Microfinance institutions (MFIs) are worried a new directive by the sector’s regulator that caps loans at K500,000 could stifle small business growth and the development of the burgeoning MFI sector as it seeks to expand its role in the country.
Myanmar’s MFI sector has experienced a boost in the past two years with the establishment of internationally backed institutions looking to capitalise on the estimated 84 percent of Myanmar’s population who have no access to financing.
Those institutions were only recently regulated with the passage of the Microfinance Law in November 2011, but already international finance institutions view the sector as volatile due to the inability of the regulatory body, the Microfinance Supervisory Committee (MSC), to enforce responsible lending
In an effort to ensure that the estimated 150 operating MFIs are fulfilling their mission to provide financing alternatives to the poor, rather than providing loans to
established businesses, the MSC on January 14 issued a directive introducing a ceiling of about US$500 per loan.
“Microfinance is very important for alleviating poverty. We’re doing our best to make sure it helps poor people,” U Win Aung, the managing director of the MSC, told The Myanmar Times.
The move surprised many in the industry, who said they will ask the supervisory committee to amend the new rule they claim will affect their respective bottom lines as well as the bottom lines of their clients.
“It’s important not to be too restrictive,” said Fahmid Bhuiya, chief operating officer of Pact Global Microfinance Fund. “The limit might get in the way of lending to the exceptional entrepreneurs who create employment.”
Pact is Myanmar’s largest nongovernmental MFI, providing some 730,000 microloans worth $141 million in 2012, according to its website. Mr Bhuiya said Pact planned to work with other MFIs to have the regulator reassess the limit.
According to the law, MFIs are restricted from offering loans over 2.5pc per month, or 30pc annually – a rate comparable to the global average and significantly lower than the 10pc per month loans offered by informal “loan sharks”. In addition to a set interest rate, the law stipulates on additional interest paid on deposits cannot be less than 1.25pc per month, or 15pc annually.
Kim Bunsocheat, managing director and chief executive of Cambodia-based Acleda MFI Myanmar Co Ltd, said the K500,000 cap would also cut jobs that could be created by small businesses expanding on the back of an MFI loan facility.
“If the limit were higher, they could hire a larger workforce,” he said.
Acleda, which launched an MFI in Myanmar in March, will set up an additional 12 branches in addition to its current six to reflect its growing loan portfolio, said Meas Sangvath, a consultant with the MFI, adding that the MFI lent US$3.26 million to 8361 people last year.
Other MFI’s are looking to make a push as well, such as Bangladesh-based BRAC, which is awaiting approval to open six branches this year.
Previously, there was no written limit on loan size and little indication a hard cap was coming, though insiders said discussions to create a K500,000 maximum loan size had been on the table for some time.
Based on limited data in the sector, the International Finance Corporation early last year estimated that the sector’s loan portfolio totalled US$283 million spread over 2.8 million clients, with a market demand for microcredit at about $1 billion nationwide.
Myanmar’s microfinance sector “is on the cusp of what could be an exponential growth phase”, International Finance Corporation resident representative Vikram Kumar told The Myanmar Times.
Mr Kumar said that while a loan limit higher than K500,000 should be considered, MFIs would need to implement international standard solvency and liquidity requirements.
The MSC moved to implement a solvency ratio for deposit-taking MFIs of 15pc and a liquidity ratio of 30pc in its January directive.
While MFI officials wish to see the new directive overturned, some experts are siding with the MSC’s decision, saying that the mission of an MFI is not to serve the general banking needs of the population, but to provide affordable financing to the poor.
“[MFIs] shouldn’t be complaining about [the cap]. If they want to do banking then they should apply for a banking license. They already have a lot of leeway in that they don’t follow the [regulations put forth by the] Central Bank,” said Thatha Hla, an economist with the Asian Development Bank.
“The danger is that you have a sector that is growing very quickly and some of these MFIs have a poor track record, while others have no experience … They are also operating with a lack of sufficient oversight and there may be reputational damage caused by MFIs not doing what they should be doing as a result,” he said, adding that borrowers may become more reluctant to use financial services again if subjected to a poor experience the first time around.
Indeed, while $500 may seem low to some, the average microfinance loan in most countries is well below the mark.
For London-based VisionFund International, who offer microloans in Myanmar, the average loan size is $257, while Jeremy Kloiser-Jones, chief executive of locally-based BC Finance Limited, said the average loan offered by his firm is even lower at between $150 and
“There is clearly demand for unsecured lending ... and there is space where the banks who need to take collateral are not allowed to by the Central Bank,” he said.
“There is no one else to fill that gap.”
– Additional reporting by Mon Mon Aye, Bridget Di Certo and Philip Heijmans