The 2003 banking crisis of Myanmar was a major bank run in private banking that hit Myanmar (Burma) in February 2003. It started with a decline in the trust for private financial institutions following the collapse of small financial enterprises and proliferating rumors about the liquidity of major private banks. Leading to a bank run on the Asia Wealth Bank, the crisis quickly spread to all major private banks in the country. It led to severe liquidity problems for private banks and scarcity of the kyat. Though exact data is not available, it is believed that the crisis caused major economic hardship for many in Myanmar.
Background
Myanmar's banking system had been in a process of transition in the period leading up to the crisis. From the 1962 overthrow of the government by General Ne Win until 1990, state institutions dominated the financial sector in Myanmar. Only with the adoption of the Financial Institutions of Myanmar law by the State Peace and Development Council in 1990 were private banks allowed to form and operate in the country. By early 2003, there were 20 private banks in the country. However, many of these banks were relatively small. Five private banks dominated the field: Asia Wealth Bank, Yoma Bank, Kanbawza Bank, Myanmar Mayflower Bank and the Myanmar Oriental Bank. Though not all private banks grew considerably by international standards, the growth of the private banking sector and the share of the deposits in private banks increased in the 1990s and early 2000s. While private banks accounted for only about 10% of savings in 1994, by 2003, the amount increased to about 66%. Though state owned Myanmar Economic Bank had the most number of branches, in all other metrics private banks started to overshadow public banks.
However, while the importance of private banks in Myanmar did increase in this period, there were multiple indicators that suggested the private banks did not truly perform optimally. For example, outside of certain urban centres such as Yangon and Mandalay, the banking system did not penetrate the lives of the populace. For the majority of the population, keeping wealth in form tangibles (such as gold or other precious metals) and borrowing from private moneylenders were still the norm. Also, though entrance to the market was available after 1990, the banks still had to work under wide-ranging regulations; including ceilings on interest rates. The fact that these ceilings were below the inflation rate of Myanmar led to “schemes (especially in real estate) whose principle promise was to act as an inflation hedge,” which ultimately resulted in real estate price bubbles and financial instability even before the 2003 crises.
Origins of the crisis
In the second half of 2002, many informal finance enterprises in the country started to go under. These enterprises were not authorized deposit taking institutions under the Financial Institutions of Myanmar Law, but nevertheless accepted deposits by using the loophole of naming the depositors “shareholders.” They promised investors considerably higher interest rates than what private banks were offering (usually around 10% per year.). While these high rates, regularly reaching 3-4% per month, seemed hardly possible to return on a sustainable basis, large amount of investors used these entities nevertheless. More often than not, the enterprises depended on either highly speculative investments for the promised rate of return or even sometimes turned out to be not much more than ponzi schemes. Nevertheless, the collapse of the informal finance companies is considered one of the early triggers of the crises. Not only were some of the authorized banks experienced direct financial loss because of exposure to these enterprises through lending and share investments, it also brought about distrust in the still newly liberalized financial sector.