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Crowdfunding: Alternative financing for SMEs in Myanmar

S weeping changes in the business environment swamp not only Myanmar but the Southeast Asia region as well. In Myanmar, US sanctions were lifted, investments laws were revised, visa applications were enhanced enticing millions of tourists to visit the country. US involvement in the region may decrease as a result of the Trump presidency, but the void will be taken up by China who is more than eager to prove its dominance in the region. Interesting times indeed for business.

Myanmar, despite the change in the government, has been slow in catching up and effecting reforms that would catapult it to the frontlines of emerging economies. The economic plan of the government unveiled recently was a frustration with its motherhood statements and lack of clear implementation measures. People were told to be patient, not to rush the government and give it a chance to implement structural changes that would ensure long-term sustainability. Sadly, the world will not wait for the moves of the Myanmar government. Business will go on and competitors will pounce on whatever opportunity that comes their way.

An emaciated SME sector

The micro, small and medium enterprises (SME) is the workhorse of Myanmar’s economy in terms of number, contribution to employment and economic output. But its current status can be described as mediocre in terms of quality of products and services, and stagnant as it cannot upgrade and expand to cater even to domestic needs. This can be attributed to financing which remains to be one of the challenges that have not been addressed effectively by the government. The problem is not the lack of money in the market, but the restrictions that diverts flow of funds away from the sector and limit access to finance to SMEs. These include archaic property laws and land registration, unreliable property valuation, stringent bank requirements and confusing regulatory practices.

Informal moneylenders and relatives remains the source of financing. This may be good for startup enterprises, but not as sustainable source of funds for an expanding business. It has its inherent limitations. The amount is limited and the frequency is not assured as relatives may also need the money in the future, not to mention it is also costly.

Informal moneylenders and relatives remains the source of financing. This may be good for startup enterprises, but not as sustainable source of funds for an expanding business. It has its inherent limitations. The amount is limited and the frequency is not assured as relatives may also need the money in the future, not to mention it is also costly.

Banks remain to be a hurdle for entrepreneurs. Standard requirements for bank loans are high walls that cannot be breached. Business license, for one is confusing as the government requires licensing for products and services from several agencies. License for most products and services are regulated and as a result becomes a commodity that is bought and sold. As it transfers to several speculators, the mark up increases up to the point where it is not profitable anymore. This basic situation is not addressed but consented to the detriment of entrepreneurs.

Another requirement is audited financial statements for three years. Most entrepreneurs do have basic record of their transactions, and upgrading it to a format that would reflect the financial condition of the enterprise and can be understood globally is a must. But in an environment where even big companies does not have financial statements and with few qualified practicing accountants, the requirement for a 3-year audited financial statement is ridiculous.

Micro-entrepreneurs should not have to wait for three years just to produce financial statements just to qualify for a bank loan. The only way to beat around this requirement is to produce a spurious financial statement which defeats the purpose of having the financial statement as the reflection of the actual status of the enterprise.

Among the requirements, collateral is the most important because this is the primary basis in determining the loan amount. This is also the most problematic because land registration is not systematic and there are only certain types of lands that can be accepted as collaterals. Farm lands are inadmissible as collateral because of an existing law prohibiting confiscation of farmlands placed as collaterals.

For startups and micro-entrepreneurs, banks are dead ends in financing.

Crowdfunding potentials

A ray of hope however can be gleaned from the virtual world. One interesting development is the leapfrogging of the country’s telecom industry and the affordability of gadgets which made it possible even for the poor to have a mobile phone. Social media and even e-commerce gradually finds its way to local consumers. Sharing economy is now in Myanmar and financing may not be far behind. Crowdfunding, one of the popular sources of financing in the developed countries may work out in the country.

What is crowdfunding? It is simply a platform where people, from the most ordinary to the highly sophisticated investors, provide funding to business ideas. People invest in a business idea if the product interests them. Some invest because they will be among the first to have a chance to use a new innovative product, while some invest for the financial returns when the product became a hit among consumers. Crowdfunding offers access to funding anywhere in the world from investors looking for profitable undertakings. In 2015, it was estimated crowdfunding investment volume reached more than $30 billion. How does it work? The ‘crowd’ is the online audience who are expected to contribute ‘funding’ to the enterprise. An online crowdfunding platform is needed where an entrepreneur can open an account and promote the product. Among the most popular in internet are Kickstarter, Indiegogo and Crowncube. A cursory look in the internet reveals a number of campaigns for Myanmar activities. Most of the campaigns however are for charity aimed at supporting social projects, and mostly initiated by foreigners.

There are millions of Facebook users in Myanmar. An effective financial literacy campaign can transform these social media users into savvy investors, using their phone and the internet not only to swap gossips, movies, and the latest fashion but also park their unused money. A growing middle class with disposable income is the environment where crowdfunding thrives. Harnessing this potential opens a venue where SMEs and social enterprises can get their funding. It may even eclipse traditional sources of funding.

Creating the appropriate environment Economic development is a priority program, and the heart of this should be the development of SME. The government at present may not have the financial resources to support SMEs, but at least it should energized the sector and stimulate entrepreneurship by creating the right environment – streamlined registration and tax policies, easy access to financing and market linkage, among other initiatives.

Taking advantage of the crowdfunding as source of financing for SME, several initiatives can be done. The legal framework for e-commerce covering interconnection of telecom and banking services, money transfer policies, electronic payment system and the anti-money laundering policies should be in place. As more enterprises are established or upgraded, other industries will benefit. Take for example the cargo delivery sector. Other than the post office, transfer of goods is made through buses plying key cities of the country. Professional delivery companies will have to emerge to address the needs of enterprises in delivering products in all parts of the country.

Crowdfunding will facilitate financing of enterprises without the limitations of banks and other financial intermediaries. The crowdfunding platform is the intermediary in itself, facilitating transactions between entrepreneurs and investors. It is high time someone from the government or from the SME sector to take action and work on how to maximize opportunities offered by crowdfunding