Photo: Myanmar Insider
There is an increasing interest in business in Myanmar as the country opens up its economy to the rest of the world. One of these is financial services, particularly ‘microfinance’ which has evolved from informal moneylenders and stereotyped “loan sharks” into a billion-dollar global industry with commercial investors participating, stock market listing and regulation by government agencies. With the establishment of the Grameen Bank in the early 80s, microfinance has since become an instrument in poverty alleviation, and in stimulating rural economies.
The potential for microfinance in Myanmar is huge. A large part of the country is still inaccessible and remote areas have no formal financial service providers. In most areas where financial service providers are present, many entrepreneurs are still not able to access the financial services necessary for expansion. Emerging enterprises are also left to scavenge working capital from informal sources that are expensive and unreliable. Recent emphasis on ‘financial inclusion’ and the proof that there is indeed wealth at the “bottom of the pyramid” has attracted commercial investors to venture into the microfinance industry. Traditionally this was the turf of non-government development organizations. For those interested in venturing into microfinance operations, these basic facts are important.
1. Opportunities in the microfinance industry abound
In November 2011, the Myanmar Microfinance Law was passed outlining the framework for the operations of microfinance activities in the country. It defines microfinance in the context of the country’s financial system and provides for the licensing and supervision of microfinance service providers. Microfinance institutions can provide the following financial services to its clients:
b. Savings deposits
c. Remittance services
d. Insurance services
e. Borrow locally and from abroad
f. Other financial services
There are two types of licensed microfinance institutions: deposit-taking institutions and non-deposit-taking institutions.
• Deposit-taking institutions are full financial intermediary institutions utilizing deposits from its clients to finance lending operations.
• Non-deposit-taking institutions provide loans from their own funds. In simple words, microfinance service providers operating like a bank.
2. Microfinance is a regulated industry in Myanmar
Myanmar is no stranger to financial crises resulting from bank failures. As such, regulation was among the primary concerns of the government when microfinance was allowed to operate in the country. It is necessary to ensure that ordinary people utilizing financial service providers are protected. The regulation of microfinance institutions was placed under the Myanmar Microfinance Supervisory Enterprise (MMSE) a newly formed agency, previously tasked with the management of pawnshop operations of the government. This is the agency that issues licenses to operate, monitor and supervise microfinance institutions. It is expected that there will be a harmonization of operations since the previous function of the agency was to manage pawnshops, while microfinance primarily requires the provision of non-collateralized loans. Compared to neighboring countries with vibrant microfinance industries like Cambodia, Vietnam and the Philippines, regulatory functions are vested with their respective central banks.
3. The minimum capital requirement to be licensed is modest
Among the requirements necessary for licensing, the upfront capital is the most crucial. Applicants for a license are required to deposit the following amount:
• For deposit-taking institutions: Kyat 30 million (approximately US$ 30,000)
• For non-deposit-taking institutions: Kyat 15 million (approximately US$ 15,000).
The amount may be substantial for local individuals and development agencies, but is meager for foreign companies and international development agencies with big budget programs.
4. Various types of organizations are allowed to provide microfinance services
Any legally registered organisations are allowed to operate microfinance services as long as they are able to get a license from the MMSE. These include local and international development organizations, partnership firms, cooperative societies, bank and non-bank financial institutions and partnership firms.
On the one hand, non-government development organizations can enhance its programs by adding these services and expect to become more sustainable and less dependent on donor funds. Whereas, profit-oriented organizations can channel financial resources into areas where it’s most needed and in the process help prime rural economies.
Currently there are close to 200 microfinance service providers in the country. In terms of outreach and loan portfolio, the international development agencies are the biggest. These include PACT, ACLEDA, MFI Myanmar, World Vision and Proximity. On a local level, coops make up the main bulk of licensed microfinance service providers.
5. The areas covered by current microfinance operators is still small
The biggest microfinance operators are present mostly in the Mandalay-Yangon-Delta “corridor”. Most parts of the country are still considered to be under-served financially, which means more financial service providers are needed. These gaps can be filled by expansion programs of existing players and/or new players.
6. Financial and technical support is available to microfinance service providers
Since microfinance is a nascent industry in Myanmar, support from donor institutions is available. International donor agencies are providing not only loan funds to microfinance services providers but also technical assistance to enhance the capacities of microfinance operators and even the regulatory agency. Among the institutions providing support to the industry and individual institutions are: the International Finance Corporation (IFC), European Union (EU), UNDP Capital Development Fund (UNCDF) and Asian Development Bank (ADB), to name a few.
7. There is an interest rate cap that may limit investment to the industry
One limitation in the industry is the interest rate cap which was pegged by the law where interest rate on loans shall not exceed 2.5% per month (30% APR) and the interest paid on deposits shall not be lower than 1.25 per month (15% APR). This policy may limit the institutions that will enter the market, experience in other countries shows that microfinance thrives best under a liberal interest rate regime.
8. There is also a cap on the maximum loan amount.
To maintain that the loans will be micro, the maximum loan amount to an individual borrower is pegged at Kyat 500,000. This may be considered low especially by micro-enterprises that need more working capital. Although in rural areas, that amount may be more than enough to start a small income-generating activity that will augment the financial resources of a family.
For microfinance service providers, the amount may be big for first-time borrowers, but for repeat borrowers and those that have expanded their economic activities through microfinance, the cap can become a handicap.
9. A microfinance network is being set-up
Major industry players have started initiatives at forming an industry association. A core group has started setting up the structure for the Myanmar Microfinance Network. Besides representing the industry, the network is aimed at promoting responsible finance. Among the global campaigns, it promotes social performance management (SPM) to ensure that microfinance institutions don’t drift away from their social mission. Another campaign is the promotion of client protection principles (CPP) to ensure that policies and procedures of microfinance institutions are not harmful to clients. Other advocacies of the network hopefully will cover improvement in the policies and regulatory framework.
10. Risks can be managed
Microfinance is a high-risk business and problems resulting from operations or the market environment may happen. Experience of how other countries responded will help in preventing the same happening in Myanmar. Among the risks that should be monitored closely are over-indebtedness, governance, management quality, credit risk and political interference. These challenges can only be addressed by industry initiatives and participation of all stakeholders.
First published in Myanmar Insider, Vol. 1 Issue 8, July 2014.