A Survey of Microfinance Institutions in Burma

By

Sean Turnell

Burma Economic Watch

Economics Department

Macquarie University

Sydney, Australia

Abstract

Problems in the financial sector have loomed unusually large in the history of modern Burma. From the colonial-era dominance of the much maligned Chettiars, the failures of cooperative credit, the financial repression of socialist banking, to the fitful reforms of recent times, Burma has consistently failed to develop the financial system and institutions it needs. Now, against this unpromising backdrop, microfinance has made its first, tentative, steps.

This paper will examine the current state of microfinance in Burma. Noting the failures of the past, it will consider the extent to which modern microfinance methodologies promise the hope that history need not repeat itself. The paper will illustrate the various microfinance schemes currently in the field in Burma, and the nature and extent of their operations. The paper will conclude by exploring the challenges still facing microfinance in Burma, and the degree to which apparent indicators of progress may mask a less comforting reality.

JEL Classification: O16, P34, Q14.

Keywords: Microfinance, Burma, Myanmar.

I. Introduction

In recent years much excitement has accorded the emergence of microfinance as a device for poverty alleviation and economic development. Microfinance, according to its advocates, creates the means for greater employment and income-generation, allows the poor to smooth consumption and meet social, religious and other obligations, offers financial protection from crises and disasters, encourages schooling and empowers the marginalised – especially women. Inspired by the example of such famous microfinance institutions (MFIs) as the Grameen Bank of Bangladesh, BancoSol of Bolivia, and the Unit Desas of the Bank Rakyat Indonesia, MFIs of all types and sizes have appeared all over the world. A myriad of models and methodologies have been employed by these MFIs, but certain key principles stand out. These include a presumption that access to credit is more important to the poor than the price of that credit, the widespread use of group and progressive-lending as a substitute for collateral, the maintenance of low administration costs through simplified procedures, the mobilisation of savings through deposit products, and the use of intensive motivational techniques (McGuire and Conroy 2000:2-3). International donors spend around $US1 billion per year on microfinance, and by 2005 almost 100 million people had access to microfinance in over 70 countries (ADB 2005:17).[1]

One country greatly in need of the benefits promised by microfinance is Burma. Isolated for four decades, and for most of this time in possession of a financial system repressed in the familiar socialist pattern, in recent years the country has made certain faltering steps in the direction of financial reform. Notwithstanding these, access to credit and other financial services (especially in rural areas) remains greatly restricted. According to the UNDP (2003:9) the ‘lack of access to credit to purchase agricultural inputs’ is the most important constraint to the capacities and incomes of Burma’s rural poor.

Against this obvious need, various nascent microfinance schemes have emerged in Burma in recent years. Some of these are quite large, even by global standards, but their operations are scarcely known outside the country and the handful of NGO workers directly involved with them. The purpose of this paper, accordingly, is to attempt to shine a light on microfinance in Burma.

The paper begins (Part II) by examining the three large microfinance schemes in Burma that operate under the auspices of the United Nations Development Program (UNDP). This is followed in Part III by an analysis of some lesser schemes, most of which have been established by Western NGOs. Part IV takes up the significant challenges to microfinance in Burma, and the barriers and opportunities to it forming the basis of a sustainable financial system. Part V concludes.

II. The Major UNDP Microfinance Schemes

The most important microfinance schemes in Burma are those operating under the auspices of the UNDP, and in collaboration with the United Nations Office for Project Services (UNOPs). These schemes, which commenced operations in 1997, are organised under the UNDP’s ‘Human Development Initiative’ (HDI) in Burma. The HDI was established to implement basic development and assistance programs at the ‘grass roots’ level, and to avoid working through local and central government authorities in Burma to the extent possible (UNDP 2001:2).[2] The HDI has been initiated in four phases thus far, HDI-I (1994-1996), HDI-II (1996-1999), HDI-III (1999-2002) and HDI-IV (2003-2005). Delays in getting the Burmese Government’s approval caused a six month hiatus in the operations of the HDI across 2002-2003, which delayed the start of HDI-IV and set its completion date back to 2005.[3] Practical planning to extend the HDI through 2006 and beyond is currently underway in both the UNDP and UNOPs.

The UNDP’s primary microfinance operations in Burma are limited to three distinct geographic regions – in the (Irrawaddy) Delta, the ‘Dry Zone’ (‘upper Burma’) and Shan State. Collectively 11 Townships and 2,400 villages are included in this ‘footprint’, in theory reaching around five percent of Burma’s population (Rahman 2003:6). The extension of the UNDP’s microfinance operations to another 11 townships (in the Delta and Dry Zone regions) is currently under way. The selection of villages was initially undertaken by UNDP teams in Burma who mapped out the fields of operations for the HDI more broadly. Their criteria for including a village in the HDI took into account various socio-economic indicators, including income estimates, measures of health, food and water security, education, remoteness and, the ability of people to access formal credit of some kind. However, recognising that farmers, artisans and traders (poor, but not the poorest of the poor) were the most effective beneficiaries of microfinance, the UNDP’s formal microfinance schemes were established in only 1,700 of the 2,400 villages of the HDI as a whole. Less formal schemes, which are labelled by the UNDP as ‘self-reliance groups’ were established in the remaining villages, and in parallel to the MFIs in others. It is, however, to what we might call the ‘big three’ MFIs of the UNDP that we focus our initial attention. By far the most important of the MFIs in Burma, they are designed for ‘national replicability’ and as pillars upon which a new rural finance system might be built (UNDP 2003:6).

The UNDP oversees the three MFIs it sponsors in Burma but, importantly, their creation and on-going management has been ‘subcontracted’ to three international NGOs with a track record of operating microfinance schemes. Though there are marginal differences between the three MFIs, each is founded on a common methodology that is based upon that established by the Grameen Bank, and replicated in many countries since. It is to the details of each the three UNDP MFIs in Burma that we now turn:

(i) Delta Region Microfinance Organization: Founded by Grameen Trust

Due to its proximity to Rangoon, and the fame of its founding agency, the most prominent of the three UNDP MFI’s in Burma is the ‘Delta Region Microfinance Organization’ (DRMO) which, up until 2002, was managed by the Grameen Trust. The DRMO is a Grameen Bank replication project which, as noted, was established under the auspices (and finance) of the UNDP in 1997. For the first six years of its operations the DRMO was directly operated by Grameen Trust according to its ‘Build, Operate and Transfer’ (BOT) model, under which Grameen initially implements the project, trains and ‘empowers’ local staff and ultimately hands over the project to local operators. The BOT model is used by Grameen in circumstances where there are no viable local microfinance partners, but with the expectation that local capacities can be built up in two to four years. As it turned out, it took six years for Grameen to ‘transfer’ the DRMO, and even then not to a local partner, but (as detailed below) to another foreign NGO.

The DRMO was initially established in three townships – Bogolay, Mawlamyinegyun and Labuta, which will shortly be joined by four more in the north of the Delta. The area is traditionally the location of Burma’s famed ‘rice bowl’, but is now both economically and ecologically degraded. Over 70 percent of the population in the Delta are engaged in agriculture (still primarily rice cultivation), fishing and forestry. Over half of these are landless, and have limited access to employment and income-generating opportunities beyond subsistence. Access to health and education services are greatly restricted, and the region’s susceptibility to flooding and other natural disasters means that food security is persistently precarious (UNOPs 2005:9).

The DRMO was founded with six members of the Grameen Bank, together with local field staff that finally numbered 116. Around 70 percent of all the local staff were women. Provided with an initial budget of close to $US1 million by the UNDP, by 2001 the DRMO had almost 18,000 (exclusively female) borrowers and had disbursed nearly $US1.7 million/K1.6 billion in loans.[4] A repayment rate of 100 per cent was claimed, but the Grameen Trust reported some problems with high ‘drop out’ rates of both borrowers and staff. Most of the former left the scheme because the poverty of the Delta forced them to relocate. The staff losses resulted from a mix of causes – the usual attrition that came from better opportunities elsewhere, as well as those staff who found themselves unable to cope with the demanding Grameen system, and the challenges of the Delta’s physical environment. The Grameen Trust reported that some staff regarded their journeys by boat to isolated borrowers as ‘highly risky’, particularly during the monsoon season (Grameen Trust 2000).

The interest rates charged on loans from the DRMO are set at 20 percent per annum (though they are levied monthly), whilst 5 percent per annum is paid on deposits (Grameen Trust 2000). Such rates are well below the rate of inflation in Burma, which, for the purposes of its own calculations, is assumed by the UNDP (2003:30) to be 40 percent.[5]

Group and progressive lending is foundational to the Grameen system as employed by the DRMO in Burma. Under the traditional Grameen Bank model, borrowers are arranged into credit and savings groups of five members eachwhich in turn are ‘federated’ into ‘centres’.[6] Groups are self-selecting, but DRMO staff organise groups that do not spontaneously form. In addition, progressive lending according to so-called ‘2:2:1’ staggering is applied. According to this, initially only two members of a new group are eligible to borrow. If, after six weeks these two borrowers meet their principal and interest payments, another two members of the group become eligible to borrow, and so on. Consistent with the Grameen model, credit and savings group members effectively guarantee the repayment of each others loans, replacing ‘physical’ with ‘social’ collateral.

Hand-over to EDA

There was a gap in the external management of the DRMO during the hiatus between HDI-III and HDI-IV. According to the UNDP (2003:19), the fact that the DRMO did not collapse as a result ‘demonstrated that local management has gained sufficient capacity to run a micro-finance operation without full-time external technical assistance’. Yet, notwithstanding this, it also noted that ‘continued external technical assistance is needed strategically for the next few years to ensure that the expansion and deepening of the project’s lending operations are prudently and professionally managed’.

In May 2003, management of the DRMO passed to EDA Rural Systems of India.[7] Established in 1983 and based in Gurgaon, India, EDA’s principal activity is to manage microfinance programs, conduct microfinance personnel training and, via a subsidiary, Micro-Credit Ratings International Limited (M-CRIL), to provide credit ‘ratings’ for other MFIs. M-CRIL rates over 120 MFIs in South and Southeast Asia – suggesting, it might be supposed, that EDA has a substantial feel for ‘what works and what does not’ in the context of microfinance (ADB 2005:27). In comparison to the Grameen organisation, EDA is a very small outfit – employing two dozen or so professionals as well as local staff. In operating the DRMO, EDA has had to ‘contract out’ many functions to casual appointees, local and international.

By 2005, the DRMO had over 41,000 active clients and had a total loan portfolio outstanding of K1.7 billion. Repayment rates of 98 to 100 per cent are claimed, as is complete operational self-sufficiency (but not financial self-sufficiency). Table 1 below provides a snapshot of the DRMO as at March 2005:

Table 1: Selected Indicators (DRMO)

No.of Clients / 57,025
No. of Active Clients / 41,058
Loans Outstanding / K1,660m
Total Value of Loans Dispersed / K7,290m
No. of Loans Dispersed / 208,768
No. of Credit and Savings Groups / 9,514
Ave.Loan Size / K26,200
Total Savings Deposits / K700m
Repayment Rates / 98-100%
Proportion Women / 100%
Interest Rate (nominal) / 20% p.a.

Source: UNOPs (2005:10)

(ii) Dry Zone Microfinance Organization – Operated by PACT Myanmar

The largest and perhaps most impressive of the UNDP microfinance schemes currently operating in Burma is the Dry Zone Microfinance Organization (DZMO) which is managed by ‘PACT Myanmar’.[8] Based in the United States, ‘PACT’ (originally ‘Private Agencies Collaborating Together’) was founded in 1971 as an umbrella group to assist member NGOs to access US Government aid funding. In 1992, however, PACT itself became an NGO with a vocation of poverty alleviation around the world through ‘local capacity building’. PACT first entered Burma in 1997 after it was selected to manage the DZMO.

The DZMO is currently located in 624 villages centred on three townships (Chaung-U, Kyaukpadaung and Magway), but from 2005 an additional 7 more townships will join the scheme. The Dry Zone is one of the poorest but most densely populated regions of Burma. Water is scarce, agricultural productivity is low and much of the natural environment is severely degraded. Most of the population of the area is landless, and depend upon seasonal farm labour to survive. Beyond this, employment and income opportunities are limited. According to UNOPs (2005:8), average incomes are not sufficient to cover basic needs for food, clothing and shelter. Access to education and health services are likewise greatly restricted. The DRMO charges an interest rate of 22.5 percent per annum on its loans, and claims a repayment rate of 99.59 percent. Women comprise 98.5 percent of borrowers, and the DZMO specifies that potential borrowers must meet one or more of the following criteria:

1)They must be a female-headed household.

2)They must be landless.

3)They must be subsistence farmers.

The DZMO organises its borrowers and savers into the familiar five-member credit and savings groups popularised by Grameen. According to PACT, creating the groups is usually a three-day process in Burma. On the first day of their arrival, local PACT employees go into a village and call a meeting at which the principles and benefits of microfinance are introduced. On day two, a number of pilot groups are formed, savings are collected and the first loans dispersed according to the 2:2:1 staggering. With this demonstration fresh in the minds of the village, on day three all of the remaining eligible and suitable MFI members are formed into their credit and savings groups. Most of these will be self-selecting, but when five-member groups don’t spontaneously form, local PACT staff will act as ‘facilitators’. Though group-lending is the methodology employed by the DZMO to ensure loan repayment and other requisite disciplines, PACT reports that cultural factors are just as important in achieving the DZMO’s 97.3 percent ‘on time’ repayment rate. Central to such factors is the notion of saving ‘face’ by ensuring repayment, not just individually or even in terms of a household, but for an entire village. According to PACT, the only time in any village that such high repayment rates were threatened occurred in 2004, when a rumour swept multiple villages that PACT had decided to convert loans into ‘grants’. Needless to say, the rumour was quickly quashed.

Once the credit and savings groups have been formed, PACT creates ‘Village Credit Organisations’ (‘ViCOs’) to serve as apex organisations to dispense the loan funds, collect the savings and monitor and supervise the groups generally. The ViCOs are managed by a village executive committee which is elected from the savings and credit groups. By centralising the savings of the village with the ViCO, credit and savings groups that are net borrowers can access a pool of funds beyond that which they could raise on their own, whilst groups that are net savers have a ready mechanism through which their savings can be placed to earn a return. Each ViCO is devolved decision making regarding loan approvals, but decisions on interest rates and the like remain with the DZMO head-office. No PACT or UNDP staff serve on ViCOs, and there are meant to be no links to other NGOs, or Burmese government authorities of any kind. ViCOs meet weekly to make loans and collect payments of principal and interest. PACT claims, with some justification, that such weekly meetings are often the only public meetings permitted in the villages in which it operates.