Microfinance institutions (MFI) in Myanmar are facing significant risks in the wake of the COVID‑19 health and economic crisis, and a serious negative shock to the MFI sector carries severe implications for poverty and food insecurity. Through a review of Myanmar’s early policy responses, best practices identified by international and local experts, and online discussions with leaders of Myanmar’s MFIs, Russell Toth is informing policymakers of the crucial role that Myanmar MFIs play in a wide range of economic and food security activities.
You can read the full paper by Russell Toth here, in English and Burmese.
မြန်မာဘာသာဖြင့်ရေးသားထားသော စာတမ်းအပြည့်အစုံကို ဤနေရာတွင် ဖတ်ရှုနိုင်ပါသည်။
Background: The Microfinance Sector in Myanmar
The microfinance sector in Myanmar has experienced rapid growth since 2012/13 when a modern regulatory system was created, new MFIs were launched, and donor support to the sector expanded.
As of mid-2019, the MFI sector served 3.4 million members across 15 states and regions, representing around 15 million individuals.
Current Situation
Myanmar was one of the first countries after China to feel the economic effects of COVID‑19 through slowing tourist arrivals from its neighbor (Aung Hein and Minoletti 2020). The following restrictions on movement brought rapid disruptions across the economy, including in the microfinance sector.
MFIs began to suspend loan repayments in late March and implement response plans, including social distancing procedures, group meeting suspension, and COVID‑19 information campaigns.
Additionally, repayment suspension, combined with ongoing operating costs, financing obligations, and expected withdrawals of members’ savings balances, imply that MFIs will have to severely cut back their upcoming monsoon season lending in the absence of major injections of outside capital.
As a response, the Government of Myanmar announced a financial support package on March 18 with a value of 0.1 percent of GDP. This includes loan support for small and medium-sized enterprises, with a much larger COVID‑19 Comprehensive Response Plan likely on the way.
The country’s largest donor consortium, LIFT, is also facilitating access to USD 60 million of additional loan capital and advocating for other regulatory adjustments that could result in doubling the amount of loan funds available to LIFT-supported MFIs.
Potential Negative Effects of Lending Disruptions on Food Security
The COVID‑19 pandemic and resulting economic shocks will have major impacts on poor and vulnerable populations in Myanmar, including actors in agricultural value chains that supply the bulk of Myanmar’s food (Boughton et al. 2020). MFIs play a crucial role in financing value chains as well as small and medium-sized enterprises that provide non-farm livelihoods for the poor.
A serious disruption to MFIs has the potential to exacerbate food insecurity.
MFI disruption damages economic resilience in the short-to-medium term, lowers agricultural output in the upcoming monsoon production season, and harms the potential for microfinance to contribute to economic recovery.
Financial Challenges for Microfinance Institutions Resulting from the effects of COVID‑19
The various challenges currently facing MFIs can be analyzed through the lens of Myanmar’s microfinance ecosystem, depicted in Figure 1. MFIs provide intermediate wholesale financing from international and domestic capital sources to borrowers through small retail loans.
The most urgent challenge to MFIs is a cash liquidity crisis.
Incoming sources of cash – collection of loan repayments and acceptance of savings deposits – have been nearly completely frozen by the Financial Regulatory Department (FRD), suspending most MFI activities. MFI customers will also seek to withdraw savings balances from deposit-taking MFIs. Meanwhile, salaries to staff and operating expenses may continue to accumulate.
On the other side of the balance sheet, MFIs face obligations to service their sources of capital, as seen on the left-hand side of Figure 1.
In terms of timing and flexibility, these obligations may take on very different forms for different MFIs. Debt financing will have fixed principal payment obligations and interest responsibilities whereas equity-type investments and ownership shares will obligate the financier to take on a greater share of downside risk. Meanwhile, the Central Bank of Myanmar regulates large international capital flows, with the Myanmar Microfinance Supervision Committee in Financial Regulatory Department-Ministry of Planning, Finance, and Industry (FRD-MOPFI) approving changes in MFIs’ capital.
Policy Guidance: Global Best Practice in COVID‑19 Response
We particularly draw upon the advice of Bull and Ogden (2020) for how the microfinance ecosystem should act in response to COVID‑19 so that hundreds of millions of poor people globally can continue to rely on MFIs to borrow, save, and build their livelihoods:
- Development finance institutions, multilaterals, and bilaterals should study prior financial crises to consider how to structure rescue packages for MFIs.
- Investors, funders, and lenders to MFIs “should consider temporarily suspending and rolling up returns on their outstanding loans to MFIs, pushing out repayment terms and relaxing covenants.”
- Central banking authorities, and in Myanmar, the FRD-MOPFI, should undertake efforts to maintain the solvency of MFIs, including easing reserve requirements, facilitating capital injections, and directing financing from the central bank.
- MFI and digital financial services regulators should facilitate adaptations to public health guidance during the crisis by reducing travel and face-to-face contact.
- MFIs themselves will need to make difficult choices about loan suspensions, restructuring of loans, and operational transitions.
Policy Guidance: Recommendations for Myanmar
International microfinance experts are deeply concerned about the risks facing MFIs and the potential for MFI disruptions to compound the economic shocks hitting developing country economies. Adapting this advice to the Myanmar context, we recommend the following policy responses:
- Declare MFIs an essential service and allow MFIs to resume operations on May 1.
- Prioritize the recommendations in Slover’s LIFT Economic Response brief (2020) to allow the microfinance sector to rapidly contribute to economic resilience.
- Work with the MFI sector, Central Bank, and MOPFI to enable MFIs to access capital injections, working on realistic timelines.
- Identify and leverage key convening forums to coordinate and communicate responses.
- Consider the approval of loan products adapted to circumstances.
- Coordinate information on agricultural demand.
It is important to combine efforts to address liquidity and potential solvency challenges faced by Myanmar’s MFIs with efforts to ensure that food supply chains operate smoothly and that agricultural producers receive useful demand signals. The most urgent responses should be timely and doable, focused on leveraging existing, at-scale platforms implementing existing products and modalities.
This work was undertaken through funding support provided by the United States Agency of International Development (USAID) under the Myanmar Agriculture Policy Support Activity (MAPSA). This blog post was prepared by Michael Wang, Mickey Leland International Hunger Fellow at the International Food Policy Research Institute (IFPRI).