New restrictions on small-loan agencies in Burma could stifle micro-business developments critical to raising rural people out of poverty, an economist has warned. But other financial experts say restrictions have become necessary because some agencies have been rashly lending cash without sufficient safeguards.
Scores of lending agencies, some commercial and some non-profit NGOs, have opened up in Burma where they are known as MFIs or microfinance institutions.
The government’s Microfinance Supervisory Committee (MSC) has imposed a lending cap of 500,000 kyat, equal to US$507, because it thinks there is a danger of the system running out of control.
“It is the case that some of the licensed MFIs are overstepping the rules, and engaging in practices that would raise genuine prudential concerns,” Burma economy expert Sean Turnell told The Irrawaddy.
“However, the limit does constrain ‘good’ MFIs from undertaking lending that can make a critical difference—that is loans above $500 that could be genuinely transformational, allowing scale so that micro-enterprises can become the small to medium enterprises that Myanmar needs for development, and to create employment,” said Turnell, a professor of economics at Macquarie University in Sydney, Australia, and co-editor of the Burma Economic Watch bulletin.
An initiative to lend the equivalent more than $3 million to tens to thousands of rural people was due to get under way this month involving five local agencies, the US-based non-profit Pact Global Microfinance Fund (Pact) and the UN agency LIFT, the Livelihoods and Food Security Trust Fund.
LIFT’s donors include the governments of a number of Western countries, mostly from the European Union but including the US, Australia and New Zealand.
“We’re proud to be working with our new partners and LIFT to profoundly improve the livelihoods and food security of as many as 45,000 families in places where there is no access to credit but an abundance of need for it,” Pact representative Fahmid Bhuiya said in a statement in December.
Reaction to the new Naypyidaw restriction on lending has been mixed.
The International Finance Corporation (IFC) suggested there could be more flexibility on lending limits, but the Asian Development Bank (ADB) said MFIs needed to be properly regulated.
The biggest small loans lender in Burma, Pact, and LIFT did not respond to requests this week from The Irrawaddy for comment.
“Pact is recognized as a global leader in, and preferred partner for, lasting solutions in the areas of health, livelihoods and natural resource management. Our uniquely integrated approach, adapted to local needs in every one of the more than 25 countries where we work, is shaping the future of international development,” the Washington-based agency says on its website.
More than 100 MFIs are now in operating in Burma as the demand for cash credit among a huge rural population with no access to traditional banking services grows. Some of them are purely commercial businesses based in similarly poor and developing countries, such as Cambodia and Bangladesh.
The IFC last year estimated that about 2.8 million people in Burma were being reached by micro-financing but suggested that the demand was four times greater.
A recent report by the ADB on micro-financing across the region said there was a huge demand among the poor but it needed to be managed in a “financially sustainable way”.
“With microfinance becoming increasingly commercialized in the region, the study stresses the role of government and agencies such as ADB in addressing the financial needs of the poor, while at the same time ensuring the institutional sustainability of microfinance providers,” the report said.
“For microfinance to have a greater impact on reducing poverty in the region, it needs to better target the poor and focus more on educating them in using basic financial services.”
Turnell told The Irrawaddy that a number of MFIs which have sprung up recently in Burma “are little experienced in the methodologies required for successful microfinance.
“That being the case, it may not be a bad thing that some of them are restricted according to loan maximums to protect themselves, and their clients.”
But instead of placing a blanket curb on MFIs, Turnell suggests an alternative.
“Probably better would be a case by case regulation on this front, subject to individual institution assessment as to capacity. However, this would be very costly, and probably beyond the supervisory capacity of the [Microfinance Supervisory Committee] regulator.
“Another answer might be to allow loans greater than $500, in exchange for a step up in capital employed, or some other metric that gets closer to those required by banks.”
With conventional banking still in its infancy in Burma and the much-vaunted Internet banking revolution via new mobile phone and wireless networks still a dream, MFIs remain the only potential source of capital for millions of Burmese—apart from the traditional high-interest loan sharks.