How microfinance projects can contribute development to Myanmar?

By: Thinn Nay Chi Sun

The increasing numbers of Microfinance Institutions are trying to win over the 33 million unbacked residents in the country. Nowadays, microfinance in Myanmar is recognized as one of the essential tools to wipe out poverty affected societies. It is working to align existing players with new market entrants, investment and reform to bring a new modern sustainable sector.


Overview of financial inclusion in Myanmar


According to the World Bank, with a quarter of the Myanmar population living under the poverty line and as much as 87 percent hailing from rural areas, the microfinance sector has good potential to grow in Myanmar. Microfinancing has grown rapidly since the country passed the Microfinance Business Law in 2011 allowing microfinancing firms to operate, with some 180 companies now serving 3.4 million clients and a total loan portfolio of K350 billion, according to the Myanmar Microfinance Association (MMFA).

The participation of Myanmar’s banking sector to the country’s economy is limited compared to other ASEAN member states. Myanmar has the lowest banking assets-to-GDP ratio in ASEAN. But the banking asset growth rate is 18% which is the fastest growth rate in the region. Since 2013, banks and other financial service providers have been expending non-cash payment system in the country.


According to the research from Livelihoods and Food Security Fund (LIFT) in 2012, less than 20 percent of the population is accessible to formal financial services. In both rural and urban areas, the use of informal providers of money transfer services are common although there are additional 10-20 percent expense every month.


Key financial inclusion constraint in Myanmar


The Banks and Financial Institutions Law of Myanmar has been passed by Parliament in 2016 since the political reforms in 2011. In the past, the Financial Institutions Law of Myanmar, which was enacted in 1990, only provided very general rules for local financial institutions. However, the new rules consist of a wide range of guidelines on commercial banks, state-owned banks, private enterprises, and foreign banks. Myanmar microfinance sector has grown increasingly to be an important sector as a financial service provider targeting the population with low income. As inclusive finance can reduce poverty, the government gives a crucial role for it.


Many international donors and investors are helping financial inclusion in Myanmar. In the mid 1990s, UNDP started to fund microfinance projects in Myanmar and followed by many agencies through Livelihood and Food Security Fund (LIFT). The World Bank Group has been supporting the regulatory framework and good practices in the microfinance industry.


While considering the impact of microfinance, social and financial impact is crucial to include. The aim of microfinancing is not only to provide a livelihood but also to improve women empowerment, health and education. When microfinance is implemented, it needs to have positive impact on the society.

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Providers of microfinance services in Myanmar


Microfinance is largely known as a main development tool to advance financial inclusion and reduce poverty in Myanmar. It is first introduced to Myanmar by UNDP’s Human Development Initiative in 2011. In November 2011, new microfinance law was passed by allowing foreign and local investors to form privately owned MFIs in the country. Before Microfinance law was make in November 2011, only PACT UNDP were allowed to work in Myanmar legally. Roughly 80 percent of the total portfolio and outreach is record by PACT UNDP. Later, most international and local NGOs have received the microfinance license. However, with the wide financial gap, the number of reliable providers with the potential to develop a sustainable and responsible method are still limited.


In Southeast Asia, Myanmar is one of the poorest countries with a per capita income of approximately 832 USD in 2011. Its financial sector is underdeveloped and small. It is influenced by four state-owned banks and 19 private banks. Although 17 foreign banks have introduced local representative offices, foreign banks were not allowed to operate in the country. Overall, the banking sector is obviously constrained.


State-owned banks like Myanmar Economic Bank (MEB) and Myanmar Agriculture Development Bank (MADB) have a big overreach. MADB provides deposit and credit to over 1.4 million people in underdeveloped areas. Private banks are not involved in microfinance because of a lack of interest and regulatory reasons. International and national non-government organizations (NGOs) such as GRTE, Proximity, World Vision and PACT have launched microfinance initiatives since the mid-1990s with some success.


Overview of Myanmar’s Banking Sector


There are different kinds of microfinance organizations. Microfinance can be found as institutions like cooperatives, banks and non-governmental organizations (NGOs). Some organizations are founded for specific community with the aim to support the financial development. Some NGOs might serve as microfinance organizations to provide relevant services in poor communities.

In Myanmar, there are six kinds of microfinance service providers. They are (1) informal and semi-formal sector, (2) banks, (3) cooperatives, (4) NGOs, (5) specialized agricultural development companies and (6) government organizations.


A large informal sector includes money lenders which are expensive and unreliable. According to Myanmar Small & Medium Industrial Development Bank (MIDB), the informal sector is expanded throughout the country including the rural areas.

State-owned banks, especially Myanmar Economic Bank (MEB) is the largest provider of deposit services with 325 branches in Myanmar. It gives subsidized funding to Myanmar Agriculture Development Bank (MADB) and Myanmar Livestock and Fisheries Development Bank (MLFDB) which is the semi-private bank. According to the World Bank (Seward 2012), MLFDB with 53 branches across the country, it provides 55% of the loans to the agricultural sector. Private banks have little interest in microfinance as they have less capacity and expertise for certain regulatory constraints. They serve only a small portion of the micro segment as their main focus in on urban areas.


Cooperatives focus primarily on deposit mobilization and microloans in urban areas. Supervised by the Ministry of Cooperatives, the entire cooperative sector as of March 2012 was comprised of one apex, 20 unions, 461 federations, and 10,751 primary societies.


Sixty specialized agricultural development companies support value chain financing for rice production. Gold Delta and Kittayar Hinthar had outstanding paddy loans of 3 billion and 2.4 billion according to the list of 38 companies provided by the Myanmar Rice Industry Association in July 2011.


The government plays a crucial role at the retail level of financial sector. Microfinance Supervisory Enterprise (MSE), formerly known as the Myanmar Small Loan Enterprise (MSLE) has the responsibility as a microfinance supervisor of government body.


Policy and regulatory framework of microfinance in Myanmar


Microfinance was the early priority of the government and Myanmar enacted the Microfinance Law in 2011, lending by MFIs has become the biggest source of financing for the rural economy. There are almost 200 licensed MFIs, serving an estimated 5.5 million clients in Myanmar. Myanmar Ministry of Planning and Finance is partnering with DaNa Facility and the United Nations Capital Development Fund (UNCDF) Myanmar to support financial inclusion by setting out goals through Financial Inclusion Roadmap.


Myanmar aims to improve financial inclusion from 30% in 2014 to 40% by 2020 and adults using more than one product from 6% to 15% with quality and effective financial services. According to a part of MAP program report in 2018, the percentage adults with access to at least one formal financial product had jumped from 30% in 2013 to 48% in 2018. The government legislation aims to accelerate the development of MFI sector, transform INGOs which operate in businesses into microfinance companies and restrict illegal leading firms.


In order to be licensed MFIs, they need to have a legal status as cooperative, an NGO, or a private local or international company or organization and minimum capital of 15 million kyat for non-deposit taking and 30 million kyat for deposit taking. They may provide loans and voluntary deposits for time being. They need to have a maximum lending rate of 30 percent per annum or 2.5 percent per month and a minimum rate on deposits of 15 percent per annum or 1.25 percent per month.

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How microfinance can help the grassroots


Microfinance is the provision of financial services, such as microcredit loans, savings and micro-insurance, to very poor people who would not otherwise have access to formal banking services. Microfinance has proven to be a powerful tool in the fight against poverty. Women particularly benefit from microfinance as many MFIs target female clients. Small, non-collateralized microcredit loans enable impoverished women to create and build sustainable livelihoods, earning an income for themselves and their families.

Microfinancing is a way to offer financial services to weaker groups of the society which cannot access loans from banking institutions. The loans are given to generate incomes such as buying or creating assets, risk mitigation and emergencies. The purpose of microfinancing is to support unemployed and low-income community to be self-sustained by getting access to loans, savings and other credit services.


Microfinance has four motives: to support family self-help, to help micro-entrepreneurs, to restructure the financial services industry and to build social capital. Microfinance organizes itself to offer a much better financial deal to the poor who are looking for loans to start or expand their tiny businesses or to pay school fees, or to replace the roof, or to deal with a medical emergency.

Most of the microfinancing is given by organizations that prioritize in small loans and these are known as Microfinance Institutions which can be divided into four categories. These are (1) money lenders, savings collectors and pawn brokers which provide quick and convenient service, (2) self-help groups and credit unions which are managed by poor people with low operational cost, (3) NGOs which make innovative systems such as village banking and solidarity lending and (4) banks which consist of state banks and private banks.


The potential for microfinance in Myanmar is huge. A large part of the country is still in-accessible and remote areas have no formal financial service providers. In most areas where financial service providers are present, many entrepreneurs are still not able to access the financial services necessary for expansion. Emerging enterprises are also left to scavenge working capital from informal sources that are expensive and unreliable. Recent emphasis on ‘financial inclusion’ and the proof that there is indeed wealth at the “bottom of the pyramid” has attracted commercial investors to venture into the micro-finance industry.


Successful microfinance projects and risks of operating microfinance projects


While looking into successful microfinance project, NABARD experience from SHG-bank linkage program can be taken as an example. NABARD serves as an apex-refinancing agency for institutions providing investment and production credit for promoting the various developmental activities in rural areas. For its microfinance program, the core strategy is the development of the SHG-bank linkage model to increase its outreach to the poorest. The strategy involves forming small, cohesive and participative groups of the poor, encouraging them to pool their thrift regularly and using the pooled thrift to make small interest-bearing loans to members and, in the process, learning the nuances of financial discipline. Subsequently, bank credit also becomes available to the group, to augment its resources for lending to its members. NABARD sees the promotion and bank linking of SHGs as part of an overall arrangement for providing financial services to the poor in a sustainable manner and also as an empowerment process for members of these SHGs. The SHG-bank linkage program has proved to be the major supplementary credit delivery system with a wide acceptance by banks, NGOs and various government departments.


In order to implement successful microfinance projects, there are also challenges that MFIs have to encounter.


Operational risk management in MFIs are important to measure risks such as frauds, liquidity and charge of interest rates. All the risks experienced by the microfinance institutions can be divided into market, credit, operational and strategic. Poor staff management in formal organizations permits – and even fosters – informal intermediation, reducing microfinance effectiveness. We found that loan officers at formal microfinance organizations have an incentive to focus on quantitative outcomes such as the number of loans provided and rollovers of “safe” loans, rather than on funding the poorest borrowers. Loan officers know that some borrowers use their loans to lend to others; they provide loans to these informal intermediaries because they know that they will reliably pay back their loans.


What Diinsider is working with Grassroots


Diinsider is a content creator and solution provider for entrepreneurs, development actors and partners in the bottom of the pyramid market. It aims to scale up with the grassroots. We are grounded with the community and partnering with local organizations when implementing the projects which are impactful for the respectful community. We mainly focus to implement sustainable development projects for the region to lessen development gaps. Diinsider is also working on microfinance projects in Myanmar with the aim to improve the livelihood of rural population through inclusive finance.




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