Background Paper No. 3 - Rural Finance in Myanmar

ABSTRACTED FROM THE EXECUTIVE SUMMARY: Farmer indebtedness is a serious problem in Myanmar and the number of landless farm households is increasing. Working capital finance for farmers is exceedingly expensive except for the rather small amounts provided by the MADB and bad harvests can mean that farmers need to sell their land to satisfy loan repayments, becoming casual laborers instead. There is a serious lack of financing for equipment. There are also very few storage facilities in villages that would allow farmers to store paddy and sell it later, hopefully at a higher price than right after harvest, nor are there lenders that would provide credit using the stored harvest as collateral. In order to solve the shortcomings of Myanmar’s rural finance system a comprehensive and multi-pronged approach is suggested. The following recommendations aim to address both the lack of financing for agricultural growth and the high level of indebtedness in rural areas. While most activities will require a long-term approach there are some short-term benefits to be had as well. Table five indicates which agencies would have a comparative advantage in taking on sponsorship of individual activities. A. Long Game – more than three years: 1) Explore the possibility to require commercial banks to dedicate a percentage of their loan portfolio to agricultural loans. This could already have short-term results; 2) Explore the possibility to restructure or reform MADB to become a commercially managed and sustainable bank. Some short-term results are possible as well; 3) Support the start-up and development of savings-based community financial institutions in remoter rural areas to address over-indebtedness; and 4) Support the government in developing an enabling framework for the financial sector. B. Short Game – benefits to be expected within 2-3 years: 1) Allow commercial banks to undertake agricultural lending and assist them in developing respective capabilities, if necessary; 2) Enable MFIs to extend their services further into rural areas and to develop agriculture finance products, including inventory credit; 3) Promote the set-up of leasing companies or leasing subsidiaries of existing financial institutions; and 4) Explore the potential for setting up providers of non-financial services to farmers. C. Recommendations regarding technology-driven innovations: 1) M-banking: Undertake preparatory work in setting up the enabling regulatory and licensing framework for m-banking. Determine and establish the possible partnership arrangements so that m-banking can be implemented fairly quickly once the technological and cost obstacles are overcome; and 2) International Remittances: Support the ongoing effort to enable efficient and cost- effective inward international remittances. They represent an interesting business proposal for Myanmar banks, given that an estimated 7 million Myanmar citizens live outside the country. No further information is available as to the level and distribution of remittances within the whole country or individual States.