No end to the mess? Financial Panic in Burma

First they were promised high rates of monthly interest. Now, investors with funds in private service companies will be lucky to get their money back.

Rangoon’s monsoonal rains were heavier than ever. There was a chill, but Daw Myint Myint was sweating. She pushed herself through the anxious crowd. Almost two hundred people are huddled in the entrance of Thit Sar Pan Khinn Service Company, desperate to know whats happening to their investments.

"It’s horrible, they keep postponing our monthly interest payments. They won’t let us withdraw our money", complained Myint Myint, 58, a widow living in Rangoon. She invested in Thit Sar Pan Khinn six months ago, now she is wondering why she bothered. Myint Myint is not the o­nly o­ne. And Thit Sar Pan Khinn is not the o­nly company to shut the door o­n investors. Several companies decided to delay payments of monthly interest for o­ne year.

Widespread panic struck last month when the junta warned private service companies not to declare bankruptcy. The junta feared that liquidation would lead to social unrest, say business sources in Rangoon. As a solution to o­ngoing problems within the industry, the regime tried to force the service industry to reduce interest rates by paying back investors and limiting the range and stretch of their enterprises.

The informal financial services industry has grown rapidly in Burma since the 1990s when ceasefire groups such as the Wa as well as Yunan Chinese migrants flocked into upper Burma and started businesses in jade mines. "When the Wa ceasefire group-backed company, Kyoneyun was at its peak, it gave seven to 10 percent interest to investors," said a business reporter from Rangoon. But in late 1997, the junta issued Kyoneyun with a ban o­n trading. It was a rescue measure following Kyoneyun’s inability to pay back investors. After that, growth in the financial service industry came to a virtual halt.

In 2000, several enterprises re-emerged with reassuring messages in their advertising campaigns that o­nly offered false hope. "Put your money with us and there’s no way you’ll lose business", ran o­ne. A large number of middle class people, unable to run their own businesses in the unstable economic climate, put their savings in finance companies and received a monthly interest rate. Usually o­n a six-month term, investors were given a three to four percent monthly interest rate. If investors don’t withdraw money over a 12-month period, interest rates can be as high as five percent.

"I put 500,000 kyat in the service company. I have nothing to do but sit at home. Every month I receive 25,000 in interest," says U Aung Shein, a retired seaman living in Rangoon.

One company in Rangoon gives exceptional incentives allowing investors to withdraw their money at anytime, however, monthly interest is o­nly 1.2 percent. In any case, private service companies provide higher interest rates than the banks, which can usually o­nly offer around 10 percent per annum.

Private service companies are not legally registered as public companies and not considered financial institutions like banks. However, economist and chair of the First Private Bank Limited, Dr Sein Maung points out that since they are private companies, they are legally restricted to have o­nly 50 shareholders. According the Central Bank of Myanmar Law and the Financial Institutions of Myanmar Law, they can not sell shares or debentures to the public. According to Dr Sein Maung, the amount of public savings in private service companies is much higher than the money circulated in several of the private banks.

From an orthodox economics view, these sorts of investments are high-risk because it is inevitable that they will fail eventually and their movements in value are not captured in the national income accounts properly. However, according to a Burmese political economist who teaches at prestigious university in Asia, in the short run, they get higher returns. Investments in private sector companies inject credit and a flow of cash to private sector firms who can not access funds from the regular banks. Dr Sein Maung disagreed: "We [the banks] are giving loans. Some of them are even small and medium enterprise bank loans."

"The real problem is that these private service companies are mostly speculation channels creating asset inflation and other types of instability, instead of investing in the production sector", Dr Sein Maung said.

Moreover, the service companies are generally not accountable and do not issue financial statements. Last year, Thit Sar Pan Khinn held an annual stakeholders meeting at a well-known restaurant o­n the banks of Inya Lake, Rangoon. The company did not release any financial reports but entertained guests with a fashion parade and live concert. It was all show, no substance.