Reinventing microcredit in Myanmar
After years of hype, microfinance now faces challenges in the fight against poverty. But in Myanmar’s largely unexploited market, small innovators are experimenting with solutions.
Microcredit is booming in Myanmar. After the first regulations for the sector appeared in 2012, microfinance institutions (MFIs) have mushroomed in the country. Providing small loans before was limited to a couple of NGOs and the Myanmar Agricultural Development Bank, leaving a large part of the demand unmet. Out of Myanmar’s ca. 50 million population, 2.5 million working-age adults still cannot access formal financial services such as loans or saving facilities, according to the United Nations’ capital investment agency UNCDF.
A reality that stands in stark contrast with the skyscrapers and shopping centres of uptown Yangon, as lustrous as they come in Western Europe. After decades of military protectionist government, the country has gradually liberalised since 2010, when releasing Aung San Suu Kyi from house arrest and partially handing over power to a civilian government. Major infrastructure works and foreign investments have started. Now the IMF puts the country among the fastest growing economies in the world.
But there is still a long way to go for the former Burma. Although no poverty data are available, it has the lowest life expectancy and second-highest child mortality rate among asian countries. At this turning point, microloans could play an important role in ensuring sustainable development of the still deprived Burmese.
While microcredits can start a new chapter in Myanmar, former practices have both been praised and criticised in the rest of the world. In 2006, pioneers Muhammad Yunus and Grameen Bank received the Nobel Peace Prize for their work, ‘creating social and economic development from below.’
Recent research however – from the renowned MIT-economists Esther Duflo and Abhijit Banerjee among others – has strongly downplayed the image of microcredit as the ultimate tool for poverty eradication, its positive effect on households’ incomes being much less than the success stories may suggest.
‘While it may work well with the moderate poor, it mostly bypasses the extreme poor. The assumption is that people benefitting from microloans are already productive and not too deprived.’
Faisal Kazi from BRAC Myanmar, a Bangladesh-based international NGO, acknowledges that microcredit is not the solution for the poorest of the poor. ‘While it may work well with the moderate poor, it mostly bypasses the extreme poor. The assumption is that people benefitting from microloans are already productive and not too deprived.’
‘If you divide the population into five groups, 1 being the poorest and 5 generating the most economic activity, BRAC Microfinance focuses on groups 2 and 3 for its microloans. For tier 1, we have a graduation model that uplifts extreme poor to avail mainstream credit services after two years.’
But things are moving in the microfinance landscape. Realising that the traditional system has little impact in alleviating poverty, old and new players in the sector are reinventing micro loans through a variety of innovations. The largely uncovered market of Myanmar might just be the fertile ground to grow new approaches to microcredit.
Microcredit meets mobile tech
Covering new market segments in microcredit is exactly the goal of Miranda Phua and co-founder Laurent Savaete from start-up Zigway. With their mobile lending application, they want to address low-income families in the outskirts of Yangon.
‘In sectors such as construction, the urban poor live on daily wages. When they cannot go to work, due to illness for example, they need to borrow money to get through the day. Now they have no option but to borrow from local lenders, who can ask interest rates of 60% per month, or even more,’ Miranda Phua says.
Why wouldn’t they go to regular microfinance institutions, where the interest rate is legally capped on 30% per year (2.5% per month)? Phua: ‘MFIs usually offer loans starting from 150.000 kyats (ca. 105 euro), which is too much for just one day. Lending smaller amounts is simply not cost-effective, since MFIs have to visit the borrower in person. Transport and staff costs per loan would be too high to be covered by a 30 % per month rate.’
Mobile money technology could be the answer to the overhead cost problem many MFIs are facing. Mobile phone use in Myanmar is widely spread, particularly smartphones, even among the poorest. ‘Our mobile lending application would simplify the process and reduce overhead costs,’ Phua says.
‘Our mobile lending application would simplify the process and reduce overhead costs. Assessing creditworthiness can happen swiftly through algorithms.’
‘Assessing creditworthiness can happen swiftly through algorithms that analyse the borrower’s past behaviour: based on GPS data showing regular daily movement, they can determine whether a person has a job for example. Lending and collecting repayments can be done through the application as well. This opens the possibility to offer ‘nano loans’, small loans up starting at 20.000 kyats (ca. 14 euro) that are requested and approved within minutes. Reimbursement happens in accordance with the borrower’s ability to repay.’
As a for-profit social enterprise start-up, Zigway is cooperating with both mobile payment services and existing MFIs. Phua explains: ‘Partnerships with MFIs mean a ready-made network of clients right from the start. Moreover, we help to expand the MFI’s reach and to decrease overhead costs. The idea is that the MFIs grant us a percentage of this profit.’
BRAC believes in new microcredit technology as well. ‘Imagine a person in a small, remote village. It is after 8 pm and suddenly he falls sick and has to go to the hospital. He doesn’t have the money right away. How and where can he get it? Mobile money technology could be the solution. Besides possible cooperation with start-ups such as Zigway, we are willing to invest in this kind of innovations ourselves’, Faisal Kazi says.
As promising as it may sound, the app still has to proove its working. Zigway is currently undertaking testing and piloting of its technology, ahead of a wider scale launch in the upcoming months. Phua and Savaete hope to demonstrate to what extent this app can make a difference.
From farmer to bank manager
Amidst the hills of Shan state, farmer Tha Bie is sorting out his beans. Harvest has been satisfying. Thanks to the local community bank, Tha could borrow 150.000 kyats (ca. 105 euro) to invest in ‘chemical medicine’ for his crops. ‘It looks like we will make more profit’, says Kha, his wife.
Tha lives in Paung Daw, a Pa’O minority village near Inle, the scene of another alternative microcredit practice. Its inhabitants do not rely on external MFIs, but borrow from the local Community Bank. Villagers own and manage the bank through an elected committee, consisting of three men and four women.
This is the work of Shanta Foundation, a US charity organisation. Shanta employees advised Paung Daw inhabitants during the creation of the local bank in 2013, enabling them to vote interest rates and other loan terms themselves. The foundation has provided initial funding, but not without mobilising the locals: for every $100 the villagers could raise, Shanta has added $1000. Now the bank operates independently. Evidently transport costs do not apply, which allows to keep interest rates between 2 and 4% per six months.
‘We partner up with these Pa’O villages for a period of six years, setting up the bank and giving various trainings’, says Zachary Ray, Technical Advisor at Shanta’s Myanmar branch. ‘The first two years require intensive coaching, but as the partnership ends the community runs the bank independently and decides on how to spend the bank’s revenue. We do offer to audit the banking activities afterwards, a free optional service most of the villages make use of.’
‘Even though we provide initial funding, the villagers are implied in investments and decisions from the very beginning. They righteously consider the bank and the school as their own projects.’
Farmer and local bank manager Oo Thein is proud to present his hand-drawn chart, showing revenues made over the years: ‘A part is reinvested in the bank, another percentage goes into the funding of the local primary school. Last year, a record amount of 1.346.000 kyats (ca. 930 euro) was used for school equipment and teacher wages.’
‘Even though we provide initial funding, the villagers are implied in investments and decisions from the very beginning. They righteously consider the bank and the school as their own projects, and continue to take care of them after Shanta leaves,’ Ray says.
A textbook example of community empowerment, but it has to be mentioned that Shanta has chosen a particular ethnic group for its projects. Ray: ‘Pa’O people are indeed known for their honesty and meticulousness. We haven’t tried this model outside the Pa’O community yet. The goal is to expand to other parts of the country, but for now we haven’t received enough funding to do so.’
Involving the locals in microfinance as such is not an entirely new concept. BRAC, just like Grameen Bank, organises group meetings in villages through which they extend their lending activities. Faisal Kazi: ‘Diversity in micro lending practices is very welcome. However, it is always a question whether project like this can be scaled up. Will it be sustainable in the long run? We surely hope that it is the case.’
Impact investing revisited
Instead of relying on charity funding or development bank support, certain MFIs are funded through private equity, a model referred to as impact investing. Critical voices (such as economists Milford Bateman and Ha-Joon Chang) emphasize the risk of reducing the microcredit market to a merely profit-generating activity, often resulting in higher interest rates and aggressive recollection practices to ensure attractive returns for investors.
‘But we have to be careful. Impact investing should share the same mission to alleviate poverty, and companies need to have enough patient capital to not be worried about making profit quickly – a difficult proposition.’
‘We believe in a diverse microfinance market where different approaches complement each other,’ Kazi says. ‘But we have to be careful. Impact investing should share the same mission to alleviate poverty, and companies need to have enough patient capital to not be worried about making profit quickly – a difficult proposition.’
Brian Powell’s impact investing projects seem to be in line with that mission. Trying to reconcile return on investment and poverty eradication, he comes up with a new model for his start-up Impact First Peer-to-Peer.
‘To avoid over-indebtedness, I aim to complement microloans by offering equipment and services for farmers. If their farming activity does not generate enough profit to pay off the equipment, they can just stop the service but are not in debt. Liability stays with the company, not with the borrower.’
Yet to be launched, probably in June 2017, Powell is currently establishing a drying service company. ‘The common practice for the majority of the rice farmers is to presell a portion of their harvest to cover the cost of seeds and fertilizer, at about 40% less than the price expected at harvest,’ he explains.
‘Microcredit at an affordable rate already allows them to invest without preselling, a financial advantage. If however, you also offered them access to bulk crop drying services, the value of their harvest increases, since dried rice is worth more than wet rice. Now you haven’t just slowed their spiral into debt, but begun to reverse their fortunes: they can make profit.’
The model would be a joint venture with a local partner running each dryer. ‘I plan to split it 50% for the partner, 25% for an investor and 25% for the company. Each joint venture should make about $10.000 per year after expenses. Cutting off taxes, currency conversion and transfer costs, each investor would end uap with $1.250 a year on a $6.500 investment. Of course impact investing is not the safest of options, but a possible return on investment of 19% should be worth the risk.’
Initially, Powell worked on a model to rent equipment for farmers as well. But then he stumbled upon a legal roadblock preventing foreign companies from retailing. And that is not the only restriction Myanmar’s legal framework poses to MFIs, even after last year’s regulatory update.
Although Faisal Kazi has had positive experiences with Myanmar’s microfinance regulators, he criticises the legal constraints to obtain debt funding from foreign institutions. ‘An association of Myanmar microfinance companies has advised the government on last year’s update, and the majority of our suggestions have been adopted. But one key issue still to be addressed is debt financing, where interest rate on foreign lending is capped by Myanmar Central Bank. This makes borrowing funds from foreign banks a hard and slow process.’
A remark that is also made in an opinion piece by former Yangon IFC officials Julie Earne and Marisa DeAngelis, highlighting the need for a sound regulatory framework that allows for a variety of funding sources for instance, and proposes hedging tools to overcome the fluctuating currency exchange rates.
Miracles don’t exist
In spite of a strong belief in their cause, a sense of relativity exists among the microcredit providers. ‘Yes, microcredit is good in that it is better than the current alternatives,’ Brian Powell writes in an e-mail. ‘But in most cases, it doesn’t stop the spiral down, only slows it. Combined with value adding services, on the other hand, microloans can be the leverage to move farmer’s incomes in a positive direction.’
Faisal Kazi admits that not every microcredit story is a successful one. ‘And that is fine. Not everyone can be the next Bill Gates. Offering access to finance and a climb on the ladder, that is already a win.’
This article was created with the help of The Caravan’s Journal