. "She'll lend a woman 80 kyats in the morning, that woman will buy vegetables and sell them, and then give back 100 kyats in the evening."

Larger loans, though, are usually transacted among friends, and since the business is illegal, a large amount of personal trust is involved. Notes are exchanged between borrowers and lenders saying that the money is being given "in trust" to the other person for a defined period, with no mention of interest.  

And sometimes, borrowers default. The underground banker has lost money on several bad loans, including one to a woman who left, as collateral, her gold jewelry -- which turned out to be fake. Another loan of several hundred thousand kyats to a successful timber company was lost when the government suddenly and severely restricted teak exports.

But for the most part, the profits far outweigh the risks. And now the underground bankers are now starting to use the legal banks to their own advantage. The banker interviewed by Asia Times said she was about to take out a large, legal loan at 16 percent annual interest --  and then lend the money out again for at least three times as much.