The best borrowers in the world

Microfinance institutions that target low-income earners with loans and other financial services have been streaming into Myanmar since the country began opening to the world after the change of government in 2011.

The MFIs include commercial ventures, like Bangladesh-based BRAC, and publicly-funded non-profit organisations like PACT, which has been in Myanmar since 1997 and in 2012 became the Pact Global Microfinance Fund.

BRAC started its registration process in 2012 and initially applied for international non-government organisation status, a procedure requiring the approval of several ministries. Its registration as an INGO was approved in 2013 and it was granted a microfinance licence in June 2014. To provide microfinance services, BRAC created a separate for-profit entity.

“Our vision is credit plus,” said BRAC’s country representative, Mr Faisal Bin Seraj Kazi. “We’ll provide microfinance first and help build infrastructure. Then we build on that with health and education programs through our INGO. Ultimately we want to setup a commercial bank as well, like we did in Bangladesh. But with the current regulatory environment in Myanmar this is still a long way away. Foreign banking licences do not allow for retail banking activities.”

BRAC will not be providing services for the poorest 10 percent of the community. “Some find it controversial, but we have to admit that microfinance is not the answer for these destitute people. For them we have developed other programs,” said Mr Kazi.

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MC Projects Myanmar, a subsidiary of Meridian Capital, recently received its temporary registration. Its main shareholder, based in Hong Kong, has put up US$10 million for the MFI to invest in a loan portfolio. Interest rates will typically be 30 percent yearly, although in practice most loans will be repaid within 6 months. The loans are relatively expensive because the process is labour intensive. For every small loan, often several hundred dollars, the case manager has to go into the field to assess the application.

“We are focusing on individual loans and expect to break even after three years,” said MC Projects Myanmar chief executive Mr Frank Snieders. “If the regulations remain the same we will still be compensating for accumulated losses in year five, though. If regulations change this picture might change for the better.”

An issue being encountered by MC Projects Myanmar is a stipulation by the regulator that 50 percent of the loans go to borrowers in rural areas.

“I can understand that,” said Mr Snieders. “But in practice it leads to more time spent on loan delivery by MFIs, which makes it harder to make loans profitable. Usually MFIs start with the cities, after which they roll out rurally. In Myanmar we have to go rural right away. In the first year we will open two branch offices, in Yangon Region and Mon State.”

In the 18 months since it began operating in Myanmar, BRAC has experienced unexpectedly strong growth gures. It has opened 24 branch offices and has plans to open 20 more by the first quarter of 2016. Most of the offices are in central Myanmar. “We will reach Mandalay in 2016,” said Mr Kazi.

BRAC has $2.2 million in outstanding loans and disbursements almost double that figure. “This is our own capital. We can inject up to $10 million before we have to start looking for debt financing,” said Mr Kazi.

PACT estimates demand for micro-loans in Myanmar at $1 billion a year. Only about 28 percent of demand is being met, creating huge opportunities for new players.

It is not only foreign entities in the microfinance market. Myanmar Finance International Ltd is a joint venture between Myanmar Investments International Limited and its partner, Myanmar Finance Co., Ltd. In mid-November the Norwegian Investment Fund for Developing Countries injected $1.4 million in the newly-established MFIL.

“Our total capital is $5 million,” said U Aung Htun, MFIL’s managing director. “Our philosophy is that it is perfectly possible to do good and make a profit.” “Microfinance is important for the development of Myanmar. I expect the market to grow. We will employ our capital first. In the second stage we might have to attract capital from abroad.”

Mr Kazi says prospective customers will not necessarily be flocking to BRAC’s offices, despite the market’s growth potential.

When BRAC opens a branch office it conducts a census of the households within a radius of five kilometres. “That is the first time people get the message that BRAC is here,” said Mr Kazi. “We look at all the data we have gathered and will then communicate pro-actively with people who we think will be good borrowers. We’ll tell them: Why don’t you set up a group?”

Strong growth and the need to finance debt will generate its own set of problems, though.

Regulatory issues are hampering MFIs, Mr Kazi said. The rst problem is that MFIs are not allowed to borrow from domestic banks and there are limits on finance sought from international banks. Only $3 million in debt nance can be acquired in foreign currency, at a maximum interest rate of 8 percent. The maximum interest on kyat loans is 13 percent.

“In the long term we are looking for a loan portfolio of around US$40 million,” said Mr Kazi. “So there’s a big difference between what we need and what we can get. The only way, for now, is to get private equity. There are no limits on that.”

Mr Snieders said there was a “finance gap” for small entrepreneurs needing loans of between K5 million and K15 mil- lion. “Because of all the constraints banks don’t grant loans smaller than K15 mil- lion,” he said. “Micro nance loans are capped at K5 million. Those who are not serviced by the banks or by us are nding money at the informal market. They have to engage with loan sharks or other less savoury parties.”

Mr Kazi said inadequate regulation of credit and loans was retarding the growth of small and medium enterprises.

Mr Snieders blamed a lack of experience with microfinance for a regulatory climate that is preventing the MFI sector from blossoming.

“The regulators at the Ministry of Finance operate carefully, probably assuming that if you allow too much freedom some might misuse that space,” said Mr Snieders. “This is a learning curve for them. They want the best for consumers, who themselves have very little experience with microfinance loans. Nonetheless, this is a good time to enter the market. In the coming years I expect the regulatory climate to change and international best practices to be adopted.”

There is other good news. Mr Kazi has been pleasantly surprised by the repayment mentality of Myanmar borrowers. In a post-conflict country such as Liberia, where he has worked, it was hard to get the default percentage below 5 percent. In Myanmar, where BRAC lends exclusively to women to empower them and because they are better borrowers, the default rate is 0 percent.

“This is really, really fascinating,” said Mr Kazi. “They are the safest clients I have ever encountered. And it’s not unique to BRAC. Other MFIs have the same experience.”

He offers a number of explanations for this remarkable behaviour.

“Firstly, the Myanmar have experience with repaying informal loans,” he said. “Myanmar also has a very controlled economy and a repressive past. Therefore defaulting is intimidating to people. A third explanation is that the Myanmar are quite religious. They are afraid that if they default they will return to earth after they have died in the shape of a lower life form. Defaulting is bad karma.”

By Hans Hulst

By Hans Hulst

Hans Hulst has been writing about Myanmar since 2000. He wrote three books on the country and published widely in European newspapers and magazines.
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