Enabling New Business: Myanmar’s Microfinance Sector Powers Economic Growth
Better laws, increased competition, and rapidly expanding mobile access are all converging to transform Myanmar’s microfinance sector. As I have reported, Myanmar’s economy is evolving into something radically new after decades of isolation, and financial services to low-income, underserved segments are playing a major role in driving growth.
Accion’s partner in Myanmar, DAWN Microfinance, recently conducted a survey among its current clients. One of them, “Maya” (not her real name), had taken a first loan from DAWN of US$15 five years ago, when she was just selling dried fish from a straw mat laid on the roadside. Maya now borrows US$200 from DAWN every six months to expand her inventory, selling rice, eggs, and cooking oil, among other groceries and household goods. Her business initially provided her family of five with a small amount of supplementary income. But with the growth in sales she attributes to her loans from DAWN, Maya’s business now contributes a greater share of the family’s income than her husband’s daily wages do.
As she plans how to expand her enterprise even further, Maya hopes to diversify into clothing sales, a venture which would require at least US$500 in new capital. Her aspirations reflect those of many DAWN clients — they see enormous potential to grow their businesses if more capital were available. The average current loan size for DAWN is just under US$200, but the average desired loan amount is US$475. Of course, not every client who says they want a larger loan could actually manage one. But their confidence in asking for more testifies to the potential they see to grow their businesses.
Recent directives by the Central Bank should make it easier for microfinance institutions to access funding and in turn serve more clients with larger loan amounts. And access to financial services in general is also expected to expand. A 2013 UNCDF study found that 70 percent of Myanmar’s adult population lacks access to any financial service. Myanmar’s government, however, has outlined plans to reduce that figure by at least 10 percentage points by 2020. DAWN’s survey suggests that progress is being made. Only 9 percent of DAWN’s current borrowers had taken a loan before being offered one by DAWN, but since receiving their first loan, 23 percent have been offered a loan by another microfinance institution, suggesting increases in access and competition.
Competition is also helping drive services better tailored to the needs of customers. Since Myanmar’s microfinance industry was formally regulated in 2011, providers have rarely faced competition when opening in a new area. Microfinance interest rates are capped at 30 percent per year, a fraction of the amount charged by unregulated moneylenders, which, at 10 percent or more per month, can exceed 200 percent on an annualized basis. It has historically been easy for microfinance institutions, with much more attractive (albeit mandated) interest rates, and with few competitors, to find new clients just by word of mouth. Institutional growth was limited only by how much equity capital its shareholders were willing to invest in the company.
But with competition now increasing, a simple low-cost loan is no longer sufficient. Customers are asking for larger loan amounts, more personalized repayment schedules and health and life insurance for their families. And as clients become more familiar with financial services, they are demanding higher-quality products — a huge step in the development of the industry.
As Myanmar’s financial services sector, and its economy as a whole, continues its dramatic growth, microfinance institutions must continue to improve their offerings. Building on the core banking system implemented with Accion, DAWN is examining opportunities to leverage technology and data to improve the quality of its products. Mobile phone penetration and smartphone adoption are rapidly increasing across Myanmar as well, and although not all of DAWN’s clients can afford a high-end phone yet, DAWN expects to offer microfinance loans via mobile channels in the near future for those who can.
The widespread optimism about the future of Myanmar’s economy is warranted. With the new government committed to responsible fiscal management and US sanctions to lift, Myanmar will benefit from increased interest from global businesses. Even as the government aims to make Myanmar a more attractive place for companies to do business, DAWN is working to ensure that Myanmar’s entrepreneurs will benefit from the vast economic opportunities that the entire country is now poised to enjoy.
This post originally appeared on the Wall Street Journal’s Multipliers of Prosperity, in partnership with the MetLife Foundation.