IFC to Fund Major New Microfinance Institution in Myanmar

By Carey L. Biron Reprint | | Print |

WASHINGTON, Jan 23 2013 (IPS) - The International Finance Corporation (IFC), the World Bank Group arm that focuses on the private sector, announced Wednesday that it would be backing a new microfinance institution in Myanmar aimed at reaching 200,000 people by 2020.

The move marks the first investment the IFC has ever made in Myanmar, also known as Burma. Although the country joined the IFC in the mid-1950s, it had never received a loan by the time that most international financial institutions pulled out of Myanmar in the late 1980s, citing an increasingly dictatorial government.

Last August, however, following two years of contested pro-democracy reforms in Myanmar, the World Bank re-established an office in Yangon. Now, the Washington-based IFC has struck an agreement, along with several European financial institutions, to back a Cambodian bank’s proposal to create a major new programme to begin providing loans to micro and small businesses in Myanmar.

On the back of the IFC’s two-million-dollar investment, ACLEDA MFI Myanmar (named after its parent, the largest bank in Cambodia) is expected to begin operations by the end of this year. The IFC, which has also helped ACLEDA expand to Laos, says that the programme will be reaching out mostly to small businesses owned by women.

“Our investment in a microfinance institution is a good start to our support for Myanmar’s economic reforms in order to improve access to finance, create more jobs and reduce poverty for its people,” Sergio Pimenta, the IFC’s director for East Asia and the Pacific, said Wednesday in a statement.

According to a 2011 estimate by the United Nations Development Programme, which has been offering microcredit in Myanmar for a decade and a half, demand for loans by rural Myanmarese could be as high as 470 million dollars a year.

A microfinance initiative backed by major Western donors, including the United States, was set up in Myanmar in 2009, and began officially operating in 2011 after the passage of new national legislation formalising the domestic microfinance industry. Called the Livelihoods and Food Security Trust Fund (LIFT), the programme’s latest annual report says that it has already assisted 1.1 million people, around two percent of the population.

While the LIFT programme is overseen by the United Nations and exists largely to funnel donor monies in particular directions, the IFC sees the aim of the new ACLEDA initiative as being to pave the way for other international private-sector microfinance organisations.

“Through ACLEDA MFI Myanmar, IFC will help scale up the country’s microfinance industry and increase access to financial services for both the urban and rural poor,” Pimenta says. “This will help convince other players that affordable microfinance services can be delivered effectively in Myanmar.”

Responsible delivery

Microfinance remains a relatively young industry, having been created around two decades ago and having seen significant expansion only over more recent years. During that period, many of the world’s largest financial institutions have become involved in microfinance, offering banking services and small loans to impoverished individuals, communities and business owners.

According to many estimates, there are currently around 200 million users of microfinance programmes around the world – and upwards of another two billion that continue to lack access to financial services.

Proponents say such programmes allow applicants otherwise deemed uncreditworthy by most banks to participate more freely in the market economy, particularly helping women to set up or expand small businesses and, more generally, increasing financial inclusion.

But critics maintain that despite its successes, microfinance is little more than a way for multinational financial institutions to gain access to communities otherwise generally out of reach. They warn that for-profit programmes have a spotty record in furthering development or tamping down poverty levels, and at times have done more harm than good.

Given a notably rickety financial regulatory system, such dangers seem particularly apparent in Myanmar.

Microfinance leaders are clearly aware of this record. In a taped conversation posted by the IFC this month on microfinance and “responsible delivery”, Doris Kohn, a top official with the German banking group KfW (together with the IFC, the world’s largest microfinance partner), stated that microfinance is no “silver bullet” for development.

“There have been some bad experiences, but any industry experiences those, and there are some not-so-responsible players, but all in all this should not cloud the fact that there have been enormous achievements,” Kohn said. “We have seen some overheated markets and some … competition leading to over-indebted clients, so I do believe that regulation is needed to prevent that from happening.”

In Myanmar, however, financial regulation remains weak, although, pushed by the international community, the government has come out with a series of reforms and new laws aimed at strengthening long-maligned (or non-existent) regulatory authorities. Yet according to a new ranking by Maplecroft, a British risk assessor, the country remains one of the riskiest places to do business, ranked fifth from the bottom in the “extreme risk” category.

The worry for some scholars and activists, then, is that as Myanmar’s microfinance sector opens up, it will attract some of the industry’s more predatory or unscrupulous companies – the type against which KfW’s Kohn was warning.

Still others say that microfinance itself receives more emphasis from development institutions than it deserves.

“Far more important than microfinance is getting proper development banks – or central bank policies that provide similar functions – for medium and large domestic enterprises on a long-term, low-interest subsidised basis, as has been a cornerstone of all countries that have industrialised,” Rick Rowden, a development consultant who has worked in Myanmar, told IPS.

“Microfinance is nice and all, but it has little to do with the fundamentals of industrialisation or long-term development strategy.”