Myanmar, June, 24 2013 -
“Microfinance is a platform builder, like education. No one claims that having a school in your village will eliminate poverty, but if you don’t have a school in the village you have less chance of emerging from poverty.”
Microfinance may not be the magic bullet to fight poverty after all, some experts are saying. The practice of extending small loans to entrepreneurs has been intensively promoted as the solution for poverty since the mid-1990s. In Myanmar the sector was small and operated in a legal grey area until 2011, when a microfinance law was approved by parliament.
The government has pledged to reduce poverty to 16 percent by 2015, and its National Comprehensive Plan contains an eight-point rural-development and poverty-alleviation scheme. One of the points covers microfinance.
But after crises in India, where heavily indebted lenders had difficulty repaying their loans, experts are questioning whether microfinance actually has an impact on poverty.
“The best studies we have aren’t suggesting a big impact on poverty one way or the other. The impact is approximately zero. What really reduces poverty is industrialisation and emigration. Both have been more important in Bangladesh for reducing poverty than microcredit,” says David Roodman, a senior fellow at the Center for Global Development who focuses on microfinance, debt relief and aid effectiveness.
“However, financial services such as loans and savings accounts are extremely important. We all need ways to set aside money for the things that are important or to obtain funds in emergencies,” he said.
Pact Global Microfinance Fund has operated in Myanmar since 1997. Its chief operating officer, Fahmid Karim Bhuiya, is convinced that microfinance can improve living conditions.
“It’s very unlikely that half a million people are borrowing from us, repaying their loans regularly and investing in their business, if they are not getting any benefit out of it,” Mr Bhuiya said.
“We should not only look at the financial gain. It is much more than just reducing poverty,” he said.
A United Nations Development Programme (UNDP) impact study from 2011 showed that clients of microfinance in Myanmar fared somewhat better in areas such as food security and education compared to non-clients.
Sanjay Sinha, director of Micro-Credit Ratings International, which undertakes financial and social ratings of microfinance institutions, said microfinance is one of several tools to reduce poverty but does not work in isolation.
“The availability of small sums of money must be combined with improved market conditions, upgrading of skills and facilitation of other features that affect the lives of poor people,” said Mr Sinha.
In Bangladesh the microfinance sector is more mature, after years of experience. One institution is Save Safe, whose ambition is simply to help poor people manage their money.
“Microfinance is a platform builder, like education. No one claims that having a school in your village will eliminate poverty, but if you don’t have a school in the village you have less chance of emerging from poverty,” says Stuart Rutherford, the founder of Save Safe.
He pointed out that Myanmar was still at the beginning stage but had the late starter’s advantage of being able to learn from others’ mistakes.
Mr Roodman said he believed the “major risk” in Myanmar was that “lots of outside groups will set up microfinance banks”.
Currently 142 organisations are licensed to conduct microfinance operations in Myanmar.
“These will all grow fast at first because they are starting small. But because there are so many of them, they will start overlapping and lending to the same people without realising it. Then some people will borrow too much and there could be a bubble.”
But Mr Bhuiya said he disagreed and that people in rural areas should also be able to choose which lender they wanted to use.
“I don’t think overlapping is a problem. I think village residents can be more rational and intelligent than rich people, since they have to manage with a very small amount of resources.”
He said the cap on interest rates, which is currently set at 2.5pc a month, would slow growth in the sector and could lead to more remote areas missing out completely.
“The interest rate is too challenging for new organisations so it’s hard to say when microfinance will reach more remote areas. If organisations cannot make their full cost recovery, they will not expand. If they don’t ... then people will not get loans. We might think a restriction on interest rates would be very helpful, but in reality it won’t. Nobody will go to these remote areas with these costs, because they cannot make a profit on it,” he said.
But not everybody agrees the interest rate is a problem. Mr Sinha said that the cap could be interpreted several ways with vastly different results.
“Applied as a flat interest rate for a one year loan, 30pc collected with monthly repayments works out to an annual interest rate of over 55pc. In addition, if a lender charges loan processing fees it can increase its revenue on capital to more than 60pc, which is more than adequate to cover the expenses of operating in even the most difficult conditions in Myanmar,” said Mr Sinha, who visited Myanmar earlier this year to meet the Myanmar Microfinance Supervisory Enterprise (MMSE) and hold discussions with members of the microfinance community..
“If the restriction is interpreted more strictly it could mean 30pc collected on declining loan balances - meaning the revenue on the disbursed loan amount could not be increased beyond 30pc a year – then it is possible to manage within this revenue in relatively easy-to-operate areas like the delta, but not in the more sparsely populated and hilly regions of the country.”
While an India-style crisis may be far away, there still is a clear shortage of experience and knowledge of best practices in Myanmar, he said.
“A better way is for regulatory authorities to monitor expenses and surpluses generated by financial institutions to ensure that borrowers are not being exploited. However, that is a more difficult task, requiring international knowledge and experience that MMSE freely admits it does not have.”
Mr Bhuiya said he believes Myanmar is already a step ahead. “I personally think the situation in Myanmar is more secure. It is under legal control and surveillance. It is very unlikely that anyone can get away with manipulative behaviour.”