Despite the minimal profits, Myanmar’s microfinance industry continue to attract international and domestic investors. Currently dominated by international development agencies, private investors are gradually entering the market, buoyed by the success of microfinance institutions (MFI) in the neighboring countries of Bangladesh, Cambodia and the Philippines where commercialization of the industry increased the number of people with access to financial services.
Microfinance is effective in ‘democratizing’ credit by providing services to borrowers considered by banks as ‘un-bankable’. People who cannot pass stringent bank requirements are able to borrow from MFIs through loan products that do not require real estate collaterals.
This makes MFIs a different breed of financial service provider. It is a business that has a double bottom line – profit and a social responsibility. No wonder many entrepreneurs are joining the bandwagon. As of October 2016, there are 168 licensed MFIs, more than half are local companies while 28 of these are foreign companies. Loan portfolio is at 1,909,629.38 million kyats, released to 2,264,495 borrowers from 221 townships.
Changes in an evolving industry
In the rural areas, people are still wary of formal financial institutions. When cash is needed, the reflex action is to pawn jewelleries, the traditional savings instrument easiest to monetize.
If there are no jewelleries to pawn, informal moneylenders are then sought, the lender of last resort. Informal moneylenders are often demonized as bloodsucking monsters charging usurious interest rate and fleecing their clients to the last drop of blood. But a closer look would reveal that they are but the relatives, friends and people who have extra cash and are willing to help somebody in need.
MFIs are supposed to make informal moneylenders obsolete. It is expected to replace the informal transactions with more formal arrangements as a platform for a wide range of financial services – savings, credit, insurance and other services. It also considers the safety of the borrowers as the players will be regulated and supervised by a government agency.
Myanmar’s experience in socialism brought about the catastrophic collapse of the country’s financial system. A series of financial crisis erased whatever trust is there with the financial system. Hoping to prevent the recurrence of financial crisis, stringent policies aimed at strengthening the financial system were put in place, but instead turned out to be an overprotective barrier that limited the flow of finances to those who needed it most.
The microfinance industry felt this pressure with the restrictive provisions of the Microfinance Law. Funds inflow were not allowed and there were caps on the loan amount and the interest rate on loans. Savings from the borrowers were also limited. The initial euphoria diminished as the MFIs grapple to stay afloat amidst the restrictions.
Five years later, changes for the better were introduced by the Financial Regulatory Department (FRD), the government agency under the Ministry of Finance and Planning regulating the industry. Previously the regulatory agency for pawnshops, it evolved into the country’s guardian of institutions providing financial services to the unbanked. With five years under its belt, the agency is more than ready to steer the industry into greater heights.
Attracting more funds
Funds from the government are not enough to address the credit needs in the rural areas. Even with donor funds it cannot cope with the increasing needs of the emerging micro, small and medium enterprises (MSME). Harnessing the private sector is one of the measures to enable the microfinance industry to mobilize funds and channel it where it is needed most. The growth and success of microfinance industries in neighboring countries can be attributed to private sector participation.
Towards this end, FRD adjusted its policies and allow MFIs to borrow funds, opening the floodgates to loans locally and from investors abroad. The only condition is that it should be approved by the Central Bank. Socially-responsible investment companies supporting MFIs in other Asian countries are now looking at Myanmar as the next destination of their support. There is still an issue in the foreign exchange as the kyats fluctuate in the market, but suffice it to say that one of the roadblocks to more funds has been addressed.
Parallel to this is the policy in mobilizing savings. It does not only allow borrowers to avail of the safekeeping facilities of the MFI, it also allows the use of the resources within the community. Savings mobilization however, is prone to abuse, more particularly the compulsory savings which some MFIs make as a requirement to avail of a loan.
The FRD to this end required that savings should only be mobilized from borrowers and in no way should be collected from non-borrowers. Moreover, compulsory savings should not go beyond 5% of the loan amount. As a sweetener, savings should earn and interest rate of not less than 15% per annum.
Furthermore, FRD segmented the MFIs and allowed only those that are financially strong to be designated as ‘deposit-taking’ MFIs. Only those with 300 million kyats capital and 3 years’ experience in Myanmar are allowed to be deposit-taking, compared to ordinary MFI that is required only to have a 100 million kyats capital.
Protecting the borrowers
One of the most welcomed changes is the government’s embrace of the Client Protection Principles. The principles were developed as a result of the excesses of the MFIs at the time when the industry started to commercialize. As some MFIs saw the ‘wealth at the bottom of the pyramid’, they tried to max out the profits that can be generated from the clients by charging not only high interest rates but other unnecessary fees and deductions, penalties for minor offenses, and other practices inimical to the clients. This is the dark side of the industry commercialization leading to the ’mission drift’ of some big MFIs.
Part of the self-correction efforts of the industry was to create measures that would address the abuses and isolate those who continue to burden the borrowers with lopsided policies. The Social Performance Task Force (SPTF) was formed to manage the assessment of the MFIs’ social performance as a measure that an MFI is not drifting away from its social mission. Later, the Smart Campaign advocated the adoption of the Client Protection Principles to ensure that the features of loan products are not detrimental to the clients.
The microfinance industry now consider social performance and adherence to client protection as an indicator of ‘good housekeeping’ for MFIS. It also became indicators that most funders and investors would like to see before investing in an MFI.
Among the principles adopted by the FRD are:
- Appropriate product design and delivery that meet clients’ needs
- Prevention of over-indebtedness
- Transparency- disseminating information regarding financial services in language that is accessible to the clients
- Responsible pricing- ensuring that pricing for financial services does not affect clients negatively
- Fair and respectful treatment of clients
- Privacy of client data- ensuring the security of client data
- Mechanisms for compliant resolution- having in place procedures to resolve disputes with credit bureau or exchange of information
It is expected that the changes will attract more institutions, help improve access to finance and direct more funds to rural areas help in the economic development of the country.