The UNDP Microfinance office in Nyaungshwe, Shan State. (Michael Coghlan/Flickr).

Ambitious plans to expand financial services for Myanmar’s poor and help promote economic growth have a long way to go

In recent decades, the steady rise in use of modern financial products – bank accounts, loans, insurance – has been a critical driver of sustained growth across Southeast Asia.

But this expansion hasn’t quite made it to Myanmar yet. In this country of 51 million people where 95 percent of adults make less than US$10 per day, users of banking services, credit and risk-mitigation products are painfully thin on the ground.

Financial inclusion is a key part of the government’s ambitious reform agenda. In May, the government said it wants to provide 40 per cent of the population with access to formal financial services by 2020, up from 30 per cent today.

Myanmar’s unmet financial needs are vast. According to a comprehensive assessment of Myanmar’s financial inclusion needs called Making Access Possible (MAP), conducted last year by two UN agencies and a number of private think tanks, just five percent of the country’s adult population has a bank account.

The MAP report is part of a consultation process between Naypyidaw and various international stakeholders that began in late 2012 with the release of the Framework for Economic and Social Reforms. An ambitious, if rough, blueprint for the country’s development, it emphasises the need to modernise agriculture, promote foreign investment and reduce poverty by improving access to credit and creating jobs.

Myanmar’s entire financial sector is notable for its high level of informality. In a survey for the MAP report, 30 percent of respondents reported using formal financial services – including microfinance schemes and short-term, collateralised loans from pawn shops. But 31 percent reported using unregulated financial services, such as loan sharks and informal remittance schemes, with 21 per cent saying they rely on informal services exclusively.

According to Hennie Bester, a key author of the MAP report and technical director of the Centre for Financial Regulation and Inclusion, a South African think tank, retail debt in Myanmar is almost evenly split between informal lending, at 4.54 trillion kyats (US$4.5 billion), and informal lending, at 4.8 trillion kyats.

Bester was in Yangon last week at a UN-sponsored conference on financial inclusion in ASEAN where he stressed the importance of bringing this money into the formal system. Those ASEAN countries with robust, formal financial systems enjoy the highest levels of economic growth, he noted.

“Formal services allow you to tap underneath the mattress: to bring that money into your economy to build factories, to create infrastructure that is desperately needed,” he said. “The challenge that the government has – and the opportunity – is to bring that inside the economy.”

One avenue for easing access to formal financial services is through mobile banking and credit services, which have reached maturity in some developing markets, notably in East Africa. While mobile phone penetration in Myanmar currently sits at under 15 percent, the launch of two new foreign-owned networks since August is expected to see mobile phone use soar.

The use of predatory, unregulated lenders – perceived as more accessible than formal institutions, particularly by day labourers and informal workers – has led to a crippling cycle of indebtedness. Individuals relying on their services have a significantly higher debt burden than urban workers with stable employment.

Farmers, however, are no longer as reliant on loan sharks as they used to be, particularly after a new microfinance law passed in November 2011. Myanmar’s largest microfinance scheme – launched in 1997 by US-based non-profit organization Pact with United Nations Development Programme support – has been joined by programmes by major charities, including Save the Children and World Vision, as well as two foreign banks, AEON from Japan and Cambodia’s ACLEDA.

The surge in microfinance lending over the past three years, along with increased lending by Myanmar’s Agricultural Development Bank, means that farmers are now the country’s largest users of formal financial institutions.

But access to capital is only one part of the puzzle. With crop insurance not available in Myanmar, Bester warned, lending goes towards mitigating losses and not agricultural productivity. According to the MAP survey, 42 per cent of farmers reported relying on savings or borrowing to “manage the impact of insurable risk events,” indicating a need for insurance vehicles tailored to Myanmar’s agricultural base. Agriculture makes up roughly 40 per cent of Myanmar’s GDP.

“What you may find is that if you have an undeveloped financial market, where you don’t have risk mitigation products, a government policy to grow agriculture through credit may in fact be entirely unproductive, because the credit is going to deal with losses,” Bester said.