Microfinance as key poverty eradication strategy for Myanmar

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MicrofinanceAlong with other policies, Myanmar’s president Thein Sein has identified microfinance as one of the key initiatives to tackle extreme poverty in the country. However, with a domestic financial sector still underdeveloped, and a private sector showing little interest in the microfinance business, the mission is not easy to accomplish.

In a speech at the Rural Region Development and Socio-economic Improvement Conference on June 2 in Yangon, the president reaffirmed the government’s plan to reduce extreme domestic poverty from the current 26 per cent to 16 per cent of the population by 2015, endorsing, among other initiatives, the development of the microfinance sector. Along with this initiative, he announced the launch of a new programme that will lend 100.000 kyats ($105) per family charging just 2,5 kyats as service fee, with the option to get 500.000 kyats more if borrower repays the loan in time.

Microfinance schemes are relatively new and underdeveloped in Myanmar compared to other countries in Southeast Asia, and laws prohibit uncollateralised lending.

Although cooperatives exist since decades, microfinance arrived in the country only with the United Nation’s Human Development Initiative in 1997. In November 2012, the government approved a new microfinance law aimed at creating a legal framework for the sector. The law regulates licensing and operation of microfinance institutions, and since its implementation more than 60 organisations have applied for licenses. However, the local microfinance industry still lacks technical expertise and capacity to meet domestic demand.

Today, microfinance services in Myanmar are mainly used by the informal and semi-formal sectors, government institutions, cooperatives, private banks and NGOs.

The informal financial sector has a large outreach in the country and includes groups of organised  money lenders that charge 10–20 per cent interest per month. The absence of an official money remittance system between banks has created informal money transfers businesses (so-called hundys).

The semi-formal sector consists of pawnshops and community-based organisations such as village savings and credit groups that often deal only in gold, charging 3–5 per cent interest per month.

Within the formal sector, state-owned banks are the main players. The Myanmar Economic Bank represents the largest provider of microfinance services in the country through the Myanmar Agriculture Development Bank, which is a specialised bank for rural development.

The cooperatives sector, which focuses principally on deposit mobilisation and microloans in urban centres, is also strong in the country. It comprises of 20 unions, 461 federations and 10,751 primary societies.

In the private sector, banks have so far demonstrated very little interest in embarking on microfinance And are also lacking capacity and expertise. Moreover, local regulatory restrictions are not encouraging private sector participation in the field. Private banks are, for example, subject to a minimum interest rate of 8 per cent on savings and 13 per cent maximum interest on loans, which does not allow them to offer competitive rates compared to the public banking sector that currently rules the market.

According to industry experts, the current microfinance outreach in Myanmar is 2.8 million clients, with a total loan portfolio of 236 billion kyats ($248 million), while demand is estimated to be at around $1 billion. Thus, there is significant room for growth in the sector – but the current laws do not permit stronger private participation that would be fundamental for further sector growth.

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Reading Time: 2 minutes

Along with other policies, Myanmar’s president Thein Sein has identified microfinance as one of the key initiatives to tackle extreme poverty in the country. However, with a domestic financial sector still underdeveloped, and a private sector showing little interest in the microfinance business, the mission is not easy to accomplish.

Reading Time: 2 minutes

MicrofinanceAlong with other policies, Myanmar’s president Thein Sein has identified microfinance as one of the key initiatives to tackle extreme poverty in the country. However, with a domestic financial sector still underdeveloped, and a private sector showing little interest in the microfinance business, the mission is not easy to accomplish.

In a speech at the Rural Region Development and Socio-economic Improvement Conference on June 2 in Yangon, the president reaffirmed the government’s plan to reduce extreme domestic poverty from the current 26 per cent to 16 per cent of the population by 2015, endorsing, among other initiatives, the development of the microfinance sector. Along with this initiative, he announced the launch of a new programme that will lend 100.000 kyats ($105) per family charging just 2,5 kyats as service fee, with the option to get 500.000 kyats more if borrower repays the loan in time.

Microfinance schemes are relatively new and underdeveloped in Myanmar compared to other countries in Southeast Asia, and laws prohibit uncollateralised lending.

Although cooperatives exist since decades, microfinance arrived in the country only with the United Nation’s Human Development Initiative in 1997. In November 2012, the government approved a new microfinance law aimed at creating a legal framework for the sector. The law regulates licensing and operation of microfinance institutions, and since its implementation more than 60 organisations have applied for licenses. However, the local microfinance industry still lacks technical expertise and capacity to meet domestic demand.

Today, microfinance services in Myanmar are mainly used by the informal and semi-formal sectors, government institutions, cooperatives, private banks and NGOs.

The informal financial sector has a large outreach in the country and includes groups of organised  money lenders that charge 10–20 per cent interest per month. The absence of an official money remittance system between banks has created informal money transfers businesses (so-called hundys).

The semi-formal sector consists of pawnshops and community-based organisations such as village savings and credit groups that often deal only in gold, charging 3–5 per cent interest per month.

Within the formal sector, state-owned banks are the main players. The Myanmar Economic Bank represents the largest provider of microfinance services in the country through the Myanmar Agriculture Development Bank, which is a specialised bank for rural development.

The cooperatives sector, which focuses principally on deposit mobilisation and microloans in urban centres, is also strong in the country. It comprises of 20 unions, 461 federations and 10,751 primary societies.

In the private sector, banks have so far demonstrated very little interest in embarking on microfinance And are also lacking capacity and expertise. Moreover, local regulatory restrictions are not encouraging private sector participation in the field. Private banks are, for example, subject to a minimum interest rate of 8 per cent on savings and 13 per cent maximum interest on loans, which does not allow them to offer competitive rates compared to the public banking sector that currently rules the market.

According to industry experts, the current microfinance outreach in Myanmar is 2.8 million clients, with a total loan portfolio of 236 billion kyats ($248 million), while demand is estimated to be at around $1 billion. Thus, there is significant room for growth in the sector – but the current laws do not permit stronger private participation that would be fundamental for further sector growth.

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