Private Banks Adopt ‘Letter of Credit’ System

By May Lay 6 August 2012

Burmese private banks began using the internationally-recognized Letter of Credit (LC) system on Wednesday to aid financial mobilization and facilitate trade.

“We have just introduced the LC system with local private banks and later we will try the fully functioning LC system,” said a spokesman for Asia Green Development Bank (AGD).

An LC is a document that a financial institution issues to a seller of goods or services which guarantees that they will be paid for what is delivered to a third-party buyer. The issuer then seeks reimbursement from the buyer or the buyer’s bank. LCs are important in modern business as it transfers much of the risk from trading partners to their banks.

The LC system was previously offered by state-owned financial institutions—Myanmar Investment and Commercial Bank and Myanmar Foreign Trade Bank—but there was so much red tape that businesses have been reluctant to use it. LCs currently cost US$30 for export and $50-1,500 for import documents.

“For economic reform, we need good financial institutions. We had to sell our dollars or foreign currency at illegal money changers on the street in downtown before as we did not have official exchange counters [offering a realistic rate],” an exporter of beans and pulses told The Irrawaddy.

“Now we can check the going market figures at the official exchange center. But we need to complete too many steps at financial institutions to mobilize our money safe and fast. From my point of view, the LC system is an important part for the export and import business. But it takes many hours to use the LC system at state-run banks.

“I hope private banks can efficiently offer the LC system with a good service,” he added.

Local exporters hope that using the LC system at private banks will offer safety while being easier than state-run banks as they will not have to provide as much detailed information regarding the nature of their dealings.

“Many people in the country bring money in a bag. It is really funny for me when men bring money in their luggage to buy a car at the showroom,” said the owner of Farmers Automobile Showroom, Sa Yar San Road, in Rangoon.

The 11 private banks which are allowed to use the LC service are the same as those which received permission to open foreign currency accounts last month—Myanmar Apex Bank, Myanmar Eastern Bank, Cooperative Bank, United Amaya Bank, Myanmar Industrial development, Inn Wa Bank, Tun Foundation Bank, Ayeyawaddy bank, Myawaddy bank, AGD and Kanbawza Bank.

The International Finance Corporation (IFC) told a press conference in Rangoon on Wednesday that they will work closely with the banking and microfinance sectors as 95 percent of the private sector in Burma is made up of small businesses.

“The focus on the financial sector at the beginning will be key. We need functioning [domestic] financial institutions which are linked with external financial institutions also,” said an IFC spokeswoman.

Local banks will first link with foreign equivalents in Singapore, Thailand and Malaysia where the major Burmese migrant worker populations are based. Then, providing the LC service works efficiently, they will extend their links to institutions in South Korea, Indonesia and India and so on.