Microfinance stagnates due to tough rules

The domestic microfinance industry is being held back by a number of constraints on funding, preventing more small-scale loans from being
disbursed, according to industry insiders.

Customers wait at the counter of one of Yangon’s modern microfinance institutions.Photo:Thiri Lu / The Myanmar TimesCustomers wait at the counter of one of Yangon’s modern microfinance institutions.Photo:Thiri Lu / The Myanmar Times

A microfinance law was passed in November 2011, one of the first new pieces of legislation brought in by the civilian government. The industry had previously been closed to all but a handful of institutions, but following the law a number of international players entered and local organisations began looking at expansion.

Yet much of the early excitement around the potential for microfinance has been held in check, as cumbersome regulations have meant the industry is growing much slower than many would hope.

Acleda is one of the large foreign organisations that entered in the wake of the microfinance law. The Cambodian firm, which transformed from an NGO to becoming Cambodia’s largest microfinance institution (MFI) and bank, has had a Myanmar presence since early 2013.

Acleda Myanmar managing director and CEO Kim Bunsocheat said that while it is able to offer the small-scale microfinance loans on a limited scale, it has so far been unable to borrow from abroad to fund an expansion of its services.

The problem is not on the business end – a number of well-known organisations such as the International Finance Corporation (IFC) and Blue Orchard have discussed extending financing to Acleda – but rather that the loans are not being approved by the Central Bank of Myanmar.

“We are told our interest rates can’t be above 8 percent for dollar loans, 10pc for Myanmar kyat loans, but it is hard to borrow at these rates from creditors from abroad,” he said. Acleda’s rules mean nearly all of its borrowing must be in local currency.

“Most international institutions say around 12 to 15pc [for kyat loans], while dollar loans are at 7 to 9pc.

“I think this is still a constraint.”

Acleda has so far been unable to received funding from foreign sources, and is instead limited to lending out its initial capital, hampering its ability to lend to those who could use the funds.

Microfinance means the provision of microcredit, defined in Myanmar’s microfinance law as loans without collateral to reduce the poverty of grass roots people and to improve their socio-economic life.

These loans are small-scale in nature – Myanmar has a $5000 limit on microfinance loans, having changed a previous policy of limits of $500 after industry criticism. Still, the loans are tiny by most measures. Acleda’s average loan size in Myanmar is $230, about a tenth of its average Cambodian microfinance loan size of about $2500.

The amount of loans MFIs can offer is directly affected by the size of their funding – more funds means more loans.

Debt financing is one of the main methods of funding microfinance, though it has become nearly impossible for foreign institutions in particular to access funding.

New rules stipulate that the local MFIs cannot borrow internationally or from private banks, and can only borrow from state-owned Myanma Economic Bank inside the country. The rules also say that foreign MFIs cannot borrow locally, but can turn to foreign banks or institutions for funding – if the funds can be brought into the country.

Several government officials responsible for microfinance declined to comment or did not return request for comment on this article, including U Win Aung, head of microfinance regulatory body Financial Regulatory Department (FRD).

So far MFIs have been able to grow primarily with donor money, but several of them are on a scale where donations are no longer a solution.

One official from a foreign MFI in Myanmar said the entire industry is disappointed with the rules restricting borrowing. “Basically the industry was growing rapidly and needed to grow more – but now no one can borrow,” he said.

The intention of Central Bank of Myanmar is honourable but the cap is misplaced for several reasons, according to Jerome Pirouz from The Currency Exchange Fund (TCX), a fund that provides instruments to hedge the currency risk between international investors and local borrowers in less-liquid emerging and frontier markets.

The statement, sent in response to questions from The Myanmar Times, pointed out that the Central Bank auctioned 3-month treasury bills last month at a yield of 8.19pc – the riskless rate of return that is an indication of where is the cost of funds for risk-free assets in kyat for 3 months – as evidence that caps of 10pc on “unsecured” wholesales loans to microfinance were untenable.

Additional funding is necessary to meet borrowers’ needs.

“Demand for microfinance in Myanmar exceeds supply [by] four times,” the statement said. “MFIs crave funding to expand their balance sheet as they scale up operations.”

Currency of loans also matters. Myanmar MFIs cannot lend to their customers in US dollars, as then the customers are on the hook for currency risk if the exchange rate moves against them. As a result, MFIs are reluctant to take US funding, particularly as apart from TCX there are likely no institutions willing to provide the hedging that ensures the MFIs are not exposed to currency risk.

Yet debt is only one component of the mix that local MFIs use to finance their activities. MFIs also make use of equity, deposits and grants – though each stream has its own challenges.

Equity financing for its part is expensive and limited.

MFIs can also be funded through deposits – though in Myanmar this is difficult. Deposit accounts must pay a minimum 15pc annual interest in the country – compared with 8pc at commercial banks – while MFIs are capped at 30pc a year for loans. Representatives from several MFIs told The Myanmar Times that the spread between the 15pc rate on deposits and 30pc rate on loans is generally uneconomical given the local costs they face, which are particularly high compared with other countries.

In many instances, debt is the preferred method of financing.

While Acleda has been at the fore of attempts to receive debt financing from foreign sources, a number of other MFIs are also looking at ways to fund future expansion. BRAC, a Bangaldesh-based development organisation, has an ambitious business plan to open 120 branch offices in Myanmar by 2018, according to its country representative Faisal Bin Seraj Kazi. At the moment it has 12 branches in the country, though it hopes to increase that number to 30 by the end of the year.

BRAC has pursued a mixed approach to funding. It has equity investment from its parent organisation, as well as accepting deposits and is applying for grants. It may also turn to the debt market in the future.

While this year’s plans are funded, its rapid plans for expansion mean it will need to diversify its funding sources in the future.

Current restrictions mean it cannot borrow from local banks, and must instead turn to foreign entities if it borrows.

“For us it would be better if we could get a loan from the local bank in local currency,” said Mr Kazi. “That would help us have [insulation] from currency exchange rate fluctuations.”

Still, Western sources of funding are often important.

“Even if you have a South-South approach, for funding you need a West-South approach,” he said.

The IFC, which would like to provide debt finance to local MFIs, said in a statement replying to questions from The Myanmar Times that debt to MFIs is usually priced using three components – country risk, project risk and cost of swapping US dollars to kyat.

Country risk estimates the risk of the country in terms of political stability, regulatory environment and ability to repatriate funds. Project risk covers the institutional risk of an MFI. The cost of swapping US dollars by a hedging provider like TCX a function of the risk they see for bearing the foreign exchange risk on their balance sheet.

It added several recommendations for policy changes in the country to allow MFIs to grow.

“MFIs should ideally be allowed to borrow at market rates – the interest rate MFIs borrow at should not be subject to caps that are inconsistent with how the market would price MFI risk,” the IFC said. Additionally, in many other markets globally, strong, well-capitalised MFIs are allowed to accept deposits at market rates from the public at large, not only credit customers and not necessarily at a pre-determined floor, as is currently the case in Myanmar.

“IFC and many other stakeholders are providing MFI global practice examples from other countries to show how the sector funds itself. We are trying to send a consistent message from many stakeholders to the Central Bank, Ministry of Finance and Financial Regulatory Department,” it said.

“Until MFIs are allowed to borrow, the sector is likely to stagnate.” However, it added that credible international lenders are best placed to assess and price this risk and it is the responsibility of the regulators to ensure that borrowing is responsible and consistent with prudential norms followed in other similar markets where there is a thriving microfinance sector.

Source: Myanmar Times

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