Myanmar Microfinance (MFI): New Directive Caps Loans At $500, Could Stifle Small Business Growth

A new directive in Myanmar caps microfinance (MFI) loans at $500, which has the sector worried that small business growth could be stifled even as it expands its role within the Southeast Asian economy.

The industry has experienced considerable growth in Myanmar in the last two years, as the previously closed-off economy opened and internationally backed financial institutions have capitalized on the estimated 84 percent of Burmese who have no access to financing, the Myanmar Times reported on Monday. To date, there are about 150 MFIs operating in the country, providing financing options for the impoverished population.

In an effort to enforce responsible lending, the Microfinance Supervisory Committee (MSC), Myanmar’s regulatory body for the MFI sector, has announced a new directive on Jan. 14 that capped microloans at about $500.

“Microfinance is very important for alleviating poverty. We’re doing our best to make sure it helps poor people,” U Win Aung, the managing director of the MSC, told the Myanmar Times.

While regulations are necessary to stabilizing the industry, many have said they will ask the MSC to amend the new rule, which will affect the lenders’ bottom lines as well as those of their clients.

“It’s important not to be too restrictive,” said Fahmid Bhuiya, chief operating officer of Pact Global Microfinance Fund. “The limit might get in the way of lending to the exceptional entrepreneurs who create employment.”

The directive also specified that MFIs are restricted from offering loans with monthly interests exceeding 2.5 percent, or annual interest rates exceeding 30 percent, ceilings comparable to the global average and much lower than the 10 percent per month generally offered by “loan sharks” and other informal lenders in Myanmar.

Aside from stifling business growth, the $500 cap could also mean fewer jobs that small businesses would have otherwise been able to provide, said Kim Bunsocheat, the managing director and chief executive of the Cambodia-based MFI, Acleda MFI Myanmar Co. Ltd.

“If the limit were higher, they could hire a larger workforce,” Bunsocheat said, according to the Myanmar Times.

Last year, the microfinance sector in Myanmar reached more than 2.8 million clients, with a loan portfolio totaling $283 million, with a market demand for about $1 billion, meaning the industry has a lot of room to grow. Vikram Kumar, the resident representative of the International Finance Corp., said that the sector “is on the cusp of what could be an exponential growth phase.”