The Polish Solution to Myanmar's Banking Sector

Often, for the post-socialist policy makers, the main dilemma concerns the ideal ownership structure. This prompts a plethora of questions. Should we build a strong domestically-owned sector or should we rely on foreign banks? Will strong foreign banks push our weak domestic banks out of the market? Will they then take off with our money if a crisis arises? A mixed structure is necessary. But what is the ideal mixed structure?
Myanmar policy makers’ indecisiveness has already resulted in the process of banking sector development being broadly seen as lagging behind. If Myanmar’s leaders need an example, they should turn to Poland.
At the beginning of its economic transformation, Poland lacked the capital, expertise and the interest of investors. In the early 1990s, not everyone was convinced that communism was gone forever. The government chose to liberalise access to the banking sector for foreign banks and to promote the development of the private sector. The share of private banks rose steadily, reaching 20 per cent in 1992. Those banks, however, were weak, and this compounded the effects of the recession experienced by most post-socialist economies. Inevitably, this led to the accumulation of bad loans, which, by 1993, accounted for 30 per cent of all loans in Poland. Only an ambitious reform program introduced by the government ameliorated the situation. It forced banks to restructure their debt, increase capitalisation and consolidate. It also gave banks additional instruments. Only on rare occasions would the Central Bank inject capital, and on strict terms. Privatisation of state-owned banks continued. All those activities strengthened the domestic banking sector. Once the world realised Poland had returned to the family of liberal democracies and market economies for good, foreign banks came to the country in large numbers.
A number of factors lie at the core of Poland’s success.
First, Poland’s economic reformation resulted in a healthy mixture of foreign and domestic banks. The domestic sector developed and matured; the foreign sector brought capital and expertise, and thus contributed to the system’s modernisation and efficiency. Currently, the foreign sector owns around 65 per cent of the market share, and this share is slowly decreasing;
Second, a strong economy with a continuous long-term potential for growth attracts more actors from the international financial sphere and ensures that those already in the market do not want to leave.
Third, a strong state with strong institutions, which behave as transparent and effective guardians of the rules of the economic game – contribute to the quality of Poland’s banking sector. The Polish Financial Supervisory Authority (KNF) effectively exercises its power as a supervisory and controlling body;
Last but not least, most foreign banks in Poland have been domestically incorporated commercial banks, not branches of foreign banks. In other words, although their owners reside abroad, they are Polish companies and are subject to Polish law and Polish supervision. Most of these banks’ heads are Polish nationals, a sign that Polish managers have become equally competent with their international peers.
Naturally, these conditions and arrangements cannot stop the flight of capital, but, in times of crisis, they always make escape the unfavourable option.
Myanmar is at a crossroads. The banking sector needs rapid improvement, expansion and upgraded capacity. It needs to catch up with the dynamic changes elsewhere in the national economy. The presence of foreign banks, with their money and expertise, is crucial. They can easilybe a part of the government strategy for the financial system’s development. And there will be space for a robust domestic sector,too. What is most important now is to make sure capital stays in the country. And it will, if Myanmar continues its fast economic growth, and if investors, consumers and bankers are convinced that this is the best place for their money. By all means, it is achievable.

The author is chief economist, the Embassy of Poland in Bangkok. He edited the book “From Central Planning to Market: Poland’s Transformation in a Comparative Perspective and the Lessons for Myanmar” published by Chulalongkorn University.