- BY San Thein
Banks’ role in supporting the economy
In its latest series of financial sector reforms, the monetary authority issued the regulation on Credit Reporting System (CRS) on March 31, 2017. It is an essential tool for financial institutions (the lenders) to measure potential credit risk and to assess the creditworthiness of a prospective borrower – a useful instrument for managing the ‘credit risk’. The regulation has paved the way for the establishment of credit bureaus in the country. As defined in the Financial Institutions Law, a credit bureau is an entity specialized in the collection and sale of credit performance information for individuals and companies. It is hoped that the regulation on credit reporting system and subsequent establishment of ‘credit bureaus’ will encourage local bankers to take risks in extending loans to their borrowers.
The bank credit plays a crucial role in economic development. A scholar once said it is like a human heart pumping blood into the body. Optimum amount of blood pumped from the heart into the human body will keep the later in a healthy condition – giving the human body necessary resistant power and stamina; likewise sufficient amount of bank-loans will be essential for an economy to grow healthily and to be able to absorb shocks. However, the country’s bank-loans to private sector as a percentage of GDP, the financial intermediation ratio, is the lowest among the ASEAN peers, meaning that the blood pumping from the heart is not enough to keep the economy strong and healthy. According to the World Bank’s report of Doing Business 2016, getting credit is a big obstacle to doing business in Myanmar.
When we look at the issue closely, we find out that access to finance is a big issue in the three main areas which are essential for economic development. These three main areas are (1) agricultural sector, (2) small and medium-sized enterprises (SMEs) and (3) foreign trade.
Myanmar is an agricultural country. About 70 per cent of population in Myanmar are living in the rural area and they all are reliant on agriculture sector. Contributing about 30% of GDP to the economy, employing two-third of workforce and generating over 25% of export earnings, the agriculture sector serves as the foundation for development of the economy. Recognizing the importance of it, every government of Myanmar tries to develop the economy based on the agricultural sector together with accompanying agenda for poverty reduction. In its twelve-point economic policy, the current administration has vowed to establish an economic system which can deliver a proportional development in agriculture, livestock and industry sectors thereby to attain a balanced growth, food security and export.
However, agricultural sector remains underdeveloped. Farmers are struggling for their own existence using the primitive ways of cultivation. Lack of technical know-how, and insufficient financing and investment are major causal factors for its underdevelopment. We have a policy bank by the name of Myanma Agricultural Development Bank. It extends credits to farmers in order to support the development of agriculture and livestock. It provides seasonal loans for crop cultivation and term loans for acquisition of farm machinery and equipment. The Central Bank of Myanmar has allowed establishment of regional farmer development banks to provide loans to farmers in respective regions. With these banks the amount of loans has increased over the past years, but it is still far short of covering the cost of production. Since the risk in extending loans to farmers is high, local private banks are reluctant to be involved in agricultural financing.
The small and medium-sized enterprises (SMEs) in Myanmar represent more than 95% of enterprises and have the potential to become the driving force behind the country’s fast growing economy. Most SMEs are not registered officially, which makes data collection more difficult and constitutes an additional burden for banks to service them. Supporting SMEs is a key element of Myanmar’s Government Framework for Economic and Social Reforms because SMEs are of an utmost importance for job creation and sustainable economic development. The new SME Law underlines the significance of this business sector.
SMEs in Myanmar face many challenges. Various surveys (e.g. the World Bank’s doing business) show that access to finance is one of the major challenges. SMEs have specific needs when it comes to finance: collateral, repayment schedule and loan amount must be tailored to meet the borrower’s ability to repay and to fit the purpose of the loan. The financial sector in Myanmar is not able to meet the needs of SMEs for financial services in an adequate way.
The biggest obstacles to receiving bank loans are connected to (i) high collateral requirements, limited in practice mainly to land and buildings, (ii) complicated and long loan-application procedures as well as (iii) limited duration of loans. Banks currently extend credit only to established businesses but not to start-ups.
Hence, it comes as no surprise that the sources of financing for SMEs originate mainly from personal savings and informal personal loans by connected parties (e.g. family members).
The biggest constraints in providing SME Finance on the bank’s side include a certain distrust in their financial statements, a lack of past credit information, a difficult legal environment when it comes to enforcing loan contracts and liquidizing collateral, as well as regulatory limitations such as ceilings on lending interest rates, strict collateral requirements and limited loan durations.
Although the SME Development Law was enacted in April 2015, relevant rules and regulations for its systematic implementation are still waiting to be passed. The JICA two-step loans to SMEs are being disbursed through six local banks and grants for SME-Finance by a German Development Bank (KfW) are in the pipeline. These loans and grants should be part of the SME development program which is to be implemented under the SME Development Law.
Another important task for banks in Myanmar is Trade Financing. Most developing countries such as ASIAN tigers and China make export promotion as their main development strategy by adopting export-led growth policy. Learning the success stories of these countries, export-led growth policy becomes a guiding principle for Myanmar’s economic development. Myanmar has only a few export items, mainly agricultural and primary products such as rice, beans & pulses, teak & hardwood, minerals & gems, gas, etc. Their supply inelasticity makes it hard to boost their production to take the advantage of current kyat’s depreciation against major currencies of trading countries – something that can be done in an industrialized country. Another weakness is their vulnerability to economic shocks both externally and internally such as bad weather, workers’ strikes, a sudden fall in the commodity prices and trade embargo.
It is encouraged to learn that Myanmar is trying to address these issues by implementing the National Export Strategy (NES) jointly developed by the Ministry of Commerce and the International Trade Centre (ITC) together with the technical and financial supports of other development partners. However, although a few local banks are facilitating external trade, access to finance to boost external trade is still very limited. Local exporters and importers find it hard to get bank financing to promote their businesses in a sustainable way. Such trade financing as supplier’s credit, buyer’s credit, credit line, credit guarantee insurance, etc. are new to our bankers. Their limited expertise in these areas, low IT system, scarcity of foreign exchange, poor risk management system of the banks, etc. are majors obstacles to the promotion of effective trade financing.
Some suggest establishment of Export-Import Banks (EXIM banks) or Export Credit Agencies. They play a vital role globally in promoting and facilitating international trade. However, it will take time to establish them. They will be scheduled institutions under the current Financial Institutions Law and therefore separate laws for their establishment have to be passed.
To enable us to solve the problem easily, we should take the advantage of having thirteen foreign banks in the country. They are internationally reputable banks with rich experience and expertise in foreign banking. We should consider seeking their support in trade financing.