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    Microfinance in myanmar   sector assessment (ifc-cgap)   2013 jan Microfinance in myanmar sector assessment (ifc-cgap) 2013 jan Document Transcript

    • Microfinance in MyanmarSector AssessmentBy Eric Duflos, Paul Luchtenburg, Li Ren, and Li Yan ChenJanuary 2013IFC Advisory Services in East Asia and the Pacific
    • IFC Advisory Services in East Asia and the PacificMicrofinance in MyanmarSector AssessmentBy Eric Duflos, Paul Luchtenburg, Li Ren, and Li Yan ChenJanuary 2013
    • About IFCIFC, a member of the World Bank Group, is the largest global development institutionfocused exclusively on the private sector. We help developing countries achieve sustainablegrowth by financing investment, mobilizing capital in international financial markets,and providing advisory services to businesses and governments. In FY12, our investmentsreached an all-time high of more than $20 billion, leveraging the power of the privatesector to create jobs, spark innovation, and tackle the world’s most pressing developmentchallenges. For more information, visit www.ifc.org.About CGAPCGAP is an independent policy and research center dedicated to advancing financialaccess for the world’s poor. It is supported by over 30 development agencies and privatefoundations who share a common mission to improve the lives of poor people. Housedat the World Bank, CGAP provides market intelligence, promotes standards, developsinnovative solutions, and offers advisory services to governments, microfinance providers,donors, and investors. For more information, visit www.cgap.orgDisclaimerIFC, a member of the World Bank Group, creates opportunity for people to escape povertyand improve their lives. We foster sustainable economic growth in developing countries bysupporting private sector development, mobilizing private capital, and providing advisoryand risk mitigation services to businesses and governments.The conclusions and judgments contained in this report should not be attributed to, anddo not necessarily represent the views of, IFC or its Board of Directors or the World Bankor its Executive Directors, or the countries they represent. IFC and the World Bank do notguarantee the accuracy of the data in this publication and accept no responsibility for anyconsequences of their use.
    • iTABLE OF CONTENTSAcronyms.................................................................................................................iiAcknowledgments................................................................................................. iiiExecutive Summary................................................................................................ ivI. Country Context...................................................................................................1A. Population..............................................................................................................2B. Economy.................................................................................................................3C. Financial Sector Overview........................................................................................4II. Micro Level: Demand and Supply of Microfinance.........................................7A. Demand for Microfinance........................................................................................8B. Supply of Microfinance............................................................................................8III. Macro level: The Policy, Regulatory and Supervisory Framework............ 13A. Policy Environment................................................................................................14B. Regulatory Environment.........................................................................................14C. Supervisory Capacity.............................................................................................16IV. Meso Level: Financial Infrastructure, Networks, and Training.................. 19A. Financial Infrastructure..........................................................................................20B. Networks and Training Institutions.........................................................................21C. Research...............................................................................................................21V. Funding............................................................................................................. 23VI. Recommendations.......................................................................................... 25A. Policy, Regulatory, and Supervisory Framework.......................................................26B. Demand and Supply of Microfinance......................................................................27C. Market and Financial Infrastructure........................................................................28D. Funder Effectiveness..............................................................................................29Annex ..................................................................................................................... 31A. Summary of Opportunities and Challenges in the Market.......................................32B. Profile of Key Microfinance Operators.....................................................................33C. Areas for Future Research at the Policy Level..........................................................38D. List of Meetings....................................................................................................39E. Research Background............................................................................................40F. Bibliography...........................................................................................................41
    • iiACRONYMSAFD Agence Française de DeveloppementAMDA Association of Medical Doctors of AsiaAML/CFT Anti-Money Laundering and Combating the Financing of TerrorismASEAN Association of Southeast Asian NationsCARD Center for Agriculture and Rural DevelopmentCGAP Consultative Group to Assist the PoorDFI Development Finance InstitutionEAP East Asia and PacificEU European UnionFI Financial InstitutionFIND Financial Inclusion for National DevelopmentFMO Financierings-Maatschappij voor OntwikkelingslandenGDP Gross Domestic ProductHR Human ResourcesIDA International Development AssociationIFC International Finance CorporationIFI International Finance InstitutionsIMF International Monetary FundKfW Kreditanstalt Fur WiederaufbauLIFT Livelihoods and Food Security Trust FundMADB Myanmar Agricultural Development BankMAP Making Access PossibleMFI Microfinance InstitutionMIDB Myanmar Small & Medium Industrial Development BankMIS Management Information SystemMISFA Microfinance Investment Support Facility for AfghanistanMNO Mobile Network OperatorsMSE Microfinance Supervisory EnterpriseNGO Nongovernment OrganizationOSS Operating Self-SufficiencyPACT Partner Agencies Collaborating TogetherSWIFT Society for Worldwide Interbank Financial TelecommunicationUNCDF United Nations Capital Development FundUNDP United Nations Development ProgramUNOPS United Nations Office for Project ServicesWB World BankKyat/US$ exchange rate: 100 Kyats = 0.12 US
    • iiiACKNOWLEDGEMENTThis report was written by Eric Duflos, Paul Luchtenburg, Li Ren, and Li Yan Chen. The authors would liketo thank those who have reviewed the report and provided invaluable comments: Rachel Freeman (IFC),Simon Andrews (IFC), Sanda Liepina (IFC), Charles Schneider (IFC), Hannfried von Hindenburg (IFC),Steve Rasmussen (CGAP), James Seward and Nataliya Mylenko (World Bank), Myint Kyaw, Barclay O’Brien,Andrew Kirwood (LIFT), Thein Myint (UNDP), Neal Youngquist (World Vision) and Fahmid Bhuiya (Pact).We would also like to thank Patrick Carpenter (IFC), Anna Nunan (CGAP) for editing this report, KaiBucher (CGAP) for his review, and Kunthea Kea (IFC) for the layout. We are also thankful to the people andorganizations who have contributed to this study through interviews before, during, and after our mission; theyare listed in the annexes of this report.Paul LuchtenburgCover (left)Page 33Eric DuflosCover (right)Page 1Page 7Page 15Page 21Page 25Page 27Photo Credits
    • ivMyanmar’s re-entry onto the global stage provides aunique opportunity for IFC and the World Bank toengage in interventions that support developmentof Myanmar’s nascent private sector. In June2012, IFC and CGAP representatives conducted afinancial sector scoping review to assess Myanmar’sfinancial inclusion landscape and explore potentialinvestment and advisory interventions. This reportpresents the team’s key findings and preliminaryrecommendations. It aims at providing more publicinformation, and helping define strategies to supportthe sector going forward. Additionally, it aims atinforming a joint and complementary approachamongst the donors and Development FinanceInstitutions to develop the sector.Myanmar is one of the poorest countries in SoutheastAsia, with a per capita income of approximatelyUS$832 in 2011 (IMF 2012a). Its economysuffers from unstable inflation, a rigid interest rateregime, and a distorted exchange rate. Recently,the government embarked on a series of reformsto improve the business and investment climate,facilitate financial sector development, and furtherliberalize trade and foreign direct investment.The financial sector in Myanmar is small andunderdeveloped. It is dominated by four state-owned banks and 19 private banks. Foreign bankscurrently are not allowed to operate in Myanmar,though 17 foreign banks have already establishedlocal representative offices in-country. Overall, thebanking sector is severely constrained in its outreachto the unbanked, with some industry estimates andrecent research suggesting that less than 20 percent ofthe population has access to formal financial services(LIFT 2012).The demand for microfinance1is high. However,few institutions provide microcredit, and unmetdemand is estimated by industry experts at close toUS$ 1 billion (UNCDF 2012). Demand for formalsavings is difficult to estimate and may depend onregions. Past crises in the banking and cooperativesectors have eroded public trust in formal savingsproducts. Use of informal providers of credit andtransfer services in both urban and rural areas iswidespread despite the additional risks and expense(10–20 percent per month) (LIFT 2012).2Two clearpriority markets are rural finance, with 54 percentof the population involved in agriculture, andinternational remittances, with over three millionpeople from Myanmar working abroad (Ministry ofLabour 2012).The authors estimate that current microfinanceoutreach is 2.8 million microclients. The supply sidecomprises a variety of formal and informal actors.State-owned banks, such as Myanmar EconomicBank(MEB)andMyanmarAgricultureDevelopmentBank (MADB), have a large outreach. MADB reportsthat it provides deposit and credit to more than 1.4million people in rural areas, but on a subsidizedbasis. Private banks are not involved in microfinance,partly for regulatory reasons and partly because of alack of interest. Cooperatives, which started in theearly 20th century, report more than 10,000 primarysocieties and 470,000 members. International andnational nongovernment organizations (NGOs),such as Partner Agencies Collaborating Together(PACT), GRET, World Vision, and Proximity, havepioneered microfinance methodologies since themid-1990s with some success. The UNDP–PACTproject is the largest microfinance initiative; it reportsover 360,000 active borrowers and over 420,0001This paper uses the shorthand term “microfinance” to refer to financial services for low-income people.The financial services used by low-income peopleinclude credit, savings, transfers, and insurance.2According to the LIFT report, informal lending rates are usually below 20 percent, but they can go as high as 30 percent per month.EXECUTIVE SUMMARY
    • vdepositors. In addition, although 60 specializedagriculture development companies support 200,000farmers with loans each harvest season, the largest onehas fewer than 7,0003clients. Informal lenders andsemi-formal village revolving funds or community-based organizations are also widespread.4Finally,severalpoliticalandgovernmentorganizationsdelivercredit. Overall, suppliers have limited capacity toexpand in a sustainable way, and the transformationprocess of NGOs into for-profit licensed institutionscould take years to develop. The market is thereforelarge enough to attract greenfield banks that couldsignificantly improve outreach while contributing toinnovation in the sector. While it needs to be furtherresearched, the scope for branchless banking seemslimited due to the lack of infrastructure and the highcost of SIM cards.On the policy side, President Thein Sein’s publicendorsement of the development of a microfinancesector in May 2011 has opened the door toformalizing microfinance. In November 2011, thegovernment adopted a new Microfinance Law aswell as Notification 277 and Instructions. Thisframework allows local and foreign investors toestablish fully privately owned MFIs, includingthose existing microfinance providers operating“illegally” before the law was established. While amore thorough analysis is required, the new legalframeworkforMFIshasseveralchallengesthatshouldbe considered, including limited differentiationbetween deposit and nondeposit MFIs, low capitalrequirements for deposit-taking institutions, and aninterest rate ceiling. The low capital requirementshave spurred an influx of registered MFIs (118 MFIlicenses were issued between November 2011 andNovember 2012). In addition, the MicrofinanceSupervisory Enterprise has been tasked to licenseand supervise MFIs despite its limited experiencein supervising financial institutions. It will thereforerequire significant training.While the review focused on supply and policyenvironments, it also noted that the financialinfrastructure is underdeveloped and lacks afunctioning payment system. The central bank isactively working on this matter. There is no activecredit bureau. The supply of technical support isalso limited, with only a few trainers available. Amicrofinance working group made up of leadingmicrofinance NGOs has been established; it couldplay an important role in the dissemination of goodpractices and advocacy. Donors have increased theirfinancial support to microfinance. UNDP was thepioneer in doing so, with PACT in the mid-1990s;the Livelihoods and Food Security Trust Fund(LIFT) organized by a group of 10 donors has alsobecome a key player after the Nargis cyclone in 2008.Notable forthcoming initiatives include the WorldBank Financial Inclusion for National Development(FIND), which aims to support the regulatory andsupervisory framework, and the UNCDF MakingAccess Possible (MAP) diagnostic tool, which willbe used to conduct an in-depth diagnostic that caninform and influence future policies and donoractivities. IFC is also planning a program to supportthe sector.In summary, the microfinance sector is at the earlieststages of development in Myanmar. There are greatopportunities alongside great challenges for growth.Any successful intervention will require a rapiddissemination of international good practices and ahigh level of donor coordination.3Interview with Myanmar Rice Association, June 2012.4Interviews with PACT and LIFT, October 2012.
    • 1I. COUNTRY CONTEXT
    • 2PopulationPopulationper sq kmNumber ofDistrictsNumber ofTownshipsNumber ofVillagesPopulation20121 Mandalay Region 14% 620 7 31 5,472 8,865,8582 Ayeyarwady Region 14% 240 6 26 11,651 8,435,7863 Yangon Region 12% 744 4 45 2,119 7,563,3774 Sagaing Region 10% 68 8 37 6,095 6,382,7235 Bago Region 10% 157 4 28 6,498 6,155,1736 Shan State 10% 38 11 54 15,513 5,952,8527 Magway Region 9% 122 5 25 4,774 5,480,7368 Rakhine State 6% 93 4 17 3,871 3,412,5299 Mon State 5% 244 2 10 1,199 3,001,72410 Kayin State 3% 61 3 7 2,092 1,848,95911 Tanintharyl Region 3% 96 3 10 1,255 1,676,28212 Kachin State 3% 22 3 18 2,630 1,962,74813 Chin State 1% 16 2 9 1,355 580,45114 Kayah State 1% 27 2 7 624 321,447Total 64 324 65,148 61,640,645States/RegionsSource: Ministry of HealthFigure 1: Myanmar Demographics DataA. PopulationWith a geographic area of 676,578 km2, Myanmaris the second largest country in Southeast Asiain size (behind Indonesia); it has an estimatedpopulation of 62 million.5More than two-thirds ofthe population lives in rural areas, where agricultureis the main source of employment, particularlyaround the Irrawaddy valley, which is situatedbetween the Arakan Mountains in the West andthe Shan Plateau in the East. Myanmar has one ofthe lowest population densities in the region, withan average of 90 inhabitants per square kilometer.The country is composed of 14 states and regions,64 districts, 324 townships, and 65,148 villages.The most densely populated areas are Yangon,Ayeyarwady, Mandalay, and Mon State. Thepopulation is ethnically diverse, with 135 distinctethnic groups and 108 different ethnolinguisticgroups. The total population is estimated to be 68percent Burmese, 9 percent Shan, 7 percent Karen,4 percent Rakhine, 3 percent Chinese, 2 percentIndian, and 2 percent Mon.Myanmar has a favorable geographic location interms of trade: it borders India and Bangladesh tothe Northwest, China to the Northeast, and LaoPDR and Thailand to the East. The country hasa clear potential to be a regional trading hub. Ithas extensive fertile land and is richly endowedwith natural resources, including oil and naturalgas, metals, wood products, and precious stones.However, decades of isolation has left the countryseverely underdeveloped. Myanmar is one of thepoorest countries in Southeast Asia, with a percapita income of approximately $832 in 2011. Itwas ranked 149 out of 187 countries in the 2011UNDP Human Development Index. According tothe UNDP-supported household surveys, overallpoverty was 26 percent in 2009, with significantlyhigher poverty concentration in rural areas (29percent rural vs. 15 percent in urban areas) (UNDP2011).5IMF estimate for 2011. Readers should note that data on Myanmar are limited and inconsistent, with population estimates ranging from 48 million to 62million.The latest national census was conducted in 1983. Similar data discrepancies exist for other economic and social indicators.
    • 3b. ECONOMYWhiletheeconomyhasexperiencedreasonablegrowthin recent years (real GDP growth was estimated at5.3–5.5 percent in 2010–2012 by IMF), much of thiswas driven by buoyant commodities exports and highfiscal spending in the run-up to the 2010 elections.The overall economy continues to suffer fromsignificant macroeconomic imbalances, includingunstable inflation, a rigid interest rate regime, anda distorted exchange rate system. Furthermore, thebusiness environment is widely viewed as opaque,corrupt, and highly inefficient. Wealth from amplenatural resources is often concentrated in the handsof an elite group. In 2011, Myanmar was ranked 180out of 183 countries in the Corruption PerceptionsIndex by Transparency International. 6Undertheleadershipofthenewpresident,TheinSein,the country has embarked on a series of economicreforms to improve the business and investmentclimate, facilitate financial sector development, andfurther liberalize trade and foreign direct investment.Actions have included adopting a managed floatexchange rate regime,7increasing the deposit-to-capital ratio from 10 to 25 times (IMF 2012b), andallowing agricultural land to be leased for up to 60years.8Further reforms are underway to promotesustainable growth and to improve internationalcompetitiveness, including passage of the newFinancial Institutions Law, Foreign Investment Law,9and Special Economic Zone Law. Implementation ofthese laws will be critical if Myanmar is to join theASEAN integration in 2015, which aims to create asingle market and production base with the free flowof goods, services, investment, capital, and labor inSoutheast Asia member countries.6http://cpi.transparency.org/cpi2011/results/7The managed float system allows for daily fluctuations in the exchange rate of Myanmar kyat to the U.S. dollar, against the initial exchange rate ofUS$1 = 818 kyat set on 1 April 2012.8Interview with MADB, June 20129The Foreign Investment Law was recently passed on 2 November 2012.Source: IMF – Myanmar 2011 Article IV Consultation.Figure 2: Macroeconomic Snapshot
    • 4C. Financial Sector OverviewThe financial sector is small and highlyunderdeveloped. Access to financial services isseverely limited, as reflected by the low outstandingloans-to-GDP ratio of 4.7 percent and deposits-to-GDP ratio of 12.6 percent in 2011 (Seward2012). Four state-owned banks and 19 privatebanks dominate the sector, which is closed toforeign competition in accordance with the existingFinancial Institutions Law, which prohibits foreignbanks from operating or engaging in any jointventures with local banks. Myanmar has, however,committed to allow foreign banks to establishwholly owned operations once domestic bankshave been prepared for foreign competition. Workis underway to revise outdated banking laws aheadof Myanmar’s integration with ASEAN in 2015(McNulty 2012). In anticipation of this, 17 foreignbanks have established local representative officesin the country.There is only one state-owned insurance company inMyanmar. It is small in scale and outreach and offersno insurance for any form of agricultural sectoractivities, such as flood, crop, or livestock. For thefirst time in more than 50 years, private insurancecompanies have been given conditional approvalby Myanma Insurance and the Insurance BusinessSupervisory Board (IBSB) to begin operations.IBSB received 20 applications, but only 12 havebeen approved (all local and no foreign), pendingtheir ability to meet paid-up capital requirementsand deposit funds in Myanmar Economic Bank. Ofthe 12 companies, three plan to offer life insurance,which requires paid-up capital of K6 billion (nearlyUS$7 million). The remaining nine institutions planto offer life and general insurance, which requirestotal capital of K46 billion or (US$53 million).The companies are Apex Insurance InternationalCompany, IKBZ Insurance Public Company, GreatFuture International Insurance Company, CapitalLife Ltd Insurance Application, Global StandardInsurance Public Company, Green Asia InsuranceCompany, Jade King and Queen Service Company,Mya Wady Insurance Company, Pillar of TruthInsurance Company, Citizen Business InsuranceCompany, Ayeyar Myanmar Insurance Company,and Myintmo Min Insurance Company (MyanmarTimes 2012).Source: Central Bank of Myanmar website - retrieved July 2012.Table 1: Overview of Myanmar’s Banking SectorState-Owned Banks (4) Domestic Private Banks (19) Foreign Banks with Rep Offices (17)Myanma Agriculture and Development Asia Green Development Bank AB BankMyanma Economic Bank Asia Yangon Bank Bangkok Bank Public CompanyMyanma Foreign Trade Bank Ayeyarwaddy Bank Bank for Investment and Development ofMyanma Investment and Commercial Bank Co-operative Bank Brunei Investment Bank (BIB)First Private Bank CIMB Bank BerhadInnwa Bank DBS BankKanbawza Bank First Commercial Bank, Singapore BranchMyanma Apex Bank First Overseas BankMyanma Industrial Development Bank Industrial and Commercial Bank of ChinaMyanma Livestock and Fisheries Development Malayan Banking Berhad (MAYBANK)Myanmar Citizens Bank Mizuho Corporate BankMyanmar Oriental Bank National BankMyawaddy Bank Oversea-Chinese Banking CorporationSibin Tharyar Yay Bank Siam Commercial Bank Public CompanyTun Foundation Bank Sumitomo Mitsui Banking CorporationUnited Amara Bank The Bank of Tokyo-Mitsubishi UFJYadanabon Bank United Overseas BankYangon City BankYoma Bank
    • 5Expanding financial inclusion and microfinanceis closely related with the stage of development ofthe formal financial sector. Currently several factorsinhibit financial sector growth and outreach to theunbanked populations:10Interest rates are set by the Central Bank.• In January2012, the Central Bank lowered the minimumdeposit rate from 10 percent to 8 percent, andthe maximum loan rate from 15 percent to13 percent. This narrow spread of 5 percentdiscourages banks from reaching the lower end ofthemarketsegmentduetohigheroperatingcosts.Deposits are limited to 25 times paid-up capital.• While the deposit-to-capital ratio was increasedfrom 10 to 25 times in March 2011, it still limitsthe ability of banks to mobilize more savings. As aresult, most banks do not serve rural areas, whichrepresent at least two-thirds of the population.Banks must maintain a liquidity rate of 20 percent.• Only 80 percent of deposits can be lent out.This shifts the focus of most banks to serve moreprofitable segments, such as the larger trade andconstructioncompanies,andfurtherlimitscreditaccess to smaller enterprises and microclients.Collateralized lending is conservative, with a 50• percent loan-to-value (LTV) ratio. The CentralBank has expanded the eligible list of collateralto include land, buildings, gold, exportablecrops, and bank deposits.The LTV of 50 percentis a self-imposed industry standard that reflectsthe conservativeness of the banking sector.Limited provision of insurance services.• As noted, there is only one state-ownedinsurance company in Myanmar; it is smallin scale and outreach, with no insurance forany form of agricultural sector activities,such as flood, crop, or livestock insurance.Banking products and services are limited.• Thesector is largely confined to fixed depositsand one-year fixed-rate loans. Some banksalso offer domestic remittance services, butthese are limited to urban areas, with hundys(informal domestic and international transfers)serving the larger rural market. Recently,private banks have been authorized to establishinternational banking businesses; 11 privatebanks are in the process of installing SWIFTto begin international remittance operations.Limited prospects to use technology to increase• access. The potential for branchless bankingis limited because of the monopolistic andunderdeveloped status of the communicationsector. Myanmar’s mobile penetration rate isestimated at less than 5 percent with 3 millionusers, though the number of unique users couldbe as low as 1.3 million; a SIM card costs betweenUS$160 and US$200 (Nomura Equity Research2012). It will take time before mobile networkoperators (MNOs) can launch financial servicesin Myanmar, though the government has showninterest in moving this forward.10Information based on World Bank (2012b) and interview with Central Bank (June 2012).
    • 7MICRO LEVELDEMAND AND SUPPLY OF MICROFINANCE II.
    • 8Microfinance is widely seen as a key developmenttool to promote financial inclusion and alleviatepoverty in Myanmar. While cooperatives haveexisted in country since the early 20th century,microfinance was first introduced to Myanmar in1997 by UNDP’s Human Development Initiative.In November 2011, the government passed the newMicrofinance Law, paving the way for expansion ofmicrofinance services by allowing local and foreigninvestors to establish wholly privately owned MFIsin country. This law also provided a legal footingfor those existing microfinance providers that hadbeen operating “illegally” before the law’s passage.Nevertheless, the number of promising providers(i.e., institutions with the potential to scale up in asustainable and responsible way) remains limited,and the financing gap is wide.A. Demand for MicrofinanceA recent survey of 4,000 households conducted byLIFT found that only 16 percent of households usedformal financial services. According to the survey, themost common sources of loans were family, friends,and moneylenders. Interestingly, poorer householdsborrowed mostly for food purchase and healthemergencies, whereas higher income householdsborrowedforinputpurchaseandbusinessinvestments(LIFT 2012). This recent survey supports earlierclaims that a large section of the population relieson informal lenders to meet its cash flow needs.Most notably, while the agricultural sector represents43 percent of GDP and employs 54 percent of thepopulation, only 2.5 percent of all outstandingloans are made to this sector (Seward 2012). TheMyanmar Agricultural Development Bank (MADB)estimates that the production cost per acre of ricefarmland is 100,000–150,000 kyats (US$115–170),for which the maximum loan from MADB is 50,000kyats, leaving a potential gap of at least 170 billionkyats (US$194.3 million). Additionally, a farmer canborrow for a maximum of 10 acres. Farmers often fillthe gap by borrowing from informal money lenderswho often charge 10–20 percent interest per month(LIFT 2012). Alongside the demand for loans is theneed for domestic and international money transfers,which is mostly met by using informal transferproviders. According to the Ministry of Labour,there are over three million overseas workers fromMyanmar working in ASEAN, as such, there is highmarket potential for international remittances. It isestimated that remittances from migrant workersrepresent at least 5 percent of the country’s GDP(Hookway 2012).It is estimated that the demand for microcredit isclose to US$1 billion (UNCDF 2012). While overalldemand exceeds supply, according to MADB there ispotential for over-indebtedness of farmers in somegeographic areas (apparently due to several factors,such as the recent decline of the price of rice andbeans, which are the main cultivations, and accessto multiple loan sources, including money lenders).According to LIFT (2012), 63 percent of householdsinterviewed had increased their level of indebtednessin the past year.While the demand for microloans andmicrotransfers is clearly reflected in the largesupply of informal services, the demand forsavings is more complex and will require furtherresearch. Public trust in deposit services has beeneroded by a cooperative crisis in the 1980s and abank run in 2003–2004. Additionally, Myanmar’shigh inflation over the past decade (averaging over20 percent from 2000 to 2009) (IMF 2012b), hasprompted many to save in gold and commoditiesinstead. However, the 2011 introduction of anew deposit insurance scheme (which covers upto 500,000 kyats per depositor) and a seeminglystabilized inflation rate may help make savingsproducts more attractive (Thit 2011). Accordingto PACT, there is significant demand for savingservices but the nature and the amplitude of thedemand varies depending on regions.11B. Supply of MicrofinanceBased on the limited data available, we have estimatedthat current microfinance outreach is 2.8 millionmicroclients, with a total loan portfolio of 236 billionkyats (US$283 million). See Table 2. Relative to theenormous demand, there are few institutions thatprovide microfinance services that have the potentialto reach a large scale while providing their services ina financially sustainable and responsible way.11Interview with PACT, October 2012
    • 9Microfinance Providers in MyanmarCategory Individual InstitutionsNumber ofBranches /OutletsNumber ofBorrowersOutstandingLoan Portfolio (inKyats)Average Loanoutstanding(in Kyats)Number ofDepositAccountsTotal Savings(in Kyats)AverageDeposit Size(in Kyats) RegulatedSupervisoryAgencyMADB1205 1,420,000 84,000,000,000 59,155 1,720,000 86,891,840,000 50,519 Yes Ministry ofA i lMSLE2143 208,778 31,341,790,000 150,120 N/A N/A N/A YesMinistry of Financeand RevenuePrivate Bank MLFDB253 N/A N/A N/A N/A N/A N/A YesCentral Bank ofMyanmarPACT - UNDP3105 365,410 52,701,000,000 144,224 420,133 10,930,000,000 30,000 No N/APACT MFI316 57,128 4,234,502,910 74,123 N/A N/A N/A YesMicrofinanceSupervisoryEnterpriseGRET MFI44 6,155 840,041,000 136,481 Non-deposit taking MFI YesMicrofinanceSupervisoryEnterpriseSave the Children MFI5N/A 7,737 367,747,782 47,531 7,737 25,975,513 3,357 YesMicrofinanceSupervisoryEnterpriseWorld Vision MFI612 13,282 1,910,033,328 143,806 N/A N/A N/A YesMicrofinanceSupervisoryEnterpriseProximity Design MFI78 16,000 3,113,831,000 194,614 N/A N/A N/A YesMicrofinanceSupervisoryEnterpriseAMDA8N/A 1,510 55,109,960 36,497 N/A N/A N/A No N/ATotal8N/A 1,197 165,077,000 137,909 N/A N/A N/A No N/ACentral CooperativeSociety MFIs9 46 32,851 1,125,690,000 34,267 32,851 340,340,000 10,360 YesMSE / CentralCooperative SocietyFinancial Cooperatives -Union of Savings andCredit Federation91625 476,632 16,500,000,000 34,618 476,632 24,200,000,000 50,773 YesCentral CooperativeSocietyRice SpecializationCompanies10 38 57,502 20,092,708,226 349,426 N/A N/A N/A No N/AOther Agri SpecializedCompanies10 22 140,000 20,000,000,000 142,857 N/A N/A N/A No N/AWomens Union1116 4,800 48,000,000 10,000 N/A N/A N/A No N/AUnion SolidarityDevelopmentAssociation12N/A N/A N/A N/A N/A N/A N/A N/A N/AN/A N/A N/A N/A N/A N/A N/A No N/ATOTAL 2,293 2,808,982 236,495,531,206 119,763 2,657,353 122,388,155,513Notes to the Table: It should be noted that overall data availability and accuracy is low, so the above figures should be read with some caution.Assumes US$1 = 875 Kyats.1. Data as of March 2012 provided by MADB.2. Data as of March 2011 from CBM (Seward 2012)3. Data as of September 2012 from UNDP for PACT UNDP and as of end October 2012 from PACT for PACT MFI.4. Data as of October 2012 from GRET.5. Data as of October from Save the Children. Savings are from members only.6. Data from World Vision MFI, 9 November 20127. Data from Proximity Design, October 2012.8. Data as of end-September 2009 from ACTED and Banking with the Poor Network (2009).9. Data as of May 2012 from CCS. Data for Microcredit Cooperatives as of September 2011.10. Data as of September 2011 from the Myanmar Rice Association.11.Estimates provided during interview with MADB, June 2012.12.No data available.State OwnedBankNon-GovernmentalOrganizationCooperativesSpecializedAgriculturalCompaniesCommunity BasedOrganizations12Table 2: Microfinance Providers in MyanmarNotes to the TableIt should be noted that overall data availability and accuracy is low, so the above figures should be read with some caution. 1. Data as of March 2012 provided by MADB. 2. Data as of March 2011 from CBM (Seward 2012) 3. Data as of September 2012 from UNDP for PACT UNDP and as of end October 2012 from PACT for PACT MFI.4. Data as of October 2012 from GRET. 5. Data as of October from Save the Children. Savings are from members only. 6. Data from World Vision MFI, 9 November 2012 7. Data from Proximity Design, October 2012. 8. Data as of end-September 2009 from ACTED and Banking with the Poor Network (2009).9. Data as of May 2012 from CCS. Data for Microcredit Cooperatives as of September 2011.10. Data as of September 2011 from the Myanmar Rice Association. 11.Estimates provided during interview with MADB, June 2012. 12.No data available.
    • 10MADB has about half of the estimated microclients.Generally, microfinance operators offer productsdesigned to help micro or small enterprises meetproduction needs or enable poor households tomeet primary needs. Products include income-generating loans, agricultural loans, consumer loans,healthcare loans, education loans, client welfareschemes, and voluntary savings. Microsavingsremain underdeveloped due to a limited number ofsuppliers and the aforementioned lack of savingsculture. The rough data estimate in Table 2 indicatethat approximately 2.2 million people have accessto formal voluntary “microsavings,” mostly throughstate banks, private banks, and cooperatives.12There are six kinds of providers of microfinanceservices in Myanmar:Informal and semi-formal sector1. Banks2. Cooperatives3. NGOs4. Specialized agricultural development companies5. Government organizations6. INFORMAL SECTOR AND SEMI-1. FORMAL SECTORA large informal sector exists and is composed ofmoney lenders and hundys (informal domestic andinternational transfers). Informal providers areexpensive and can be unreliable. Money lenders arereported to charge 10–20 percent interest per month,an indication of significant unmet demand formicrocredit (LIFT 2012). The informal remittancemarket and hundys are widespread throughout thecountry, according to Myanmar Small & MediumIndustrial Development Bank (MIDB), includingin rural areas, and are providing much neededinformal domestic and most often internationalremittance services. Family and friends, who chargevarious interest rates, are another important sourceof informal credit especially for the poor (LIFT2012).The semi-formal sector comprises of pawn shops13and community-based organizations, such as villagerevolving funds and village savings and creditgroups. While pawnshops are officially registered,it is not clear how they are supervised. Manydeal only in gold, and they charge 3–5 percent ininterest per month (LIFT 2012). Many village-based organizations were created by donors andinternational NGOs. According to MADB there are12,000 of them serving 1.4 million people (Seward2012).2. BANKSState-Owned BanksState-owned banks, particularly MyanmarEconomic Bank (MEB), represent the largestprovider of deposit services in Myanmar. With 325branches, MEB provides access to deposit services,primarily in urban areas (Seward 2012). Whileit does not engage in microlending, MEB doesprovide subsidized funding to Myanmar AgricultureDevelopment Bank (MADB), which is a specializedagricultural development bank. MADB and thesemi-private bank Myanmar Livestock and FisheriesDevelopment Bank (MLFDB) provide small-scale loans to microenterprises. MADB has 1.72million savers and 1.4 million borrowers, primarilyin rural areas and the agriculture sector.14Limitedinformation is available on MLFDB. According tothe World Bank (Seward 2012), MLFDB has 53branches, and 55 percent of the its loans are to theagricultural sector.Private BanksPrivate banks have shown little interest inmicrofinance because they often lack capacity andexpertise for the undertaking and because of certainregulatory constraints. Banks are subject to aninterest rate band of 8 percent minimum intereston savings and 13 percent maximum interest onloans on declining balance (Seward 2012). While12This figure does not include the deposit accounts from the UNDP project which is not a formal institution.13Many pawn shops are registered by the Myanmar Small Loan Enterprise.14Interview with MADB, June 2012.
    • 11banks charge a 1 percent commitment fee and alawyer’s fee, they can hardly expect to break even ifthey move into microfinance, given that operationalexpenses for PACT, the leading MFI, represent15–18 percent of its gross loan portfolio.15Second,under the current Financial Institutions Law,collateral, including land, buildings, agriculturalproducts/commodities, gold, and cash deposits,are required to back the loans, with a maximumloan-to-value ratio of 50 percent in most cases.16This requirement also applies when banks providefunding to other MFIs, such as cooperatives, theUnion Solidarity Development Party (USDP), orthe women’s association—all of which are engagedin retail lending to the rural poor—and as such itis difficult for banks to fulfill the role of wholesalefunder. The new Financial Institutions Law maycreate a better environment for banks to downscale.Private banks are reported to be generating profitsprimarily from domestic remittances and lending totrade and construction companies.17As such, theyserve only a small portion of the micro segment interms of remittances, and they focus their activity onurban areas because of the inadequate infrastructureof the financial sector. The Central Bank hasconfirmed that 11 private banks are currentlyinstalling SWIFT to establish foreign bankingbusinesses.18The Central Bank expects that threeprivate banks—Kanbawza Bank, Cooperative Bank,and Asia Green Development Bank—will be allowedto launch inward money transfers in the comingmonths.3. COOPERATIVES 19Cooperatives focus primarily on deposit mobilizationand microloans in urban areas. Supervised by theMinistry of Cooperatives, the entire cooperativesector as of March 2012 was comprised of one apex,20 unions, 461 federations, and 10,751 primarysocieties.The Central Cooperative Society (CCS) is the apexin this sector. CCS recently received a microfinancelicense. It also operates 46 MFIs that function asvillage banks in seven states and regions. As of May2012, CCS reported total capital of 152.65 millionkyats, total membership of 32,851, total savings of340 million kyats, and total loans outstanding of1.1 billion kyats. CCS appears to have a reasonablegovernance structure in place: its General Assemblyis the ultimate authority, and its Board of Directorscomprises 35 members, including five full-timedirectors.Financial cooperatives are organized under theUnion of Savings and Credit Federation (tertiarylevel society), which, as of March 2012, had 41savings and credit federations (secondary levelsocieties) and 1,625 primary level societies. TheUnion does not have a microfinance license. Itlends to the primary societies at a flat 2 percentinterest rate per month. It also launched its ownlending to individuals in June 2012. As a whole, theUnion reported savings of 24.2 billion kyats andoutstanding loans of 16.5 billion kyats, with a totalmembership of 476,632.4. NGOsBefore the passage of the Microfinance Law inNovember 2011, only PACT UNDP was allowedto operate in Myanmar legally. All others operatedwithoutlegalstatus,whichessentiallypreventedthemfrom developing or scaling up their microfinanceprograms. Since then, most international NGOs andNGOs have received or will soon receive their MFIlicense. The leading institutions (GRET, PACT,Save the Children, and World Vision) have reachedover 450,000 active borrowers with an aggregateloan portfolio of over US$69 million (see Table 2).Approximately 80 percent of total outreach andportfolio is accounted for by PACT UNDP.PACT UNDP. UNDP initiated a microfinanceproject during the second phase of UNDP’s HumanDevelopmentInitiativein1997.Theprojectactivitieswere initially implemented by three internationalNGOs (GrameenTrust from Bangladesh in the Delta15Interview with PACT, June 2012.16Interviews with Yoma and CB banks, June 2012.17Interviews with MIDB and Myanmar Oriental Bank, June 2012.18Interview with Central Bank, June 2012.19Data cited in this section were provided in June 2012 by CCS during interviews with the authors.
    • 12Region,GRETfromFranceinShanState,andPACTfrom the United States in the Dry Zone). Followingan evaluation and in light of concerns about highcosts of maintaining three distinct operationsthat had differing results, project implementationacross the three regions was consolidated under onemanagement system. In 2006, PACT was selectedthrough an international bidding process to be thesole implementing agency.As of March 2012, PACT UNDP operated in 25townships covering 5,984 villages.20With 105branches and a total staff of 1,780, PACT UNDPis the largest operator in Myanmar, it reports thatit reaches 365,410 active borrowers with a loanportfolio of 42,456 million kyats (US$51 million).Other NGO initiatives are described in Annex B.Note that the review team believes that even thelargest NGOs will require substantial upgradesto their systems if they are to sustain robust andresponsible sustainable growth.5. SPECIALIZED AGRICULTURALDEVELOPMENT COMPANIES 21Sixty specialized agricultural developmentcompanies provide value chain financing for riceproduction (i.e., they provide seasonal loans alongwith seeds, inputs, fertilizers, etc.); 40–50 of theseare said to be interested in an MFI license under thenew Microfinance Law, according to the MyanmarRice Industry Association. These 60 companiesas a whole extend an estimated 40 billion to 60billion kyats (US$45–65 million) in loans eachharvest season, supporting about 200,000 farmers.According to a list of 38 companies dated 9 July2011 and provided by the Myanmar Rice IndustryAssociation, the largest two companies (Gold Deltaand Kittayar Hinthar) had outstanding paddy loansof 3.0 billion and 2.4 billion kyats, covering 76 and176 villages, and reaching 6,866 and 6,824 farmers,respectively.6. GOVERNMENT ORGANIZATIONS(NONBANK)Through its various organizations (the women’sunion and political party organizations), thegovernment also plays an important role at the retaillevel. This may raise several concerns, includingpotential conflict of interest, but it does not threatento crowd the private sector out of the market.The Myanmar Small Loans Enterprise wasestablished in 1952 as the State PawnshopsManagement Board. In October 1961, it becamea subsidiary company of the Burma EconomicDevelopment Corporation (BEDC) under thename of the People’s Loans Company. WhenBEDC was nationalized in 1963, the People’sLoans Company was incorporated first into thePeople’s Bank of the Union of Burma and theninto the newly formed Myanmar EconomicBank as a small loans department of that bank.When the Financial Institutions of MyanmarLaw of 1990 was promulgated, the small loansdepartment seceded from the Myanmar EconomicBank and became a separate financial institutionin 1992 under the name of the Myanmar SmallLoans Enterprise.The newly established Microfinance SupervisoryEnterprise (MSE), formerly known as the MyanmarSmall Loan Enterprise (MSLE) has taken on newresponsibilities as a microfinance supervisor for theentire sector. According to the World Bank (Seward2012), MSLE issued 208,778 small-scale loans tomicroenterprises by March 2011, for a value of 31.3billion kyats (US$37.6 million). Loans are shortterm and are issued largely against gold collateralwith high interest charges (3 percent per month)and thus are similar in style to pawn shop lendingoperations.The Union Solidarity Development Party (USDP),the ruling party in Myanmar, has lending operationsin each of the 330 townships in the country. USDPcharges 3 percent per month on its loans with atypical ticket size of 30,000 kyats. Repaymentrates of these loans are unknown. Total outreachis estimated to be around 500,000 for the entirecountry.2220UNDP emails, December 2012.21Data in this section are from an interview with the Myanmar RiceIndustry Association, June 2012.22Interviews with World Vision and Asia Development Institute, June2012.
    • 13MACRO LEVELTHE POLICY, REGULATORY,ANDSUPERVISORY FRAMEWORK III.
    • 14Overall, the policy and regulatory environmenthas improved significantly over the past year.However, weaknesses in regulations andsupervisory capacity will need to be fixed as soonas possible to ensure healthy development of thesector.Note: The information in this section is sourcedfrom the team’s review of unofficial translationsof the Microfinance Law and its instructions, theCooperative Law, and the Financial InstitutionsLaw, as well as several reports from donors andindustry players (see bibliography in Annex E).The team also interviewed 24 industry players,including staff from the Central Bank and MSE.Many different laws and regulations can fosteror hamper financial inclusion. A more thoroughanalysis of all the other laws and regulations isrecommended as part of the FIND and the MAPprojects. (see examples in Box 1)A. Policy EnvironmentThe country is witnessing a rapid evolution atthe policy level. The government appears eagerto create a more conducive environment forbanking and for broader financial inclusion.This is partly motivated by domestic pressures(upcoming elections) and external pressures(entry into ASEAN and removal of sanctions).Several laws and regulations are currently beingrevised, and microfinance is among the eightpriorities of the National Development Strategy.The term “microfinance” is mostly associated withcollateral-free microlending in Myanmar.Political influence within the financial sectorruns deep. For example, the government has beeninvolved in the direct provision of microcreditthrough cooperatives since the 1970s and haseconomic branches of the party in all the 330townships. Regional authorities also influencesupervising and granting of licenses to MFIs.The government plays a significant role inthe banking sector, as evidenced, for example,by MADB providing subsidized credit to anestimated 1.4 million farmers. The banking sectorwill most likely undergo significant reform, withexpectations for greater foreign investment andmarket liberalization to follow broader structuraland macroeconomic reforms. Early progressincludes the liberalization of the exchange rate toa managed float in April 2012.Reforms in telecommunications and upgradesin all phases of infrastructure will be critical forincreasing financial inclusion. The World Bankestimates that 75 percent of people do not haveaccess to electricity and only 12 percent of theroads are paved. Only 1 percent of the populationaccesses the Internet, and 5 percent have accessto a phone.B. Regulatory EnvironmentRevisions to the Microfinance Law Directives andInstructions (which do not require parliamentapproval) and more trained supervisors arenecessary to foster the growth of safe, sustainable,and responsible MFIs. The most notableregulatory reforms to date are the November2011 Microfinance Law, Notification 277/2011and the Directives and Instructions 1&2(23 December 2011) from the MicrofinanceSupervisory Committee, and Directives 1 fromthe Microfinance Supervisory Enterprise (23December 2011). A thorough review of all recentregulations noted in Box 1 is recommended as acomplement to this report.Current regulations make it difficult for commercialbanks to serve the poor. Banks cannot lend atan interest rate above 13 percent; this effectivelycurtails their ability to lend profitably to low-incomesegments. Likewise, MADB has an interest rateBox 1. Example of Key Regulation for FinancialInclusion in Myanmar (as of June 2012 unless stated otherwise)Financial Institutions Law (1990)—being revised• Foreign Investment Law (1988) new law was passed in• November 2012NGO Law• Central Bank Law (1990)—being redrafted• Cooperative Law (1992)• Microfinance Law (2011), Microfinance Notification and• Directives (2011)AML/CFT Law and regulations• Telecommunication Law (being revised)• Labor law•
    • 15cap at 8.5 percent, which also limits any potentialexpansion. One positive development is the recentchange in collateral requirements for securedtransactions. Banks are now authorized to usegold as well as agriculture production as collateral.This may prompt banks to increase their lending,especially since many people save in gold.According to MSE, as of November 2012,there were 118 licensed institutions, includingsix international NGOs, nine NGOs, 60cooperatives, and 43 local companies. Abouthalf of them (63) have deposit-taking licenses.Cooperatives currently represent the largest shareof licensed MFIs and are expected to continue toplay a key role; however, they do not operate inrural areas where the need is most pressing. MSEis keen to see international MFIs, cooperatives,and international NGOs expand into rural areas.Preliminary Analysis of theMicrofinance Law and InstructionsAccording to the new law: “Microfinance meansextending microcredit to the grassroots people,accepting deposits from them, carrying outremittances, carrying out insurance business,borrowing money from local and abroad andcarrying out other financial activities.” Beforethe new law, microfinance activities (with theexception of PACT UNDP) were regulated onthe basis of Memorandums of Understandingbetween NGOs/projects and the government.NGOs/projects did not have legal status, andtherefore, their operations were relegated tothe informal sector. The new law confers legalstatus and enables licensed MFIs to providecredit, savings, insurance, and transfers (thoughthis is limited, for the time being, to credit anddeposits [see Directive 2 of 23 December]). MFIsneed to have legal status before they can applyfor a microfinance license (e.g., as an NGO,cooperative, or private company). MFIs lookingto open a new branch need the approval of boththe Region and the Supervisory Committee (seeFigure 3).Box 2. Key Requirements for Licensed MFIsHave a legal status as cooperative, an NGO, or a private local• or international company or organizationHave minimum capital of 15 million kyat for nondeposit tak-• ing and 30 million kyat for deposit takingMay provide loans and voluntary deposits (for time-being)• Have a maximum lending rate of 30 percent per annum or• 2.5 percent per monthHave a minimum rate on deposits of 15 percent per annum• or 1.25 percent per monthThe law’s new “instructions”23also include somedegree of consumer protection. For example,Notification 277, Item 40, requires MFIs toregularly “notify the customers of the termsand conditions associated with their depositsand loans, including the interest rate and thecalculation method.” MFIs are compelled tocomply with AML/CFT regulations.There are several issues relative to the currentregulation:1. Limited differentiation between deposit-takingand nondeposit-taking MFIs. According to globalgood practices on microfinance (CGAP 2012),to enable depositor protection, deposit-takinginstitutions of significant scale require specificprudential regulation and supervision (adaptedfrom banking prudential supervision) that ensurethese institutions are solvent. Lending-only MFIsalso require regulations, but none that directlyaims to ensure their solvency (e.g., consumerprotection, AML/CFT).2. The minimum capital requirements are too lowespecially for deposit-taking MFIs. Entry is tooeasy for small institutions with limited potentialfor growth and could result in the supervisoryauthority being overwhelmed as well as in failure ofinstitutions. In comparison, the minimum capitalrequirements in Cambodia for nondeposit-taking MFIs is around US$70,000 and US$2.4million for deposit-taking MFIs (National Bankof Cambodia 2012).Source: Microfinance Law and Directives,December 2011, unofficial translations23Note that some translations mention “instruction”, and othertranslations mention “directives”
    • 163. The interest rate ceiling and the spread between de-posits and loans are too low. Myanmar’s operationalcosts are typically high due to poor infrastructure,and inflation has historically been volatile (i.e.,estimated above 20 percent year-to-year, eventhough officially it is at 8 percent). While infor-mal lending rates are estimated at 10–20 percentper month (LIFT 2012), MADB lending rates arecapped at 8.5 percent and commercial bank rates arecapped at 13 percent per annum. While this ceilingis not so far from global average interest rates formicrofinance, it may discourage MFIs from servingrural areas in a sustainable way given the high trans-actions costs associated with serving rural clients.4. It is unclear whether group solidarity is a requirementfor the lending methodology.24This could restrictcertain types of institutions and available services.Many households need types of credit other thangroup-based lending; individual lending can alsobe successful without collateral.5. It is unclear whether key prudential ratios arerequired in reporting. Documents that were reviewedfor this report show several reporting formats forlicensed MFIs that focus on net profit and loss,but none of the formats requires reporting on keyprudential ratios. In addition some basic concepts,such as loan portfolio quality, are not included inthe documents reviewed.25Regulatory Environment forBranchless BankingThe telecommunications sector is controlled by thestate. It is unclear when it will open up to foreigninvestors. Myanmar’s mobile penetration rateis estimated at less than 5 percent with 3 millionusers, though the number of unique users couldbe as low as 1.3 million; a SIM card costs between$US 160 and $200 (Nomura Equity Research2012)26. Given the lack of infrastructure, thenascent payment system, and the current monopolyin the telecommunications sector, it could easilytake five to six years before mobile-phone-basedbranchless banking is fully deployed. The Post andTelecommunications Department is a division ofMyanmar’s Ministry of Communications, Postsand Telegraphs. It aims at having 50 percentpenetration by 2015 and has drafted a new lawthat might open up the sector to up to five MNOs(Nomura Equity Research 2012). At present, noagent regulation or e-money regulation exists,though Central Bank officials interviewed expressedstrong interest to learn more from CGAP andothers in these areas.C. Supervisory CapacityThere are two key challenges regarding thesupervision of microfinance activities: (i) thefragmentation of supervision and (ii) the limitedtechnical knowledge of the newly established MSE,which, in its previous capacity, provided smallbusiness loans on behalf of the Ministry of Finance.Fragmented SupervisionAs evidenced in Table 3, the supervisory structuregoverning the different types of financial inclusioninstitutions is highly fragmented.Type ofProviderBanks Cooperatives MFIs MADB Pawn ShopsSupervisorCentral Bank ofMyanmar(CBM)a and lineministries forstate-ownedbanksMinistry ofCooperatives andits regional officesMicrofinanceSupervisoryCommittee,MicrofinanceSupervisory Enterprise,and regionMinistry ofAgricultureMyanmarSmall LoanEnterpriseand localauthoritiesa Note that CBM is a department of the Ministry of Finance and Revenue. Also, specialized banks (governmentand semi-government) fall under their respective ministers.Table 3: Supervisory structure for key financial inclusion institutions—Draft Analysis24See Directive 1 of MSE.25For more information on key prudential ratios for microfinance deposit-taking institutions, see CGAP (2012).26According to the IFC Office in Rangoon,the cost had gone down to $US 120 by January 2013
    • 17Low Capacity of MicrofinanceSupervisorMSE is the main agency responsible for dailysupervision of MFIs, even though it has no previoussupervisory training. In addition, MSE maintains itstraditional small loan operations. This double role asa provider of financial services and supervisor is notusually considered good practice and raises questionsabout roles and responsibilities. Some of thisconfusion may be due to translation issues, becausetheNotification(implementingtextoftheregulation)is less than clear when delineating responsibilities.27Because MSE expects the demand for small loans tobe gradually replaced by microfinance, it does notintend to stop or spin off the small loans.MFIs face other issues, including the fact that MSEreporting deadlines vary across states and divisions.Providers are often required to report on theirmonthly activities before the close of the month or afew days thereafter, which does not allow for enoughtime for accurate reporting.MSE has 1,800 staff in 15 states/divisions acrossthe country; not all of them are involved in MFIsupervision. At the state level, there are 92 supervisoryofficials and an average of five to six staff per state.28Ithas 32 staff in Nay Pyi Taw, including 10 supervisoryofficials. Currently, MFIs are active in only 12 statesand divisions. MSE expects to increase staffing ineach region as necessary to meet growing needs.It also is keen for staff to receive supervisory andEnglish-language training. MSE has little experiencein supervising financial institutions, and staff willrequire significant training.29A list of other regulation and supervision areas toresearch is included in the annex as inputs for futurediagnostics.27For example, paragraph 47 says, “the MFI shall accept the inspection of the auditors appointed by the Microfinance Supervisory Committeeor inspectors assigned by the respective working committee of Region or state Government and Nay Pyi Taw Council.”28Note that these figures were collected during the IFC visit to Nay Pyi Taw; other sources mention a lower number of staff responsible forsupervision.29Interviews with MSE in Nay Pyi Taw, June 2012Figure 3: Overview of the Regulation and Supervision Structure
    • 19MESO LEVELFINANCIAL INFRASTRUCTURE,NETWORKS,AND TRAINING IV.
    • 20The research focused on analyzing the retaillevel and policy environment (micro and macro)and did not undertake a thorough review of themarket and financial infrastructure. However,preliminary assessments found that, similar tothe rest of the financial sector, the meso level formicrofinance in Myanmar is under-developedand evolving rapidly.A. Financial InfrastructureThe financial infrastructure in Myanmar is stillin its infancy stages compared to its ASEANneighbors. This weak financial infrastructureimpacts microfinance in a number of ways. Theauthors have listed below a number of issuesand recent developments that could affect thedevelopment of microfinance and financialinclusion in the future.Myanmar currently has no credit bureau.• This could become and issue as economicdevelopment and financial sector competitionincreases. Having a credit bureau could helpbanks and MFIs reduce overlap and thuspotential over-indebtedness.This is importantissue as some segments of the population maybe over-indebted (see demand section)The payment system is underdeveloped. A• national switch is in the works but is not yetoperational. There is a short-term plan to tiethe national switch to the regional switch.The Central Bank has sought assistance from• the Japanese Government to develop a cloud-based,high-speednetworktosupportfinancialtransactions throughout the country. Thenetwork is estimated to cost US$384 millionand will initially connect the Central Bank’slinks in Nay Pyi Taw, Yangon, and Mandalay(McLaughlin 2012).Use and acceptance of negotiable financial• instruments (e.g., checks) is expected in 2013.An interbank check-clearing mechanismneeds to be developed concurrently with theintroduction of checks or soon thereafter.ATMs were introduced only this year in• Myanmar and, while the situation is evolvingrapidly, there were 88 ATMs in September2012. Both Visa and MasterCard entered themarket in November 2012 (Robinson 2012).MasterCard holders will be able to withdrawmoney from the 36 Cooperative Bank ATMs,and it is expected that MasterCard will signlicenses with other banks in the future (Thanand Kyaw 2012). Earlier in the same monthVisa signed licensing agreements with threedomestic banks: Kanbawza, Co-operativeBank, and Myanmar Oriental. Visa cards willbe used at ATMs and at some point-of-salesmachines (Than 2012).There is no real securities market (though• securities are issued by companies andbanks, they are not listed on an exchangeand, in most cases, are not traded). Thegovernment has issued limited governmentdebt, which is largely bought and held bybanks. A Memorandum of Understandingwas established in March 2012 between theCentral Bank and a partnership between theTokyo Stock Exchange and Daiwa SecuritiesGroup to share knowledge and expertise indeveloping a securities exchange. Daiwa haslong-standing ties to Myanmar and attemptedto establish a securities exchange in the mid-1900s (Lwin 2012).A deposit insurance scheme that covers a• maximum of 500,000 kyats per depositorwas introduced by the state-owned insurancecompany, Myanma Insurance. As of October2012, it is expected that all private banks willbe required to adopt the deposit insurancescheme, with an annual premium of 0.25percent (Mon 2011).Western Union announced a partnership• with Myanmar Oriental Bank, as its firstagent to offer Western Union money transferservices in Myanmar. Western Union claimsthat it will adjust its fees for the largenumber of migrant workers who send moneyback home. Although Myanmar Oriental
    • 21Bank has only 19 branches, it plans to opensmall stations nationwide to offer moretransfers (Zin 2012).Some international audit firms are• re-entering the market. PwC (PricewaterhouseCoopers) is expected to restartoperations in November 2012. KPMG hasjust opened its office in Yangon. KPMG plansto provide tax and advisory services initiallyand audit services later (Deed 2012).B. Networks and TrainingInstitutionsCurrently, there are no formal microfinanceassociations in Myanmar. There is a microfinanceworking group (MFWG) that has an informalmembership made up primarily of internationalNGOs active in microfinance, including WorldVision, PACT, Save the Children, AMDA,and GRET. Other smaller NGOs that plan tointroduce microfinance include Mercy Corps andEntrepreneurs du Monde.As of November 2012, 118 microfinance licenseswere issued by the Microfinance SupervisoryEnterprise mainly to local and internationalNGOs and cooperatives. As the number andvariety of licensed institutions grows, the valueof membership should increase, particularly whenit comes to fostering a productive relationshipwith the government. The current challenge is todevise a structure that can incorporate the widevariety of institutions without compromising itseffectiveness.While there is no specific microfinance traininginstitute or center, two initiatives may addressthe situation. CARD, in collaboration with theGerman Savings Bank SBFIC, plans to providecapacity building to two emerging MFIs (MingalarMyanmar and Myanmar Egress). And PACT haslaunched a training program funded by LIFTfor up to nine local NGOs to build capacity inmicrofinance provision.International rating agencies will play animportant role in the future. In July, PlanetRating conducted a review on PACT so that itwould comply with a LIFT request that all futuremicrofinance fund recipients obtain a rating froman external rating service.C. ResearchThere has been limited research conducted on thesector. However, a recent LIFT Baseline survey(2012) looks into use of credit, among otherproducts. And the MAP Diagnostic is expected tobringininternationalresearchbodies(FINSCOPEand CENFRI) to further analyze the sector.
    • 23FUNDING V.
    • 24Funding for microfinance from internationaldonors started in the 1990s through the UnitedNations and then funding increased significantlyafter the Nargis cyclone.While there is no formal microfinance apex• 30in Myanmar, LIFT (a multi-donor trust fundled by UNOPS created in response to thedamage cause by the 2008 tropical cycloneNargis) provides funding to several MFIs.Contributors to LIFT for microfinanceinclude AusAid, DFID, and the EC. LIFThas granted more than US$12 million formicrofinance activities run by MFIs (UNDP/PACT, Save the Children/Dawn, andGRET). LIFT plans to work with the WorldBank on the FIND project, with UNCDFon the MicroLead project, and on the MAPdiagnostic of Myanmar. It anticipates thatfunding will increase through a specificmicrofinance window, which is in the finalstage of approval by the LIFT Board. Withthe recent arrival of a microfinance specialist,LIFT will continue to play a significant rolein the sector by coordinating donors, andfunding certain MFIs.• UNDP, a long-time supporter of microfinance,has provided more than US$30 million formicrofinance over the past 15 years. UNDPis developing a new three-year microfinanceplan for 2013–2015. The creation of a povertyscorecard for Myanmar based on Grameen’sProgress out of Poverty Index (PPI) supportsthis new strategy.• UNCDF plans to support greenfieldorganizations at the retail level through theMicroLead project, which is funded by LIFT.Its upcoming MAP diagnostic, also fundedby LIFT, is a diagnostic and programmaticframework to support expanding access tofinancial services for individuals and micro andsmall businesses. The MAP framework createsa space to convene a wide range of stakeholdersaround evidence-based country diagnosticsand dialogue and leads to the developmentof national financial inclusion roadmaps. Theframework was developed by UNCDF inpartnership with FinMark Trust and Cenfri.The MAP assessment will cover the demandside, supply side, policy, legal, regulatory andsupervisory, financial infrastructure, and clientcapability and protection.In September 2012,• DFID awardedmicrofinance grants to GRET, Save theChildren, PACT, and World Vision to expandmicrofinance access to over 60,000 borrowersthroughout Myanmar.The• World Bank Group has recentlyopened an office in Rangoon and is using ajoint approach wherever possible to supportthe development of the sector. The WorldBank is launching the Financial Inclusionfor National Development (FIND) project,which will primarily support MSE. Assistancewill focus on three main areas: (i) institutionbuilding for microfinance supervisionthrough the reform and implementation ofthe microfinance law and regulations; (ii)capacity building for MSE staff to perform itssupervisory functions and for microfinancelenders in relation to evaluating borrowers andkeeping accounts; and (iii) financial literacyand awareness. According to the World Bank,this assistance will be implemented in closealignment with the broader work to reformthe financial sector in Myanmar as proposedin the Financial Sector Master Plan and otherinitiatives to improve access to finance bythe Central Bank of Myanmar. Recognizingits need for support, MSE has requestedtraining from various sources. IFC’s primaryfocus will be to develop capacity at themeso and micro levels. IFC plans to supportgreenfields and provide a targeted sector-wideapproach by supporting several promisingimplementers, such as international NGOs,in their transformation and scaling up process;supporting capacity building at the meso level;facilitating the dissemination of internationalgood practice on responsible finance, branchlessbanking, and other key topics in collaborationwith CGAP; and partnering with World BankFIND on regulatory aspects.30CGAP defines an apex as a second-tier (or “wholesale”) fund that channels public resources to multiple retail financial providers
    • 25RECOMMENDATIONSVI.
    • 26The following are recommendations to strengthenthe sector based on the findings of the review.Given that this report is a rapid assessment, theproposed next steps are indicative, and manyareas will require further research. The reportwas presented and discussed with over 40 keystakeholders at a meeting on 19 October 2012in Yangon. It is envisaged that IFC will supportseveral of the recommendations through itsupcoming Myanmar Microfinance program, incoordination with other donors and investors.A. Policy, Regulatory, andSupervisory FrameworkShort term(next six months)Review and adapt current microfinanceregulation. Given the fast growing numberof licensed MFIs and the limited supervisorycapacity, current regulations need to be reviewedin a timely fashion to ensure they are in line withinternational good practices.31There is a risk thatMSE may create a situation where it does nothave the capacity to supervise the institutions thatit licenses to raise deposits. As supervisor, MSEshould require sufficient minimum capital tokeep the gate sufficiently narrow for MFIs wantingto become licensed deposit-taking institutions sothat it can effectively conduct onsite and offsitesupervision. For example, a distinction couldbe made between those institutions that requireprudential supervision (mostly those that raisedeposits) and those that follow nonprudentialregulations (which apply to all MFIs and includeconsumer protection). Licenses for deposit-taking institutions should require havingsignificant minimum capital as well as reportingon key accepted prudential ratios, such as capitaladequacy ratio (see CGAP 2012). The law forcooperatives should be reviewed at the same timeto prevent regulatory arbitrage whereby deposit-taking cooperatives apply for an MFI license torealize a “softer” regulatory regime. While a deeperanalysis of the regulatory framework is necessary,the team suggests that a rapid review of existingmicrofinance regulation by the World Bank,in collaboration with CGAP, could enable thegovernment to make the necessary adjustments toimprove the safety and reputation of the sector.Identify requirement for nonprudentialregulations. Nonprudential regulations shouldbe reviewed as part of an in-depth regulatoryframework review. The government may considerdeveloping consumer protection regulations thatenable transparency, fair treatment, and effectiverecourse mechanisms. At the same time, a moreflexible approach may be necessary with regardto the current interest rate ceiling for MFIs,which may be too low for MFIs working inrural areas, where operational costs are higher.Once the communication market is liberalizedand the payment system is more advanced, thegovernment could explore how it can issuefavorable agent banking and e-money regulationsto foster the emergence of branchless bankingthat can significantly increase financial access.Review supervisory structure. The governmentmay review its current supervisory set up toincrease links between MSE and the CentralBank, which is responsible for bank supervision.In several countries, MFIs have transformedinto commercial banks that have become marketleaders (e.g., Equity Bank in Kenya), and thecentral bank is almost always involved in thesupervision of deposit-taking MFIs in successfulmicrofinance markets (e.g., Cambodia, Pakistan).In many cases, a special unit of the central banksupervision department is responsible for thesupervision of MFIs.Medium term(over the next three years)Strengthen the supervisory capacity. There ishigh demand from and urgent need by thecurrent supervisor for training and capacitybuilding. While it will take some time to build31Namely CGAP (2012) and BIS recommendations.
    • 27up supervisory capacity, training should startnow. The Central Bank and MSE require world-class training on international good practices forregulation and supervision of microfinance andon accounting and English language. There areseveral training opportunities in the region andglobally, including the CGAP-Toronto CenterMicrofinance Supervisors Training Program andthe Boulder-Turin training. The Alliance forFinancial Inclusion (a network of central banksworking together on financial inclusion) also offerslearning opportunities through knowledge exchangewith central banks. MSE has requested, andfunders should consider funding, an experiencedresident microfinance regulation and supervisionexpert to provide direct hands-on support. Englishlanguage will be an issue, so significant translationof key international good practice documents ishighly recommended. MSE has recently recruitedan English teacher. It may also consider recruitinga few bilingual staff who can facilitate knowledgeexchange with international organizations and withother supervisors in the region.B. Demand and Supply ofMicrofinanceShort term(next 12 months)Gain a better understanding of the sector. Thissector assessment is not sufficient by itself toguide government policies and strategy for thedevelopment of financial inclusion. A more in-depth review of certain areas of the assessment isnecessary. For example, a thorough analysis ofthe prudential and nonprudential regulations(as mentioned above) and of the payment systemwould be useful for developing longer termpolicies.It is also important to better understand demandfor financial services and products, given thecomplex history of the banking and financial sectorin Myanmar. The team recommends the industryfurther research and understand the diversity ofthe demand for financial services in Myanmar. Ashighlighted by the LIFT Baseline Survey (2012),the significant diversity of the population requirescurrent and future providers of financial servicesto ascertain the specific needs of the segmentsthey serve and adapt their services accordingly.This should include an understanding of what itwill take for people to put their money in a formalsavings account, given the current lack of trust inthe banking sector. Likewise, demand surveyswill help define key characteristics of paymentservices (e.g., local transfers) and understand thelevel of over-indebtedness. MAP will provide anopportunity to research and analyze client demandinformation.Medium term(over the next three years)Support the emergence of sustainable retailproviders. Given the huge gap between demandand supply of financial services, and the limitedfocus on sustainability and international goodpractices of the current providers, the teamrecommends building up the capacity of thoseproviders that show solid potential for reachingscale in a sustainable and responsible manner andattracting internationally recognized greenfieldbanks.While 118 MFIs had obtained a license as• of November 2012, fewer than 10 have thepotential to become large-scale sustainableinstitutions. Donors and investors need toassess the potential of existing institutionsand build capacity using performance-basedcontracts and international standards. It isexpected that promising MFIs will requiretechnical support in human resources,management information systems, productdesign, risk management, and businessplans. Although MFIs can remain NGOs,organizations that want to significantly scaleup will also need support for becoming limitedliability companies as there is no precedent forthis.Market demand is also large enough to absorb• several international greenfield microfinancebanks that can both raise the bar and providea demonstration effect for the industry. Thenumber of greenfield microfinance banksthat Myanmar can absorb will depend onpotential scale, target clients, and geographic
    • 28focus. Preference should be given to those thatare willing to go to rural areas/down market,those that have a strong responsible financetrack record, and those that are interested inhelping the sector improve. The governmentand international funders should support suchmarket entrants. These new entrants need tofully understand and adapt their businessmodel to the local Myanmar context.Ensure transparent and responsible financialservices. The market is relatively new, so thereis great opportunity to apply international bestpractices early on, especially in areas of transparencyand responsible finance. Good examples of this areorganizations that ensure they do no harm, putclients first, create demand-driven products, andare models of transparency in all of their operationsand dealings. The team also recommends that keyplayers endorse the Smart Campaign for clientprotection and that the largest players get certifiedby the Smart Campaign for client protection toserve as models and promote broader clientprotection within the industry. The team alsorecommends that emerging MFIs report theirfinancial and social performance to MIX (a globalplatform for reporting on microfinance activity)with donor assistance, if needed.Explorethepotentialforbranchlessbanking.Whilethe infrastructure is not yet available to unleashthe potential of branchless banking to expandfinancial access, the situation may evolve rapidlyover the next few years. It will be important toconsider how technology and global lessons learnedon branchless banking can be used to expandfinancial services in Myanmar.C. Market and FinancialInfrastructureShort term(next 12 months)Help strengthen the working group. With the rapidincrease in the number of licensed MFIs, there is aneed to bring these organizations into a network forsupport and development. Most of these providersare small and have the potential to cause harm tothe sector through practices that are not client-focused. The potential for savings fraud amongthese smaller players should not be underestimated,as it can escalate to foster further mistrust of thebanking sector. Currently, there is a working groupmade up primarily of international organizations,such as PACT, Save the Children, World Vision,and GRET. This group can play a significant roleas a convening body, particularly with an increasingnumber of organizations receiving their MFIlicenses. The association might play a significantrole in increasing the technical capacity of itsmembers.Support the emergence of technical providers.Given the lack of human capacity, the industryneeds to attract more international experts andtechnical providers with a view to transferringskills to local counterparts. One option would beto create an apex that is mostly focused on fundingtechnical assistance for participating MFIs. It couldalso provide credit lines to promising MFIs untilthey are fully capable of raising significant depositsor raising funds from private commercial banks.32In addition, donors should sponsor a critical massof national stakeholders to attend key trainingsessions, such as the Boulder-Turin training.Medium term(over the next three years)Build a sound payment system infrastructure.A solid payment system is required to enable thesector to provide much needed payment services.The current payment system is underdeveloped.By supporting both the government and theprivate sector to develop a sound paymentsystem, donors and investors will also facilitatethe emergence of a financial ecosystem that cansupport new business models based on technology,such as mobile phone banking and agent bankingusing point-of-sale devices or other devices toundertake microfinance transactions, and also linkfinancial access with other kinds of services (e.g.utilities).32For more information on good practices for apexes see Forster, Duflos, and Rosenberg (2012).
    • 29Explore creation of a credit reporting system.Credit information bureaus, when properly used,can reduce the risks of over-indebtedness, becausethey can help lenders to become more aware ofthe amount of debt clients are carrying. The teamrecommends exploring the creation of a creditbureau in which all key microfinance providers ofa certain size are required to report.D. Funder EffectivenessShort term(next 12 months)There is a clear opportunity in Myanmar to ensuredonor good practice from the start. The CGAPcountry reviews (CLEARs) have demonstratedthat good donor coordination can significantlycontribute to the development of the sector (e.g.,Cambodia); conversely, the reviews have shownthat donors can have a negative effect on the sector(e.g., Nicaragua). Given the fact that Myanmaris likely to become a “donor darling,” the risksare high for duplication and high disbursementpressure. However, LIFT has shown that effectivedonor collaboration mechanisms do work inMyanmar.Microfinance cannot effectively absorb verylarge chunks of money, especially early on. Afinancial inclusion donor group could be set upto include all funders interested in supportingmicrofinance in Myanmar. This group couldbuild on LIFT and include other donors andinvestors that support the sector. It also shouldhold regular meetings. Funders could review theirrespective comparative advantage for supportingthe Myanmar microfinance market (e.g., humanresources, funding instruments, technical know-how, experience in the region, performancemeasurement tools, etc.), and collaborate witheach other on this basis. The group could alsocontribute knowledge to the upcoming MAP,adopt common reporting standards for MFIs, andco-fund specific projects.
    • 31ANNEX
    • 32 There is interest of several international MFIsand investors to enter the market. There are start-up NGOs with support fromregional technical providers. Several INGOs have significant microfinanceoperations, with PACT UNDP covering 80% ofthe INGO outreach,World Vision, Proximity, Savethe Children, and GRET. As of November 2012, 118 institutions hadobtained an MFI licence. Myanmar Agriculture Development Bank haslarge outreach with 1.7 million depositors and1.4 million borrowers. Cooperatives also have a large outreach withover 475,000 members. Private banks are now permitted to performinternational banking operations; opportunityfor international remittances. There are approx. 60 rice specializationcompanies with value-chain finance. Governance is a concern due to past government intervention. There is low capacity of all institutions at the retail levelcompared with rest of the region. The informal sector is active on lending and remittances, butthese come with high prices (10–20% per month) and withrisks (hundys). The transformation process of INGOs will be complex(ownership and governance issues). The cooperative movement has a mixed reputation dueto previous crisis in the sector and historical governmentintervention. Commercial banks are not providing services to SME andmicroclients due to lack of capacity and expertise and tounfavorable regulation. Overall capacity of banks is low.There are only 88 ATMs in thecountry, and debit cards are just being introduced. Branchless banking is nonexistent, but there is a high level ofinterest from different players. There is low mobile phone penetration (with SIM cards costingUS$200), poor connections, and unstable electricity supply. Government is committed to reform. There is interest in innovation and newtechnologies for financial inclusion. The Microfinance Law creates legal space forpreviously informal MFIs. World Bank and other donors are prepared tosupport supervisors. Opening up of banking sector may provide newopportunities for financial inclusion. The new Farm Law allows land titles to be usedas collateral. The World Bank project will support supervisoryauthority. The supervisory capacity for microfinance is limited. There are weaknesses in microfinance regulation (min.capital, methodology, interest rate, etc.). Supervision of microfinance is fragmented. There has been a high level of government interventionhistorically. There are lingering effects of the cooperative and bankingcrisis (1980s for co-ops and 2003–2004 for banks). It is unclear whether cooperatives are well supervised. Technical support providers are entering themarket (e.g., CARD and Planet Finance). Microfinance Working Group is operational. There is LIFT funding coordination. The upcoming MAP should prove helpful. The payments and telecommunication landscapeis evolving and may provide opportunities forbranchless banking. Payment system is underdeveloped. The telecommunication sector is under-developed. There are no credit bureaus or collateral registries. Limited collateral types are allowed. Microfinance Working Group has no legal status anddoes not include many players yet (primarily INGOsand donors). There is a lack of training providers.Strengths and Opportunities Weaknesses and ChallengesMesoLevelMacroLevelMicroLevelA. Summary of Opportunities and Challenges in the Market
    • 33B. Profile of Key MicrofinanceOperatorsINFORMAL SECTOR1. (see Section III for details)2. BANKS (STATE-OWNED AND PRIVATE)Myanmar Economic Bank (MEB) is Myanmar’slargest bank in terms of number of branches (325)(Seward 2012). It evolved from State CommercialBank (SCB), established in 1954, which provided awiderangeofcommercialbankingservicesacrossthecountry. MEB continues as a state-owned financialinstitution, owned and supervised by the Ministryof National Planning and Economic Development,though the Central Bank has indicated that it isslated for privatization. MEB operates primarily inurban areas.MEB provides commercial banking services aswell as development banking services to both ofthe private sector and the state sector (it providessubsidized funding to Myanmar AgricultureDevelopment Bank [see below], a specializedagricultural development bank). According to aWorld Bank report (Seward 2012), governmentbonds represented about 20 percent of total assetsin 2011, with loans representing only 8.3 percent.The bank has limited growth potential because ofits small capital base, and it is not allowed to keepthe profits.Myanmar Agriculture Development Bank (MADB)is owned and supervised by the Ministry ofAgriculture and Irrigation.33It has the mandate toeffectively support the development of agricultural,livestock, and rural socioeconomic enterprisesin the country by providing banking services,including loans (seasonal loans and term loans)and deposits (savings deposits from rural savers at8 percent per annum). MADB is not allowed toprovide remittance services. Paddy loans represent90 percent of its loan portfolio, with land registryas collateral (50,000 kyats per acre for up to 10acres, representing one-third to half of the totalcost of rice production). Loans are approved,disbursed, and repaid at the bank’s branch counters,which are mostly located in township centers, afterthe government terminated its vehicular mobilebanking services in 1998. Lending methodology isbased on 5–10 members of group liability.MADB is the second largest financial institutionin Myanmar by number of branches (205). As ofMarch 2012, MADB reported total assets of 116billion kyats (US$132.6 million), total loans of 84billion kyats (US$96 million), and total depositsof 86.9 billion kyats (US$104.3 million). With apaid-in capital of only 2 billion kyats, MADB isthinly capitalized. It suffers financial losses dueto subsidized lending rates (8.5 percent lendingrate compared to 13 percent charged by othercommercial banks), nonperforming loans resultingfrom directed lending programs (e.g., overdueloans of 91 million kyats from directed lending torubber plantation in mountainous areas throughthe Ministry of National Races and Border AreasDevelopment), and low efficiency due to highoperational costs associated with operations inrural areas where infrastructure is extremely poor.More recently, the bank suffered major depositwithdrawals with total deposits dropping to 68billion as of 21 June 2012, because its directeddeposit rate of 8 percent is even lower than thecurrent inflation rate in Myanmar. The bank thriveson government subsidies channeled through MEB.MyanmarLivestockandFisheriesDevelopmentBank(MLFDB) used to be a state-owned bank owned bythe Ministry of Agriculture and Irrigation. MLFDBis believed to be the only private or semi-privatebank in Myanmar that provides microfinance,primarily to farmers engaged in livestock andfisheries operations. Its scope is clearly different fromthat of MADB, which primarily finances farmersengaged in paddy and other crops plantations.According to a World Bank report (Seward 2012),over 55 percent of MLFDB’s loans are made to theagricultural sector. MLFDB has 53 branches andhas a unique business model for lending. As withother private banks, MLFDB requires collateralfor loans, 80–90 percent of which is in the formof land or buildings. It is also conservative in33Information provided here on MADB is from a presentation made by MADB to the review team in June 2012.
    • 34lending against the collateral pledged; it has itsown assessors in each branch to value collateral.Unlike other private banks, MLFDB hasexperimented with other forms of collateral,including equipment and fish/shrimp in coldstorage as collateral. MLFDB does not currentlyplan to establish a subsidiary to do its microfinancebusiness (Seward 2012).3. COOPERATIVES 34Cooperative activities were introduced in Myanmarat the beginning of the 20th century. Cooperativesfocus primarily on deposit mobilization andmicroloans in urban areas. Supervised by theMinistry of Cooperatives, the entire cooperativesector comprises of one apex, 20 unions, 461federations, and 10,751 primary societies (as ofMarch 2012).The Central Cooperative Society (CCS) is the apexin the sector. Under a newly received microfinancelicense, CCS also operates 46 MFIs of its ownthat function as village banks, covering sevenstates and regions. With a total staff of 40 at theseven branches, CCS provides seed money to theMFIs—4.5 million kyats initially and an additional4.5 million kyats at the third month. The 46MFIs, located in townships, have a total staff of252. The loans provided by the MFIs range from45,000 kyats to 120,000 kyats, with a compulsorysaving equivalent of 2.5 percent of the loan size.The interest rate for loans is 2.5 percent per monthflat (roughly 60 percent APR) and 1.25 percent forsavings. Voluntary savings are no less than 1,000kyats.According to CCS, the MFIs have 98–99 percentrepayment rates because the loans typically have a60-day tenure and repayments are collected everyday. As of May 2012, CCS reported total capitalof 152.65 million kyats, 32,851 total members,total savings of 340 million kyats, and total loanoutstanding of 1.1 billion kyats. CCS appears tohave a reasonable governance structure in place,with its General Assembly being the ultimateauthority; its Board of Directors comprises 35members, including five full-time directors.The financial cooperatives are organized underthe Union of Savings and Credit Federation(tertiary level society), which has 41 savingsand credit federations (secondary level societies)and 1,625 primary level societies (as of March2012). The Union does not currently have amicrofinance license—a grace period is extendedto cooperatives under the new MicrofinanceLaw. The Union lends to the primary societies at2 percent flat per month. It reports that, as ofMay 2012, it has an outstanding loan portfolio of1,086 million kyats, with a share capital of 60.72million kyats. The Union also launched its ownlending to individuals in June 2012. As a whole,the Union reported savings of 24.2 billion kyatsand outstanding loans of 16.5 billion kyats, witha total membership of 476,632.Among thousands of primary-level societies,the Employee Savings and Credit Cooperatives(1,191 primary societies), the Bazaar Savingsand Credit Cooperatives (304), the MicrofinanceCooperatives (142), and the Agriculture Savingsand Credit Cooperatives (896) are the largestgroups. The Employee Savings and CreditCooperatives serve government employees fromdepartments, schools, and hospitals, reachinga total of 265,199 members, with 17.2 billionkyats in savings and 6.7 billion kyats in loans,as of May 2012. The Bazaar Savings and CreditCooperatives are community-based creditsocieties in urban areas with members comprisingmostly market shop owners. These cooperativescombined have 45,792 members, with 3.4 billionkyats in savings and 5.5 billion kyats in loans.The Microfinance Cooperatives have 44,329members, with 1.3 billion kyats in savings and2.3 billion kyats in loans. The Agriculture Savingsand Credit Cooperatives have 121,312 members,with 2.3 billion kyats in savings and 2.0 billionkyats in loans.The Cooperative Bank (CB Bank), a privatebank with 25 branches, is closely associatedwith the cooperative system. It is owned by4,500 shareholders, including 1,500 individuals(representing 70 percent of shareholders) and3,000 cooperative societies. CB Bank lends34Information provided here on CCS is from interviews with and handouts from CCS, June 2012.
    • 35to CCS, the union, and the primary societies,despite that fact that loans to the cooperativesystem represent less than 3 percent of its totalloan portfolio. As of 6 March 2012, CB Bankreported total capital of US$40.69 million, totalassets of US$732.22 million, and total profit ofUS$11.46 million (as of 15 March 2012). CBBank has an ambitious expansion strategy and hasreceived Central Bank approval to expand its branchnetwork from the current 25 branches to 55 branchesby the end of 2012. It has recently installed ATMsand is in the process of launching an internationaltransfer business. It also plans to launch a debit card,a Visa/Master card, and mobile banking.4. NGOsUNDP initiated a microfinance project inMyanmar during the second phase of UNDP’sHuman Development Initiative in 1997. Theproject activities were initially implemented bythree international NGOs (Grameen Trust fromBangladesh in the Delta Region, GRET from Francein Shan State, and PACT from the United States inthe Dry Zone). An evaluation and concerns aboutthe high costs of maintaining three distinctoperations with different results led to theconsolidation of the project implementationsunder one management system. Through aninternational bidding process, PACT became thesole implementing agency in 2006.As of March 2012, PACT UNDP operated in25 townships, covering 5,984 villages. With 102branches and total staff of 1,673, PACT UNDP wasthe largest operator in Myanmar, reaching 365,410active borrowers with a loan portfolio of 52,701million kyats (US$62 million).35PACT UNDP offers 10 products, including eightmicroloans (with loan sizes ranging from US$65 toUS$250), one microenterprise loan (with loan sizeup to US$1,875), and one microinsurance product.Because the insurance business is restricted by law,PACT UNDP launched the Beneficiary WelfareProgram, which provides loan write-off and US$125for loss of life at a premium linked with loan size (1percent of loan amount applied).The microfinance methodology used in the PACTUNDP project is similar to that of the Grameenmethodology. It features several flexible options inthe repayment schedules based on the type of loanfor which an individual applies. As a rule, repaymentsare made by regular installments according toagreed-upon schedules (weekly, bi-weekly, ormonthly). The major exception is agricultural loans,which are collected as a lump sum during harvesttime as a balloon repayment. The interest rate is 2.5percent per month. According to PACT UNDP,repayment rates are close to 100 percent, andmost loans are meant for agriculture (34 percent),livestock (33 percent), and trading (21 percent).Borrowers can access higher loan amounts basedon successful repayment of previous loans.PACT Myanmar is an international NGO whollyowned by PACT Global Microfinance Fund,which is registered in the United States. It enteredMyanmar in 1995 by providing assistance to thepoor through income-generating projects. In 1997,it started microfinance operations under the UNDPproject. PACT Myanmar engages in microfinance,health, and livelihood programs.PACT Myanmar recently received a microfinancelicense under the new Microfinance Law evenas it retains its NGO legal status. It operates inthe Magway region, which covers five townships(Minbu, Salin, Aung Lan, Myo Thit, and Pya Pone).It has 11 branches, with a total staff of 182 (171field based and 11 Yangon based). It plans to expandto another 14 townships by adding 40 branches by2014. As of April 2012, PACT Myanmar had 48,041active members. It reports an OSS of 200 percent.Proximity is a U.S.-based international NGOthat has operated in Myanmar since 2004.36Itfeatures innovative and affordable climate-smarttechnologies and services to villages nationwide.Proximity has a customer base of around 100,000rural households that are predominantly small plotfarmers. Products include foot-operated irrigationpumps, drip irrigation sets, water storage tanks,solar lanterns, financial services, and farm advisoryservices. Proximity delivers its products through anextensive agent network in 125 townships (out of a35Information provided here on PACT is provided by PACT through interviews and correspondence in June, October, and November 2012.36Information provided here on Proximity is from interviews and correspondence with Proximity through June and October 2012.
    • 36total of 330 townships in Myanmar), including 165private dealers, 800 village agents, and 1,400 villageassociations. To date, Proximity has delivered morethan 110,000 products that have helped generateincome for more than 500,000 people.Proximity started credit lending three years ago.It has a total of eight offices, 135 sales andcollection officers, and 17 dedicated credit officers.It offers two loan products. The first enables farmersto buy Proximity irrigation products and purchasebasic farm inputs (e.g., seed and fertilizer). Overthe past three years, Proximity has made a totalof 42,517 of these loans, at an average loan sizeof around US$54. The second product is a croploan targeting small-plot rice farmers who needto purchase inputs and hire labor. These are six-month bullet loans with a flat rate of 2.5 percentper month on an average loan size of US$125.Repayment rates have been 97–98 percent on over16,000 active borrowers.World Vision is an international NGO that hasbeen in Myanmar since 1958.37It provides awide range of community development activities,such as healthcare, infrastructure projects, schoolconstruction and education and nutrition supportto children, agriculture and livelihoods trainings,etc. It operates in 11 out of 14 states and divisions inthe country, with a staff of 850, mostly local. WorldVision started microfinance operations in Myanmarin 1998 with microloans to the agriculture andcommerce sectors. It currently operates in Yangon,Mandalay, and Ayeyarwady regions and Shan andKayin states, with a network of 14 branches and 85staff. World Vision reported total number of activeborrowers of 13,282 (83 percent women) and a loanportfolio of US $2.3 million with a loan range ofUS$40–1,200 as of early November 2012.The loansare mostly group loans that follow a methodologysimilar to that of Grameen. Repayment rate is 99percent. Two-thirds of the loans are used for tradeand production, 18 percent are for agriculturepurposes, and 12 percent are for the servicessector. World Vision charges an interest rate of 2.5percent flat per month. The standard loan periodis six to nine months. Consistent with its socialmission, World Vision is piloting and investigatingfinancial services with impact on vulnerable groupsand children. An additional focus is job creationas financed income activities lead to employmentgains. Jobs sustained include loan recipients as wellas an additional 30 percent of total borrowers.World Vision microfinance activities are supportedwith technical assistance and oversight from theLondon-based VisionFund global network of35 MFIs. VisionFund supported World VisionMyanmar’s recent implementation of an industry-recognized loan management information system(MIS). Fully operational in October, the MIS willlead to more secure reporting and improved socialand financial analysis of client data. VisionFundhas also used its own experts to train MSE andmicrofinance practitioner supervisors in the area ofrisk management.Save the Children is an International NGO withheadquarters in London.38It is funded by varioussources on a global level and received grants fromvarious bilateral and multilateral donors locallyin Myanmar. It started Dawn Microfinance inMyanmar almost 10 years ago, under agreementswith the departments of Health and SocialWelfare. In June 2012, it registered and received amicrofinance license under the new MicrofinanceLaw.Save the Children offers microloans and takessavings from members only, primarily in rural areasand peri-urban areas in the outskirts of Yangon.Loan sizes vary between US$40 to US$125, with aloan period of six months and weekly or biweeklyrepayments. It has also introduced seasonalagricultural loans in rural areas, with interest paidbiweekly and lump sum payment of principal after16 weeks. The interest rate is 2.5 percent flat permonth. Dawn Microfinance is currently expandingrapidly and preparing for transformation into amore commercially viable provider of financialservices.GRET is the first international NGO to receive anondeposit-taking microfinance license under the37Information provided here on World Vision is from interviews and correspondence with World Vision in October and November 2012.38Information provided here on Save the Children is from contacts with Save the Children in November 2012.
    • 37new Microfinance Law.39It started a microlendingprogram in very remote areas in Chin State in1995 with support from the European Union,UNDP, Stromme Foundation, and some embassies.The program was set up using a network ofvillage credit schemes (i.e., a decentralized systemenabling the community to be actively involvedin the management of the service). Each villagebank comprises 10 to 30 solidarity groups with fivemembers per group. Members of the group assumejoint liability for the loans. In each village bank,a credit committee, a management committee,a bookkeeper, and a cashier are chosen by themembers and trained by GRET. The managementcommittee approves the loans, and the creditcommittee disburses and collects money. Theprogram reports that it reached operationalsustainability in 2003. Since 2008, GRETintroduced an individual microenterprise loan,with the support of the European Commission,that uses individual lending methodology withtwo witnesses. The program also offers vocationaltraining on off-farm businesses. It does not takevoluntary savings.As of October 2012, GRET had 6,155 activeborrowers and a total portfolio of 840,041,000kyats (US$988,283), covering four townshipsand 99 credit schemes (89 villages) in Chin State.GRET reports a 100 percent repayment rate.Most loans are used for pig and chicken breeding.GRET charges 2.5 percent interest per monthplus an application fee. Loans are based on bulletrepayments, with 12 months for group loans and18 months for microenterprise loans.5. SPECIALIZED AGRICULTURALDEVELOPMENT COMPANIESSixty Specialized Agricultural DevelopmentCompanies provide value chain finance for riceproduction (i.e., they provide seasonal loans alongwith seeds, inputs, fertilizers, etc.). According tothe Myanmar Rice Industry Association, 40–50of these are interested in a microfinance licenseunder the new Microfinance Law. The Associationestimates that the 60 companies, as a whole, extend40 billion to 60 billion kyats in loans duringeach season, supporting about 200,000 farmers.According to an incomplete list of 38 companiesdated 9 July 2011, the two largest companies(Gold Delta and Kittayar Hinthar) had outstandingpaddy loans of 3.0 billion and 2.4 billion kyats,covering 76 and 176 villages, and reaching 6,866and 6,824 farmers, respectively.39Yangon is the center of distribution for riceproduction. The Rice Industry Association and theSpecialized Agricultural Development Companieswere formed to coordinate among farmers,traders, millers, and other companies on thesupply chain. The Rice Industry Association is a100 percent privately owned nonprofit associationformed by various stakeholders of the riceindustry. Specialized Agricultural DevelopmentCompanies, usually one in each township, aretypically owned by a few Yangon companies withexport experience and local farmers, traders, andmillers in the respective township, with a typicalpaid-in capital of 1 billion kyats. It provides abundled package to farmers, including technicalassistance/capacity-building services, seeds,fertilizers, rice milling, sales contract, etc., inaddition to cash and in-kind lending at 2 percentper month. An average borrower holds five toseven acres and receives a loan of 70,000 to 80,000kyats per acre, compared to the 50,000 kyats peracre they can get from MADB. An uncollaterizedgroup lending methodology is used. They reporta 95 percent repayment rate in the past threeconsecutive years.Specialized Agricultural Development Companiesprovide an interesting supply chain model andare reported to have good credit policies withreasonable repayment rates. However, their marketreputation is not great due to funding constraintsas their capital is limited and banks are not lendingwithout adequate acceptable collaterals.The key stakeholders of the Rice IndustryAssociation are mostly successful businessmenwho have close connections with the government.The new regulation for MFIs, with very lowcapital requirements, makes it possible for them totransform into MFIs.6. GOVERNMENT ORGANIZATIONS—NONBANKS (see Section III for details)39Information provided here on GRET is from contacts with GRET in November 2012.40Information provided here on the Myanmar Rice Industry Association is from interviews with the Myanmar Rice Industry Association in June 2012.
    • 38C. Areas for Future Research at the Policy LevelThe following areas require further research; theymay be addressed in upcoming research and/or byFIND and MAP initiatives:• Microfinance Law. There seems to be differentrequirements for local and internationalorganizations to get a license (see Appendix A ofDirective 2).• Portfolio quality. How do MFIs report theirportfolio quality to the supervisors? There areno standards cited in the reporting formatsof the Microfinance Law Instructions.• Transformation of projects and NGOs into for-profit MFIs. The transformation of the UNDPproject into a legal MFI will raise severalquestions, as will the transformation of NGOsinto for-profit MFIs in the future. See Lauer(2008).• Consumer protection. Given the high level ofover-indebtedness of farmers in several areasof Myanmar, it is important to explore howthe current legal environment will protectclients against over-indebtedness and abusivecollection lending.• Bank downscaling. With the new conditions forsecured lending transactions, where gold andagricultural production can be considered ascollateral, banks may be able to downscale inthe future. Further research on this opportunitywould be useful. Bank downscaling could haveregulatory consequences (e.g., how would themicrofinance portfolio of a bank be regulatedand supervised?).• Foreign direct investment and banking sector laws.It is important to understand the dynamicsof this issue and when foreign investors willbe able to engage in a joint venture. There areindications of emerging partnerships (e.g., withSingapore banks).• Agent regulation. According to some of ourinterviews, an agent regulation is in theworks. It would be useful to find out moreabout this regulation as it could open somenew opportunities for branchless banking(see Duflos [2012]).• AML/CFT. According to the Central Bank, thegovernment has created a Financial IntelligenceBureau that includes the Central Bank.The teamwas told that the requirements from the AML/CFT Law are quite strict and require showingan ID card and having two introducers. Moreresearch on how to adapt such requirements tolow-income segments would be useful.• Regulation and supervision of cooperatives.The Ministry of Cooperatives has townshipantenna with up to 10 supervisors who controlcooperatives financial statements quarterly andconduct monthly onsite supervision.The qualityof this supervision should be assessed.• Pawn shops. There are different opinions in thesector on how pawn shops are regulated andsupervised. Additional research on that frontwould be welcome.
    • 39D. List of MeetingsThe team met with the following institutions and organizations:Regulators and supervisorsCentral Bank of MyanmarMicrofinance Supervisory EnterpriseBanksBank for Investment and Development of VietnamMyanmar Agriculture Development BankMyanmar Industrial Development BankYoma BankMyanmar Oriental BankCooperatives BankMicrofinance organizations and cooperativesCARDCentral Cooperative Society and Financial Cooperative UnionGRET NGOMyanmar Rice Association/Specialized Agriculture Finance CompaniesPACTProximityPlanet FinanceSave the ChildrenWorld VisionDonors/DFIs/IFIs/OthersMarket expertsUNCDFUNDPUNOPS—LIFTUSAIDWorld Bank
    • 40E. Research backgroundTo identify the technical assistance support needed toimprove access to finance and to inform future IFCinvestment decisions, the visit focused on mappingMyanmar’s financial sector with a microfinancefocus. The research commenced in June 2012and was carried out by IFC’s Paul Luchtenburg,senior operations officer for Microfinance AdvisoryServices in EAP; Li (Linda) Ren, senior operationsofficer for Microfinance Investment Services inEAP; Li Yan Chen, associate operations officerfor Advisory Services; and Eric Duflos, East Asiaand the Pacific regional representative for CGAP.The goal of the review was to determine the• landscape for microfinance in Myanmar and toidentify key potential partners. To achieve this,the team did the following:Assessed the overall environment, market, and• role of sector stakeholders.Estimated the gap in access to financial services• for microentrepreneurs and low-incomepopulations.Reviewed leading microfinance institutions/• programs in terms of (a) major challenges; (b)market outlook; (c) outreach and efficiency indeliveringfinancialservicestomicroentrepreneursand the broader population; (d) managementand operations, including range of services;and (e) potential to significantly expand and becommercially viable.Reviewed the current regulatory and supervisory• framework for microfinance.The team met with representatives from• stakeholders involved in financial inclusion,including regulators; supervisors; representativesof state-owned banks, commercial banks,cooperatives, licensed MFIs, internationalNGOs, donors, DFIs/IFIs; and other marketexperts. Annex D offers a detailed list of theseparticipants.This report presents a preliminary analysis and abroad snapshot of the microfinance sector and relatedmacroeconomic and financial sector developments.This report and the information herein shouldnot be considered definitive, particularly given thelimited publicly available information in Myanmarand the nascent stages of Myanmar’s financial andmicrofinance sectors.Upcoming initiatives, such as the UNCDF MAP, theWorld Bank FIND project, and other donor works,may serve to complement this report and enablegreater understanding.
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    • 45Myanmar37 Kaba Aye Pagoda RoadYangonTel: (951) 662-866Fax: (951) 665-537Email: Cschneider@IFC.orgHanoi3rd Floor, 63 Ly Thai To Street,HanoiTel: (84-4) 3934-2282Fax: (84-4) 3934-2289Email: pluchtenburg@ifc.orgwww.ifc.org/eastasiaAll CGAP publications are availableon the CGAP website atwww.cgap.org.CGAP1818 H Street, NWMSN P3-300Washington, DC20433 USATel: 202-473-9594Fax: 202-522-3744Email: cgap@worldbank.orgJanuary 2013