Completing the Kayin Project

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Monday will be the culmination of a development project in Kayin State, Myanmar. A conference will showcase the results of the three-year project – a registered cooperative with savings and lending service as well as an e-money service, and an enterprise and agri-business enhancement component for the borrowing members.

In 2014, the project started six months late because of some administrative concerns as the government has to cope with the increase of development agencies flooding the country.  But the project team was able to catch up on the activities and reach the finish line on time.

The results of the project affirmed the tools and methods initially employed in other ASEAN countries and now used in Myanmar. These include savings mobilization techniques, cooperative formation, value chain analysis for agri-commodities and enterprise development.  The tools are now being marketed to other development agencies for replication.

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THE CHINA LOAN: Managing Debt and Sustaining Development

eximbank-chi_20131126135212242Addressing 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.

Policy recommendations

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

Sustainable Cooperatives: Alternative financial support systems for the poor

ImageAn emerging economic order

The ASEAN economic integration scheduled to be fully implemented in 2015 will have great impact on the people of the region. Designed to be a common production and marketing unit, goods and services will flow freely among its member-countries and will trigger a survival-of-the-fittest mode for businesses in the region. As competition provides lower prices and better products and services, benefiting the people, it will also weed out inefficient companies resulting in the laying-off of workers. Industries will consolidate leaving fewer surviving players to dominate the market. In this scenario, it is evident that the more developed member-countries of ASEAN will have a head start.

It is expected, but not assured, that the benefits of the economic integration will trickle-down to the marginalized sectors of the society. Definitely, a large number of people will be excluded in the process especially those coming from the less developed member countries. Growth rates may be observed, but it take some time before the poor will enjoy the benefits of the new economic arrangement. The poor will have to cope with these developments with minimal support. So far, there are no talks of safety nets for the poor, and it seems that everybody is thinking that there will be no massive economic dislocation as a result of this integration.

Left on their own, history shows that poor people coped during hard times by pooling their resources and sharing whatever they can to assist each other. These informal support systems still exist in poor communities and are evident in small self-help groups. It may be an informal collaboration at the start, but it can lead to a more formal and long-term arrangements like cooperatives. During the advent of the Industrial Age in Europe, people flocked to the cities in search of work but ended up being exploited as cheap labor. Poverty persisted and poor people were excluded, consigning them as commodities in the new economic order. The poor coped by forming self-help societies that later on became formal cooperatives. Raiffeisen cooperatives in Germany and the cooperative societies initiated by the Rochdale pioneers of England became models of cooperativism worldwide that has not only reduced poverty but have evolved to become major industry players globally.

Cooperatives as coping mechanism of the poor

What makes cooperatives successful? Basically it is the number of members. A big number of people pooling small amounts to generate a large working capital that will enable them to venture into enterprises which will not only serve the members but the whole community as a whole. Picture a scenario where thousands of poor people regularly deposit small cash amounts into a cooperative. The pooled deposits are then lent out to members some of whom are developing micro-enterprises. Those entrepreneurs will be able to expand their businesses and may even hire members who have no jobs. Income from interest payments of the borrowed funds will add to the growing fund of resources that will be available to other enterprising members. Financial services provide opportunities for members to venture into income-generating activities and contribute to job creation.

From the same scenario, the cooperative may venture into retail business of prime commodities. It can buy products in bulk and can offer lower prices to its members because of the savings generated from doing away with middle-men and avail of discount by buying in bulk. Invaribly members consume the products and services because they own the cooperative and it offers cost value. The sheer volume of small transactions will provide additional income for the cooperative.

The continuous and regular pooling of resources, the provision of financial services to members with entrepreneurial spirit and the establishment of basic services that responds to the needs of members builds up not only the financial resources but the institutional capacity of the cooperatives. As the cooperative becomes more efficient, it can assume more functions and businesses to serve its members and the public.

Cooperation does not only happen among individual persons because cooperation among cooperatives also takes place. It one of the basic principles of cooperativism – strength in numbers. This makes cooperatives one of the best mechanisms for economic inclusion. Giving the poor and the marginalized an opportunity to participate in the economic activities through cooperatives. Individually, the poor will have no say, but through a cooperative, they can be a player just as they are in other ASEAN countries with strong cooperative movements like Thailand, Indonesia and the Philippines.

Status of Myanmar Cooperative Sector

The growth of the Myanmar cooperative movement is attributed to the Ministry of Cooperatives, the government agency responsible for supervising and regulating cooperatives in this country. Its main objective can be summarized into two: first, to improve the socio-economic life of rural and urban people at grass-roots level; and second, to support with full strength by cooperative businesses for the development of the nation’s economy. Main activities of the ministry in promoting and developing cooperatives include cooperative development, small scale industry development, import-export enterprise development and the strengthening of the apex organization.

The Central Cooperative Society (CCS) is the apex organization composed of the all the primaries and syndicates in the region. As of 2013, the total number of registered cooperative primaries was at 20,658. It has total individual membership of 2,403,365. In terms of financial resources, total savings stands at 340Million kyats and loans outstanding at 1.1Billion Kyats. A large number of registered cooperatives are agricultural co-operatives in rural areas that are utilized as channels of support for agricultural producers. The rest are services cooperatives more prevalent in urban areas among the working class, providing savings and credit services.

The recent introduction of the Microfinance Law encouraged some cooperatives to register as microfinance service providers. In 2013, a total of 71 cooperatives were given licenses to function as MF (Microfinance) operators and is this is expected to increase as the regulatory framework for microfinance is being fine tuned. . The CCS was also allowed to operate microfinance operating units and set up branches to serve its members.

This is a good development as the presence of many cooperative microfinance service providers will promote financial inclusion and bring financial services to the doorstep of the members. It will allow people to enhance and increase their economic activities as working capital can be accessed from these institutions.

The challenges of sustainability

Cooperative development in Myanmar has a long history. With direct support from the government, it has survived domestic and regional economic crises. However, with the advent of free-trade arrangements and the gradual opening up of the country’s economy to the West it brings with it some challenges.

1. Increasing financial inclusion especially for those living in the rural areas

The total number of members in the cooperatives are but a small portion of the total population of the country. If we divide the total number of members with the number of registered cooperative primaries, it will give an average of 116 members in a cooperative. The urban cooperatives may have more than the average number, but rural cooperatives may have even less than the average number. Two challenges are evident: first, making these cooperatives bigger in number to generate more resources and transactions; and second, forming new and bigger cooperatives to cover areas that have no cooperatives.

2. Institutional development by enhancing skills of management teams

As the volume of members and transaction grows, there is a need to formalize and enhance governance and management systems. Volunteer work is not bad, but a fulltime and more professional workforce may have to man the cooperatives to make them more efficient and to meet the complexities of managing multiple services and ensuring membership care. An in-house training program that will ensure a pool of trained staff familiar with such operations should be coupled with management and executive training for the management team and policy-makers. The institutional capacity of the cooperatives has to be brought up to the same level of cooperatives operating in other ASEAN member-countries.

3. The need for matching funds

At the start, the pooled resources of the members may not be enough to provide for all the financial requirements of the members. As they gradually build-up their working capital out of the small savings and the incremental income for operations, there is a need to match these funds to hasten the development process. Matching funds, be it grants or soft loans, is ideal because it is founded on the concept that the cooperative has to first prove it can generate internal resources. The principle of cooperation among cooperatives will work best in this situation wherein inter-lending among cooperatives can be facilitated.

4. Social performance

Doing good is not enough, it should be ensured that there is no harm done to clients. Institutions providing financial services are doing good by providing opportunities to its clients, but they can also find themselves in a bind when they see clients mired in debt and still poor. Cooperatives and other institutions like microfinance that are founded on social services should have a built-in system for social performance management from the start. It should not wait until later or when mission drift is evident before corrective measures are installed.

Support to upgrade existing rural cooperatives and to organize new ones founded on a large base of membership, strong governance, skilled management and relevant products and services will provide the poor with a coping mechanism that will absorb the economic shock of ASEAN integration. It will also be the springboard for small and subsistence economic activities to develop into microenterprises and move towards small and medium enterprises (SME). Cooperatives are the most appropriate platform in developing a country’s agriculture and rural enterprises.

Published in Myanmar Insider, Vol. I, Issue 7, June 2014