While the financial services industry in Myanmar is seeing rapid progress, the provision of funding is the biggest barrier 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 per cent of the population estimated to be unaffiliated with a bank. For farmers, taking on debt is also a risk with increased weather pattern instability due to climate change. So far in the democratic era neither the former ruling USDP nor the current NLD have managed to implement a comprehensive natural emergency plan for at-risk farming regions.
Under current regulations, affordable financing is hard to come by aside from a small number of exceptions, owing to tight interest rate guidelines, with lending capped at 13 per cent 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 imported fertilizers 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 small hold 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 moneylenders 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 moneylenders. Typically, these unregulated lenders apply a “5 to 6” ratio, in other words for every $50 lent, $60 needs to be paid by month’s end, meaning an extortionate 20 per cent 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 per cent of farmers made use of formal credit, 25 per cent borrowed from unregulated parties and the remaining 38 per cent 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 democratic government, eager to accelerate financial inclusion.
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 100,000 Kyats ($81) to 150,000 Kyats ($122) for a maximum of 10 acres, at an annual interest rate of 8 per cent. 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.
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 352 billion Kyats ($285.9 million) and an outstanding loan portfolio of 256 billion Kyats ($207.9 million). Micro-savings amounted to 68 billion Kyats ($55.2 billion). 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. 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.