The History of Commercial Banking in Burma - Case Study Example

? The History of Commercial Banking in Burma Qn Commercial Banking in Colonial Burma During the colonial era Burma, commercial banking, as commonly conceived today, only arrived in Burma, during the time of the wars that led to the rise of British rule. Before then, the country had trading houses, for example the Wallace Brothers – whose function was taken and dominated by banks later. The banks that overturned the banking structure of Burma include India Presidency Banks, British exchange banks and a few banks from outside the British Empire. The indigenous banks of Burma were not started, until after the county’s independence in 1948.The banks that started operations in Burma during the colonial times, targeted the export trade of rice. They centralized their operations around Rangoon, engaging mainly in Chettiar lending, except a few like Dawson’s bank, which exited Burma after the 1942 invasion by the Japanese (Econ 335 a). Remarkable in the philosophical and the ideological banking profile of colonial Burma, are the exchange banks, which initiated western banking services at Burma. These exchange banks trace their origins to the trading firms of Burma, which mediated the commercial dealings of Burma with the outside world – throughout the nineteenth century. These firms include the Wallace Brothers, which was a remarkable example of the transition from being merchants, towards assuming the role of merchant bankers. By the end of the 19th century, the traders and the merchants that had operated as banks across the British Empire, either converted or left business for international banks. Most of these banks were headquartered at London, including Lloyds Bank and the National Bank of India (Econ 335 a). Most of the banks did not engage in the service of the entire population, particularly the countryside, but focused on the financing of rice trade, among a few other commodities at Rangoon. The finances of these banks were mostly outsourced from outside Burma, particularly London; the banks, later diversified towards the collection of deposits from European professionals, managers, and Burmese and Indian traders. The banking sector of colonial Burma was characterized by trade finance and the sale of bills of exchange. The bill of exchange is among the finance tools that revolutionized international trade during the nineteenth century; the instrument allowed exporters to receive the value of their exports, immediately after the sale of the exports, and in the local currency. The service was offered by exchange banks, which marked a reduction in the risks borne by exporters and importers; it also increased their access to credit. The bills of exchange were a short-term credit instrument, ordinarily 60 days, and not longer than 90 days. Banking institutions like the British banks, concentrated in the provision of financial services, and funding to businesses, particularly European as well as the colonial administration and its agencies. For instance, the Imperial bank offered wholesale financing to Chettairs, thus was an import financier of the Burmese agricultural sector. Despite the dominance of British banks, non-British exchange banks like Citibank started their operations in Asia, during 1812. The bank started its operations at Rangoon in 1919. For example, some Chinese banks arrived into Burma, immediately after the completion of Burma Road, in 1938 targeting the upcoming opportunities (Econ 335 a). There was the rise of Burmese banks, including “U Rai Gyaw Thoo and Dawson’s Bank”. Dawson’s Bank was started in 1905, with the role of assisting Burmese agricultural players, so that they could free their lands from Indian-money-tenders. The local banks sought closeness to the farmers, so that they would ensure that they would get cheap credit, and, so that the banks would ensure that they used the money for the specified purpose. U Rai Gyaw Thoo was among the first Burmese-operated and owned bank, which grew out of shipping, trading and money lending. There were very few Burmese banks, as a result of the failure of indigenous banks, which resulted from a number of factors. These factors include that Burmese banks were not experienced, and they lacked the joint stock company outlook (Econ 335 a). During the great depression, commercial banks experienced the difficulties borne by WWI, which resulted in major retrenchments and decline. For example, during 1925 the price of Rangoon export rice went down by 8 percent, from the 1920 price, and later – during 1928 it had gone down further by another 9 percent. Commercial banks were also affected by disruptions to capital flow, which resulted from the war. There was the era of banking under the Japanese rule, after 1942 after WWII. Later, there was the return of the exchange banks, where questions on debt moratoriums and whether to recognize the transactions that had taken place under the Japanese system (Econ 335 a). Qn. 2 Banking in Burma’s Parliamentary Democracy Era Burma got its independence in January 1948, but immediately went into chaos. However, the chaos advantaged Burma, in that it led to increases in the price of rice, which increased Burma’s rice exports. The major economic change led to the formation of a state agricultural bank, which was more like a revolutionized cooperative movement. This changed the role of the state into a principal player, marking the beginning of Burmanization and public ownership. The increased participation of the government resulted in the realization of sustainable growth, which proved immune to the corruptions and the inefficiencies of government controlled credit facilities. Burma’s banking was marked by Agricultural finance, insisting on universal access to credit among cultivators and lessening the cost of credit, so as to increase the benefits to the rural populations. The system also sought to reduce land alienation, and stopping the remittance of profits to foreign countries (Econ 335 b). The changes in the Burmese banking system included the formation of the Furnivall’s committee for a national agricultural banking institution. The formation of the agricultural bank entailed the creation of a committee of inquiry, and recommended that banks had to start operations in 1949. For instance, different groups in the All-Burma Peasant Association (ABPA) offered support at the rural areas. During the parliamentary democracy era, the banking climate was changed, towards ensuring that it would be founded in the village, the procedure for loan recovery would be highly democratic, and would not require more than the villager can give – both in knowledge and costs. This led to the formation of village banks, which were somehow owned by the village. The bank would be controlled by a village committee, which had the village headman as the bank’s chairman. The village banks would accept deposits, engage the government in capital provision, and offered only short-term funding. The banks relied on group-lending, which would safeguard the credit-worthiness of the borrowers (Econ 335 b). The era was marked by Pydawtha, which was royal pleasantry seeking to break the colonial extractive economy. The new system focused more on the industrialization of Burma, and not the agricultural sector, like the case was – earlier – among banking institutions. The focus of the formation of SAB was the center of the 5-year model towards the realization of Agricultural development and sufficiency. There were other institutions that influenced the availability of credit to agriculturalists. These include cooperatives, which would dispense credit to agriculturalist, in pursuit of a more egalitarian division of economic power. The second types of institutions were state pawnshops, which offered day-to-day financing to agriculturalists, for crop and other agricultural finances. There were Chettiars, which were viewed as colonial exploitation institutions. Other organizations that influenced agricultural credit include Dawson’s bank and the SAMB (State Agricultural Marketing Board) (Econ 335 b). During the parliamentary democracy era, many rural credit organizations were developed, but there was still the problem that they did not offer enough credit, as a result of the credit values inherited from the colonial era. For instance, the interest rates charged by many indigenous institutions were higher than those required by Chettiars – they reported interest rates of 250 percent on annual basis, although the credit was offered for shorter durations. The era was also characterized by the rise of a commercial banking with two aims: fostering industrialization and the transformation of the system, from one dominated by foreign bankers, to one which was led by local institutions. The state commercial bank (SCB) was established in 1954 (Econ 335 b). The SCB would accept deposits, offer credit, develop innovative productive models, supplement the services of commercial banks and so they could increase commercial banking coverage. Later, there was the rise of private commercial banks, which increase the shift towards local banks, from the dominance of foreign ones. Examples include Avabank, and Union of Burma C-operative Bank. Qn. 3 The Road to Ruin: Credit and Banking under Military Rule in Burma There was the nationalization of banks, which was based on the fact that private banks: domestic and foreign did not embrace the national socialist ideology. The Ne Win’s Revolutionary council idealized and enforced the broad nationalization. The nationalization of banks was also grounded on the central role of banks within the Burmese economy, through the areas of mobilizing funds, credit expansion and fostering personal savings. Banks also hold a central place in the foreign trade of Burma. Some of the banks nationalized include the Central Bank of India, and the Habib bank. The shift was also grounded on the need to increase the solidarity between Burma and its neighbors, including China and India. For instance, one distinctive shift in this area was the response by China, which nationalized the Bank of China, as an attempt to increase the solidarity and the friendship sustained with its neighbors. After the nationalization, the RC government granted special functions to the eight nationalized banks. The roles included specialization in industrial credit, increasing savings, the services offered to the government by the UBB, servicing state corporations and boards, managing private accounts, and facilitating the Union of Burma Insurance Board. The nationalization of banks was also supported by the adoption of restrictions and regulations on Burma’s banks. The measures included strict interest rate regulation, the control of the rates offered by banks – during the securing of deposits, and receiving loans below the inflation rate. There were other veritable measures, particularly, those designed to check the activities of Burmese depositors. For instance, bank depositors were only allowed to hold a single account with a given bank (Econ 335 c). There was the formation of the People’s union bank of Burma, which absorbed state-owned banks and other people’s banks, including the UBB. The rationale of forming the single banking entity was based on the need to employ different undertakings on banking, currency and credit; money lending, insurance and foreign exchange among others. The era was also characterized by the agricultural credit of 1962-1965, which was instituted in response to the needs felt. The massive lending to agriculture was employed to stimulate lending in the sector, among the many nationalized banks. The era was also characterized by the monetary policy of 1962 and 1966, which was designed to expand credit levels, and increase the government’s net cash imbursement. The policy resulted in a 43 percent growth in the demand deposits at banks (Econ 335 c). There was the demonetization of 1964, which declared all K100 and K50 as non-legal tender – they were supposed to be surrendered to receiving centers. The policy also entailed the inspection of people handling more than K 4,200 and there was also the application of a special tax. There was also the expansion and the development of Agricultural credit between 1966-1973, with the aim to contain domestic trade; increasing the provision of agricultural inputs, and increasing the efficiency of agriculture. During the new era, advance purchase standards were developed, replacing the bulk of credit availed earlier. There was also the banning of private money lending and other avenues of accessing credit, as a way of streamlining the access of credit among Burmese people. Later, there was the end of the monobank, which came in through a continued adoption of market processes and decentralizing decision-making (Econ 335 c). Reference List Econ 335 (a)., Commercial Banking in Colonial Burma: Assignment Paper 1. Econ 335 (b)., Banking in Burma’s Parliamentary Democracy: Assignment Paper 2. Econ 335 (c)., The Road to Ruin: Credit and Banking under Military Rule in Burma: Assignment Paper 3. Read More