Microfinance: Pros and cons

The Microfinance Law was enacted in Myanmar in 2011, and since then, some 176 foreign and domestic microfinance institutions have been established within the country. They include five international non-governmental organisations (INGOs), 22 NGOs, 39 foreign institutions, 107 local institutions and three joint-venture institutions.

The main objective of microfinance institutions is to promote rural development and reduce poverty. While their purpose is noble, microfinance institutions face the difficulty of distributing micro-loans to a large number of poor in the country.

As a result, the operational costs of microfinance institutions are high, and consequently, their interest rates go up as well, with the global average being 37 per cent. If a business model that returns higher profit than the micro-loan interest rate cannot be achieved, then the situation will aggravate.

Myanmar’s financial sector does not yet effectively meet the demands of the country’s growing economy.

Businesses identify the lack of access to finance as the largest constraint to doing business in the country.

Improved access to credit will mean higher incomes and more jobs. Farmers, small businesses and low-income households will benefit.

Most institutions also fail to complete background checks on people who secure a loan. In later years, the trend has shifted from giving out a large number of micro-loans to ensuring that start-ups and entrepreneurs have sustainable development.

Another issue related to high operational costs is that most microfinance institutions base their target area in places with reliable infrastructure and good communication networks.

As a result, a single person may be able to procure loans from several institutions based in the same area but down the line may become overwhelmed by the large interest rates and be unable to pay back. Incidentally, this means that most micro-loans do not reach areas that are in dire need of capital to boost livelihood. This global phenomenon is seen in Myanmar as well.

Myanmar’s first-ever Credit Bureau, to be launched soon, will help alleviate some of the issues that microfinance institutions face. Additionally, microfinance institutions can cooperate among themselves to resolve issues and provide assistance in their related fields.

In conclusion, I beseech all relevant parties to assist and support microfinance institutions, so that poverty in rural areas is reduced and rural development is achieved.

Ref; The Global New Light of Myanmar