Filling the funding gap: Increasing the credit options available for smallholders

While the financial services industry in Myanmar continues to move forward, the provision of funding remains the biggest roadblock to small-hold farmers. For the most part, banks lack flexibility due to rigid interest rates and overprotective collateral-based lending, which hinders their ability to provide finance to farmers. Likewise, a lack of tenure security accentuates the limited amount of rural loans. In addition, mistrust of the financial system saturates the market, stemming from Myanmar’s 2003 banking crisis. Furthermore, the banking sector does not cater to the mass market, especially the rural community, with over 90% of the population estimated to be unbanked.


Under current regulations, affordable financing is hard to come by, apart from a small number of exceptions, owing to tight interest rate guidelines, with lending capped at 13% for a maximum of a one-year loan period. Even in cases where credit is made available to farmers, it is often not tailored to production cycles. Ultimately, due to low incomes and insufficient credit, farmers are unable to take necessary measures to increase productivity through the use of good-quality chemicals. Often, poor-quality fertiliser and pesticides are used to tend to crops which in turn leads to a viscous cycle of poor yields and low incomes. As a result, the majority of smallhold farmers remain entangled in a “low-level equilibrium trap” of poor-quality inputs and low revenue.

Given these constraints, farmers are often forced to seek out unofficial money lenders to support crop inputs, such as seeds and chemicals. The lack of savings and insurance facilities also puts farmers at risk of over-indebtedness to money lenders. Typically, these unregulated lenders apply a “5 to 6” ratio, in other words for every $50 lent $60 needs to be paid by month end, meaning a 20% monthly interest rate.

In a 2014 report compiled by the Livelihoods and Food Security Trust Fund (LIFT), entitled “Making Access Possible”, it was estimated that 37% of farmers made use of formal credit, 25% borrowed from unregulated parties, and the remaining 38% had no access to financing whatsoever. However, circumstances are gradually changing as more finance options come on-line driven by the easing of regulation under the country’s first-ever democratic government, eager to accelerate financial inclusion.

Steps Towards Inclusion

The previous government set out an ambitious target for financial inclusion, with a goal of bringing financial services to 40% of the population by 2020, and having 15% of the population using more than one financial product within that time frame. Undoubtedly, this could not be achieved without the liberalisation of the telecoms market, which began in 2013 and has since recorded rapid growth. The expansion of mobile phone usage has opened a window for financial institutions to partner with mobile operators to access hard-toreach rural locations. This so-called digital money gives the opportunity to create innovative credit and savings products that will reduce transaction costs and give the unbanked masses access to a wide range of financial services for the first time. This should, in theory, trickle down into the agriculture value chain.

State Bank

The farming community has three main avenues to access credit: the formal banking sector, microfinance institutions and unregulated lenders. The state-owned Myanmar Agricultural Development Bank (MADB) has historically been the primary source of funding for rural landowners. Unlike commercial banks, the MADB does not require collateral to issue loans, instead it spreads risk by issuing loans to a group of farmers who collectively guarantee each other. As of mid-June 2016, the bank increased loans per acre (0.4 ha) from MMK100,000 ($81) to MMK150,000 ($122) for a maximum of 10 acres, at an annual interest rate of 8%. Although as of 2014 the bank had 14 regional offices, 164 branches and 48 agency offices, its reach is fairly limited. Loans are heavily weighted towards rice farmers and exclude many crops, including fruit and vegetable production. While the bank has made significant commitments to landowners, it does not provide financing to value chain actors, thus excluding traders and logistic companies, hence the splintered supply chain.

A 2014 report by the World Bank summarised the MADB as having an innovative structure but with a thin portfolio focused on rice farmers, a lack of risk management and weak governance. Considering these pitfalls, the Myanmar Rice Federation (MRF) submitted a recommendation to the Ministry of Commerce in early 2016 for the privatisation of the MADB. The MRF is pushing for the corporatisation in an effort to deepen the pockets of the MADB, which currently relies on loans from the state-owned Myanmar Economic Bank (MEB) to stay afloat. The MRF believes private investment and corporatisation would give the bank more freedom in terms of product choice and loan disbursement.

Shortly after the recommendation by the MRF, the government announced that it was preparing to move the MADB from within the Ministry of Agriculture, Livestock and Irrigation to the Ministry of Planning and Finance. As of late 2016 the MADB was still under the supervision of the Agriculture Ministry and was continuing to receive funding from the MEB. However, a government committee assigned to carrying out four-month corporatisation feasibility study had been established and commenced work.


To fill the funding gap and compliment the efforts of the MADB, a number of micro-finance institutions (MFIs) have been entering the market since the mid-1990s, though the legal framework governing their role was only passed in 2011. According to Germany’s GIZ, by February 2016 the Myanmar microfinance sector had served 1.6m clients, with total assets valued at MMK352bn ($285.9m) and an outstanding loan portfolio of MMK256bn ($207.9m). Micro-savings amounted to MMK68bn ($55.2m). While the focus is not solely on rural communities, the growing presence of MFIs is assisting the development of the agricultural value chain. A total 168 licensed MFIs were under the Financial Regulatory Department (FRD) as of March 2016.

Under the requirements of the FRD, MFI loans are restricted to MMK5m ($4060), with interest payments capped at 30% per annum, or 2.5% per month. Of the 168 MFIs, 110 are deposit taking, with a compulsory micro-savings interest rate of 15% per annum, while voluntary deposits earn 10% per annum. The minimum paid-up capital required for deposit taking MFIs is MMK300m ($244,000), for non-deposit-taking MFIs MMK100m ($81,000) is required. In terms of prudential ratios, the minimum solvency ratio is 12% and the minimum liquidity ratio is 25%.

Industry participants are pressing policymakers to adjust their mind-set of “one size fits all” regulatory framework. Policy reform is expected to extend the reach of MFIs, a position summarised in a paper entitled “Policy Reform Recommendations to Accelerate Microfinance in Myanmar” by the Myanmar Microfi-nance Association (MMFA). One of the biggest shortcomings of current regulation is that all MFIs are subject to the same requirements, despite having different capacities. This hinders the segment’s ability to provide a wider range of services. The MMFA is thus pushing for regulatory innovation with the long-term vision of creating a two-tiered MFI system, where tier 1 would have the ability to borrow from local and foreign sources, take deposits and offer a wide range of services that meet customer needs. Given the growing range of crops being grown and the need for financing this expansion entails, such sophisticated MFIs would support farmers. On the other hand, tier-2 MFIs would offer a smaller range of products and have lower capital and liquidity requirements. The paper also recommended that tier-2 operators have the opportunity to graduate to tier 1.

Food For Thought

The MMFA paper sets out eight pillars of reform to establish a dynamic micro-finance system in Myanmar. Part of the challenge is the capacity to implement proposed reforms. If these recommendations were successfully initiated, there is little doubt that the agriculture value chain would strengthen significantly. International institutions, such as GIZ, the World Bank, USAID and many others, are partnering with local bodies and the government to assess how best to apply remedies.

Given the mounting efforts to improve access to credit, policymakers will have to contend with the potential for over-indebtedness, which can lead to land loss and major disruption in the development of the agriculture sector, not to mention the livelihoods of rural dwellers. However, increasing access to credit is only part of the problem. Sustainable benefits will only be realised once a variety of savings, insurance and transaction services are available. These services would equip farmers with the tools necessary to manage risk and capture growing market demand.