According to the Financial Institutions of Myanmar Law 1990 , financial institutions are not allowed to provide uncollateralized credit. All bank credit has to be collateralized either with real estate or by a fixed deposit account. Millions of small and micro-entrepreneurs who could not provide collateral to banks have to rely on informal money lenders for credit, with average reported monthly interest rates of around 10%. Farm-workers and casual laborers also borrow informally from their employers at similar interest rates, or take advance on their wages, fixed at a lower rate.
Microfinance in Myanmar was introduced in 1997 as a separate project under UNDP’s Human Development Initiative (HDI) in 11 townships. The main project objective has been to progressively develop locally managed self-sustaining microfinance operations to serve the needs of poor households.
There are three primary goals of the Microfinance project in Myanmar:
• To build financial capital in the form of credit and savings for the poor,
• To develop and build financial institutions in the form of microfinance organizations.
• To advocate for the emergence of a broad based microfinance sector.
To take advantage of Microfinance’s best practices from different modalities around the world it was initially implemented through various International NGOs-- Grameen Trust for the Delta zone, PACT in the Dryzone and GRET for the Shanzone, selected on their previous geographical experiences. However, all of them basically followed the GRAMEEN model of group based lending procedure. Later in March 2005, in order to consolidate the three operations into a single entity, PACT was selected as the single implementing partner.
The Microfinance project provides financial and non-financial services to the poor at both the village and town/ ward levels. The system targets the poor who are “unbanked”--the women, the landless, and other vulnerable and marginalized groups. The approach is a three pronged strategy that consists of facilitating access to microfinance services, using the group lending methodology and stimulating small business ventures through small enterprise and business development support financial services. Building on the Grameen model, adapted for the local culture, the project practices a “solidarity Group lending methodology” recognizing that the power of the group is a more successful cultural indicator for motivation than the individual.
Loans are given to individuals in the group and it is the individual’s responsibility to repay the MFP on time. There are no restrictions on loan utilization. Each member invests the money in her own chosen business. The average loan size is rather small, with an average of US $60; however, this is enough to make a significant difference to people struggling to make ends meet. Moreover after repaying earlier loans and their businesses grow, they are eligible to access to bigger loan sizes. Social loans such as educational and healthcare loans are also made available to clients. Voluntary savings is also included as an important service of microfinance. With appropriate methodology and services provided by the project, the people have been able to utilize the loans to improve their livelihood.
The interest rate (currently 3% per month) is not subsidized but very modest compared to that of moneylenders, and usually set at a level that can cover the administrative costs, for financial and institutional sustainability and to a certain extent to cover inflation.
There are several flexible options in the repayment schedules based on the type of loan for which an individual applies. As a rule, repayments are made by regular installments according to the agreed-upon schedules (weekly, bi-weekly or monthly).The major exception is Agricultural loans, which are collected as a lump sum during harvest time as a balloon repayment. Default risk is minimised through "social collateral" if one person defaults, their fellow group members must repay. Loan repayment rates for the UNDP project always stand at an impressive 98 + per cent.
Some International NGOs have also been providing microfinance type services as part of their broader activities and poverty alleviation intervention, implemented under MOU agreement with the government line Ministries. Recently, Semi government agencies and government sponsored NGOs are also piloting some kind of group based micro credit in peri- urban areas. In terms of geographical coverage, institutional microfinance including the UNDP project exist in 46 our of Myanmar’s 330 townships, which represent around 6,000 villages. Countrywide, more than 100,000 new members joined the MFP in 2009 and a similar trend of growth and progress in expected in 2010.