Addressing financial needs in the rural areas
Initial reports showed that the Ministry of Cooperatives (MOC) disbursed to target recipients throughout the country, the first tranche of the loan extended by the China Exim Bank. A report entitled Rural Development, Socioeconomic Improvement, Poverty Alleviation and the Cooperatives distributed during the celebration of International Cooperatives Day held in Nay Pyi Taw last July 4, stated that 203,539 million Kyats were provided to cooperatives in 307 townships in 15 states/divisions nationwide. The portfolio included the $100 million from the China Exim Bank received in December 2013 and April 2014. Dubbed as Micro Capital Loan, the funds were distributed to individual borrowers at 100,000 Kyats each, for agricultural production or rural enterprises. The report further stated that the lending program registered 100% repayment rate to date.
Prior to its approval, some members of the Pyidaungsu Hluttaw expressed reservations in recommending for the government borrowing from China because of concerns on the management of funds and the capacity of the government to repay the loan. With a ten-year term, the loan is charged with 4.5% p.a. and retailed to individual borrowers at 1.5% per month.
The initial report looked promising and persuaded the Pyidaungsu Hluttaw to approve the second tranche of $300 million. It has improved features, increasing the maximum individual amount at 500,000 Kyats and lowering the interest rate at 1.1%. In addition, $30 million of the tranche was set aside for agricultural mechanization program, with loans devoted to hire-purchase of agricultural machineries.
The hire-purchase scheme for agricultural machinery is another project of the MOC in partnership with the Daedong Industrial Co. of South Korea. The company distributes agricultural machineries such as power tiller, tractor, pumps, transport tractor, lawn mower and trailer. It partnered with the MOC and offered two schemes: direct cash purchase or hire-purchase arrangement. The term of the arrangement is 7 years, with the recipient giving 10% of the purchase price and twice-a-year amortization. Latest data showed 154,289 units of agricultural machineries were distributed through this arrangement.
Contribution to financial inclusion
The China loan contributed to increase access to credit in the countryside. The program enabled people in the rural areas to access financial resources they can use to venture into productive economic activities. It is expected that local economies will be energized as a result of the infusion of fresh financial resources to the communities. Farmers were among the main beneficiaries as most loans were expected to finance agricultural production. It will support purchase of inputs and in some cases, acquisition of farm machineries. The funds may either augment whatever resources from government banks that have been provided as part of other programs.
Gaps, issues and concerns
Despite the supposed benefits, there remain questions on the long term sustainability of the lending program. Foremost among the concerns is the management of funds. There is no question on the capacity of the MOC as a government agency, but the issue is that loan management is not part of the ministry’s core competencies, but that of a financial institution. MOC can best manage the development and institutional strengthening of cooperatives rather than manage loans. Present results may show 100% repayment rate but that may not be the case during repeat loans and in the succeeding loan cycles. Lessons in agricultural finance reflect deterioration in loan portfolio over a long period as the farmers encounter production problems like natural calamities and fluctuations in prices of agricultural products, limiting their ability to pay back loans.
Relative to this issue is the capacity of the conduit institution. It is not workable for the MOC to do direct lending to individual borrowers. It has to wholesale the funds to cooperatives who are more familiar with their members and thus identify who may borrow and who may not. Cooperatives as conduits have to be organizationally strong with the capacity to handle the complexities of managing lending operations. Most of the village-level cooperatives at present may not be strong enough to handle lending operations involving huge amounts.
The present Micro Capital Loan is a catch-all loan product. Appropriate product design is an important element in any lending program and should meet specific needs of various kinds of rural borrowers which can be segmented into three: subsistence-level livelihood activities (like ambulant vendors), micro-enterprises that has attained certain level of stability and business volume (like grocery stores) and agricultural production. Most microfinance practitioners have developed micro-agri loan product considering the distinctiveness of agricultural production.
There was also the concern for the overlapping of the program with the present lending program of the Myanmar Agricultural Development Bank (MADB). The possibility of borrowers receiving loans from both the MADB and the MOC is not farfetched. The fear is that instead of reducing poverty, the program might end up with people deeper in debt.
Risk management is quite limited at this point. No facility for crop insurance that will absorb the shock when calamity occurs. This may limit the number of people who can borrow again after each calamity, and those who cannot borrow from the program may end up back to informal money lenders, and more deeper in debt.
These are some of the issues that have to be addressed immediately to ensure that the program will indeed support sustainable development in the rural areas, and will not end up burdening the people with more debt.
Based on the status of the program, three broad strokes can be recommended to make certain that the program will be ready to face challenges soon.
1. Financial institution to manage the lending program
To rationalize the program, it would be best for MOC to focus on the development and strengthening of cooperatives at the grassroots level and leave lending operations to financial institutions. In transition, a department or a special unit within the MOC can be set up to focus on the management of the lending program. The main function of the unit should be to qualify cooperatives who can borrow from the fund, processing disbursements, collection and remedial management for past due accounts.
2. Development of financial intermediary cooperatives.
Cooperatives as conduits of loan funds should be strengthened and upgraded. A capacity building program should be implemented to enhance the capacities of cooperatives. In addition, there is a need to merge small village-level cooperatives into village-tract level or the township level to have economies of scale. Bigger cooperatives with more members and with more financial resources and with full-time staff should also assume financial intermediation functions – mobilizing savings from its members and the community and providing loans to support economic activities of the members. Financial education advocacy will also be an important role of the cooperatives.
3. Integrated agricultural production
Support to agricultural production should be aimed towards integration. At present, MOC initiative supports production stage through the Micro Capital Loan and the farm mechanization. Through the cooperatives, it should be programmed to control the whole value chain of agricultural commodities. This means the cooperatives would also have its own post-harvest facilities and processing facilities, marketing arm and transport facilities. Integrating production through the cooperatives will make possible the farmers’ capacity to control the price of agricultural commodities.
Debts when managed well can be used to facilitate sustainable development, or if not, it can be a burden to taxpayers.
Originally published in Myanmar Insider, August 2015