Can microfinance help Myanmar’s economic woes?

Despite being one of Asia's fastest-growing economies ever since 2012, Myanmar is beset by multiple economic issues and poverty. Can microfinance be the solution?

Decisionmakers in Myanmar probably popped open champagne bottles when the World Bank released its economic projections for the country in June. According to its estimates, growth is expected to rise to 6.5% this fiscal year and will accelerate to 6.7% by 2021. Political and economic reforms since 2012 have led to industrial activities being restarted, supported by the strong performance of the garment sector and construction activities. Entire industrial sectors have been liberalized, and, thanks to the China-Myanmar Economic Corridor, the number of megaprojects is growing.

Yet there are risks. While the economy of Myanmar has taken off with growth rates consistently above 6 percent, there is some concern over the sustainability of this growth. As the experience of other developing countries shows, sustainable development can only happen if GDP rates are doubled by heavy investments in physical infrastructure and capital markets. But for a government stultified by corruption, these investments are not a given.

Perhaps the most important risk factors come from external factors. The flow of FDI into Myanmar is likely to be affected by slowing global and regional growth, especially in China, together with a renewed escalation of global trade tensions. On top of this non-negligible geoeconomic risk, there is also insecurity in border areas, the Rakhine crisis, with violence and forced displacement of refugees, and the recent flare-up in violence involving the Arakan Army. The human rights violations committed by the government are now putting at risk Myanmar’s privileges under the EU’s Generalized System of Preferences (GSP), as calls are growing for the country to be kicked out.

In this context of nascent growth and external instability, top-down actions of government spending and massive FDI influxes need to be complemented by a bottom-up approach to accelerate poverty alleviation. Here is where microfinance institutions (MFIs) come in: while MFIs are no cure-all for sustained development, there is strong evidence that suggests these companies can have a significant impact on domestic growth (GDP). Why? Because MFIs are helping social businesses run by women and young entrepreneurs, which are usually most likely to live beneath the poverty line.

MFIs are especially important in countries such as Myanmar that have inefficient financial markets. The stock exchange, which began trading in March 2016, has only five listings. Overall, their market capitalization is less than 1% of the country's gross domestic product. But with no sovereign rating or secondary market, the notes are struggling to attract investors, and the country has no market at all for corporate bonds.

In this context, MFIs have the potential to fill the gap and to create domestic markets and infrastructure to strengthen the economy from the ground up. So far in Myanmar, more than 5 million borrowers have received loans through MFIs, allowing them to start businesses or pay debts (especially healthcare-related ones).

One such company, Easy Microfinance, was started in 2015, shortly after the country opened its doors to foreign investment. Financed by Meridian Capital Limited, a Hong Kong-based investment firm that reportedly began exploring investment opportunities in Myanmar from the time the country opened to foreign investment in 2014, Easy Microfinance now claims 100,000 borrowers, 16 branches in six regions and 450 employees..

Although the overall penetration of MFIs is still low, businesses are beginning to benefit and success stories abound. Most of Easy Microfinance’s clients, for example, are entrepreneurial women or small businesses that own a small shop or stall. 99% of its borrowers have been able to pay their loans, making Easy Microfinance profitable almost as soon as it opened up shop in Myanmar. As Meridian Capital’s Askar Alshinbayev puts it, “we have opened up a world of opportunity for small businesses and traders to start or grow their businesses”.

Locally-focused investment strategies that concentrate on smaller businesses have helped distinguish MFIs like Easy Microfinance from other outside investors amidst Myanmar’s troubled political context. As Nick Powell of Delta Capital, which has partnered with Meridian Capital on the Easy Microfinance initiative, told Nikkei last year: “We like businesses that provide goods and services sought by the growing middle class. We tend to avoid sectors that come with high government involvement and regulatory risks.”

For smaller amounts of money, mobile banking also has potential. In 2018, mobile service operator Telenor launched an app called Wave Money, which enabled users to transfer money via Telenor's 80,000 mobile agents nationwide. Telenor is offering the service in cooperation with Yoma Bank, a midsize commercial lender. Such small-scale solutions offer a lifeline for many until the economy matures.

But can Myanmar’s microfinance boom last and create prosperity? According to the World Bank, microfinance is generally seen as a way to fix credit markets and unleash the productive capacities of poor people dependent on self-employment. In the 1990s, the microfinance sector expanded rapidly, leading to the creation of new social enterprises and social investment. But while economic reforms have been a boon to the economy of developing countries, growth post-reform and sustained growth are two different things. The latter requires public spending, investment in infrastructure and encouragement to the domestic industry, and developing countries have often found that the environment of heady liberalization post-reform is often not conducive to expansive fiscal stimulus.

 It remains to be seen if Myanmar can sustain growth rates while balancing the pressures of fiscal probity with the need to create infrastructure and expand capital markets. At the core, the problem of sustained growth requires strong fundamentals: a stable exchange rate, growing exports, a strong domestic demand for local industry and services. And while MFI’s, by design, encourage these fundamentals, Myanmar has a lot of work to do.