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Microfinance in Myanmar: A Silver Bullet to Stamp out Poverty?

 

The passing of the Microfinance Law in 2011 led to a rapid influx of Microfinance Institutions (MFIs) in Myanmar. As of December 2015 there were over 256 MFIs operating in Myanmar, all competing to crack the estimated 33 million unbanked residing here. It is believed informal money lenders charging extortionate interest rates will become obsolete as the poor, when given the opportunity to use a MFI, will seize the chance.

Supporters trumpet the benefits of microfinance, some even hailing it as a silver bullet to eradicating poverty. A silver bullet maybe not, more a silver lining.  It provides a valuable tool in helping poverty stricken societies. It delivers credit to those the traditional banking system fails through smoothing consumption, financing micro enterprises that drive growth and create jobs and, with help from other inputs, plays a vital role in reducing poverty.

There is evidence of the benefits in Myanmar. Jason Meikle, deputy director of Pact Global Microfinance Fund (PGMF), which has been operating in Myanmar since 1997, lists “improved housing, improved nutrition, improved investment and education, improved governance and improved standing for the women in the house and village” in the areas where PGMF is present.

The impact is likely influenced by PGMF’s engagement with the community where they operate. Prior to extending micro credit potential customers attend a five part business training course “to get them in the mindset about what business they want to do and… the importance of building up savings.” Building up a relationship with the community where you operate is also important; MFIs cannot expect to distribute loans indiscriminately and reap the rewards.

Kim Bunsocheat, CEO of ACLEDA MFI Myanmar, which has been operating in Myanmar since 2012, also spoke of the importance of relationships. “You need to know the culture and the real situation [where you operate]. If you do not know this then you cannot be sustainable.”

ACLEDA bring their vast experience from operating in Cambodia, yet Bunsocheat still preaches the importance of the time required to build trust and cultivate relationships with their customers in a new market.

Like PGMF, ACLEDA disseminate technical knowledge to their customers. Bunsocheat believes knowledge is “atomic” where knowledge spreads from its nucleus, the MFI, out to its customers and then into the wider community.

Microfinance is still an evolving concept in Myanmar. The passing of the Microfinance Law led to a rush of MFIs wishing to operate, crowding out regions like Yangon while leaving many rural areas unserved. It is mandated that 50 percent of a MFIs’ customers must be in rural areas, yet this is not strictly enforced. Past loan caps imposed by the Microfinance Supervisory Committee had to be amended due to outcry from MFIs. MFIs, particularly locally operated ones, have stringent rules when trying to raise capital that inhibit growth as they are only allowed to borrow from selected local lending institutions that require almost prohibitive amounts of collateral.

Over indebtedness of borrowers is currently not monitored in Myanmar, potentially leading to tragic consequences. Currently clients can borrow from multiple MFIs, potentially racking up unsustainable amounts of debt. There is little information sharing between MFIs, nor a credit bureau where MFIs could see whether a borrower has outstanding loans. New regulations are required to mitigate against over indebtedness, for the protection of both the borrower and the MFI.

Initiative must be taken to utilise technology, particularly mobile banking. Mobile proliferation throughout Myanmar is increasing rapidly, yet mobile banking is currently underdeveloped. Meikle believes the current regulation is “not enabling, and does not provide enough incentives” for it to be successful. It is unclear whether the current bank-led model includes MFIs; it is imperative they are included as a ‘financial service’ to make mobile banking a success. The Central Bank of Myanmar must issue new regulations to utilise the power of mobile banking to help extend banking services to the rural poor.

New MFIs, especially for-profit operations, will struggle to become sustainable in Myanmar. Most MFIs are centred around the populated regions of Yangon, Mandalay and Ayeyarwady, with already large competition for customers. Regions further afield who are not served by MFIs have high operating costs due to their isolated location, owing to the fact Myanmar has one of the lowest population densities in South East Asia. Obtaining a market share is possible, but will take substantial investment of both time and money.

Meikle candidly recognises that PGMF’s sustainability “has been possible to a large extent due to the extensive grant funding received at the beginning, being able to establish ourselves without having to provide a financial return for investors.” He notes the strict interest rate restrictions “hampers the growth of the sector, and hampers the new players coming up” while understanding the need for the regulations to protect and improve the lives of the local population. Meikle concludes “if you are doing commercial microfinance… you have to be doing it for the people, not just as a way of making money.”

Again Bunsocheat echoes this sentiment. “We need time, maybe around ten years, for the customer to understand what the financial sector can do [for them].” As a for-profit MFI ACLEDA is here for the long term, understanding the path to profitability is both convoluted and slow. “You can crash”, Bunsocheat warns, if you do not invest the time in getting to know the culture and real environment in Myanmar.

Microfinance has great potential in Myanmar to help alleviate poverty, in conjunction ongoing reforms. Poverty does not have a single source, and there is unlikely to be a silver bullet to solve it. Macroeconomic reforms, industrialisation, export promotion and investment in health and education are all required to benefit Myanmar’s poor.

With the strong mandate given to Aung San Suu Kyi’s NLD Party in the recent election, we believe the new government will place greater emphasis on alleviating rural poverty through smart policy and the intelligent use of technology. With this, Microfinance will become an even more valuable tool to address poverty in Myanmar.

Author: Tadhg Walker

Tadhg is a law graduate from University of Otago (NZ). The above article is part of a research project that Tadhg was involved in as part of his time at Consult-Myanmar Co Ltd in Yangon.

This article was also published in the Myanmar Business Today at https://mmbiztoday.com/articles/microfinance-myanmar-silver-bullet-stamp-out-poverty

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