Microfinance sector already fragmented and expanding credit too swiftly could tip the financial sector into a crisis
The prospect of doing business in Myanmar just got juicier. With its very first credit-risk rating coming up, Myanmar is likely to see a new injection of investments.
Banking groups Citibank and Standard Chartered are expected to receive a formal mandate to advise Myanmar on how to earn a credit rating, which would be necessary if the government hopes to raise capital by selling bonds.
However, it is anybody's guess where the bulk of the investment money will flow. This is, after all, a land of legendary riches. Besides precious stones, Myanmar has proven oil reserves of 50 million barrels (and 10 trillion cubic feet of gas reserves). But with its financial sector in infancy, an open-door policy could do more harm than good if not carefully calibrated.
If the country is to avoid the pitfalls of transitioning into a market economy, it must build a robust financial sector. But it should be one that makes it easier for an entrepreneur to borrow 150,000 kyat (S$165) for setting up a rice farm rather than a speculator seeking to make a windfall.
A well-lubricated financial sector is the key to unlocking the enterprising energy of an economy. It helps create jobs and provides families the incomes with which they can improve their lives. Development economists call that financial inclusion, but Mr Aung Khaing Htay, a taxi driver who drove me around Yangon recently, simply calls it "money".
Prosperity depends on how much money you have access to. Yet, according to the World Bank, 73 per cent of the world's poor still do not have bank accounts.
For a family living on less than US$1.25 (S$1.76) a day - the widely accepted income line of poverty - a bank account is the first step on the ladder out of misery. It can help start a small business, protect what little income the family has and ensure it gets the social security promised. Which is why access to finance is seen as the silver bullet that can break the cycle of poverty. But that is not as easy as it looks.
Mr Aung moonlights as an entrepreneur on the side. The dried salted-fish business that he runs from his home earns him 200,000 kyat a month. But with the price of fish being volatile and the value of the kyat sliding, he is contemplating shutting down his business. If only he could borrow enough money to set up a small cold-storage, he could turn things around.
The trouble is, he has almost no assets to put up as collateral. That leaves him relying mostly on friends and family to find the money to start a venture. That is not the way to make small enterprises successful.
The unmet demand for microfinance in Myanmar is estimated to be at least US$1 billion - four times greater than supply. There are 142 microfinance providers operating in the country, and collectively they reach 2.8 million borrowers. Together, they hold a total loan portfolio of 236 billion kyat. But only 16 per cent of households in Myanmar have access to formal financial services.
The vast majority of the poor have to knock on the door of a local moneylender who charges 10 to 20 per cent a month as interest. Borrowings at such rates can rarely ever be paid back. This is why the country needs a financial architecture that allows legitimate banking to reach the poorest.
Providing access will be a long, hard slog. The most urgent need for Myanmar is to establish a consumer credit bureau that is capable of evaluating risk on loans for the many smallholders and entrepreneurs who cannot put up hefty collateral. It would also need to lift the cap of 13 per cent interest on loans that makes banks reluctant to service low-income borrowers.
Myanmar's antiquated clearing system, which requires banks to physically transfer truckloads of cash each day, will need to be replaced with an electronic one. Therefore, real-time network connectivity between branches should be a priority. And, with mobile phones fast becoming common, it should be possible to provide everyone minimum guaranteed access to some form of financial service reasonably quickly via mobile-banking.
As Myanmar counts down to elections in November, it will come under pressure to liberalise its financial sector. But the generals in charge must be cautious. The microfinance sector is already too fragmented. There are far too many small players in the market. The capital requirement - US$30,000 - for setting up microfinance institutions is low, putting into question the viability of some of these lenders.
Also, the apex microfinance regulatory body, the Microfinance Supervisory Enterprise, does not have the capacity to supervise small money-lending institutions.
If Myanmar liberalises rules too quickly, Mr Aung could borrow more than he can afford to pay back. Expanding credit too swiftly could tip the financial sector into a crisis. The last thing that Myanmar wants is a repeat of its bank run of 2003. Transitioning to a liberal market economy is fraught with dangers - and whoever wins the coming elections must introduce reforms with caution.
• The writer is the director of research at the Global Institute for Tomorrow, Hong Kong
A version of this article appeared in the print edition of The Straits Times on September 10, 2015, with the headline 'Myanmar must introduce finance reforms with caution'. Print Edition | Subscribe
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