The third goal of the Myanmar Economic Reform and Recovery Plan (MERRP) is focused on rural growth, and envisages a stronger role for MFIs and the state-owned Myanmar Agricultural Development Bank (MADB).
Agricultural development is a key part of producing rural growth, and the first relevant action plan for the financial sector is an expansion of rural lending from Myanmar Economic Bank (MEB) and MADB.
The action plan calls for MEB and MADB to provide more than just “simple crop loans”, offering financing for a “full range of activities and agricultural production, storage and marketing chains”.
The IFC, among others, has been focussed on the importance of financing across value and marketing chains. In 2019, for example, the IFC estimated Myanmar farmers are suffering harvest losses of around 20% due to inadequate storage facilities while waiting for higher post-harvest period prices.
In April that year, the IFC extended a $3m credit facility to Sohan Lal Commodity Management (SLCM) Myanmar, a subsidiary of Indian agricultural logistics group SLCM. That firm reported it had reduced post-harvest losses to 0.5%.
Under the MERRP, either MEB or MADB will aim to expand their lending to agricultural supply chains by Q2 2020-21.
We note that MEB and MADB appear to have been providing short dated value chain financing already (see separate story in this week's brief).
We also note that MADB and MEB have shown signs of modernisation in recent months. MADB signed agreements in September with mobile providers including Ongo, KBZPay, OK$, Shwe Bank, CB Bank and MPT Money to disburse digital agricultural loans to farmers.
MEB has partnered with Wave Money on pension distribution.
MADB also has experience with hire purchase equipment loans, and we expect it to be relatively straightforward for the banks to begin lending to logistics and storage companies.
Concessional loans for MFIs
A second relevant action plan for the financial sector is to “strengthen the scope and depth of MFI’s in rural financing by allowing them to seek adequate funds in the form of onshore loans at reasonable interest rates”.
This action plan calls for MFIs “focussed on rural financing” to be provided with “concessional loans” by the end of 2020-21.
The financial regulators have long tried to incentivise micro lenders to focus on rural areas. Initially, there was a requirement that a certain percentage of a firm’s business had to be in rural areas. Even after this was removed, there were anecdotal reports that MFIs expanding into poor rural areas found it easier to receive approval for branch opening and other administrative issues
The fact that MFIs will receive “concessional loans”, implies that the financing they will provide to rural borrowers will also be below market rates. It is difficult to judge this plan without details on the nature of the financing and which lenders and borrowers will qualify.
We note MADB loans for crops and hire purchase pre-pandemic came with interest rates of around 8% - far below the interest rate on typical microfinance loans.
It could be that the government envisages a programme similar in structure but wider in scope to the recent tea shop lending programme. Here MEB’s provide 1% one-year loans to MFIs, who will lend the funds to registered tea shops and restaurants at 2%, the announcement said.
Another MFI-focussed action plan aims to lift the ceiling on loan sizes for “selected MFIs” to help service what it calls the “missing middle” of micro, small and medium-sized enterprises that are too small to access bank funding and too large for existing MFI lending limits.
We note that in May, parliament discussed amendments to the microfinance bill that included the enterprise loan limit from Ks10m to Ks20m. Boosting the ceiling for lending to SMEs and potentially allowing MFIs to take collateral have been discussed in the industry for years.
There are relatively few MFIs with the balance sheet and expertise to want to lend to SMEs in large volumes. But the MERRP appears to favour caution in going down this route.
The action plan aims to have increased the maximum loan size of at least one MFIs by 2020-21.
Finally, a related action plan is one that would simply provide an MFI liquidity facility “to meet any contingency funding needs”.
Although many of the larger MFIs have borrowed from local banks or foreign investors through the LIFT-TCX programme, there are still many that will suffer a liquidity shortfall.
Research from social enterprise analytics firm M-Cril published in July suggested that the 20 largest Myanmar microlenders may experience a liquidity shortfall of around $177m.
This was before the regulator asked lenders to postpone collecting loan repayments for November or December until April 2021. We believe this will only increase the need for liquidity assistance.