Microfinance in Myanmar is at an inflection point: A confluence of maturing incumbent players, new market entrants, technology, reform and investment are aligning to enable a modern sector.
At this precipice between old and new, what are the most effective levers to foster responsible and equitable growth?
Our experience at the International Finance Corporation shows that formal microfinance companies, mobilising a variety of market-based funding sources, and offering a holistic menu of products through diverse delivery channels are the pillars of a sustainable sector.
For decades, the supply of microfinance in Myanmar was the domain of international non-governmental organisations (NGOs) and Myanmar Agricultural Development Bank (MADB).
These institutions offered mainly small loans of up to K500,000 (US$400). With this narrow and limited supply, the majority of the population was relegated to using informal, unregulated sources of credit, often at excessively high rates.
Anecdotally, informal pricing is often described as “five-to-six”, where for example, K50,000 borrowed at the beginning of the month is repaid as K60,000 at the end of the month – effectively a 20 percent per month interest rate.
Compounded on an annual basis, this informal rate is significantly higher than the regulated interest rate of 30pc per year.
Today, there is growing diversity in the supply of microfinance, with more than 250 licensed local and international microfinance institutions (MFIs).
Much more is also known about the demand for microfinance due to well-funded research initiatives and detailed market studies, such as the Making Access Possible Report and the Myanmar Financial Diaries Project.
This wealth of data provides an opportunity to develop a tailored approach as the microfinance sector in Myanmar matures.
Global trends in microfinance have seen a move away from the traditional model of NGOs, in favour of MFIs registered as companies. Regulated private sector MFIs, with shareholders and sponsors experienced in microfinance, tend to provide the strongest foundation for long-term provision of services.
These MFIs typically champion responsible finance principles such as corporate governance, risk management policies and procedures, and transparency at all levels to investors, regulators and clients.
Regulations ensure these institutions adhere to prudential requirements – such as minimum capital, reserve planning for non-performing loans, pricing and reporting – ensuring transparency of operations and protecting underlying clients.
Generally, private sector MFIs capitalise earlier and more quickly, supporting investment in technology, staff development and research and development for products and channels.
Ensuring well-governed, well-capitalised companies is a necessary step, but insufficient on its own: MFIs must further be able to fund portfolio growth on a sustainable basis.
As the microfinance industry developed globally, the types of funders expanded significantly to include private sector institutional investors, commercial banks, private equity funds and individuals.
In Myanmar, the commercialisation and professionalisation of the microfinance industry will likewise attract investors offering a variety of funding sources to MFIs.
Funding today is the single biggest stumbling block for the Myanmar microfinance sector. Regulation allows for leverage (debt-to-equity ratio) of 5:1, yet there is effectively no leverage in the sector.
In countries where microfinance flourishes, the funding structure tends to be diverse, meaning that MFIs are able to access a variety of funding sources – local and international debt, equity and savings – on a market basis.
Given fluctuations in currency exchange rates, the ability of MFIs to match the currency they borrow with the currency they lend is essential for sound risk management.
Developing solutions such as hedging tools and swap markets would allow MFIs to obtain long-term local currency funding and minimise their foreign exchange risk.
Moving along the maturation curve, once institutions are well-governed and well-funded, the third critical piece is to deliver relevant products efficiently.
While historically microfinance grew up on the theory that a small loan could meet many of the financial needs of the poor, it is now clear that everyone – whether rich or poor – requires a range of financial services.
Secure and accessible savings cushion unexpected risks, such as doctor’s bills, and planned expenses, such as school fees. Transaction and payment services enable people and businesses to securely send value cross-country and across borders.
Credit can be tailored, to address different needs. The world has moved beyond a one-loan solution for financial services – and so too should Myanmar.
Channel diversification is equally important. Branch penetration in Myanmar is exceptionally low at 2.6 branches per 100,000 people, compared to 4.8 in neighbouring Cambodia.
However, Myanmar has a markedly high adoption of smartphones: of 37.5 million subscribers, 66pc are smartphone users, compared to 29pc of 25.8 million in Cambodia.
New technology and the rapidly increasing availability of 3G data are influencing how financial services are delivered, facilitating transactions through the use of tablets, point of sale (POS) devices and mobile phones.
These factors allow MFIs to increasingly reach clients at locations they frequent every day. Notably, evidence shows that this is not a zero- sum game. In Kenya, as mobile payments and agent access points grew, the formal banking sector also grew. Greater inclusion benefits all areas of the financial sector.
As Myanmar moves forward in so many ways, we must remember that with privilege comes responsibility and that not all providers are created equally.
MFIs offering an expanded menu of services, such as intermediating deposits from the public, should be subject to stricter regulations.
A sound regulatory framework is essential for ensuring that those who offer more products and services have the foundation to do so, including adequate capital, governance and capacity.
In the end, well-governed institutions capable of adhering to stricter standards should have the privilege of offering a full menu of products and services to the people of Myanmar.
Julie Earne leads IFC’s financial sector program in Myanmar. Marisa DeAngelis is an analyst at IFC Myanmar focusing on financial inclusion.