Although they comprise 98% of businesses in Myanmar, small and medium-sized enterprises (SMEs) are facing a host of growth impediments as the process of economic liberalisation accelerates, including low levels of legal and financial inclusion, infrastructure deficits preventing businesses from fully capitalising on growth in domestic and regional supply chains, and a burdensome regulatory environment.
The government’s 12-point economic development strategy specifically targets support for SMEs, aiming to improve access to credit and financial services, as well as address challenges to doing business in the country. In support of this target, the Ministry of Industry (MoI) is drafting a new SME development strategy, which will focus on infrastructure development, technology transfer and soft lending programmes. Ensuring a reliable supply of affordable credit to small businesses will be critical for long-term policy goals, with the government and international lenders moving in recent years to boost credit.
The MoI defines a micro-enterprise as any business with less than 10 employees, a small enterprise as businesses with 10-50 employees and a medium enterprise as a business with 50-100 employees. A 2015 survey of 2519 SMEs, conducted by the German Institute for Development Evaluation (DE val) found that 67% of SMEs in Myanmar are considered micro-enterprises, while 31% are classified as small.
However, according to a 2016 report published by the OECD, very little is known about the real economic impact and diversification of SMEs in Myanmar. The OECD reported that out of 127,000 formally registered businesses, 99.4% are classified as SMEs, and estimates of the country’s SME count run as high as 750,000, including family-run enterprises. There are an estimated 45,000 SMEs operating in industrial zones, 43,000 hotels and guest houses, and 1600 licensed tour companies, making SMEs a critical pillar of the economy. Most of these are not included in official statistics, however. In July 2017 the MoI reported that there were 46,794 businesses officially registered with the ministry, of which 98% were SMEs, with 9000 membership cards reportedly issued by the ministry’s Central Department of Small and Medium Enterprises Development (CDSMED).
The Road Ahead
Although they dominate Myanmar’s economic landscape, SMEs are facing challenges as Myanmar’s economic liberalisation continues, most notably limited legal and financial inclusion – DE val reports that 21% of businesses surveyed were unregistered, while just 20% had an outstanding loan. This is low given that most SMEs have considerable funding needs. “Access to finance and unfavourable repayment terms stifle the ability of SMEs to remain afloat,” Alex Jaggard, country representative at Mekong Economics, told OBG. “With access to finance, it’s not just availability, but trust that is the problem. Repayment terms for SMEs are often set at one year, meaning they have to repay quickly, which is not always possible – particularly in the tourism industry,” he added.
Accelerated economic transformation has created the need for an enabling policy environment, as bottlenecks in SME development, such as lack of access to finance and infrastructure, as well as administrative hurdles, weigh on the business and investment climate. Myanmar dropped one spot on the World Bank’s “Doing Business 2018” report, ranking 171st place out of 190 economies surveyed, and continues to rank low in categories such as starting a business (155th) and accessing credit (177th). “Regarding the sectors that offer the best investment opportunities, I believe infrastructure represents the low-hanging fruit. Myanmar needs to broadly upgrade its infrastructure to attract more investment,” Melvyn Pun, CEO of Yoma Strategic Holdings, told OBG. “In addition, mobile penetration is now above 100%, making the technology sector very interesting. I believe significant development will be made in financial technology and e-commerce. Growing consumer demands also make the consumer businesses attractive.”
Recent Policy Development
Supporting SME development offers significant direct and indirect economic benefits. SMEs play an important role in alleviating rural poverty and may provide opportunities to boost value-added agro-processing. They could also become a pillar of the tax base under the right growth conditions, increasing the potential for tax collection and creating new fiscal space to support public spending. Recent policies and public lending programmes indicate growing recognition of the importance of supporting SMEs. Published in 2015, the SME Development Policy targets the creation of competitive SMEs, with the goal of reducing the constraints facing entrepreneurs, improving capital inflows, and adjusting training and awareness. The policy identifies priority support areas such as human resources, technology development and innovation, financial resources, infrastructure development, market access, appropriate taxation procedures and a conducive business environment.
However, this policy was published before the ruling National League for Democracy (NLD) won the 2015 elections, and in July 2017 the minister of industry, U Khin Maung, announced the MoI was drawing up a new development strategy for SMEs, targeting value-added production, infrastructure development, technology transfer and low-interest loans. Speaking to an SME forum hosted in Yangon, the minister said the government was also planning to enact legal reforms aimed at bolstering IT development and intellectual property rights. At the same event, officials from Yangon’s regional government announced three SME-specific strategic goals, including improved data collection, negotiation of new lending programmes with banks, and improving post-secondary education in technology and computer sciences, with the aim of creating linkages between universities and a network of planned industrial zones.
The CDSMED, meanwhile, told the forum that government lending to SMEs was expected to rise from MMK50bn ($38.2m) in 2017 to MMK150bn ($114.6m) in 2018, with the government planning to target export-oriented businesses for future loans. Government-supported SME lending programmes date back decades; the government established the state-owned Small and Medium Industrial Development Bank in 1996 to specifically target the segment, and other state-owned banks have sought to extend SME credit in recent years.
For example, with support from the Japan International Cooperation Agency (JICA), the Myanmar Economic Bank reached a MMK30bn ($22.9m) agreement with private and state-owned banks including the Myanmar Oriental Bank, CB Bank, Myanmar Citizens Bank, Kanbawza Bank and Small and Medium Industrial Development Bank in August 2016 to provide five-year SME loans ranging from MMK15m ($11,000) to MMK500m ($382,000) at an 8.5% interest rate. The MoI is also offering support, announcing days before the July 2017 SME forum that it had recommended 1000 SMEs to local banks for loan approval, stressing that a recommendation does not necessarily guarantee a loan extension.
International lenders have worked to improve access to finance. JICA has been one of the biggest international SME financiers, announcing in June 2017 that it planned to lend MMK1.3bn ($993,000) to local banks for SME loans, following the MMK41.5bn ($31.7m) extended to SMEs in 2016. JICA will provide financing for Myanmar Economic Bank’s network of SME lenders, which includes the Small and Medium Industrial Development Bank, Kanbawza Bank, Myanmar Oriental Bank, Ayerarwaddy Bank and the Myanmar Citizens Bank. However, the funds cannot be allocated to businesses in agriculture, real estate, insurance, gemstones, restaurants, alcohol sales, entertainment or ammunition, per JICA rules.
The World Bank also partnered with the government to launch an SME lending programme, the Financial Sector Development Project, in December 2016. The project targets reforms to the banking sector to improve access to loans and financial products, as well as developing the country’s microfinance and insurance sectors. Under the auspices of this project, the bank approved a $100m facility aimed at improving credit access for families and SMEs by reforming state-owned banks. Credit will be sourced from the International Development Association, and offered at a 0% interest rate with a 38-year maturity and six-year grace period.
The Way Forward
Although Myanmar has recorded double-digit growth in private credit since 2013, with credit growth reaching 33% during FY 2016/17, this financing has not trickled down to the SME segment, which may be explained by a few factors. In July 2017 the CDSMED reported most of its members had not applied for formal financing. Most banks involved in SME lending require collateral and businesses applying for a loan must have already been in business for two years, thereby excluding many young businesses from the formal banking system. It is hoped that the new Companies Act, signed into law in December 2017 and expected to be implemented by August 2018, will have a positive effect.
In December 2017 the Union of Myanmar Federation of Chambers of Commerce and Industry called on the government to improve SME lending terms, reduce interest rates, increase loan maturity periods and provide technical assistance to SMEs. U Maung Lay, vice-president of the organisation, told media that banks rely on title deeds to assess loan requests, as the Central Bank of Myanmar’s deposit rate floor of 8% and interest rate ceiling of 13% force banks to impose tough standards. As such, banks often request financial statements and business plans prior to approving a loan, and almost all banks continue to lend at a 13% interest rate to SMEs. Addressing high interest rates and short repayment periods will therefore be a critical next step for SME development.
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