2020/21 ksp policy consultation report - knowledge sharing

Presented by the MOEF, Republic of Korea

2020/21 KSP Policy Consultation Report

2020/21 KSP Policy Consultation ReportDevelopm

ent of Microfinance through Strengthening

Legal Role and Supervisory Capacity Building in Myanm

ar

Myanmar Development of Microfinance through Strengthening Legal Role and Supervisory Capacity Building in Myanmar

Government Publications Registration Number

11-1051000-001100-01

Myanmar Development of Microfinance through Strengthening Legal Role and Supervisory Capacity Building in Myanmar


KSP-미얀마-final.indd 1 2021-11-29 오후 2:59:57

Government Publications Registration Number 11-1051000-001100-01ISBN 979-11-5932-642-4 979-11-5932-641-7 (set)Copyright ⓒ 2021 by Ministry of Economy and Finance, Republic of Korea

Project Title DevelopmentofMicrofinancethroughStrengtheningLegalRoleandSupervisoryCapacity

Building in Myanmar

Prepared for Republic of the Union of Myanmar

In cooperation with Ministry of Planning, Finance and Industry

Supported by Ministry of Economy and Finance (MOEF), Republic of Korea

Prepared by Korea Development Institute (KDI)

Project Directors Jungwook Kim, Executive Director, Center for International Development (CID), KDI

Sanghoon Ahn, Former Executive Director, CID, KDI

Project Manager Hokyung Bang, Director of Division of Policy Consultation, CID, KDI

ProjectOfficers Hanbit Jung, Research Associate, Division of Policy Consultation, CID, KDI

Eunjung Yang, Senior Research Associate, Division of Policy Consultation, CID, KDI

Senior Advisor Woong-Seob Zhin, Former Governor of Financial Supervisory Service, Republic of Korea

Principal Investigator Joonhyuk Song, Professor, Hankuk University of Foreign Studies

Authors Chapter1. BumyoalLee,SeniorAdvisor,FinancialSupervisoryService

Chapter 2. Joonhyuk Song, Professor, Hankuk University of Foreign Studies

Thida Tun, Independent Researcher

Chapter3. Ji-YunLee,Manager,KoreaInclusiveFinanceAgency

Sung-Min Cheon, Head of Household Support Planning & Management Division,

Korea Asset Management Corporation

UNaingMinLatt,StaffOfficer,FinancialRegulatoryDepartment,Ministryof

Planning, Finance and Industry

English Editor KoreaTranslationsCo.,Ltd.



2020/21 KSP Policy Consultation ReportDevelopment of Microfinance through

Strengthening Legal Role and Supervisory Capacity Building in Myanmar


PrefaceKnowledge is an essential ingredient in a country’s economic growth and social development. Of

particular importance is a government’s capacity to formulate and implement policies. The global

society is focused on implementing the Sustainable Development Goals (SDGs), which promotes

knowledge sharing between countries in order to improve their policy capacity and to tackle

development issues and enhance global prosperity.

Indeed, knowledge has taken on an ever-greater importance as the world continues to confront the

COVID-19 pandemic. During this crisis which has caused limited physical interactions, the value of

knowledge-sharing through innovation and technology has become more evident considering these

methodsofferthemostflexibleandpromptopportunitiestodevelopandsharetimelysolutions.

When it comes to Korea’s economic development, knowledge laid the foundation for Korea’s

unprecedented transformation from a poor agro-based economy into a modern industrialized nation

with an open and democratic society. Technology transfer from abroad and educational investments

helped expand the domestic knowledge stock and made this transformation possible. The Korean

government accumulated invaluable practical lessons not found in conventional textbooks through

its course of economic development.

As a result, Korea’s Ministry of Economy and Finance (MOEF) introduced the Knowledge Sharing

Program (KSP) in 2004 to share Korea’s development experience with the international community

through joint research, policy consultations, and capacity-building activities. Since its inception, the

program has played a vital role in supporting socio-economic development of partner countries

around the world.

The Korea Development Institute (KDI) has participated in implementing KSP since the program’s

launch and has been working with more than eighty foreign countries. KDI, Korea’s leading think-

tank with an extensive experience in policy research, has provided solutions to the challenges that

partner countries face in a variety of fields ranging from industrial development to public-sector

reform. In the 2020/21 KSP cycle, KDI carried out twenty-three policy consultation projects including

with two new participant countries — Albania and Uruguay.

Among the many meaningful 2020/21 KSP projects for mutual learning, one in particular worth

highlighting, was initiated by Myanmar’s Ministry of Planning, Finance and Industry (MPFI) entitled,

“DevelopmentofMicrofinancethroughStrengtheningLegalRoleandSupervisoryCapacityBuilding

in Myanmar.” Based on MPFI’s request, MOEF and KDI organized a virtual research team consisting


of Burman and Korean experts. The team conducted an in-depth analysis of internal and external

policy environments, identified Myanmar’s key development challenges, and offered policy

recommendations and action plans.

Although the COVID-19 pandemic continued to proliferate in 2020/21 and despite many restrictions

duringthistime,theprojectwasimplementedeffectivelybyutilizingvariousmethodstoimprove

interaction and mutual understanding with our partner countries. Moreover, the project was

successfully completed thanks to the cooperation and devotion from both the country and KDI

teams.

On behalf of KDI, I would like to express my deepest appreciation to the Director General, Financial

Regulatory Department (FRD), MPFI for their collaboration in the project. In particular, I would

like to extend my profound gratitude to His Excellency U Zaw Naing, Director General, Mr. U Ko Ko

Maung,DeputyDirector,andMr.UNaingMinLatt,OfficerattheFRDfortheirunwaveringsupport.

The completion of this project would not have been possible without their devotion. I also wish to

thank the KSP consultation team—Senior Advisor Woong-Seob Zhin, Principal Investigator Professor

JoonhyukSong,researchersBumyoalLee,Ji-YunLeeandSung-MinCheonandlocalconsultantsMr.

UNaingMinLattandMs.ThidaTun—forproducingthisreport.

ThisprojectbenefitedgreatlyfrommanyothersbothinsideandoutsidetheMyanmargovernment.

I would like to extend my sincere thanks to all who have made valuable contributions to a successful

completion of the project. I am also grateful to the Center for International Development of KDI, in

particular Executive Director Dr. Jungwook Kim, Former Executive Director Dr. Sanghoon Ahn, Project

ManagerDr.HokyungBang,andProjectOfficerMs.HanbitJung,fortheirhardworkanddedication

to the project.

IfirmlybelievethattheKSPwillserveasasteppingstonetofurtherelevatemutuallearningand

economic cooperation between Myanmar and Korea, and hope it will contribute to their sustainable

development.

Jang Pyo Hong

President

Korea Development Institute


Contents2020/21 KSP with Myanmar ············································································································ 015Executive Summary ·························································································································· 019

Chapter 1 Recommendations for Improving Microfinance Regulations and Supervision

Summary ·········································································································································· 0251. Introduction ·································································································································· 0282.MicrofinanceinMyanmar ············································································································ 029 2.1.MicrofinanceLandscapeandSupervisoryStructure ·························································· 029 2.2.RulesandRegulationsofMicrofinance ··············································································· 032 2.3. Financing Needs and Market Infrastructures ····································································· 0343.Korea’sExperienceinMicrofinanceSupervision ········································································ 037 3.1. Financial Supervisory System in Korea ················································································ 037 3.2. Nonbank Financial Institutions ···························································································· 038 3.3. Regulations for MSBs and Moneylenders ··········································································· 041 3.4. Examination and Enforcement Actions ··············································································· 046 3.5. Self-regulatory Organizations ······························································································ 0534.ChallengesintheMicrofinanceMarketandKorea’sSupervisoryEfforts ································· 054 4.1. Prudential Supervision and Market Impact ········································································ 054 4.2.SupervisoryEffortstoAdvancetheMicrofinanceIndustry ················································ 057 4.3.LimitationsandConcernsRelevanttotheSupervisionoftheMicrofinanceMarket ········ 0595.DiscussionsandRecommendationsforDevelopmentofMicrofinanceinMyanmar ·············· 061 5.1. ImprovementofSupervisoryEfficiency ··············································································· 061 5.2. Rationalization of Current Regulations ··············································································· 064 5.3. Responding to Changes in the Market Environment·························································· 0696. Conclusions ··································································································································· 071References ········································································································································ 073Appendices ······································································································································· 076


Chapter 2 Towards Sustainable Microfinance: Progress and Challenges

Summary ·········································································································································· 0791. Introduction ·································································································································· 0812. Recent Developments and Review of Myanmar’s Financial Markets ········································ 085 2.1.RecentDevelopmentsintheFinancialMarketandMicrofinanceIndustry ······················ 085 2.2. Global Competitiveness of the Financial Sector ·································································· 097 2.3. InitiativestoUpgradetheMicrofinanceSector ·································································· 101 2.4. IssuesandChallengesintheMyanmarMicrofinanceIndustry ········································· 1043.Korea’sExperienceinMicrofinance ····························································································· 107 3.1.MicrofinanceinRetrospective ······························································································ 107 3.2.TraditionalMicrofinance:CFIs ······························································································ 1114. Korea’s Experience with the Credit Information System (CIS) ··················································· 125 4.1. The Outline of CIS ················································································································· 125 4.2. CIS of Korea ··························································································································· 1275.PolicyRecommendationstowardsaSustainableMicrofinanceIndustryinMyanmar ············ 131 5.1. Extending the Scope and Role of the Credit Information System ····································· 131 5.2. Enhancing the Role and Responsibility of the Central Agency··········································· 1356. Conclusion ···································································································································· 137References ········································································································································ 139Appendix ··········································································································································· 141

Chapter 3 Public Microfinance and the Debt Relief System: Korean Experiences

Summary ·········································································································································· 1471. Introduction ·································································································································· 1512.TheLocalFinancialEnvironmentofMyanmar ··········································································· 152 2.1. Financial Market ···················································································································· 152 2.2. Banking Industry ·················································································································· 154 2.3.MicrofinanceSectorinMyanmar ························································································· 155 2.4. Policy Finance and Myanmar’s State-Owned Banks ··························································· 1583. Inclusive Finance in Korea ··········································································································· 160 3.1.PublicMicrofinance ·············································································································· 160


3.2. Debt Relief System in Korea ································································································· 1734. Conclusion ···································································································································· 183References ········································································································································ 190

Contents


Chapter 1

<Table1-1> MicrofinanceCoverageAreainMyanmar ····························································· 032<Table1-2> MajorRulesandRequirementsforMicrofinanceInstitutions ····························· 033<Table1-3> RegulationsonLoansProvisioningandClassification ·········································· 034<Table 1-4> Mutual Savings Banks’ Soundness Indicators ······················································· 040<Table 1-5> Number of Registered Moneylenders···································································· 041<Table1-6> Moneylenders’LoanBalanceandAverageInterestRate ····································· 041<Table 1-7> Major Rules and Requirements for MSB and Moneylenders ······························· 042<Table1-8> AssetClassificationandMinimumAllowanceforCreditLosses ·························· 046<Table 1-9> Post-examination Actions ······················································································· 049<Table 1-10> Summary of MSBs’ Business Report ······································································ 050<Table 1-11> Rating Components and Evaluation Factors ························································· 051<Table 1-12> Remedial Actions under Prompt Corrective Action ··············································· 052<Table 1-13> Key Functions of Korea Federation of Savings Banks ··········································· 053<Table1-14> KeyFunctionsoftheConsumerLoanFinanceAssociation ··································· 054<Table1-15> ComparisonofRegulationsonLoansProvisioningandClassification ················ 068

Chapter 2

<Table 2-1> Overview of SOBs ··································································································· 086<Table2-2> AssetsandNumberofBranchesof10LargestDomesticPrivateBanks (As of Fiscal Year-End 2017) ···················································································· 086<Table2-3> NumberofListedCompanies ················································································· 089<Table 2-4> Financial Status of the Top 20 MFIs ········································································ 091<Table 2-5> Code of Conduct for MFIs ······················································································· 103<Table 2-6> Foreign Assistance to Korea’s Credit Unions (As of Jan 31, 1972) ························· 112<Table 2-7> Distribution of Financial Institutions by Region (As of 2021Q1)··························· 113<Table 2-8> Distribution of Religious Population of Korea in 1984 ·········································· 116<Table 2-9> Source of Financing of Saemaul Project ································································· 117<Table2-10> LocationofFarmer’sSavingsbasedonAnnualIncomein1975 ·························· 118<Table2-11> UseofLoanfromCCs ······························································································ 118<Table 2-12> Coverage of Credit Information ············································································· 130<Table 2-13> Countries with/without PCR and CB ······································································ 131

Contents l List of Tables


Chapter 3

<Table3-1> InformalLendingSysteminMyanmar ·································································· 154<Table 3-2> Deposits and Credit Functions of Banks in Myanmar ··········································· 155<Table3-3> DepositsandCreditFunctionsofMicrofinanceinMyanmar ······························· 157<Table 3-4> State-Owned Banks’ Financial Products and Services and Outreach Areas ········· 158<Table3-5> MADBLoanConditions ··························································································· 160<Table3-6> MisoCreditLoanRequirementsandtheSourceofFunding ································ 164<Table3-7> SunshineLoanRequirementsandtheSourceofFunding ··································· 165<Table3-8> PublicMicrofinanceSupportPerformanceTrends(2008~2020) ·························· 166<Table3-9> LoanPerformanceofPolicy-InclusiveFinancebyGender(2008~2020) ·············· 166<Table3-10> LoanPerformanceofPolicy-InclusiveFinancebyAge(2008~2020) ···················· 167<Table3-11> LoanPerformanceofPolicy-InclusiveFinancebyIncome(2008~2020) ·············· 167<Table3-12> ComparisonoftheInterestRateonCreditLoansfromPublic MicrofinanceandFinancialCompanies(2020) ····················································· 168<Table 3-13> Financial Education System ···················································································· 168<Table 3-14> Financial Education Topics ······················································································ 169<Table 3-15> Business Type and Areas of Consulting ································································· 170<Table3-16> ComparisonofPublicMicrofinanceinMyanmarandKorea ································ 172<Table 3-17> Usage of Credit Cards ····························································································· 174<Table 3-18> Delinquency Rate of Credit Card Institutions ························································ 174<Table 3-19> Comparison of the Hanmaum Finance and Heemang Moah Programs ············· 175<Table 3-20> Financial Institutions in the Agreement for Hanmaum Finance (As of the Establishment Date) ··············································································· 177<Table 3-21> Performance of Hanmaum Finance ······································································· 178<Table 3-22> Financial Institutions that Participated in Heemang Moah (As of the Establishment Date) ··············································································· 179<Table 3-23> Performance of Heemang Moah ············································································ 180<Table 3-24> Performance of the Bad Banks per Year ································································ 181<Table 3-25> Comparison of Credit Guarantee Systems····························································· 186

Contents l List of Tables


Contents l List of Figures

Chapter 1

[Figure 1-1] FRD Organization Chart ·························································································· 030[Figure1-2] NumberofMFIsandOutstandingLoans ····························································· 031[Figure 1-3] Number of Operating MFIs in Types (As of January 2021) ··································· 031[Figure 1-4] Financial Supervisory System in Korea ·································································· 037[Figure 1-5] MSBs’ Capital Adequacy & Asset Soundness ························································· 039[Figure 1-6] FSS General Examination Process ·········································································· 048[Figure1-7] AverageRateonHouseholdCreditLoans ····························································· 056[Figure1-8] AmountofNewHigh-interestLoansandTheirProportion ·································· 056[Figure1-9] HouseholdCreditLoansbyInterestRates(Aggregatedby37MSBs) ················· 057

Chapter 2

[Figure 2-1] Growth Diagnostics ································································································· 081[Figure 2-2] Banking Structure in Myanmar ·············································································· 085[Figure 2-3] Size of Myanmar’s Financial Sector in terms of Total Assets ································ 087[Figure2-4] BankingIndustryDevelopment:AnOverview ······················································ 088[Figure 2-5] Number of MFIs ······································································································ 090[Figure2-6] OutstandingLoansandSavings ············································································· 092[Figure 2-7] Financial Intermediation ························································································ 092[Figure 2-8] Numbers of Active Clients and Borrowers ····························································· 093[Figure 2-9] Financial Access in Urban and Rural Areas between 2013 and 2018 ··················· 094[Figure 2-10] Financial Access for Men and Women in Myanmar between 2013 and 2018 ····· 094[Figure 2-11] Financial Access in Myanmar between 2013 and 2018 ········································· 095[Figure 2-12] Access to a Financial Account, 2005 ······································································· 097[Figure 2-13] Access to a Financial Account, 2014 ······································································· 098[Figure 2-14] Regional Competitiveness of the Myanmar Financial Market ······························ 099[Figure 2-15] Domestic Credit Relative to GDP ············································································ 099[Figure 2-16] Domestic Credit in Myanmar ·················································································· 100[Figure2-17] LoantoDepositRatios ···························································································· 100[Figure2-18] ComparisonofPerCapitaGDP:Koreavs.Myanmar ············································ 110[Figure 2-19] Timeline of Credit Events and Institutions ····························································· 111[Figure 2-20] Number of CC Branches ·························································································· 120[Figure 2-21] Mission of KFCC ······································································································· 123


[Figure 2-22] Major Works of KFCC ······························································································· 123[Figure 2-23] Credit Information System of Korea ······································································ 127[Figure 2-24] The Development of Credit Information Infrastructure in Korea ························ 128[Figure 2-25] PCR-CB Model ·········································································································· 129[Figure 2-26] Governance Structure of MMFA ············································································· 136

Chapter 3

[Figure 3-1] Overview of an Inclusive Finance Policy ································································ 152[Figure3-2] HousingLoansbyStateandPrivateBanks ··························································· 155[Figure3-3] MFI’sDataforTotalLoansOutstandingandSavings ··········································· 157[Figure3-4] PurposesofLoanfromMADB ················································································ 159[Figure3-5] TrendofCreditUnionLoans ··················································································· 161[Figure3-6] TrendoftheUseoftheRegulatedMoneyLenders ··············································· 162[Figure 3-7] KINFA Organization ································································································· 171[Figure 3-8] Structure of Hanmaum Finance ············································································· 176[Figure 3-9] Structure of Heemang Moah ·················································································· 178[Figure 3-10] Number of Debt Delinquents per Year ·································································· 180[Figure3-11] NPLRatiofrom2018to2020 ·················································································· 182

Contents l List of Figures


2020/21 KSP with MyanmarHanbit Jung (Korea Development Institute)


015

2020/21 KSP with M

yanmar

Myanmar’s government established the “12-Point Economic Policy (2016)” and “Myanmar Sustainable Development Plan (2018), while emphasizing the need to reform finance and improve access to financial services for SMEs and low-income families through the “Presidential 11 Reform Agenda (2018)”. However, only 26% of Myanmar’s population over the age of 14 had bank accounts in 2017 due to low reliability and a lack of bank access to state and private banks, which is lower than neighboring countries such as Indonesia (49%) and Vietnam (31%). Following the enactment of the Microfinance Business Law in 2011, 175 microfinance institutions are currently providing related services, and the Ministry of Planning and Finance, a local ministry, requested policy advice on revising related laws and preparing supervision measures.

The Financial Regulatory Department (FRD) under the Ministry of Planning, Finance and Industry submitted a KSP proposal for 2020/21 with three different topics for expanding financial support for low-income and SMEs by improving the microfinance laws and systems, establishing a financial reporting system, and supporting sustainable economic growth in Myanmar by improving access to financial services. Regarding Myanmar’s demand, Korea’s microfinance status would be shared in terms of market finance, public finance, and a system to enhance access to financial services through the revitalization of private financial services and fiscal policies.

Accordingly, the 2020/21 KSP with Myanmar was designed to support the establishment of policies for sustainable microfinance development and measures to improve the supervision and management of financial supervision. More specifically, there are plans to introduce not only microfinance regulation but also Korea’s experiences and its microfinance following the Preliminary Dialogue held in September 2020. As a consequence, the deliberations identified three subtopics to be studied in the follow-up project. The policy consultation team provided recommendations to Myanmar based on ample feedback from the local stakeholders

2020/21 KSP with MyanmarHanbit Jung (Korea Development Institute)


Development of M

icrofinance through Strengthening Legal Role and Supervisory Capacity Building in Myanm

ar

016

including high-level officials, incorporating Korea’s development experience. The description below provides a brief overview of the 2020/21 KSP with Myanmar.

Sub-topics Researchers Local Consultants

Recommendations for Improving Microfinance Regulations and

Supervision

Bumyoal Lee (Financial Supervisory Service) U Zaw Naing (FRD)

Toward Sustainable Microfinance: Progress and Challenges

Joonhyuk Song (Hankuk University of Foreign Studies) Thida Tun (Independent Researcher)

Public Microfinance and the Debt Relief Systems : Korean Experiences

Ji-Yun Lee (KINFA)Sung-Min Cheon (KAMCO) U Naing Min Latt (FRD)

• Senior Advisor: Woong-Seob Zhin (Former Governor of the Financial Supervisory Service) • Project Manager: Hokyung Bang (Director of the Division of Policy Consultation, CID, KDI)

For the first official stage of the 2020/21 KSP with Myanmar, the KSP Launching Seminar and High-level Meeting were held virtually in January 2020. Local demands based on the project proposal and literature review were shared between researchers and stakeholders. Based on that, relatable Korean development experiences, future research directions, and contents were also discussed. Local consultants were also introduced and the current status of partner countries were explained in more detail through individual interviews with local consultants on each of the subtopics.

In the KSP Policy Seminar and In-depth Study stage, the interim research results were presented by Korean researchers and local consultants through an online session held in April 2021. It was an opportunity to learn what additional detailed investigations were needed, to share the research results so far, and enhance the understanding of those involved with microfinance policies and measures. There were many suggestions from different experts on Myanmar’s financial markets and it was highlighted that although it is necessary to establish an integrated data system that can evaluate personal credit information for Myanmar’s microfinance, even basic personal identification information systems including resident registration numbers have not been established. Adding to that, it was suggested that establishing a credit information infrastructure using mobile phones is necessary since the mobile phone subscription rate significantly exceeds the bank account retention rate.

The Policy Practitioners’ Workshop was planned as an invitational training event for policymakers in Myanmar who would have conducted an onsite visit to Korea. However, due to COVID-19, training videos were produced and distributed to share Korea’s inclusive financial policy as well as its microfinance regulations.


017

In conclusion, KDI and the FDR collaboratively held the Final Reporting Workshop in July 2021. During this meeting, the stakeholders and researchers were able to review opportunities to increase the effectiveness of the policy proposals derived from this project. The final report on subtopic 1 analyzed Myanmar’s microfinance institutions, savings banks, and money lenders and compared them with Korea’s. It also drew implications for related laws and supervisory systems. For subtopic 2, it presented measures to strengthen legal and financial infrastructure to promote financial inclusion, focusing on cases where inclusive financial services were successfully provided through Korea’s financial policy and debt adjustment system. Subtopic 3 presented problems and solutions from Korea’s experience and operation processes related to the introduction of microfinance, and included regulatory and supervisory, accounting, and financial consumer protection systems as the main contents. A summary of the report was produced in a video and distributed for a better understanding of the final research results.

It was not an easy task to carry out this project and conduct research in the midst of COVID-19. Nevertheless, this project successfully provided multi-layered policy recommendations that are applicable to Myanmar’s current situation. For that, we would like to thank the Myanmar team, whose tremendous efforts will lead to a better system and benefit Myanmar. It was a great chance to strengthen cooperation between the two countries and we look forward to many more collaborations.

2020/21 KSP with M

yanmar


Executive SummaryJoonhyuk Song (Hankuk University of Foreign Studies)


019

Myanmar has a lower-middle income economy with a GDP per capita of 1,299 USD in 2017 and it is endeavoring to extend the provision of financial services to low-income families in a bid to promote inclusive finance to discontinue the vicious cycle of poverty. Even though Myanmar’s financial sector has been expanding in recent years, Myanmar still lacks financial competitiveness, especially in terms of the availability and accessibility of financial services compared to competing countries in the region. The government of Myanmar published the Financial Inclusion Roadmap 2019-2013 as part of the Making Access Possible (MAP) program in 2018 and rolled out the plan to overhaul its financial markets. Based on the program, the Myanmar financial regulatory authority is seeking to develop the country’s microfinance business by strengthening legal and financial reporting systems and improving client protection.

Microfinance is a fast-growing part of the financial industry in many developing countries and Myanmar is not an exception. Microcredit offers a chance to create jobs and reduce poverty and raise the socio-economic status of low-income families. After the enactment of the Microfinance Business Law in 2011, local and foreign companies are allowed to establish private MFIs to enlarge their source of funds. MFIs are permitted to undertake credit, saving, borrowing money from local and abroad, and hire-purchase and mobile payment. In order to draw attention from international investors to the local microfinance industry, Myanmar needs to improve its legal and financial reporting systems in accordance with international standards. Given that only 23% of the population over 15 years of age have deposit accounts and do not have sufficient collateral to qualify for a loan from a formal financial institution, MFIs can become a pivotal channel for helping the poor gain access to financial services. Myanmar’s government that took office in 2016 outlined 12 economic policies, one of which is to provide sustainable, market-driven finance for MSMEs and low-income households. Myanmar has many similarities to Korea when it was in the early stages of its financial development in the 1960s and 1970s even though the two

Executive SummaryJoonhyuk Song (Hankuk University of Foreign Studies)

Executive Summ

ary


Development of M


ar

020

countries differ in the size of their economies today.

After assessing the proposed research topics, the KSP mission team consulted with its Myanmar counterparts and selected three topics to help make Myanmar’s microfinance industry more transparent and robust. It is difficult to determine the adequacy of the recommendations due to the lack of information and communications caused by both the COVID-19 pandemic and the political situation in Myanmar during the research period. Despite the limitations and obstacles, the Korean mission team did its best to draw out valuable lessons in order to promote financial inclusion in Myanmar along with the progress of microfinance industry. A summary of the policy recommendations suggested for each topic is included below.

1. Recommendations for Improving Microfinance Regulations and Supervision

We examined the current state and regulatory structure of Myanmar’s microfinance industry and aimed to find factors limiting development and provide suggestions for improvement, based on Korea’s experiences in terms of relevant regulations and supervision. The scope of the research is limited to MSBs and moneylenders in Korea for direct comparison with MFIs in Myanmar.

MFIs in Myanmar have played a role in reducing poverty and improving the social and economic conditions of low-income families and MSMEs by meeting their financial needs. Despite the growth in the number of licensed MFIs in recent years, they are currently able to cover only about 30% of the demand, and MFI accessibility is much lower in rural areas than in large cities. The need for the development of the microfinance industry is emerging as an urgent and important issue in Myanmar. The development of the financial industry requires building a well-organized regulatory framework and making regulations transparent and predictable. Policy recommendations for improving the microfinance industry in Myanmar can be summarized into three areas: improving supervisory efficiency, rationalizing current regulations, and responding to changes in the market environment.

First, in a structure where the financial supervisory system is divided into the Central Bank, the FRD, and the Department of Cooperatives, cooperation and collaboration between supervisory authorities is important and should be strengthened. It is also advisable to incorporate oversight over the nonbank financial institutions and non-deposit-taking MFIs to avoid regulatory arbitrage.


021

Second, there is a need to improve the current MFI regulations. It is recommended to allow some collateral acquisition and adjust the maximum loan amounts so that the MFIs can more fully perform their role in providing financial services to low-income families and MSMEs. The current strict rules for asset classification and provisions should also be relaxed.

Lastly, financial supervision should be conducted in response to changes in the market environment. In order to solve the chronic excess demand for funds, Myanmar’s government should allow MFIs to merge in order to achieve the benefits of both economies of scale and scope. It is relatively easy for large-scale MFIs to strengthen their institutional capacities through technology, accounting systems, and human resource development, as well as complement their ability to provide collateral and funding within the group through affiliations. As a result, they can efficiently solve funding problems and provide quality microfinance services to consumers.

2. Towards Sustainable Microfinance: Progress and Challenges

The development of a financial system has long been associated with economic growth and development. Empirical studies have shown that financial deepening is strongly correlated with economic growth and development and it is vital to make the financial system sustainable. Korea has established a modern and advanced financial system, consisting of a diverse range of financial institutions. Over the last 60+ years, Korea has experienced rapid economic growth, converting an economy that was once largely poor and agrarian into an industrialized country in less than half a century. Understanding Korea’s financial development is a good starting point for establishing sustainable microfinance in Myanmar.

In order to draw out practical policy lessons, we chose periods with similar stages of development in Myanmar and Korea in terms of per capita GDP. We examined the introduction and development processes of cooperative financial institutions (CFIs) in Korea represented by Credit Unions and Community Credit Cooperatives as well as the roles and functions of the central agencies of each institution as a centralized window for dialogue with government, a facilitator to plan and perform development strategies for the industry, and a lender of the last resort to protect depositors’ savings. We discussed Korea’s experiences establishing and implementing a credit information system (CIS). The Korean CIS is an effort to achieve both a speedy establishment by delegating the role of collecting and managing data to a public entity known as KCIS as well as efficiency and innovation by promoting competition among private credit bureaus for the use of data. Based on Korea’s

Executive Summ

ary


Development of M


ar

022

experiences, we suggest the following two recommendations.

First, Myanmar needs to extend the scope of the role of its central information system. We propose a PCR-CR hybrid as the introduction of the CIS in Myanmar has been delayed. The adoption of this proposed system is suggested to facilitate the prompt activation of the CIS and ensure the transparency and reliability of the collected data. So far, the MCB has been launched as the first credit bureau, but its scope and coverage are limited to the banking sector, hence it needs to include data from NBFIs to extend credit-based lending practices to poor families without proper collateral.

Second, it is necessary to establish a well-functioning governance structure to monitor and supervise risk and improve managerial efficiency in the microfinance industry. After giving the proper authority to a central agency, the central agency should take a leading role in guiding and supervising the local MFIs, provide education and training, relay the inter-lending among MFIs, and set up a provisional fund to ensure the safety of depositors’ savings.

3. Public Microfinance and the Debt Relief Systems : Korean Experiences

In order to achieve inclusiveness and sustainability for Myanmar’s microfinance, it is necessary to establish a public microfinance and debt restructuring system for non-performing loans along with market microfinance in the mid to long run. Although the market-based microfinance industry is growing, MFIs are allowed to make non-collateralized loans, resulting in mostly group loans where personal sureties replace physical collateral. For urban workers or those who cannot obtain joint personal guarantees, they cannot currently access microfinance, limiting the scope of inclusive finance outlined in the Myanmar Sustainable Development Plan in 2018. In order to expand financial outreach, Myanmar’s government should consider introducing public microfinance to supplement the current microfinance industry and prevent usurious illegal moneylending. The government should also take up an initiative to expand opportunities for credit recovery for those who cannot make payments for their loans.

It seems that public microfinance and debt restructuring systems do not currently exist in Myanmar. However, it will be necessary to understand the role of these institutions and introduce them in order to strengthen financial accessibility and stabilize financial markets in cases of unexpected stress. Even with the development of financial markets, there will always be marginalized people who should be protected and supported by the government.


023

Based on Korea’s experiences, we propose three recommendations.

First, it is necessary to initiate government-led financial education to enhance the financial literacy of the poor and allow them to make rational financial choices. Improving perceptions of the danger of over-indebtedness and multiple loans will reduce both personal and social costs stemming from personal defaults and financial exclusion.

Second, Myanmar’s government should develop guarantee products to overcome funding problems by utilizing the credit multiple effect of these products. These guarantees should be co-funded by the government and the private sector to provide policy-inclusive finance. Introducing special guarantee products is also recommended in the case of banks and conglomerates funding resources.

Lastly, it is necessary to preemptively prepare a debt restructuring system that can comprehensively manage multiple debts that can lead to large-scale non-performing loans in Myanmar’s microfinance market. In addition, when a large-scale non-performing loan problem involving multiple MFIs and financial sectors arises, the government needs to take the initiative to prepare countermeasures. A bad bank established and operated to handle the financial distress created by non-performing card loans in 2003 was proven effective in Korea and, hence, is recommended to prepare for the introduction of a debt restructuring system.

Executive Summ

ary


Recommendations for Improving Microfinance Regulations and SupervisionBumyoalLee(FinancialSupervisoryService)

1. Introduction2.MicrofinanceinMyanmar3.Korea’sExperienceinMicrofinanceSupervision4.ChallengesintheMicrofinanceMarketandKorea’sSupervisoryEfforts5.DiscussionsandRecommendationsforDevelopmentofMicrofinanceinMyanmar6. Conclusions

C H A P T E R

01

KeywordsMicrofinanceinMyanmar,RevisionofMicrofinanceBusinessLaw,KnowledgeSharing,EfficientSupervision,RationalRegulation


025

CHAPTER

01Recom

mendations for Im

proving Microfinance Regulations and Supervision

Summary1

This study examines the current state and regulatory structure of Myanmar’s microfinance industry and aims to find factors limiting development and provide suggestions for improvement, based on Korea’s experience of promoting inclusive finance in terms of relevant regulations and supervision. As this study analyzes Microfinance Institutions (MFIs) regulated by the Financial Regulatory Department (FRD), the partner of this project, the scope of the report is limited to Mutual Savings Banks (MSBs) and moneylenders in Korea for direct comparison with MFIs in Myanmar.

Unlike banks that primarily provide credit to public institutions and large corporations in Myanmar, MFI has played a role in reducing poverty and improving the social and economic conditions of low-income families and Micro, Small and Medium-sized Enterprises (MSMEs) by meeting their financial needs. MFIs are not allowed to acquire collateral, and are subject to restrictions on loan and deposit rates and loan size. Compared to banks, MFI entry regulations are less stringent in terms of paid-in capital; however, MFIs are required to meet prudential standards such as solvency and liquidity ratios. The loan maturity is generally less than one year, so the provision for bad debts is also stipulated accordingly. As of the end of 2020, there were 188 MFIs in operation, including 21 deposit-taking and 167 non-deposit-taking MFIs. Cumulatively, they provide loans to 5.9 million customers. Despite the growth in the number of licensed MFIs over a short period of time, they are currently able to cover only about 30% of the demand, and accessibility is much lower in rural areas than in large cities. In the end, the need for development of the microfinance industry is emerging as an urgent and important issue in Myanmar.

1 ThecontentsofthispaperdonotreflecttheviewsoftheFinancialSupervisoryServiceofKorea.Anydiscussionofregulationsorpolicydirectionsinthispapershouldbeseensolelyastheauthor’sopinion.

Recommendations for Improving Microfinance Regulations and SupervisionBumyoalLee(FinancialSupervisoryService)1


Development of M


ar

026

In Korea, the non-banking sector mainly provides finances to low-credit, low-income families and small businesses. MSBs were created in 1972 to remodel the private lending market into a more structured financial setting, and currently a total of 79 MSBs with 303 branches are in operation. Private moneylenders are not officially classified as financial institutions, but they are obligated to register with financial regulatory authorities or municipalities depending on the size. As of the end of 2020, there were 1,077 moneylenders registered with the Financial Services Commission and 7,424 with local governments, for a total of 8,501. MSBs are deposit-taking institutions and provide commercial banking on a limited scale; they are regulated by paid-in capital, loan rates, and business areas. In particular, they are subject to a strict credit extension limit since they can be controlled by a single large shareholder. On the other hand, there are generally few restrictions that apply to entry requirements, business areas, or financing terms for moneylenders; where there are restrictions, they are of a loose nature. MSBs are businesses that require regulatory approval not only for entry, but also for business dissolution, merger, closure, and transfer or capital reduction. They must also comply with prudential standards including rules for capital adequacy, asset classification and minimum allowances for credit losses as well as other guidelines. Unlike MSBs, there are no specific prudential guidelines for moneylenders since they do not accept deposits. However, in order to protect consumers, various obligations are imposed for advertising loans, executing loan agreements, and collecting debt.

As Korea’s integrated supervisory authority, the Financial Supervisory Service (FSS) is responsible for the safety and soundness of all financial institutions. The FSS performs its supervision responsibilities primarily by conducting off-site surveillance and on-site examination, assessing business operations and financial health of institutions, and taking actions to address any heightened stress or risk of failure. Although the purpose of supervision is not to detect and penalize violations of laws and regulations, it is natural for financial companies to feel burdened under the supervision and examination. Therefore, checks and balances have been introduced to ensure that all processes are performed transparently and objectively, and financial companies and individuals can exercise the right to appeal the decision if they are subjected to sanctions. The regulatory authorities have an additional role to play in the microfinance market because the customer base in this case comes with a high level of credit risk and is vulnerable to economic downturn. It is important not only to ensure the soundness of financial institutions, but also to prevent the exclusion of vulnerable classes from the market. To this end, the FSS is applying regulations in a flexible manner, relaxing or strengthening the level according to market conditions. In practice, designing microfinance policy is a difficult process that inevitably requires a fine balancing of both these opposing roles.


027

CHAPTER

01Recom

mendations for Im


Although it is difficult to determine the adequacy of the FRD’s examination process and post-examination actions due to the lack of information, the policy recommendations for improving the microfinance industry in Myanmar are drawn based on Korea’s experience and summarized in three aspects: improving supervisory efficiency, rationalizing current regulations, and responding to changes in the market environment. First, in an administrative structure where the financial supervisory system is divided into the Central Bank, the FRD and the Department of Cooperatives, cooperation and collaboration between these supervisory authorities is important and should be strengthened. If possible, it is advisable to incorporate oversight over the nonbank financial institutions and non-deposit taking MFIs to avoid regulatory arbitrage. At the same time, in order that supervision and examination are conducted consistently without being influenced by the individual examiner’s judgment, it is necessary to strengthen supervisory competence. To compensate for insufficient supervisory resources, it is desirable to enhance the role of the self-regulatory organization representing the MFI. Second, there is a need to improve the current MFI regulations. To name a few, it seems reasonable to allow some collateral acquisition and adjust the maximum loan amount so that the MFI can expand its role in providing financial services to low income families and small business owners. While introducing overdue interest, the rules for asset classification and provisions need to be relaxed. On the other hand, liberalization of interest rates and expansion of MFI business areas must be pursued with caution. Given the difficulty of pre-assessing the market impact of deregulations, it should be designed with due consideration of potential side effects on the market in the future.

Lastly, as market competition intensifies, financial institutions are striving to strengthen efficiency, cost management and sustainability, and creating a more integrated institution is an increasingly popular strategy to achieve all of these goals. As MFIs in Myanmar are struggling to collect loan repayments from borrowers affected by COVID-19, the soundness of MFI has deteriorated, and eventually restructuring of insolvent MFI will be inevitable. It would be relatively easy for large-scale MFIs to strengthen institutional capacities including technology, accounting system, and human resource development as well as complement the ability to provide collateral and funding within the group through affiliation. As a result, they can solve the funding problem and provide quality microfinance services to consumers in an efficient manner. The branding of large MFIs will also be of great help in overcoming the general negative perceptions on financial companies that have gained strength through the past financial crisis. However, bigger MFIs are not always better. If the MFI market is polarized into large and small, and regulations on loan rates and collateral are eased, then the market is likely to develop in a very different form. Large MFIs will likely focus on loans with collateral for high credit borrowers just like banks, whereas small MFIs will charge the maximum rates on credit loans regardless of the funding rate. Regulatory authorities should


Development of M


ar

028

pay attention to the possibility that MFIs may, in this process, overlook their original purpose of improving the quality of life for low income households and providing financial options for MSMEs.

Korea and Myanmar differ in the size of their economy and the stage of market development, but the same principles should be applied to financial supervision and regulation. The development of the financial industry requires building a well-organized regulatory framework and making the regulations transparent and predictable. The regulations themselves also need to be changed as the environment changes, so it is important to check regularly whether the current regulations are effective. To do this, financial regulatory authorities must constantly communicate with the industry and streamline regulations in a timely manner. The growth of Myanmar’s MFI during its second decade should not simply be a continuation of its first. Through continuous technological innovation, development of client-centered products and services, and ongoing efforts for reinforcement of supervisory capabilities, it is hoped that the microfinance industry can serve as a cornerstone of improving the quality of life for people in Myanmar.

1. Introduction

In Myanmar, cooperative forms of mutual aid have been around since the early 20th century, but microfinance started its journey in earnest in 1997 under the United Nations Development Program (UNDP) of Human Development Initiative. After enactment of the Microfinance Business Law (MBL) in November 2011, regulated formal microfinance institutions have come into action. The industry itself is growing rapidly through the institutionalization of a number of local cooperatives and private financial institutions, and the participation of domestic and foreign financial institutions and NGOs has expanded steadily. However, despite the growth in the number of licensed Microfinance Institutions (MFIs), they are able to cover only about 30% of the demand, which is markedly insufficient to meet the financial needs of the low-income families and Micro, Small and Medium Enterprises (MSMEs). Accordingly, the government is seeking ways to further develop the microfinance industry, starting with the revision of the MBL.

This study examines the current state and regulatory structure of Myanmar’s microfinance industry. In particular, it aims to find factors limiting development and provide suggestions for improvement, based on Korea’s experience of promoting inclusive finance in terms of relevant regulations and supervision. As this study analyzes MFIs regulated by the Financial Regulatory Department (FRD) under the Ministry of Planning and Finance (MOPF)


029

CHAPTER

01Recom

mendations for Im


which is the partner of this project, it is to be noted that the scope of this report is limited to Mutual Savings Banks (MSBs) and moneylenders in Korea that can be compared directly with MFIs in Myanmar.2

The remainder of the report is organized as follows. Section 2 reviews Myanmar’s microfinance industry including MFI regulations, current state, business environment and related infrastructures. Session 3 describes Korea’s financial supervisory experiences with regard to low-credit, low-income households and MSMEs, focusing on MSBs and moneylenders. The regulatory and supervisory systems including procedures for examination and sanction are also presented. Section 4 explains the current state of the Korean microfinance market and the challenges facing the regulatory authorities, Lastly, Section 5 provides policy recommendations for developing the microfinance industry in Myanmar, and concerns and hopes for the future are briefly described in Section 6.

2. Microfinance in Myanmar

2.1. Microfinance Landscape and Supervisory Structure

The financial industry in Myanmar is dominated by banks and MFIs, while Non-Bank Financial Institutions (NBFIs), insurance and securities industries are in the early stages of development.3 Unlike banks that are supervised by the Central Bank of Myanmar (CBM) and primarily provide credit to public institutions and large corporations, the objectives of the MFIs are to reduce poverty and improve social, health and economic conditions for low income people as clearly stated in the MBL. It defines the role of microfinance as issuing micro-credit, taking deposits, supporting remittances, providing insurance and carrying out other financial services.4

Regarding oversight of the MFI, the MOPF develops laws and regulations for the microfinance industry through the Microfinance Business Supervisory Committee (MBSC),

2 Creditunionsandagricultural,fisheriesandforestrycooperativesinKoreaarealsoanimportantpartofthefinancialservicesforlow-credit,low-incomehouseholdsandMSMEs,buttheycanbeconsideredsimilartothecooperativesthataresupervisedbytheDepartmentofCooperativeundertheMinistryofAgricultureLivestockandIrrigation(MOALI)inMyanmar.AnoverviewofKorea'smutualcreditcooperativesandpolicyfinancecanbefoundintheprecedingstudy,“Korea’sExperienceofMicrofinanceandSMEFinancingthroughCreditUnionsandCooperatives,”2016/17KnowledgeSharingProgramwithGuatemala,pp.196-210.

3 IntheFinancialInstitutionsLaw(FIL)enactedin1990,theterm"financialcompany"wasusedseparatelyfrom“bank”tocollectivelyrefertofinancialinstitutionsthatperformsecuredandunsecuredloans,installmentfinancingandleasingbusiness.However,therevisedFILin2016newlyintroducedtheconceptoftheNBFIandclassifiedit intofinancialcompaniesandleasingandfactoringbusinessaccordingtothebusinesstype.Currently29companiesareoperatingwiththeapprovaloftheCentralBankofMyanmar(CBM).

4 ThebiggestdifferencebetweenabankandanMFIiswhethercollateral isreceived.Forbanks,onlysecuredloansareaccepted,whereasMFIsonlyhandlecreditloans.


Development of M


ar

030

which is comprised of state banks and relevant government agencies in addition to the MOPF.5 While the MBSC is responsible for issuing licenses, setting interest rates and developing overall regulations, the FRD under the MOPF is in charge of supervising and regulating the day-to-day operations of MFIs. The FRD also oversees and monitors the financial performance of MFIs and conducts field inspections regularly. With a staff of about 607 people, the FRD supervises not only MFIs, but state-owned banks, private insurance companies, and state lottery businesses. The Microfinance Regulation and Supervision Division consists of approximately 110 supervisors, has offices in each region and states, and performs supervisory duties with additional supervisory assistants.

[Figure 1-1] FRD Organization Chart

State AdministrationCouncil

Ministry of Planningand Finance

MicrofinanceBusiness

SupervisoryCommittee

DirectorGeneral

DeputyDirectorGeneral

Microfinance Regulation &Supervision Division

State-Owned Banks & State-OwnedLottery Monitoring Division

Insurance Regulation &Supervision Division

Policy, Research & TrainingDivision

Human Resources &Administration Division

Accounting Division

Source: Financial Regulatory Department (June 2021).

As of the end of 2020, a total of 188 MFIs, including 21 deposit-taking and 167 non-deposit-taking institutions, were in operation. Although local MFIs account for 60% of all MFIs, a small number of big international MFIs such as PGMF, Sathapana, Fullerton, and LOLC Microfinance dominate the market. The amount of outstanding loans has grown

5 LaunchedinJune2016,theMBSCischairedbytheMinisteroftheMOPF,andincludesofficialsfromMyanmarAgriculturalDevelop-mentBank,MyanmarEconomicBank,CentralBankofMyanmarandNationalTaxServiceandrepresentativesofMyanmarMicrofi-nanceFinanceAssociationascommitteemembers.


031

CHAPTER

01Recom

mendations for Im


rapidly, exceeding MMK2.5 trillion, but the number of customers receiving loans from MFIs is about 5.9 million which is only about 17.2% of the total working age population of 34.3 million.6

[Figure 1-2] Number of MFIs and Outstanding Loans (Unit: Billion MMK)

�

��

��

# of DMFls (Left)

��

��

��

��

�

��

�,��

�,��

�,��

# of NDMFls (Left) Outstanding Loans (Right)

��

��

��

��

�,��

�,��

��

��

��

��

��

Source: Central Bank of Myanmar (2021).

[Figure 1-3] Number of Operating MFIs in Types (As of January 2021)

INGO

NGO

Foreign

Local

Joint Ventures��

� � ��

��

Source: Financial Regulatory Department (2021).

6 Myanmar’scurrencyistheKyat,denotedthroughoutas‘MMK’.AsofJune1,2021,MMK1millionarearoundUSD608.


Development of M


ar

032

Looking at the current coverage area, microfinance services are available in 259 townships, which constitute about 78% of the total 330 townships in Myanmar corresponding to Cities in Korea. However, access to the MFIs becomes more difficult going further down to remote areas such as Wards, Tract Villages, and Villages that are comparable to Gu, Gun or smaller in Korea; thus, it may be said that only 42% of villages are able to receive MFI services.

<Table 1-1> Microfinance Coverage Area in MyanmarTarget Area Number of Areas Implemented Areas %

Townships 330 259 78.48

Wards 3,441 2,276 66.14

Tract Villages 13,969 7,905 56.59

Villages 63,854 27,194 42.59


2.2. Rules and Regulations of Microfinance

Compared to banks, entry regulations for MFI are less stringent, requiring paid-in capital of only MMK300 million and MMK100 million for deposit-taking MFI (DMFI) and non-deposit-taking MFI (NDMFI) respectively. A one-year temporary license needs a full conversion following addition regulatory review, but it does not seem like a heavy burden given the continued increase in participation. MFI business regulations were relaxed significantly in 2016, but DMFI licensing regulations have been tightened, requiring a minimum of three years of operating experience and two consecutive years of recording profits. In addition, the DMFI must have an appropriate operational management information system and strong internal controls to accommodate customer deposits. These requirements apply not only to newly established MFIs, but also to MFIs that are already in operation. As a result, some of the smaller DMFIs that were unable to meet these requirements returned their licenses or have switched to NDMFIs. As can be seen in [Figure 1-2] above, the number of DMFIs in 2019 decreased by more than 80% compared to 2018.

The most important business rule after the establishment of the MFI is the regulation on interest rates and loan size. MFI lending rate is capped at 28% per annum or 2.33% per month while unofficial private lenders typically charge at 10 to 20% per month. There are also strict restrictions on compulsory and voluntary deposits required of MFI customers. Compulsory deposits may not exceed 5% of the loan amount, and are constrained by the interest rate floor of 14%. As long as the MFI meets the 12% solvency ratio, voluntary


033

CHAPTER

01Recom

mendations for Im


deposits have no limit, but in this case the MFI is required to pay a minimum interest rate of 10% per annum.7 After all, the current maximum interest margin is 14% without considering the 2% fees that MFIs may levy on the loan in addition to the interest rates.8

<Table 1-2> Major Rules and Requirements for Microfinance Institutions

Paid-in capitalDeposit-taking MFIs MMK300 million

Non-deposit-taking MFIs MMK100 million

Interest rates

Loan maximum of 28% per annum(2.33% per month)

Voluntary deposit minimum of 10% per annum

Compulsory deposit minimum of 14% per annum(not exceed 5% of the loan)

Loans

Maximum loan size MMK10 million

Collateral requirements cannot accept collateral for any types of loan products

Prudential requirementsSolvency ratio 12%

Liquidity ratio 25%

Source: Microfinance Business Law (2011) and Directives (2011, 2013, 2014, 2016).

MFIs cannot take collateral for any types of loan products, and the maximum allowable loan size is MMK10 million, doubling from MMK5 million in 2017. While it clearly shows the policy intention to encourage lending to MSMEs, there are mixed views among MFIs regarding the maximum size of loans allowed. On the one hand, many MFIs are reluctant to lend at that size without collateral, but some MFIs want to see the lending limit rise even above MMK30 million to support hire-purchase loans for farm equipment and automobiles. In terms of regulating financial soundness, the solvency and liquidity ratios are regulated at 12% and 25%, respectively. The loan maturity is generally less than one year, so the provision for bad debts is also stipulated accordingly.

7 DespitetheregulationthatMFIscannotacceptdepositsfromnon-members,itispresumedthatlicense-relatedregulationsonDM-FIswerestrengthenedtoprotectdepositorswhenthevoluntarydepositlimitwasliftedin2016.

8 ToencourageMFIstoexpandintoruralareas,theFRDhasinformallyallowedfeesof4%onloanamountsinurbanareasand8%inruralareas.However,recentlyafeeofupto2%isaccepted.


Development of M


ar

034

<Table 1-3> Regulations on Loans Provisioning and Classification

Classification Days past due Provisions as % ofoutstanding loans

Current Performing Loans - 1%

Sub-Standard Loans 1~30 days 10%

Watch Loans 31~60 days 50%

Doubtful Loans 61~90 days 75%

Loan Loss over 91 days 100%

Rescheduled one time - 50%

Rescheduled two times - 100%

Source: Microfinance Supervisory Committee Directive No. 5/2016 (2016).

2.3. Financing Needs and Market Infrastructures

2.3.1. MFI Financing Conditions

Banks in Myanmar are primarily providing credits where they can secure collateral such as real estate, making it almost impossible for farmers or low-income people to access the services. The Myanmar Agricultural Development Bank and NGOs offer micro-credit services for farmers as part of programs to provide support for low-income families and small businesses, but it is of a very limited scale. Despite the presence of cooperatives used by most micro-loan customers, many farmers and low-income families still pay extremely high interest rates using loans from informal moneylenders.9 Therefore, it is necessary to expand the credit supply through MFIs, and for this, the activation of financing must be addressed first.

Domestic MFIs receive loans only from Myanmar Economic Bank or Myanmar Microfinance Bank to cover the necessary funds for their business, while foreign MFIs have had to raise funds from foreign partners or shareholders. Since 2016, regulations have been eased, allowing all MFIs, domestic or foreign, to borrow at home and abroad. The deregulation appears to have helped improve the MFI financing situation, but in order to obtain loans from commercial banks in Myanmar, the Myanmar Financial Institutions Act requires that land or buildings owned by MFIs be provided as collateral. With the current loan to value ratio of 40% to 50%, it is difficult for domestic MFIs to secure enough funds for their business. To make matters worse, as an impartial method for valuation of collateral has not yet been formally established, it often relies on the discretionary and conservative valuation of banks.

9 Itisknownthatinformalmoneylendersreceivealoaninterestof120%ormoreperyeardependingonthecollateral,andregisteredpawnshopsthatreceivegoldandotherpreciousmetalsascollateralhaveaninterestrateofatleast24%.


035

CHAPTER

01Recom

mendations for Im


Most foreign MFIs, which are large in size and capable of strengthening credit from foreign partners, have been financed through equity capital, loans from headquarters and affiliates, and borrowing from offshore banks, but prefer to borrow from local banks in Myanmar owing to the currency risk caused by the high volatility of MMK. Foreign MFIs are unable to provide real estate as collateral which makes it difficult to finance locally, as domestic banks in Myanmar have doubts about the MFI business model itself. Given the much lower cost of financing through the international capital markets, it is necessary to develop adequate hedging measures against foreign exchange risk for all foreign and domestic MFIs.10

2.3.2. Excess Demand and Insufficient Market infrastructure

There are still many restrictions on the MFI financing, but the demand for credit, especially for MSMEs, continues to grow rapidly. Like other ASEAN countries, MSMEs play an important role in Myanmar’s economic well-being. As the main driving force for future national economic development, more than 90% of all enterprises are classified as SMEs, accounting for 50% to 95% of employment and 30% to 53% of GDP. Currently two main channels are available for financing of MSME: policy loan through state-owned banks and loans through commercial banks and MFIs.

Policy loans with interest rates far below the market rate are always in short supply compared to demand. It is difficult for MSMEs to access even loans through commercial banks, which are less competitive than policy loans, because they are unable to provide sufficient collateral for them. After all, self-employed and small business owners with little or no collateral have no option other than to get a loan through MFI. However, most of them do not have the financial documents they need to borrow, and even the basic concepts of finance and debt management are not understood well, making it difficult for them to borrow the necessary amount.

Another important issue is the lack of market infrastructure for MFIs. The lack of an established credit information system has led to structural issues owing to which it costs more to maintain and expand than to enter the market. This in turn is hindering the profitability of MFIs and impeding vitalization of business. For many years, the Myanmar government and banks have been working with international organizations to establish a credit rating system. As a result, Myanmar Credit Bureau (MCB), a joint venture between the Myanmar Banking Association (MBA) and Singapore’s Asian Credit Bureau Holdings, was

10 Giventhatthereisnosecondarybondortreasurybillsmarket,theAMROadvisedtheCentralBankofMyanmartoconsiderintro-ducingitsownversionofDomesticNon-DeliverableForwardasatoolformanagingliquidityandhedgingagainstexchangeraterisk(ASEAN+3MacroeconomicResearchOffice(AMRO),2019).


Development of M


ar

036

launched as the first credit rating agency with approval from the CBM in April of last year. The MCB will take at least several years to play a full-fledged role by accumulating sufficient data necessary for credit evaluation, but its launch serves as the first step toward the official operation of a credit rating system in Myanmar. Along with the launch of the MCB, the Myanmar Microfinance Association (MMFA) also built a platform for collecting and sharing credit information, but this platform has not received the FRD’s official approval yet. It is expected that the upcoming revised MBL and subsequent directives will establish a legal basis for collecting and sharing customer information, which could lead to a more extensive and advanced system for collection and evaluation of credit information with the functions of analyzing customer credit and repayment capabilities.

2.3.3. Other Operational Challenges

While previous studies have not raised concerns or significant implications with regard to over- indebtedness, recent reports from local MFIs indicate that multiple borrowing is increasingly prevalent. According to a survey conducted by M-CRIL in June 2018, about 31% of MFI clients in Myanmar had three or more loans, and the rate of receiving such multiple loans was the highest in Yangon. The multiple-debt problem has an adverse impact on the soundness of financial companies, impedes the smooth supply of microfinance and, if escalates, will act as a risk factor for the entire economy. Although it is clear that problems arise due to the weakening ability of the vulnerable to repay debts when macroeconomic conditions deteriorate, borrowers prefer to take out loans at every opportunity in the presence of excess demand for financing. Local MFI managers also point out that borrowers have limited understanding of the risks associated with borrowing and insufficient knowledge of appropriate accounting practices, budget management and investment. While the aforementioned credit bureaus will play an important role in reducing risk for financial institutions, training in financial literacy is essential to ensure safe and efficient retail lending to low-income people.

Another challenge arises from the fact that Myanmar is a largely cash-driven economy, so MFIs’ loan operations are mainly based on face-to-face transactions. Loan officers typically spend long hours collecting, counting and disbursing cash to new customers, especially in rural areas. Currently, most MFIs are located in urban areas such as Yangon and Mandalay, due to which people living in other areas have limited access to financial services. This is due to the high cost of operating MFIs in rural areas. In order to offset this, MFIs may consider providing incentives such as differentiating the fees and charges levied while processing loans, or financing low-interest policy loans.


037

CHAPTER

01Recom

mendations for Im


Although the number of MFI customers is increasing and access to financial services is improving, most of them offer only standardized loan products in the form of short-term credit. In particular, MFI loan products are primarily focused on agricultural or business loans, and personal loans for other purposes, such as home improvement, education, and health, are very limited. Owing to these constraints, many are forced to turn to informal moneylenders in emergencies, and such reliance often exposes borrowers to excessive debt and higher financial distress due to the predatory practices of charging high interest rates.

3. Korea’s Experience in Microfinance Supervision

3.1. Financial Supervisory System in Korea

Korea’s financial supervisory system underwent major changes following the Asian financial crisis of 1997. To ensure effective and efficient supervision, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) were established as integrated financial regulatory authorities responsible for supervision across the entire financial sector, including banks, securities, insurance and nonbank financial institutions.

[Figure 1-4] Financial Supervisory System in Korea

Ministry ofEconomy and

Finance

Policy Cooperation

Korea DepositInsurance

Corporation Sharing ofInformation

Sharing ofInformation

Supervision&

Examination

Financial Services

Commission

PolicyCooperation

Supervision Bank ofKorea

Financial Supervisory

Service

Financial Institutions

Source: Bank of Korea (2018).


Development of M


ar

038

The FSC, as a government regulatory authority, has a wide range of powers as stipulated by the “Act on the Establishment, etc. of Financial Services Commission,” to set the government’s financial market policies, propose amendments to the financial law, make rules, grant regulatory licenses, and decide on enforcement actions. Under the two-tier system created by the Act, the FSS is subordinate to the FSC and subject to FSC’s oversight with regard to its examination, investigation, and enforcement activities. The FSS coordinates its examination and supervision activities with the Bank of Korea (BOK) and the Korea Deposit Insurance Corporation (KDIC) to ensure timely and effective examination and supervision. Further, the FSS routinely shares supervisory information with other oversight authorities on a regular basis.

3.2. Nonbank Financial Institutions

Financial institutions in Korea are broadly classified into four types: banks, nonbank financial institutions, financial investment service providers, and insurance companies. Among them, the non-banking sector mainly provides finances to low-credit, low-income families and small businesses. Nonbank financial institutions include Mutual Savings Banks, specialized credit finance companies, and mutual credit cooperatives comprising credit unions, agricultural, fisheries, and forestry cooperatives. They are classified as low-credit, low-income financial companies because their loan services target people with a low credit score who are unable to obtain loans from banks.

Among nonbank financial institutions and moneylenders with only lending functions, this report analyzes Mutual Savings Banks (MSBs) that accept deposits and provide loans for comparison with MFIs in Myanmar. Moneylenders are not officially classified as financial institutions directly supervised by financial regulatory authorities, but they are obligated to register with financial regulatory authorities or municipalities depending on the size, and certain business rules apply.

3.2.1. Mutual Savings Banks

The business of MSBs is largely limited to deposit and loan services aimed at facilitating microfinance. They were created through the enactment of the “Mutual Savings and Finance Company Act” in 1972 to revamp the private money market and bring private lending facilities into a more structured financial setting. In the early days of MSBs’ establishment, their function as a financial intermediary was weak, and financial accidents were frequent due to the governance structure centered on large shareholders and insufficient supervisory capacity. In 2001, the “Mutual Savings Banks Act” was enacted, which limited the powers of


039

CHAPTER

01Recom

mendations for Im


major shareholders and strengthened supervisory functions. Since then, the official name was changed to ‘Mutual Savings Bank’ to revitalize the business and enhance credibility, and from 2007 the name was abbreviated to ‘Savings Bank.’11

MSBs are at a disadvantage compared to banks in terms of capital size, retention of human resources, and public confidence, but have continued to grow thanks to the favorable business environment, such as excessive demand for funds in the market and the application of relaxed regulations on interest rates. However, in the 1990s, with advances in financial liberalization and opening of the financial market, the favorable business environment for MSBs receded rapidly. After the 1997 Asian financial crisis, a number of MSBs became insolvent due to the bankruptcy of Small and Medium-sized Enterprises (SMEs), excessive concentration of real estate project finances, and the moral hazard presented by large shareholders and management.

[Figure 1-5] MSBs’ Capital Adequacy & Asset Soundness(Unit: %)

�

��

��.�� .�� .�� .�� .��

# of MSBs

��

��

��

�

��

��

��

BIS Ratios Substand & Below Ratios

��

�.��

��.��

��.�� .��

��.��.��

�.��.��

��.�� .��

��

Source: Financial Supervisory Service (2021).

11 Inthisreport,thename‘mutualsavingsbank’isusedasitalignswiththe“MutualSavingsBanksAct.”


Development of M


ar

040

<Table 1-4> Mutual Savings Banks’ Soundness Indicators(Unit: Trillion KRW, %)

2018 2019 2020(p)

Assets 69.5 77.2 92.0

Loans 59.2 65.0 77.6

Deposits 59.8 65.9 79.2

Net income 1.11 1.28 1.41

Loan delinquency ratio 4.3 3.7 3.3

SBL ratio 5.1 4.7 4.2

BIS capital ratio 14.33 14.83 14.29

Note: The figures for 2020 are provisional as of March 30, 2021, when the FSS issued a press release.Source: Financial Supervisory Service (2021).

The number of MSBs, which reached around 350 in 1972, continued to decline due to the restructuring of insolvent ones led by consolidation and suppression of new establishments, and ended up at 231 in 1997. Through the 1997 Asian financial crisis, many of them were withdrawn or merged. A total of 79 MSBs with 303 branches were in operation as of December 2020. Currently, they are considered relatively sound with KRW92 trillion in total assets, and the BIS ratio of 14.29% and the non-performing loan ratio of 4.2% on average. More detailed data on asset quality and capital adequacy are included in Appendix 1.

3.2.2. Moneylenders

Moneylenders are broadly grouped into private moneylenders that provide short-term cash and loan services; collection agencies that acquire debt past due or in default and retrieve delinquent funds; and peer-to-peer lenders that provide loan information services and connect lenders and borrowers through an online platform. The moneylender business has grown significantly since the 1997 Asian financial crisis due to low interest rates and increased demand for household financing, but illegal debt collection tactics and loans with usurious interest rates have emerged as social issues. Accordingly, the “Act on Registration of Credit Business, etc. and Protection of Finance Users” (referred to as the “Moneylenders Act”) was enacted in August 2002 to ensure the transparency of the businesses and protect consumers. Under the “Moneylenders Act,” the head of the local government is granted supervisory authority over moneylenders; accordingly, the local government may inspect and suspend their business and even cancel the registration. However, since the revision of the Act in 2018, among moneylenders, those with assets exceeding KRW10 billion as corporations, peer-to-peer lenders, and debt collection agencies are now required to register with the FSC for supervision. According to the moneylender survey conducted jointly


041

CHAPTER

01Recom

mendations for Im


by the FSC, the FSS and the Ministry of the Interior and Safety in 2020, there are 1,077 moneylenders registered with the FSC and 7,424 with local governments, for a total of 8,501.

<Table 1-5> Number of Registered Moneylenders(Unit: Number of companies)

2017 2018 2019 2020

FSC Registered 1,249 1,500 1,355 1,077

Local Gov’t Registered 6,835 6,810 6,999 7,424

Total 8,084 8,310 8,354 8,501


As of the end of 2020, the outstanding balance of loans extended by moneylenders was KRW14.54 trillion, of which unsecured loans were estimated at KRW7.37 trillion and secured loans at KRW7.17 trillion while the average interest rate came to 16.3 %. By loan type, the average interest rates on unsecured and secured loans were 18.7 % and 13.9 % respectively. The number of borrowers who turned to moneylenders for credit continued to decline, to reach 1.39 million as of the end of 2020.

<Table 1-6> Moneylenders’ Loan Balance and Average Interest Rate(Unit: Billion KRW, Thousand, %)

2017 2018 2019 2020

CorporationLoan balance 15,807 16,574 15,183 13,753

# of borrowers 2,345 2,086 1,657 1,284

IndividualLoan balance 694.9 775.2 734.3 783.6

# of borrowers 128 127 120 105

Loan Type

Unsecured 12,603 11,769 8,911 7,368

Avg. rate 24.0 21.7 21.1 18.7

Secured 3,899 5,580 7,006 7,169

Avg. rate 15.1 15.2 13.8 13.9

Total Loan Balance 16,501 17,349 15,917 14,536

Average Interest Rates 21.9 19.6 17.9 16.3


3.3. Regulations for MSBs and Moneylenders

3.3.1. Authorization and Registration of Business

Unless specifically provided otherwise by the law, the incorporation of a financial services company requires authorization or registration through the FSC/FSS. Authorization


Development of M


ar

042

is administrative action that gives a person (natural or legal) the permission to engage in a regulated business activity. Some financial services businesses simply need to register with the FSC/FSS. If the applicant satisfies the established requirements, the registration is approved without regulatory scrutiny.

MSBs are businesses that require an authorization. MSBs must meet the requirements regarding the appropriate personnel and physical facilities, as well as submit a viable and adequate business plan sufficient to protect customers and conduct business. They also need responsible large shareholders who have complete control over critical issues related to the management of the company. The required minimum paid-in capital varies from KRW4 billion to KRW12 billion depending on the location of the head office. The approval of the FSC is also required for any business dissolution, merger, closure, transfer, or capital reduction.

<Table 1-7> Major Rules and Requirements for MSB and MoneylendersMutual Savings Bank Moneylender

Business License Needs to obtain a license from FSC.

• Register with the FSC/FSS if the moneylender is registered with 2 or more municipal administrations or the aggregate amount of assets exceed KRW10 billion

• Register with municipal administrative authorities otherwise

Paid-in Capital

Where its principal office is located in:• Special Metropolitan City:

KRW12 billion• Metropolitan City:

KRW8 billion• Self-Governing City:

KRW4 billion

• Registered with municipal administration: KRW50 million for corporations and KRW10 million for individual

• Registered with FSC/FSS: KRW300 million (KRW500 million for collection agencies)

Matters for Authorization Dissolution, Merger. Discontinuance Must be renewed every 3 years

Business area Within designated business area among 6 zones No restrictions

Business ActivitiesListed in the Mutual Savings Bank Act (Others need to separate authorization by the FSC)

No special restrictions except business related to gambling, entertainment bars, and multi-level marketing business

Credit Extension Limits

• Single counterparty ≤ 20% of equity capital

• Same counterparty* ≤ 25% of equity capital

• Aggregate amount of large credit extension** ≤ 500% of equity capital

No special restrictions except transactions involving lending loans guaranteeing payments, or providing financial supports for major shareholders

Notes: * A counterparty and any group of connected counterparties. ** Credit extension to a single counterparty exceeding 10% of equity capital.

Source: “Mutual Savings Banks Act” (amended on January 2021) and “Act on Registration of Credit Business, etc. and Protection of Finance Users” (amended on June 2020).


043

CHAPTER

01Recom

mendations for Im


Regulatory authorities are limiting the expansion of business areas excluding mergers after acquisitions of insolvent MSBs so that they can fulfill their role as regional financial institutions. To this end, the following approval policies are maintained: prohibiting MSBs from owning other MSBs, prohibiting the same major shareholder from taking ownership of more than three MSBs, and prohibiting mergers with expanding business areas. Currently, MSBs must hold at least 40 to 50 % of their loan portfolio in one of six business areas where their headquarters are located.12

In contrast, a moneylender can operate their business by registering with the municipal authorities that hold jurisdiction over them by meeting certain requirements stipulated by the “Moneylenders Act,” including minimum paid-in capital, completion of training on observances, and a secured business place. However, large moneylenders operating in two or more cities or provinces are required to register with the FSC. Registration requirements for the FSC are different from those imposed by municipal administrative authorities. For example, the minimum capital required by the FSC is KRW300 million (KRW500 million for collection agencies), while the minimum capital requirement for registering with local governments is KRW50 million for corporations and KRW10 million for individuals. Registration is valid for three years and must be renewed to avoid cancellation. In addition, the moneylender is responsible for indemnifying the other party for damages caused by intention or negligence while operating the loan business. To ensure this, the moneylender must make a deposit or get insurance before starting business.

3.3.2. General Business Regulations

MSBs are deposit-taking institutions and do commercial banking on a limited scale, but they are not classified as banks for supervisory purposes. The primary businesses of MSBs are mainly limited to deposit and loan services, commercial paper services, intermediary services for government/public enterprises and financial services companies, and debit card and payment settlement services. MSBs may also engage in securities broker/dealer services and trust services as stipulated under the “Financial Investment Services and Capital Markets Act” with approval from the FSC/FSS. Consumer financing services are also open to certain qualified MSBs. MSBs may participate in the sale of loans and act as agents for the sale of gift certificates and lottery tickets, and provide bancassurance services with approval from the FSC/FSS.

12 Inaccordancewiththe“MutualSavingsBanksAct,”MSB'sbusinessareasaredividedintosixregions:Seoularea/IncheonandGyeonggiarea/Chungcheongarea(Daejeon,Chungnam,Chungbuk)/Jeonraarea(Gwangju,Jeonnam,Jeonbuk,Jeju)/GangwonandGyeongbukarea(Daegu,Gyeongbuk,Gangwon)andGyeongnamarea(Busan,Ulsan,Gyeongnam).Ofthesesixregions,SeoulandIncheonandGyeonggiregionsshouldmaintaina50%localloanratiowhilethelocalloanratiois40%forotherregions.


Development of M


ar

044

Moneylenders operate businesses that provide short-term cash and loan services at higher rates than those charged by other regulated lenders. There are generally very few restrictions that apply to entry requirements, areas of business, or financing terms; where restrictions exist, they are of a loose nature. Even in business activities, there are no special restrictions except for business related to gambling, entertainment bars and multi-level marketing.

3.3.3. Business Conduct Regulations

MSBs are subject to a credit extension limit for purposes similar to banks. For a single counterparty, the credit extension may not exceed 20% of the MSB’s capital. Furthermore, the aggregate amount of credit extension to the same counterparty (the counterparty and all connected counterparties) may not exceed 25% of the MSB’s capital. Credit extension to a single counterparty that exceeds 10% of the capital is considered a large credit extension, and the total amount of such large credit extensions is required to be less than 500% of the capital. MSBs affiliated with companies in a business group are subject to credit extension limits on a consolidated basis, thus it is applicable to not only a single counterparty and a same counterparty within a stand-alone MSB, but also affiliates in a business group.

MSBs must adhere to certain requirements when expanding their credit to individual borrowers and small businesses. MSBs operating in major metropolitan areas must provide at least 50% of the total credit extended to individual borrowers and small businesses. Furthermore, credit extensions for real estate project finances may not exceed 20% of the total credit. Some restrictions also apply to securities investments. The total amount of securities investment may not exceed 100% of the MSB’s capital. With regard to individual investments, stock investments may not exceed 50% of the capital, and the total amount of stocks and bonds in a company may not exceed 20% of the capital.

In addition to equity capital, MSBs are financed by borrowing from other financial institutions, Korea Deposit Insurance Corporation, and Korea Savings Bank Association. It is possible to borrow through bond issuance if certain requirements (BIS capital ratio of 10% or higher, tier-1 ratio of 8% or higher, and investment grade acquisition by credit rating company) are met. MSBs must hold at least 10% of mutual installments savings and deposits, and at least 5% of other deposits as reserve assets for payment by means of cash or highly liquid securities such as government bonds.

Unlike MSBs, moneylenders do not have specific restrictions related to asset management such as granting credit or investing in securities. However, the total assets of a moneylender


045

CHAPTER

01Recom

mendations for Im


may not exceed 10 times the equity capital, and transactions such as guaranteed loans and financial support to large shareholders are strictly prohibited. The “Moneylenders Act,” enacted with the aim of regulating illegal debt collection and excessively high interest rates charged to protect users, imposes various obligations are also imposed for advertising loans, executing loan agreements, and collecting debt. In addition to limiting the method and broadcast time of loan advertisements, moneylenders are subject to responsible lending practices obligations. They must provide a copy of the written agreement when concluding a loan agreement, stating the details of the agreement, including the name and address of the lender and the date of the agreement, loan amount, loan interest rate, and the period and method of repayment. The lending amount must not surpass a borrower’s debt-servicing ability considering the borrower’s income and assets. Lending rates - any return regardless of name, such as commissions, discounts, fees, deductions, and overdue interests, that moneylenders receive in exchange for a loan is considered interest - must not exceed 24% per annum, which will be lowered again to 20% per annum from the second half of 2021 as further illustrated in the Appendix 2. Furthermore, a moneylender is not allowed to receive overdue interest on loans exceeding 3% per annum and violation of the requirements may result in monetary penalty.

The “Fair Debt Collection Practices Act” was enacted in 2009 to prevent debt collectors from abusing their rights or using illegal methods to collect debts, and to protect the rights of debtors.13 The Act strictly prohibits illegal debt collection practices, such as harassing the debtor through repeated visits to the workplace and home, reporting the debt situation to a third party, or inflicting mental or physical harm. Behaviors such as visiting with the intent to collect debt utilizing situations such as weddings and funerals, where it is difficult for the debtor to comply with the debt collection, are also regarded as unfair debt collection activity. In case of violation, a fine is imposed, and the debtor is compensated for any damage. In addition, the “Moneylenders Act” restricts the employment of persons who have not exceeded a certain period of time in violation of related laws and regulations, and limits the act of representing or entrusting them.

3.3.4. Prudential Regulation

MSBs must comply with prudential standards including rules for capital adequacy, asset classification and minimum allowances for credit losses as well as other guidelines. The safety and soundness standards for MSBs are similar to those for banks, but some of the standards are less stringent given their unique service characteristics and business activities.

13 TheFairDebtCollectionPracticesAct, likeotherActsandEnforcementDecreesmentionedinthispaper,canbeviewedfreeofchargeinEnglishonthewebsiteoftheKoreaLegislationResearchInstitute(https://elaw.klri.re.kr).


Development of M


ar

046

As part of enhanced prudential standards for MSBs, the minimum capital requirement was set to 7% for those with less than KRW1 trillion in assets, and 8% for MSBs with more than KRW1 trillion in assets at the end of the previous fiscal period. They also need to comply with safety and soundness guidance ratio requirements set by the FSC/FSS. MSBs must maintain a minimum Liquidity Coverage Ratio (LCR) of 100%, where the LCR is defined as a simple ratio of the inventory of high-quality liquid assets to total net cash outflows over the next 30 days. MSBs are also required to maintain the loan-to-deposit ratio on a monthly average basis at or below 100%.

Asset classification for MSBs is primarily made on the basis of the duration of delinquent payment, and some adjustments are possible to reflect the likelihood of future loan collection. Credit loss provisions must be set aside based on the assets classification made to comply with minimum allowance rules. Since moneylenders do not accept deposits, there are no separate prudential guidelines. However, it is necessary for moneylenders to prepare a business report including the amount of loans and borrowings, the number of borrowers, and the general status of the office, and submit it to municipal administrative authorities or the FSC every half year.

<Table 1-8> Asset Classification and Minimum Allowance for Credit Losses

Asset type Months past dueMinimum allowance

for credit losses

Household loan Business loan

Normal Less than 1 month 1% 0.85%

Precautionary 1 to 3 months 10% 7%

Substandard More than 3 months(within estimated collection amount) 20% 20%

Doubtful More than 3 months(excess of estimated collection amount) 55% 50%

Presumed loss More than 12 months(excess of estimated collection amount) 100% 100%

Source: Regulation on Supervision of Mutual Savings Bank Business (amended on March 2021).

3.4. Examination and Enforcement Actions

3.4.1. Off-site Monitoring

Examiners deployed by the FSS analyze financial and operational reports of financial institutions, assess quantitative safety and health measures, and work to identify areas of weaknesses and risks that require supervisory attention. A variety of sources are utilized to


047

CHAPTER

01Recom

mendations for Im


collect data for analysis, including the business report filed by financial institutions, internal reports, and meetings with senior managements and staffs of the institution. Business strategy and risk profile analysis is also performed, and FSS examiners may visit the subject institution in person to obtain additional information on unusual activities or areas of supervisory concern, if necessary. The results of off-site monitoring are often the basis for on-site examination and other supervisory actions.

3.4.2. On-site Examination

The FSS examines financial institutions to ensure they have adopted appropriate safety and soundness standards and enforce compliance with laws and regulations by performing full-scope and targeted examinations. The on-site examination process of the FSS consists of examination planning, pre-examination preparation, execution of examination, and post-examination actions, and is described in a step-by-step diagram in [Figure 1-6].

Planning for examination of financial institutions is necessary to determine the basic matters related to the examination, such as the selection of financial institutions to be examined, the types of examination to be performed, the scope of the examination activities, the tentative dates and the number of examiners to be assigned. Financial institutions are selected for a full-scope examination during the year, taking into account the size, complexity, risk profile, results of previous screening, and supervisory issues detected in the institution’s off-site monitoring. The institutions for targeted examination are generally selected based on incidence of unsound or inappropriate business practices and irregularities.

As part of the pre-examination preparation, FSS examiners gather information on the subject institution from several sources including off-site monitoring and previous supervisory assessments, as well as the overall financial and business status of the institution. The subject institution receives advance notice indicating the purpose and schedule of the examination at least 30 days prior to the start of the full-scope examination.

FSS examiners initiate the on-site examination by providing the subject institution with appropriate guidance and setting expectations for the examination to be conducted. As part of the process, the examiner may obtain statements and documents from the institution’s management and staff, and, if necessary, from other parties. At the end of the examination, the examiner meets with the management to communicate areas of weakness and other supervisory concerns that have emerged as a result of the examination.


Development of M


ar

048

[Figure 1-6] FSS General Examination Process

Examination Planning

Pre-examination Preparation

Full-scope on-site Examination

Administration of examination findings

Post-examinationadministration

Report to the FSC

FSS decision on enforcement action

FSS enforcement authority

Communication and meetingswith management and board of directors

Tentative annual and quarterlyexamination plans and coordination

Main examination matters, alert lists

Selection of examinerand strategy meetings

Analysis of off-site monitoring information, previous examination findings,

and partnership meetings

Supervision policy, key focus areas, and other matters of interest

Final annual examination plan

Distribution of the annual examination plan to supervision departments under the FSS

Issuance of examination notice to the subject institutions and request for documents

Examination commencement

Internal reporting tosenior supervisors

Deliver examination findings and supervision actions to the subject institution

Review of examination findings

Deliberation by theEnforcement Review Committee

Reporting of the EnforcementReview Committee to the governor

Examination execution

Examination report

Examination plan including the dates and allocation of examiner

Collection of information relevant to the examination

Pre-examinationsessions for examiners

Examination completion

FSC enforcement authority

Joint FSC-FSS deliberations

FSC decision on enforcement action

Formation of the examination preparation committee

Completion of examination planningand preparation



049

CHAPTER

01Recom

mendations for Im


Upon the completion of the on-site examination, the examiner prepares a report detailing the examination findings including corrective actions to be taken to address any unsatisfactory areas or deficiencies. Enforcement actions are recommended for more serious violations of laws and regulations. The examination report and enforcement action recommendations are reviewed internally by the Enforcement Review Department at the FSS to ensure proper, fair, and objective post-examination actions. After completing the internal review by the FSS, the FSC may conduct an additional review to determine the punitive actions to be taken if the matters raised in the examination results are of great importance. The review process also provides those institutions and individuals to be sanctioned with opportunities to object to the adverse action decisions made by the Enforcement Review Committee or the FSC. Enforcement generally takes the form of administrative sanctions against the authorities and individuals involved in violations of the rules, which are listed in <Table 1-9>.

<Table 1-9> Post-examination Actions

Financial institutions

• Cancellation of business authorization, approval, or registration• Partial suspension of business or operations• Closing of business office or suspension of operations• Cease and desist order for illegal or improper acts• Transfer of business contracts• Order for public announcement or disclosure notice for wrongdoing• Institutional warning

Senior executives• Recommendation for dismissal• Full or partial suspension of work• Disciplinary warning

Employees

• Recommendation for dismissal• Suspension of work• Pay reduction• Reprimand, disciplinary warning

Monetary penalty • Civil fines• Administrative fines

Other sanctions• Order for corrective measures, commitment letter, or MOU• Order for restitution of losses• Referral for criminal penalty

Source: Regulations on Examination and Sanctions against Financial Institutions (amended on May 2020).

The financial institution or its employees may appeal against the sanctions imposed on them. To ensure the fairness and objectivity of the appeal process, the Enforcement Review Department administers the appeal and notifies the subject institution or employees of the review result within 60 days from the day the appeal was filed. If necessary, the review period may be extended by an additional 30 days.


Development of M


ar

050

3.4.3. Monitoring and Examination of MSBs and Moneylenders

3.4.3.1. Examination of MSBs

MSBs are required to submit a business report to the FSS with business details by the end of the month. The business report filed by the MSB consists of 102 detailed reports on the MSB’s general and financial position along with major prudential indicators including capital adequacy, asset quality, profitability and liquidity. The off-site surveillance of the FSS is to review the submitted reports, analyze changes in the economic and financial environment, and monitor the risks arising from the management policies and strategies followed by the MSB, and the results are reflected in the on-site examination decisions.

<Table 1-10> Summary of MSBs’ Business Report

Classification Number of Reports

Reporting Frequency Major Contents

General status 12 Monthly or quarterly Company overview, shareholder and employee status, branch status, etc.

Financial status - - -

Financial statements 6 Monthly Balance sheet, income statement, etc.

Major financial status 36 Monthly or quarterlyLoan and deposits (terms, collateral, types of borrowers and depositors, etc.),capital adequacy

Capital adequacy 4 Quarterly BIS capital adequacy ratios, etc.

Asset quality 16 Monthly or quarterly NPL ratio, NPL coverage ratio, sub-standard or below loan status, etc.

Profitability 5 Quarterly ROA, ROE, securities valuation gains and losses, etc.

Liquidity 3 Quarterly Liquidity coverage ratio, assets and liabilities maturity structure, loan to deposit ratio, etc.

Compliance 8 Monthly or quarterly Credit limit management, soundness ratio compliance, etc.

Internal and external controls 5 Quarterly or

semiannually Financial incidents, internal audits, etc.

Others 7 Semiannually Dormant account, etc.

Total 102 - -

Source: Detailed Regulations on Supervision of Mutual Savings Bank Business (amended on February 2021).

Unlike banks, MSBs can be controlled by a single large shareholder, so it is important to ensure that large shareholders do not exert undue influence for their own interests. The


051

CHAPTER

01Recom

mendations for Im


FSS has a comprehensive system for monitoring the credit exposure of MSBs. The system is designed to collect credit exposure information from all MSBs and credit rating agencies each month to determine whether a lender is a single counterparty or same counterparty, as well as determine the aggregate amount of large credit extension. In addition, it monitors various risk factors associated with MSBs, such as detecting the credit limit exceed regulatory levels for each business type or to moneylenders, identifying changes in asset quality, finding signs of exceeding the regulated loan-to-deposit ratio, and detecting any abnormalities in trade receivables secured for loans.

<Table 1-11> Rating Components and Evaluation Factors

Component Quantitative evaluation factors Non-quantitative evaluation factors

Capital adequacy• BIS capital ratio• BIS Tier 1 capital ratio• Equity capital ratio

• Adequacy of the composition of capital• Likelihood of capital impairment in the future• Management’s approach to preserving the soundness of capital • Compliance with supervisory guidelines

Asset quality

• Ratio of loans with increased risk of losses

• Ratio of loans classified as substandard or below

• Ratio of loans with delinquent payment

• Appropriateness of asset classification practices• Appropriateness of credit extension policy• Adequacy of allowances for loan and other credit loss• Appropriateness of credit risk management• Appropriateness of loan evaluation and consolidated asset

management

Management -

• General financial status and operation ability• Adequacy of establishment and enforcement of the

management policy• Adequacy of ownership structure and internal control• Management of subsidiaries• Appropriateness of the risk management system• Compliance with laws and regulations

Earnings• Return on assets• Cost-asset ratio• Cost-income ratio

• Risks to the size and components of earnings• Appropriateness of the earnings structure• Appropriateness of the expense structure• Business effectiveness and capacity to generate future earnings

Liquidity • Liquidity coverage ratio;• Loan-to-deposit ratio

• Appropriateness of liquidity risk management• Appropriateness of funding structure and operation

Source: Regulations on Supervision of Mutual Savings Bank Business, Article 45 (amended on December 2020).

The on-site examination of MSBs is broadly divided into three categories: assets; liabilities and equities; and internal control. The examination on assets verifies the adequacy of asset liquidity, securities holdings, credit provisions, project financing, management of troubled loans and asset classification. The examination on liabilities and equities checks the adequacy of financing and deposit related operations as well as the adequacy of equity capital. Lastly, the examination on internal control inspects whether the MSB has appointed a compliance officer and has in place an internal control system, an internal audit


Development of M


ar

052

system, anti-money laundering measures, and compliance with the “Real Name Financial Transactions Act.”

The FSS evaluates MSBs’ business operations and health, and assigns an overall rating based on the four components that are collectively called CAEL: capital adequacy; asset quality; earnings; and liquidity. Rating of each component is determined by a combination of quantitative factors based on business reports submitted by MSBs and non-quantitative factors such as compliance with supervisory guidelines and adequacy of credit risk management. The component ratings are then aggregated to generate a composite rating, taking into account other factors such as business conditions and capability; supervision issues and concerns; assessment results from off-site surveillance and ongoing supervision; market conditions; and other relevant factors that are not fully captured in the component rating.

<Table 1-12> Remedial Actions under Prompt Corrective ActionMIR MID MIO

Potential Supervisory Actions

• Improvement of organizational and personnel operations

• Capital increase or write-off• Restrictions on expansion

into new business

• Branch closings and/or restrictions on new openings

• Dismissal of company officers• Partial suspension of the

business operations

• Retirement of company stocks

• Appointment of outside administrators

• Merger

Execution of PCA• MID triggered if business

improvement plan is rejected or executed incompletely

• MIO triggered if business improvement plan is rejected or executed incompletely

• Delicensing and business closure if business improvement plan is rejected or executed incompletely


As a general rule, supervisory evaluation and rating for MSBs takes place when the FSS conducts a full-scope examination. The rating serves as the basis for Prompt Correct Action (PCA), a remedial measure for financial institutions with heightened risk of stress or failure; the scope of PCA ranges from Management Improvement Recommendation (MIR) and Management Improvement Demand (MID) to Management Improvement Orders (MIO).

3.4.3.2. Examination of Moneylenders

Like MSBs, off-site surveillance for moneylenders begins with a review of the business reports they submit twice a year. There is a separate monitoring system that makes it possible to identify transaction details by moneylender business types (short-term cash and loan services, collection agencies, peer-to-peer lenders and connecting lenders) and loan size with rate of delinquency by borrowers, by interest rates, and by contract periods. The system automatically extracts abnormal transactions such as the bargain sale of loan


053

CHAPTER

01Recom

mendations for Im


receivables, and detects any distortion of loans and a sudden increase or decrease in delinquencies. The examination-related information submitted by the moneylenders during on-site examination is included in the system and used to analyze possible violations of the laws and regulation.

On-site examinations for moneylenders are conducted by the relevant public officials of the registered municipality, or by the FSS examiners if registered with the FSC. If necessary, the head of the local government may request the FSS to examine the moneylenders. The examination for moneylenders mainly focuses on business conduct, verifying whether the registration and renewal of the business are carried out properly, whether regular documents such as business reports are submitted correctly, whether the loan contracts, loan conditions and loan advertisement are appropriate, and whether the loan rates and debt collection procedures comply with the laws and regulations. If any violation is found as a result of examination, administrative sanctions including monetary penalty against the subject institution and individuals are imposed.

3.5. Self-regulatory Organizations

Mutual Savings Banks and moneylenders have established and operated self-regulatory bodies in accordance with relevant laws. Founded in 1973, the Korea Federation of Savings Banks (KFSB) performs various functions such as supporting MSBs’ business operations, serving as a central bank for MSBs, building and operating a computer sharing network, and acting as a self-regulatory body.

<Table 1-13> Key Functions of Korea Federation of Savings BanksFunction Contents

Support for MSBs• Conducts research and surveys for business development• Performs activities to enhance the public reputation of MSBs• Provides education and training for employees of MSBs

Role as a central bank for MSBs

• Receives and manages reserve deposits and other deposits (residual funds) from MSBs• Grants loans to MSBs, rediscounts commercial papers, and provides a guarantee of

payment• Provides emergency financial support

Support for shared computer network

• Establishes, operates, and maintains shared computer networks to support the business operations

• Conducts R&D on information technology such as smart banking and FinTech• Exchanges data with financial institutions as the IT center of MSBs• Manages customers’ data securely

Self-regulation• Exercises the entrusted authority of the FSC/FSS• Provides standards and guidelines on the business methods and regulations• Conducts autonomous deliberations on advertising contents for the products of MSBs

Source: Korea Federation of Savings Banks (https://www.fsb.or.kr/) (2021).


Development of M


ar

054

The Consumer Loan Finance Association (CLFA) was established in 2009 and 1,296 member companies are affiliated as of the end of February 2021. It maintains the business order of the moneylenders, supports the sound development of moneylender business, protects the users, and socially underprivileged, and develops educational programs.

<Table 1-14> Key Functions of the Consumer Loan Finance AssociationFunction Contents

Maintain the business order• Perform the work delegated by the “Moneylenders Act” and report it to regulatory

authorities• Cooperate in regulatory guidance as well as supervision and on-site examination

Support the sound development of business

• Guide members to faithfully comply with relevant laws and regulations• Conduct researches and hold various seminars for the sound development of

moneylender business

Protect users and socially underprivileged groups

• Recommend to improve the business method to better serve customers• Operate a consumer protection center to handle complaints• Operate a self-deliberation system for loan advertisements• Promote various social contribution activities

Perform educational projects• Provide the necessary training approved by the local governments• Provide loan brokerage education and job training for employees to create a

sound business environment

Source: Consumer Loan Finance Association (https://www.clfa.or.kr/) (2021).

4. Challenges in the Microfinance Market and Korea’s Supervisory Efforts

4.1. Prudential Supervision and Market Impact

4.1.1. Sound Risk Management of Microfinance Companies

The regulations, examinations, and sanctions on financial institutions described previously reflect the soundness perspective in that it is necessary to prevent financial institutions from bankruptcy due to insolvency of creditors and the consequent damage to consumers including depositors. The supervisory authorities are paying particular attention to the soundness of microfinance companies since their main customer base is high in credit risk, and at the same time, they cater to a large number of small customers compared to banks, which incurs high costs, making it difficult to secure sufficient profitability. Additionally, most microfinance companies have a limited customer base and, given their simple profit structure centered on loans and deposits, lack the ability to cover the high credit risk associated with microfinance. In particular, it is highly likely that the profitability and soundness of microfinance companies will deteriorate in tandem with the increasing


055

CHAPTER

01Recom

mendations for Im


difficulties faced by low-income, low-credit customers such as SMEs and the small-scale self-employed during the economic downturn. Due to the interconnectedness of the financial system, it is important to ensure the soundness of individual financial institutions from a macroeconomic point of view, given that the bankruptcy of individual financial institutions affects other financial institutions and ultimately the entire economy.

The level and strength of regulations are applied flexibly, either relaxed or strengthened according to market conditions. For example, in 2017, the FSS took preemptive measures to strengthen prudential supervision in response to a surge in household loans availed from MSBs and NBFIs. At that time, it was expected that the domestic market interest rate would rise due to the impact of the US FOMC’s rate hike, and regulatory authorities were concerned that, without proper risk management, an excessive increase in household loans could have an adverse impact on the soundness of the financial institutions. Accordingly, the BIS ratio regulation for large MSBs with assets of KRW 1 trillion or more was raised by 1 %age point from 7% to 8%, the same asset quality classification standard as that of banks was applied, and provisions for bad debt were strengthened. Loan loss provisions were weighted so they may be applied to borrowers’ creditworthiness and ability to repay their debts, increasing the additional provision from 20% to 50% for high-risk loans with interest rates of 20% or higher. Although these preemptive measures have slowed the growth rate of household loans and reduced possible prudential risks, it is also necessary to consider policy measures to mitigate the adverse effects of worsening financial difficulties for the vulnerable.

4.1.2. Challenges of the Microfinance Market

Unfortunately, it is difficult to say that the microfinance industry has developed sufficiently in Korea, given the high level of financial burden on low-income, low-credit households and MSMEs, notwithstanding regulators’ relentless efforts to improve the soundness and sustainability of microfinance companies. Established to provide financial convenience to people who do not have easy access to banks, MSB’s total loan amount was KRW 77.6 trillion as of the end of December 2020. Among these loans, household loans amounted to KRW 31.6 trillion (40.7%), of which credit loans accounted for KRW 17.1 trillion. MSB’s household credit loan rates have been steadily falling due to efforts to rationalize lending rates, including cutting the maximum rate. In particular, although the proportion of new loans with high interest rates of 20% or more has dropped to less than half in recent years, the average rate on new loans is still high at around 17%, so additional efforts are needed to reduce the interest rate burden on customers.


Development of M


ar

056

[Figure 1-7] Average Rate on Household Credit Loans(Unit: %)

��.�

��.�

��.��

��.�

��.�

��.��.�

��.�� .�� .�� .�� .��

��.�

��.�

Average rate on loan balance Average rate on new loans

��.� ��.��.� ��.�

��.��.�

��.��.�


[Figure 1-8] Amount of New High-interest Loans and Their Proportion(Unit: 100 Million KRW, %)

�

�,��

��.��

�,��

��.� ��.�

��.�

�,��,��

�,��

��.�� .�� .�� .�� .��

��,��

��,��

��,��

��

��

��

��

��

Amount of total household credit loans

Amount of new high-interest loans

Proportion of new high-interest loans

�,�� ,��

��,��

��,��

�,��,�� ,�� ,��

��.�

��.� ��.�


The household finance market, which developed in earnest after the 1997 financial crisis, has grown mainly based on secured loans, and in the case of credit loans, conservative lending practices are still dominant. The deepening polarization has not been easy to resolve, with financial companies overly competing with low interest rates for high-credit customers, while charging high rates uniformly to low- and mid-credit customers. In addition, capabilities for accurate credit evaluation and interest rate setting targeting low- and mid-credit users are underdeveloped, resulting in interest rate faults such as a gap in mid-interest rates. Looking at MSBs’ credit lending rates as of May 2021, about 74% of customers are taking loans at rates of 14% or higher.


057

CHAPTER

01Recom

mendations for Im


[Figure 1-9] Household Credit Loans by Interest Rates (Aggregated by 37 MSBs)(Unit: %)

�

��

under ��

��~��

��~��

��~��

��~��

��~��

over ��

��

��

�.�� .��

��.��

��.�� .��

��.��

�.��

Source: Author on the basis of Korea Federation of Savings Banks (https://www.fsb.or.kr/) (2021).

In fact, creditors with low loan limits are often debtors using high-interest loans from multiple financial institutions. If there is a setback in repayment, it will be difficult for individual financial institutions to reconcile their borrowings and the burden of debt collection will increase. In particular, it is necessary to prepare measures to support the low-credit people who have fallen out of the lending market, considering that the legal maximum interest rate is reduced from 24% to 20% from July 2021. In the end, the financial regulatory authorities are faced with two incompatible responsibilities: to strengthen the soundness of microfinance companies and at the same time resolve the financial hardships faced by the underprivileged.

4.2. Supervisory Efforts to Advance the Microfinance Industry

The main principles that guide financial supervisory work are transparency, fairness and reliability, and in order to faithfully implement them, regulation, examination, and sanctions practices must be improved continuously in accordance with the changing market environment. The same applies for the development of microfinance industry. The Korean financial regulatory authorities are making efforts to establish a predictable financial supervisory system that manages all stages, including entry, business, examination and sanctions. Some of the recent policies are listed below.

4.2.1. Entry and Business Stage: Clarification of Procedures and Requirements, and Improvement of Regulations in a Timely Manner

At the entry stage, the most important consideration is to clarify the list of documents required for licensing as specified by the laws and regulations, so as not to request unnecessary documents or delay or refuse the acceptance of applications without reason. Upon the applicant’s request, the FSS supports the entire licensing process through prior


Development of M


ar

058

consultation to increase convenience for the applicant. At this time, it is important to note that a dedicated consulting counter should be operated separately from the licensing department, and consulting methods and standards should be prepared so that such consulting is not mistaken for preliminary examination. The FSS also coordinates and delegates regulatory mandates to the appropriate level in order to perform fast and responsible work when approval is required at the entry and business stages. Working-level staffs can make the final decision regarding minor matters such as approving or confirming simple organizational changes or verifying related documents.

Financial laws and regulations continue to improve as overly abstract or ambiguous requirements are removed or specified accurately. However, due to limitations in objectifying all discretionary requirements, the scope of disclosure, including examples of judgments and interpretation of laws and regulations made by financial regulatory authorities, has been greatly expanded. The license manual reflecting the discretionary judgment criteria is updated on a semi-annual basis, and is disclosed so that financial companies applying for new licenses can understand the basis for judgment.

At the business stage after entry, various regulations must be checked and improved regularly to prevent business contraction not only due to explicit regulations such as financial laws and supervisory regulations, but non-explicit regulations such as those related to administrative guidance and self-regulation. In particular, before a financial company conducts a specific business activity, it may request a preliminary review of whether the activity violates the financial laws, and the regulatory authority operates a “no action letter” system that reviews and responds to the request. This allows a financial company to request confirmation of legal violations in advance if it is unclear whether they are violating the laws in the process of conducting new business or developing new products. This in turn relieves legal instability and enhances the predictability of financial supervision. In principle, a written reply is made within 30 days from the date of receipt of the request.

4.2.2. Examination and Sanctions Stage: Enhancement of Transparency, Objectivity and Predictability

It is natural for financial companies to feel burdened by supervisory examinations regardless of whether or not they violate laws, so all steps from selection of examination targets to examination steps and post-examination actions must be performed transparently and objectively. The criteria for selecting subjects of the comprehensive examination (detailed indicators, points, etc.) are disclosed and publicly announced. The selected financial institutions should be notified at least one month before the examination so


059

CHAPTER

01Recom

mendations for Im


that they can prepare sufficiently. To reduce the burden of due examination on financial institutions, it is a principle to minimize the data required for preliminary examination, and not to conduct partial examination at least 3 months before the comprehensive examination. Since the purpose of examination is not to detect violations of laws and regulations, but to provide management consulting, financial institutions that have obtained satisfactory rating are provided with incentives such as excluding them from the next comprehensive examination. After a comprehensive examination, quality control is conducted thoroughly, and independent inspections are also carried out through external organizations. In order to eliminate legal uncertainty due to prolonged post-examination actions, the standard processing period is clearly defined as 180 days for comprehensive examination and 152 days for compliance examination.

In the case of sanctions for violation of the law, abstract and comprehensive reasons for each sanction type are specified concretely to ensure the predictability and consistency of the sanctions. In particular, opinions from legal experts and financial institutions are frequently collected to improve the concreteness and appropriateness of the sanctions guidelines, and a casebook for each major sanction type is published and distributed so that financial companies and management can easily understand the basis of how the level of sanctions is determined.14 In the case of minor violations by employees, an alternative means of sanctions such as completion of compliance training has been introduced. If it is more desirable to induce self-improvement, such as strengthening internal controls, a memorandum of understanding is signed in lieu of institutional sanctions. When a decision on the sanctions is formed, the Enforcement Review Committee immediately notifies the results and details of the sanctions to the person subject to the sanctions. The right to defend against the sanction and request for re-examination is also guaranteed to the subject person.

4.3. Limitations and Concerns Relevant to the Supervision of the Microfinance Market

Microfinance itself has a fundamental limitation in that it is difficult to be activated by commercial principles. After all, if the financially underprivileged class expands due to the insufficient supply of credit to the vulnerable, the government has no choice but to intervene in the supply of credit to provide policy financial products for low-income people. However, the expansion of policy microfinance also presents some problems. First of all, the market supply function of microfinance can be greatly weakened in the long term due to policy microfinance. It also raises the issue of fairness between beneficiaries and non-beneficiaries

14 Inordertoreducethearbitrarynatureofthestandards,termssuchas“severenegligence,grossnegligenceandotherviolations”thatmaysoundvaguearedefinedbysubdividingtheminconsiderationofthedegreeandmotiveoftheviolation.


Development of M


ar

060

since policy microfinance is offered at lower than market rates. Continued low-interest support inevitably increases the cost of loan losses and raises concerns of sustainability.

In the case of Korea, critics have pointed out that the government-provided financial products for low-income people did not help to strengthen the economic foundation of the beneficiaries and only aggravated the debt burden as the side effect. This is because, in operating policy financial products, credit supply was provided without proper verification of repayment ability, resulting in a situation in which a significant number of low-income households were rather burdened with excessive debt. In addition, there have been views that the interest rate of policy financial products is set at a level that is too low compared to the borrowers’ credit risk, which fundamentally blocks the market for commercial microfinance institutions.

Despite such criticism, the government intervenes directly in the market because microfinance has the characteristics of both finance and welfare. The purpose is to help the financially vulnerable, and finance is the means for this. From the viewpoint of welfare, it is a natural approach to relieve financial difficulties with low interest rates for the underprivileged, but those who value market principles are concerned that the system’s sustainability is compromised by high insolvency rates and moral hazard. It is inevitably a difficult process for financial regulators to find the right balance between these opposing positions and to design microfinance policies that can earn public confidence and empathy.

An even more difficult challenge is that simply providing financial convenience to the low-credit, low-income people cannot solve all problems. When anyone faces unforeseen difficulties, they first try to solve the problem through finance, but the area that microfinance can solve is limited, and the effect is only temporary. Furthermore, if the situation worsens, only the burden of default remains. Ultimately, to be effective, not only financial support, but also a variety of welfare packages must be brought together, including employment, opportunities for income generation, health care, housing, and education.

Since 2008, the Korean government has been continuously expanding the supply of policy financial products that are available at low interest rates for low-income people, and providing support for delinquent people to quickly recover their credit and return to the normal financial life through various debt adjustments. Further details on expanding links between microfinance and other welfare systems and strengthening ties between different programs are covered in Chapter 2 and 3.


061

CHAPTER

01Recom

mendations for Im


5. Discussions and Recommendations for Development of Microfinance in Myanmar

Korea and Myanmar differ in the size of their economy and the stage of market development, but the same principles apply to financial supervision and regulation. As elucidated, the development of the financial industry requires building a well-organized regulatory framework and making the regulations fair and transparent. The regulation itself needs to change in line with changes in the supervisory environment, so it is important to regularly check whether the current regulation is appropriate. Myanmar’s financial regulatory authorities seem to be well aware of the importance of communicating with the industry and streamlining regulations, as evidenced by the fact that the FRD collected MFIs’ opinions through MMFA during the 2016 regulatory revisions, reflecting a large part of its requests on raising capital and business deregulation.

In this session, the current MFI regulations that are deemed to be in need of improvement are reviewed, including the recommendations provided in previous research reports. Further, based on Korea’s experience, policy recommendations are presented while paying attention to potential side effects on the market in the future.

5.1. Improvement of Supervisory Efficiency

Recommendation 1: Increase the cooperation and collaboration among the regulators and translate the directives into clear operational terms.

Unlike Korea, which employs a structure where the financial supervisory system is divided into the Central Bank, the FRD and the Department of Cooperatives, close cooperation between supervisory authorities is more important to prevent inefficiencies in supervision. For example, when domestic and foreign MFIs are providing finances locally or from abroad, it is advisable to make approval from the CBM along with the FRD mandatory. In the end, the process of obtaining approval from different supervisory authorities takes at least several months, leading to the risk that MFIs may fail to raise capital in a timely manner. In particular, when supervisory authorities are slow to make a decision, as most of the authority is concentrated on the highest decision maker, financial companies will find it difficult to plan for new product development and business expansion, which in turn will act as an obstacle to financial innovation. Therefore, efforts to minimize supervisory inefficiencies are required, such as clarifying the work process between supervisory authorities and defining the maximum time required for approval decisions.


Development of M


ar

062

Along with this, it is important to ensure the clarity of laws and regulations. The ambiguity of laws and regulations makes the supervisor’s authority abnormally excessive, causes bureaucratic inefficiency, and creates confusion in the market. For example, in the MBL directives issued in 2016, MFI’s compliance requirements for consumer protection are stipulated as follows: “MFI must comply with principles including responsible pricing, preventing excessive indebtedness, and protecting client data.” These directives provide only the declarative meaning of consumer protection because there is no precise definition of indebtedness and no guidance has been provided on how the MFI should collect and protect consumer information. As such, some MFIs refuse requests for additional loans when a customer has already taken a loan from another MFI, while others are of the stance that borrowing from multiple MFIs is not a problem if the borrower has the ability to repay. All laws and regulations must be clearly translated into operational terms to avoid any confusion in the market.

The upcoming MBL, which will be revised to reflect the changed economic and financial environment, is expected to resolve this uncertainty, and contains various support measures for the development of the MFI industry as well as matters related to sharing of customer information and financial education. Of course, all problems cannot be solved by merely revising the MBL. For example, in the case of laws and regulations that have different jurisdictions, it is unclear whether laws related to digital financial services allow MFIs to use their own mobile systems and to what extent MFIs can operate their insurance business under the Insurance Industry Law. Continuous improvement is needed to avoid conflicting laws and regulations.

Recommendation 2: The same regulatory conditions and supervision should be applied to same financial services.

Several previous reports have recommended that the MFI’s initial paid-in capital needs to be raised in order to prevent the spread of small MFIs. An MFI needs a certain amount of equity capital to start a business, and it is the paid-in capital that defines it. After the start of the MFI business, financial soundness is measured as the ratio of equity capital to risky assets. After all, the larger the operating size and the higher the loan amount, the lower is the equity capital ratio, so the MFI needs to continuously increase its equity. However, it is difficult to increase the capital in a timely manner, which is why a certain amount of capital is required for initial approval.

In fact, capital adequacy is a concept applied to the DMFI, a deposit-taking institution. This is necessary to prevent insolvency for depositors by coping with a crisis situation in


063

CHAPTER

01Recom

mendations for Im


which borrowers’ inability to repay increases. In addition to opinions on the appropriate size of paid-in capital for the DMFI, it has been argued that there is a fundamental difference between DMFI and NDMFI, so different supervisory standards should be applied. That said, while regulators should focus on prudential supervision for DMFIs, NDMFIs that do not have a deposit-taking function need to concentrate on regulation of business conducts such as consumer protection and money laundering. In reports published by IFC (2013), ADB (2016) and other development partners including the LIFT and the World Bank, there are recommendations to develop a differentiated licensing regime for depository and non-depository MFIs, including a higher minimum capital base of MMK600 million and MMK250 million respectively. If this recommendation is to be reviewed positively, it would be desirable to classify and supervise the NDMFI as a Non-Banking Financial Institution (NBFI) from a long-term perspective.

The Myanmar Financial Institutions Law, revised in 2016, categorizes finance companies, leasing, and factoring businesses that provide credit for purchases of goods or services through procurement other than deposits as NBFIs. Since they have fundamentally the same functions except the details of the specific businesses they perform, all of them are classified and supervised as “specialized credit finance companies” in Korea. It is desirable to classify NDMFIs as NBFIs and focus on supervision of business conduct, while DMFIs should strengthen prudential regulation, because the principle of “same services or activities, same risks, same rules and same supervision” should always be upheld to avoid regulatory arbitrage and ensure market integrity.

Recommendation 3: The role of self-regulatory organizations needs to be strengthened.

Over the past few years, Myanmar has rapidly transformed into a market-oriented system, but in many areas, the country has apparently retained the centralized regime involving direct market intervention of the government. Such system often faces limitations in effectively supervising the fast-changing markets due to a lack of supervisory resources.

In order to efficiently achieve the MFI’s purpose of providing financial services for low income families and small businesses, the role of self-regulatory organizations representing the MFI should be strengthened. Currently, the MMFA appears to be weak even in its ability to collect and represent the voices of member MFIs properly. It is advisable to delegate some supervisory authority to the MMFA so that a system that allows self-regulation within the industry takes roots. In particular, it is necessary to induce the self-regulatory organization play a more active role as a partner of regulatory authority.


Development of M


ar

064

With 132-member MFIs, including 20 associate members, the MMFA has prepared and provided educational and training programs on various topics such as risk management and internal control as well as management strategies including credit analysis, prevention of money laundering, and loan management. The MMFA also organizes seminar and conferences with local and international development partners and advocates for the development of MFIs and the microfinance industry as a whole. However, to date, the Secretariat consists of only a few full-time staff responsible for implementing actions for members and the sector in general, showing its limitations. In order to systematize and develop a professional education and training curriculum in the future, it is necessary to expand the organization and functions of the MMFA at a significant level, by measures such as establishing a separate education and training division within the MMFA.

Another outstanding feature of the MMFA’s recent performance is launching its own digital platform, the Microfinance Credit Information Exchange (MCIX) in October 2018, as part of efforts to integrate MFI credit data into an analysis platform to provide customer information. The MCIX announced through its homepage that the platform shared data on more than 2.1 million active borrowers from 57 MFIs in 277 townships in Myanmar as of May 2021. However, unlike the Myanmar Credit Bureau, which has been approved by the CMB, the MCIX has not yet been officially recognized by the FRD. As a result, many MFIs state they need it, but are still hesitant to participate. The regulatory authority needs to clarify the laws and regulations related to the management and sharing of customer information so that more accurate credit information can be accumulated and used correctly, while its supervisory capacity is expanded continuously.

5.2. Rationalization of Current Regulations

Recommendation 4: Allowing MFIs to take collateral against loans is desirable, but removing the interest rate cap must be done with great care.

It seems reasonable to allow some collateral acquisition and adjust the maximum loan amount so that the MFI can fully perform its role in providing financial services to low income families and small business owners. Currently, even if taking physical collateral is not allowed, nearly all MFI loans are offered to groups, rather than to individuals, which provides “social collateral” (social pressure) ensuring that all members repay their share of the loan.

Of course, people who live in one village for a lifetime have the advantage of being able to manage their credit with each other if mutual guarantees are made in a solidarity


065

CHAPTER

01Recom

mendations for Im


relationship, which will also prevent leaving the village to avoid debt repayment. However, it can cause serious side effects that destroy human relationships. Personal securities are prohibited in Korea because it is a kind of collective punishment.15 Mutual credit monitoring may increase distrust between participants, and a series of bankruptcies can lead to a serious situation where the community is disrupted. It also violates the MFI’s norm of protecting consumers from excessive debt since this is a loan structure that mass-produces debtors through mutual guarantees. Thus, an MFI’s personal loan must be based primarily on the credit history or reputation of the lender, and allowing the MFI to obtain complementary collateral would then be reasonable.

For MSMEs, it is important to increase the loan limit while allowing collateral. This is not only because the current loan limit of MMK10 million does not meet the needs of most SMEs, but also because it is necessary to find a proper balance between costly micro loans and relatively low-cost large loans. It is also unlikely that an increase in the loan limit will undermine the soundness of the MFI. However, given the difficulty of pre-assessing the market impact of deregulation, in the short term it may be safer to regulate based on average loan amount rather than a single loan limit. It is also desirable to allow small business owners and SMEs to increase the amount of loans in the future if they complete their payments within the contract period. By repeating this step, good borrowers will eventually move to banks that can lend at low interest rates reflecting the low risk. This approach will allow a natural risk-dependent price spectrum to form in the market.

Although the interest rate cap on loans may be politically expedient, it is often pointed out as an obstacle to reflecting credit risk and inflation at the proper level. Particularly, some large MFIs argue that the interest rate regulations make it difficult to secure profitability when executing small-scale loans in rural areas, leading to limited credit access for low income families and small business owners in the area. As the loan rate cap was lowered to 28% from 30%, there have been increasing demands for the deregulation of interest rates or allowing the acquisition of collateral. In principle, interest rates should reflect credit risk and inflation at the appropriate level, and it is clear that charging higher prices for higher risks creates a better functioning economy. Despite the logical consistency of the argument for easing the regulation, liberalization of interest rates must be pursued with caution.

First of all, the current loan rate is said to be 28%, but considering the 2% loan fee and the compulsory deposit rate of 14%, the actual rate is higher than the regulated rate. In addition, MFIs’ access to capital has improved significantly in recent years, repayment rates

15 InKorea,financialcompanieswerebannedfromrequestingjointguaranteesfrom2013,andregisteredmoneylenderswerealsonotallowedtotakejointguaranteesfrom2019.


Development of M


ar

066

have remained over 99% in both urban and rural areas, and most MFIs are exceeding profit margins. All of these suggest that the claims demanding deregulation of interest rates are rather weak. Considering various circumstances such as the low interest rate environment in the international financial market that can lower the borrowing expenses and the development of technology that can reduce costs through the expansion of mobile services, it is difficult to find any pressing rationale to remove the upper limit on the loan rate.

However, the current regulation that does not place any burden on the debtor with a loan delinquency has an irrational aspect, so it is advisable to introduce some overdue interest. There are no set criteria, but it seems appropriate to start with around 2% that corresponds to the extent of the recent lending rate cut. Of course, the maximum loan rate rules apply including the delinquency rate. In other words, most loans are currently issued at the highest legal rate, so even if the overdue rate is introduced, the actual burden on the borrower does not increase immediately. This seems like the right time to introduce the regulation without market resistance. To encourage expansion of business in rural areas, providing policy funding or allowing higher loan fees may be considered. Further, if the MBSC reviews the consistency of regulations on lending and deposit rates on a regular basis and publishes policy decisions related to market interest rates, it will be of great help for development of the market by enhancing transparency and predictability.

Recommendation 5: It is necessary to pay attention to possible side effects related to expansion of the MFI business.

According to the Article 29 of the MBL enacted in 2011, MFIs can issue micro-credit, receive deposits, process remittances, borrow from local and overseas entities, carry out insurance business and provide other financial services with the approval of the MBSC. However, in the absence of relevant supervisory guidelines or directives, MFI’s actual business area is currently limited to issuance of micro-credit, receipt of deposit, and domestic and international loans. It is expected that the newly revised MBK will explicitly allow MFIs to engage in businesses like hire and purchase, micro-insurance, and digital financial services. It will also include provisions on the sharing of customer information and provide relevant directives, which will greatly expand the business scope of MFIs. This is a very important step from the perspective of clarifying laws and regulations, but in order for the expansion of MFI business areas to be managed with minimal side effects in the future, careful supervision from the regulatory authority is essential.

Hire and purchase has the advantage of enhancing consumers’ purchasing power, but when unnecessary impulsive consumption occurs due to easy access to credit, it hinders the


067

CHAPTER

01Recom

mendations for Im


financial soundness of households. Based on the experiences of neighboring countries such as the Philippines and Cambodia, it is known that the products purchased the most through hire and purchase are mobile phones and used cars, rather than farming tools or equipment necessary for SMEs to produce products. In the future, the level of insolvency driven by hire and purchase, especially in large cities, should be monitored closely to prevent unnecessary purchases and the resulting spread of multi-debt in advance. Supervision is also necessary to ensure that various parties do not enter into unfair contracts in which the risks that may occur in the future are not distributed properly between providers and consumers, and bear one-sided burden only to consumers.

When selling insurance products at the MFI counter, it is necessary to stipulate that the person selling the insurance must complete appropriate training and acquire seller qualifications, to ensure that unqualified sales do not occur. In addition, given the current situation in which more than three million people work abroad and remit income to their families, proper supervision of the IT system is required when making remittances, transfers, and withdrawals that are carried out through MFI’s digital financial services.

Recommendation 6: Regulations on loan classification and provisioning need to be improved, but the obligation to verify customer information should be recognized positively.

In the case of MFIs that primarily lend to farmers, they often offer seasonal products such as pre-monsoon loans for spring sugar plantations, monsoon loans for paddy farmers, and winter loans for farmers growing beans and pulses. Even considering that the loan period is short because these loans are repaid after harvesting crops, the current rules for loan classification and provisioning requirements appear to be overly strict. In particular, the rule classifying a loan overdue by a day as a sub-standard and requiring a 10% provisioning is too burdensome for all MFIs.

Asset classification rules in Korea are based on the duration of a borrower’s nonpayment of interest or principal and the estimated amount that can be collected from the borrower’s collateral. For loans overdue for more than three months, the MSB must establish a provision for losses of 20% on the estimated collection amount and 55% in excess of the estimated collection amount. Loans that are overdue for more than one year are classified as “presumed loss” and require 100% provisioning. In the case of Myanmar banks, loans are classified only on the basis of ‘number of overdue days’, so the provisioning rules are stricter than in Korea, but loans overdue within 30 days are still classified as normal.


Development of M


ar

068

Given that many MFIs do not even have a system to check for one-day overdue, it is advisable to loosen the rules to some extent, if not at a level similar to what applies to banks in Myanmar. Considering the average MFI delinquency rate, less than 30 days of delinquencies are classified as normal and provisioned by 1%. As MSME business loans tend to have longer average loan terms, it is appropriate to set “loan loss”, which is obligated to accumulate 100% provisioning, to “over 180 days” and ease the remaining classification thresholds by one notch.

<Table 1-15> Comparison of Regulations on Loans Provisioning and Classification(Unit: %)

Provisioning rules in Myanmar Provisioning rules in Korea

Days past due MFI Regulation Bank Regulation

MSB Regulation

Bank Regulation

Household Business

- 1 0 1 1 0.85

1~30 days 10 0 1 1 0.85

31~60 days 50 5 10 10 7

61~90 days 75 25 10 10 7

91~180 days 100 5020~55 20~55 20~55

181~365 days 100 100

Over 1 year 100 100 100 100 100

Source: Microfinance Supervisory Committee Directive No.5/2016; Central Bank of Myanmar Notification No.17/2017; Regulation on Supervision of MSB business (March 2021); Regulation on Supervision of Bank business (March 2021).

Under the directive No.3/2015 of the MBSC, MFIs were required to collect “baseline data” on all their members and update information on an annual basis to measure the socioeconomic development of the customers utilizing their microfinance services. MFIs understood that the purpose of data collection was useful for making policy decisions and designing future MFI regulations and practices, but they appealed that these requirements put a burden on them by significantly increasing operational costs. The MBSC, through the directive No.1/2016, eased the MFIs’ obligation to collect customer information, instead requiring MFIs to adhere to the customer protection principles and provide responsible financial services to their customers.

In fact, it is inappropriate to check personal information arbitrarily unless it is necessary to open an account, make financial transactions, or address money laundering concerns. However, MFIs’ collection of customer information in Myanmar has other advantages. This is because MFIs maintain long-term customer relationships with local economic entities, form close relationships, and conduct regional financing based on qualitative information. In the absence of a credit rating system, households and small business owners with


069

CHAPTER

01Recom

mendations for Im


large information opacity and asymmetry need “relationship financing” that relies on long-term, detailed and specific information. MFIs should not regard the collection and management of customer information as a costly obligation; rather, it should be recognized as an opportunity to develop expertise as a local financial institution. This allows MFIs, unlike banks, to better understand the customers’ business, to know more about their daily financial needs, and to respond quickly to provide appropriate action and advice if necessary.

5.3. Responding to Changes in the Market Environment

Recommendation 7: It is inevitable to increase the size of the MFI, but it must be supervised so that MFI operations remain faithful to the original purpose of establishment.

One of the major challenges facing the MFIs in Myanmar is efficient financing to meet the growing demand for funding. As one of the active ways to solve this problem, Myanmar may consider increasing the size by the consolidation of small MFIs. Previous researches raised concerns that there were too many microfinance providers for the size of Myanmar’s economy, and that many of them could be insolvent if improperly managed and supervised. In the study by Nehru (2015), “the government should pause in issuing license, study the microfinance sector more carefully, review the current institutional arrangements for licensing and supervision, and rethink its strategy to provide a sustainable system of microfinance.” Nevertheless, given the reality that MFI penetration into rural areas is low and the public sector cannot afford to support microfinance requirements of the entire country, increasing the size of MFI rather than reducing the microfinance industry would be the right policy approach. In particular, inducing the merger of small MFIs through the strengthening of the paid-in capital regulation, and encouraging enlargement through bank affiliations are reasonable options.

Large MFIs are able to strengthen institutional capacity in areas such as technology, accounting system, and human resource development. The ability to provide collateral is complemented and funding within the group is also possible through affiliation. As a result, large MFIs can efficiently solve the funding problem and provide quality microfinance services to consumers. The branding of large MFIs will also be of great help in overcoming the general negative perceptions the public has formed about financial companies through the past financial crisis. In fact, MFIs in Myanmar are struggling to collect loan repayments from borrowers affected by COVID-19. As the number of defaults begins to surge, the soundness of MFI deteriorates, and eventually restructuring of insolvent MFI will be


Development of M


ar

070

inevitable. In the process of restructuring MSBs in Korea, mergers and acquisitions of insolvent MSBs were carried out frequently under the guidance of supervisory authorities. Of course, in line with the intensifying market competition, MSBs are striving for efficiency, cost management and sustainability, and thus creating more integrated institutions on their own is an increasingly popular strategy to achieve all of these goals.

However, bigger MFIs are not always better. If the MFI market is polarized into large and small, and regulations on loan rates and collateral are eased, then the market is likely to develop in a very different form. Large DMFIs will possibly be similar to MSBs, and small NDMFIs will take a form similar to moneylenders in Korea. In other words, as in the current problem in Korea, large DMFIs will tend to focus on loans with collateral for high credit borrowers just like banks, whereas small NDMFIs will charge the maximum rates on credit loans regardless of the funding rate. Regulatory authorities should therefore pay attention to the possibility that MFIs may overlook their original purpose of improving the quality of life for low income households and providing better funding options to MSMEs.

Recommendation 8: While actively promoting the expansion of digital financial services, it is necessary to establish an appropriate control system for the collection and sharing of customers’ credit information.

Digital financial services using ATMs and mobile phones are expanding, and some large MFIs have partnered with mobile money providers like Wave Money to start using digital platforms to execute loans and receive interest. The introduction of new technology is welcomed by both MFIs and consumers, as MFIs can build an extensive network of agents at low cost, and consumers also do not have to visit MFI offices in person for loans and interest repayment. Currently, banks are licensed to provide mobile money services if certain conditions are met, but it does not appear to apply equally to MFIs and there are no clear regulations in this regard. In particular, in order for foreign MFIs to use the mobile system used in their home country, a separate legal entity must be established and approved.

Although the newly revised MBL is known to cover the related issues, a more forward-looking policy review is needed. Large MFIs may form partnerships with respective mobile money providers to provide savings and loan products. On the other hand, by developing a system at the MMFA, small MFIs can jointly use the platform and provide their products there. Not only banks but also MFIs are included in the digital financial service expansion plan under the UNCDF’s “Expanding Financial Access Country Program for Myanmar,” and the FRD, CBM and MFIs are actively discussing related issues. The expansion of digital financial services in the future will play an important role both in terms of promoting


071

CHAPTER

01Recom

mendations for Im


inclusive finance and collecting credit records.

While all stakeholders agree that the collection and sharing of consumer credit information is essential for development of microfinance industry, MFIs currently have limitations regarding the types of information they can collect and it is not easy to collect information in a consistent manner. For example, for MFIs operating in rural areas, it is difficult to compare basic information such as customer’s name, national ID number, and registration certificate. The accuracy of customer information cannot be insured, and it is even more difficult to process it into useful data. It is clear that the expansion of digital financial services will help to collect personal financial transaction information, but more fundamentally, various attempts are needed to overcome the limitations faced in collecting and evaluating credit information. It is possible to apply an alternative credit rating method using non-financial information such as telecommunication charges, history of utility bill payment, and SNS usages as well as mobile banking and Wave Money service records. In the long term, it is desirable to develop a system that can also collect the details of transactions with pawn shops and informal money lenders, gather public information such as tax payment details, and analyze and evaluate them together.

Ensuring that the information collected is shared correctly is one of the important roles of the regulatory authorities. Some MFIs argue that over-indebtedness in certain urban areas including Yangon, Mandalay, Bago and Ayarwaddy has either become a problem recently or could become an issue, and that debtor information should be shared among MFIs to prevent this preemptively. There are efforts to facilitate the exchange of information between MFIs, but clarity of regulation is needed first. Regulatory authorities should establish institutional controls that enable MFIs to collect and use accurate data while preventing misuse of consumer information and ensuring a fair credit rating.

6. Conclusions

Over the past 10 years, the Myanmar MFI sector has grown significantly both qualitatively and quantitatively. As the MFIs of non-government organizations, which have traditionally operated to improve the quality of low income families through simple micro loans using grants or donations as a source of finance, have expanded their business direction to “financial inclusion,” they have become concerned about profitability for sustainability. The growing interest in MFIs around the world and influx of large investment funds also led to massive expansion of the industry in a short period of time. In particular, as the banking licenses have been restricted tightly in Myanmar, a number of


Development of M


ar

072

foreign banks have established MFIs in addition to their local offices, which has led to the commercialization of MFIs.

The regulatory and supervisory system must be improved for MFIs to successfully proceed with the phase of commercialization. This is especially true as the MFI industry is currently facing fundamental structural changes. Until recently, most MFIs reported that the number of NPLs are between zero and one %. Some of the most common reasons for defaults in repayment included business losses due to seasonal variations, household emergencies (education, marriage, medical expenses, death) and a lack of market linkages. Not only were group loans based on mutual guarantees, but it seems that willful defaults have remained low due to the traditional belief that a person who does not pay off their debts would fall into hell. However, the COVID-19 pandemic and the lockdowns have had a major negative impact on the NPLs. Most MFIs have had to restructure their loans by postponing the repayment dates so that customers can repay them over a longer period. This, along with a slowing economy, will affect the overall NPLs in the sector. The magnitude of losses is not yet clear, but a significant number of MFIs will become insolvent and restructuring of the industry will become inevitable. In this process, the role of regulatory authority is more important than ever before. This is even more so considering that MFI’s clients are unable to repay their loans and must again rely on unofficial private lenders.

Environmental changes will promote the enlargement of MFIs, and if regulatory rationalization is promoted continuously, it will paradoxically raise the diversity and quality of MFI’s products and services to a new level. However, it should be noted that the lack of supervisory experience regarding new technologies and products applied in this process will not only make the supervisory function inefficient, but also hinder the reliability of supervisory authority. A sufficient number of supervisors should be fostered to ensure smooth supervision and examination, and efforts are needed to strengthen supervisory competencies through continuous employee education and training. Since the current domestic human and material resources are insufficient, it is necessary to strengthen cooperation with international organizations such as the IMF, ADB and World Bank, expand the sharing of supervisory experience with overseas supervisory authorities, and establish cooperative relations at the academic and self-organization levels.

The growth of the MFI in Myanmar during its second decade should not simply be a continuation of its first. Through continuous technological innovation, development of client-centered products and services, and ongoing reinforcement of supervisory capabilities, it is hoped that the microfinance industry can be the cornerstone of improving the quality of life for people in Myanmar.


References

073

CHAPTER

01Recom

mendations for Im


ASEAN+3 Macroeconomic Research Office. “Myanmar Annual Consultation Report 2019,” October 2019.

Asian Development Bank. “Myanmar Microfinance Regulatory Benchmarking Survey,” September 2016.

Bank of Korea. “Financial System in Korea,” December 2018.

Central Bank of Myanmar. “Quarterly Financial Statistics Bulletin,” 2020 Volume I & II. April 2021.

Duflos et al. “Microfinance in Myanmar: Sector Assessment,” IFC Advisory Services in East Asia and the Pacific. January 2013.

Financial Regulatory Department of Myanmar. “FRD Organization Chart,” June 2021.

Financial Regulatory Department of Myanmar. “Microfinance Development in Myanmar,” Presented in 2020/21 KSP Myanmar Launching Seminar. January 2021.

Financial Regulatory Department of Myanmar. “FRD Monthly Report,” April 2021.

Financial Supervisory Service. “Examination Quality Control Manual,” October 2019.

Financial Supervisory Service. “FSS handbook 2020,” October 2020.

Financial Supervisory Service. “Moneylenders Examination Guide,” January 2020.

Financial Supervisory Service. “Mutual Savings Bank Examination Guide,” January 2021.

Financial Supervisory Service. “Myanmar Financial Supervisory System Handbook,” February, 2021.

Financial Supervisory Service. “Principles of Financial Supervision 2021,” February 2021.

Financial Supervisory Service. “Prompt Corrective Action Manual,” August 2018.

Financial Supervisory Service. “Press Release: MSBs’ Household Credit Loan Rates and Policy Response Direction,” March 17, 2021.

Financial Supervisory Service. “Press Release: Results of the Moneylenders Survey in the 2nd half of 2020,” June 25, 2021.


Development of M


ar

074

Financial Supervisory Service. “Press Release: Savings Banks’ Earnings 2020 (Provisional),” March 31, 2021.

FMR Research & Advisory. “Myanmar Financial Services Report,” April 2018.

Gatti, Eleonora. “Case Study of Savings Mobilization in Myanmar: Opportunities and Challenges,” UN Capital Development Fund. January 2016.

Homepage of the Korea Federation of Savings Banks (https://www.fsb.or.kr/). “The Establishment and Main Role of KFSB,” Accessed on March 10, 2021.

Homepage of the Korea Federation of Savings Banks (https://www.fsb.or.kr/). “Comparative Disclosure of Financial Products,” Accessed on June 1, 2021.

Homepage of the Consumer Loan Finance Association (https://www.clfa.or.kr/). “The Establishment and Main Role of CLFA,” Accessed on March 10, 2021.

International Finance Corporation. “Gender and Microfinance in Myanmar: The Business Case for Action,” December 2020.

International Monetary Fund. “Staff Report for the 2019 Article IV Consultation,” IMF Country Report No. 20/215. February 2020.

Japan International Cooperation Agency. “Data Selection Survey on SME Finance in Myanmar,” August 2017.

Krungsri Research. “Myanmar Regulatory Update,” May 2020.

Kyaw, Myint. “Paradigm Shifts of Microfinance in Myanmar,” Collection of Papers on Myanmar’s Financial Sector, A Joint Publication by GIZ-Myanmar and Thura Swiss(pp.97-100). January 2016.

Micro-Credit Ratings International Limited. “Multiple Borrowing amongst MFI Clients in Myanmar,” June, 2018.

Myanmar Central Statistical Organization. “Myanmar Statistical Yearbook 2019,” Ministry of Planning and Finance. September 2019.

Myanmar Microfinance Association. “Policy Reform Recommendations to Accelerate Microfinance in Myanmar,” March, 2016.

Nehru, Vikram. “Developing Myanmar’s Finance Sector to Support Rapid, Inclusive, and Sustainable Economic Growth,” ADB Economics Working Paper Series No. 430. April 2015.


075

CHAPTER

01Recom

mendations for Im


Pouchous, Anne. “The Regulation and Supervision of Microfinance: Main Issues and Progress,” The International Institute for Sustainable Development. September 2012.

Samil PwC. “Myanmar Business Guide,” 2019.

Turnell, Sean. “Microfinance in Myanmar: Unleashing the Potential,” Chapter 5 in The Business of Transition: Law Reform, Development and Economics in Myanmar. Cambridge University Press (pp.122-147). 2017.

UN Capital Development Fund. “Myanmar Financial Inclusion Roadmap 2019-2023,” November 2020.

World Bank. “Myanmar - Country Partnership Framework for the Period of FY20-FY23,” Report Number 147607-MM. April 2020.


Development of M


ar

076

Selected Financial Data for Mutual Savings Banks

The FSS regularly releases extensive information on financial services companies, the financial services industry, and the capital markets through the Financial Statistical Information System (FISIS) at http//efisis.fss.or.kr. Selected data and explanations can also be found in the annual reports published by the FSS each year. Selected data on MSB’s asset quality and capital adequacy provided in the tables below.

<Appendix Table 1-1> Mutual Savings Banks’ Delinquency Rate(Unit: %)

2018 2019 2020P

Business Loans 4.2 3.9 3.4

Self-employed 4.0 4.3 3.9

Household Loans 4.6 3.6 3.3

Mortgage loans 1.8 3.0 2.1

Unsecured loans 6.3 3.8 3.6

Aggregate 4.3 3.7 3.3


<Appendix Table 1-2> Mutual Savings SBL and Coverage Ratios(Unit: %)

2018 2019 2020P

SBL ratio 5.1 4.7 4.2

Coverage ratio 115.2 113.0 109.9


<Appendix Table 1-3> Mutual Savings Banks’ Risk-Weighted Assets and Capital Ratio(Unit: Billion KRW, %)

2018 2019 2020P

Shareholders’ equity (A) 8,239.7 9,518.3 11,030.2

Risk-weighted assets (B) 57,540.1 64,161.4 77,201.7

BIS capital ratio (A/B) 14.32 14.83 14.29


Appendix 1


077

CHAPTER

01Recom

mendations for Im


Appendix 2Changes in the Regulation on Maximum Interest Rates

Prior to 2018, different rules for maximum interest rates were applied in accordance with the “Moneylender Act,” which is applicable to credit financial institutions and moneylenders, and the “Interest Limitation Act,” which is applicable to private transactions. However, the same maximum rate has been in effect since February 2018.

The maximum interest rate under the “Moneylenders Act” was 66 % per annum at the time of enactment in 2002, but has since been lowered gradually and is now 24 % per annum. It will be lowered again to 20 % per annum from the second half of 2021.

[Appendix Figure 1-1] Maximum Interest Rates Prescribed by the Moneylenders Act and Interest Limitation Act

(Unit: %)

��.�� .�� .�� .�� .�� .�� .�� .�� .�� .��

��

��

��

��

��

��.� ��.�

��.��

��

��

��

Moneylenders Act Interest Limitation Act

Source: Author on the basis of the Enforcement Decree of the Act on Registration of Credit Business, etc. and Protection of Financial Users (amended in 2007, 2011, 2012, 2013, 2014, 2016, 2018 and 2021) and the Interest Limitation Act (enacted in 2007 and amended in 2014).


Towards Sustainable Microfinance: Progress and ChallengesJoonhyuk Song (Hankuk University of Foreign Studies)Thida Tun (Independent Researcher)

1. Introduction2. Recent Developments and Review of Myanmar’s Financial Markets3.Korea’sExperienceinMicrofinance4. Korea’s Experience with the Credit Information System (CIS)5.PolicyRecommendationstowardsaSustainableMicrofinanceIndustryinMyanmar6. Conclusion

C H A P T E R

02

KeywordsMicrofinance,CreditUnion,CommunityCreditCooperatives,CreditInformationSystem,Apex Institution


079

CHAPTER

02Tow

ards Sustainable Microfinance: Progress and Challenges

Summary

The financial sector forms the blood vessels of any economy and it plays an ever-increasing role in job creation and social development. Thus, lack of access to basic financial services can be a binding constraint or an obstacle to economic development. Mobilizing financial resources by saving and investing with saved funds constitutes the basic formula to create growth and eliminate poverty. However, many underdeveloped nations are stuck in a vicious cycle of poverty, as they do not have well-functioning financial markets and institutions to relay savings to investment. In order to extend financial outreach and provide financial services to poor agrarian communities, Myanmar has tried to nurture and foster microfinance as a vehicle for financial inclusion to reduce financial exclusion by promoting micro savings and lending. The purpose of this study is threefold. Firstly, it reviews and examines the microfinance system in Myanmar. Secondly, this study shares the Korean experience with regard to introducing and facilitating microfinance and its infrastructure. Lastly, this study suggests policy recommendations based on the experiences in Korea.

This study begins by examining Myanmar’s financial market and microfinance sector and subsequently discussing pending issues and challenges acknowledged widely in Myanmar. SOBs, private banks and foreign banks dominate Myanmar’s financial market, taking up over 90 % of total financial assets. The securities market in Myanmar is in a nascent stage, having only six listed companies as of the end of 2020. As of February 2020, there were over 188 MFIs in operation. However, MFIs are highly concentrated and the top 20 MFIs represent over 85% of the MFI market. Furthermore, foreign-owned MFIs have a predominant presence. Assessing the financial competitiveness based on the Global Competitiveness Index published by WEF, the Myanmar financial market has lagged behind its Southeast Asian competitors in terms of availability of financial services and ease of access to loans, among others. The availability of funding has been a persistent challenge

Towards Sustainable Microfinance: Progress and ChallengesJoonhyuk Song (Hankuk University of Foreign Studies)Thida Tun (Independent Researcher)


Development of M


ar

080

since the beginning of MFIs. This problem has been temporarily resolved by allowing international MFIs to operate in the market, leading to heavy dependence on foreign MFIs. Deposit-taking MFIs need a broader base to finance their operations. The business area and scope of each MFI should be expanded to increase competition and innovation among MFIs, and credit information infrastructure should be reinforced to reduce over-indebtedness of households and to increase awareness regarding repayment of loans on a timely basis, to enhance the financial soundness of MFIs.

In order to draw practical policy lessons, this study identifies periods with similar stages of development in Myanmar and Korea in terms of per capita GDP. This study will examine the adoption and growth processes of Cooperative Financial Institutions (CFIs) in Korea, represented by Credit Unions and Community Credit Cooperatives. This is followed by a review of the similarities and dissimilarities of those institutions and operating principles on which the institutions are built. Furthermore, this study describes the role and functions of the central agencies of each institution as a centralized window for dialogue with government, as a facilitator to plan and execute development strategies for the industry, and as a lender of last resort to protect depositors’ savings. Additionally, this study discusses the Korean experience of establishing and implementing a Credit Information System (CIS). This section describes four basic models of credit reporting system. Further, it explains the history of the Korean CIS as an effort to achieve both speed of establishment by delegating the role of collecting and managing data to a public entity, known as KCIS, as well as efficiency and innovation by promoting competition among private credit bureaus in terms of the use of data.

Based on the Korean experiences, this study presents the following recommendations. The first suggestion is to extend the scope of role of central information system. We propose a PCR-CR hybrid model given that there has been a relative delay in the introduction of the CIS in Myanmar. The adoption of the proposed system is favored to facilitate the prompt activation of CIS and ensure the transparency and reliability of collected data. The MCB has been launched as the first credit bureau, but its scope and coverage are limited to the banking sector, hence there is a need to include data from NBFIs to extend credit-based practices of lending to poor families without proper collaterals. The second proposal is to establish a well-functioning governance structure to monitor and supervise risk and improve managerial efficiency in the microfinance industry. A central agency with the proper authority should take a leading role in guiding and supervising the local MFIs, providing education and training, relaying the inter-lending among MFIs, and setting up provisional funds to ensure the safety of depositors’ savings.


081

CHAPTER

02Tow


1. Introduction

The financial sector constitutes the blood vessels of any economy and it plays a crucial role in not only mobilizing and allocating resources but also in reducing poverty, creating jobs, and enabling social development especially in terms of rural outreach. It consists of banks, non-bank financial intermediaries, financial instruments and markets, mobilizing resources from the surplus sector and channeling the funds to needed sectors in the economy. Lack of access to basic financial services can more than often be an obstruction or hurdle to economic growth and development. Well-functioning financial markets and a drive for financial inclusion have been widely recognized as an effective tool for poverty reduction in many countries. Accordingly, international organizations such as the World Bank and IFC etc. have endeavored to reduce financial exclusion to increase economic opportunities and raise living standards in many developing countries by promoting micro lending and savings.

[Figure 2-1] Growth Diagnostics

Problem: Low levels of private investment and enterpreneurship

Low return to economic activity

Low social returns Low appropriability Bad local financeBad internationalfinance

Governmentfailures

Poorgeography

Lowhumancapital

Badinfrastructure

Lowdomestic

saving

Poorinter-

mediation

Micro risks:Property rigthts,

corruptions, taxes

Micro risks:Financial,monetary,

fiscal instability

Informtionexternalies:

“Self-discovery”Coordinationexternalies

Marketfailures

High cost finance

Source: Rodrik (2006).

Many researchers have attempted to explain the connection between financial development and the poverty loop. Among them, Ragnar Nurkse (1953) argued that agrarian communities in underdeveloped nations were stuck in a “vicious cycle of poverty” in which low income and savings led to low investment, resulting in low yield of income to complete the cycle. He described the harm caused by usury as the factor that prevents underdeveloped


Development of M


ar

082

countries from forming capital and getting out of the vicious cycle of poverty, and stressed the needs to mobilize domestic credit to finance the economic development policy. Based on research conducted by Dani Rodrik (2006), high financing and operating costs in terms of cash management, disbursement and collection in rural areas have acted as major constraints for financial providers to extend services, resulting in low investment and poor growth outcomes.

How to mobilize financial resources to spur economic growth is an ongoing concern for both academics and policymakers. Low saving rates and investment rates are some of the common denominators that constrain economic growth and limit the possibility for the low-income households to escape from the vicious cycle of poverty. It is clear that the starting point for breaking the vicious cycle of poverty is access to an appropriate level of capital or money. There are two ways to secure that money: increase income or save money.

Since the late 20th century, microfinance has emerged as a possible solution to provide financial services to low income families with the pioneering work done by Grameen Bank of Bangladesh led by Mr. Muhammad Yunus. Many countries have since introduced microfinance services for the benefit of the low-income and under-privileged people.1 Microfinance plays a crucial role in the overall development of socio-economic conditions of the unbanked poor groups, who have remained outside of the formal financial industry. Therefore, microfinance should be distinguished from charity, which is subject to the social welfare policy, and should be run based on the principles of finance. However, even though each country introduces microfinance with a common goal and objective, the performance of the microfinance industry is as diverse as the socio-economic situation of each country.

Microfinance is a kind of financial services offered to small-sized entrepreneurs, businesses, and farmers who do not have easy access to formal banking and related financial assistances. It encompasses micro credit, credit card issuance, account transfers, and micro insurance etc. Microfinance differs from traditional banking in that microfinance involves providing collateral-free credit to low-income people. It usually consists of programs to grant small loans to individuals so that they can start businesses that create income to improve their living standards. Accordingly, the objective of microfinance is to give people opportunities to become self-sufficient by providing means to save money, borrow money,

1 Studieshaveconcludedthatmicrofinancehastheabilitytoempowerbothwomenandoppressedpopulationsinasocietythroughabottomupapproach(Connor,2017).Theseempowermentshaveledtoamarkedreductioninstarvation,disease,andilliteracyamongchildren,especiallyfemales,provingthenecessityofmicrofinanceinnationsthathavehighinequality ingenderparity(Wydick,1999).Furthermore,caseslikeBangladeshhaveprovenhowmicrofinancecansucceedinpovertyalleviationandfosteringemploymentgenerationespeciallyforthepoor.Microfinanceinstitutionsworktoempowerprivateenterprisesandreducethein-equalitygapbetweentherichandpoor,actingasan“effectivedevelopmentstrategy[thatthe]governmentcanuse…toenhancethestandardoflivingofthepoorandachievemillenniumdevelopmentgoals”(Rubana,2008).


083

CHAPTER

02Tow


and buy insurance. Microfinance institutions (MFIs, hereafter) provide financing services to the public. While the main activities of the microfinance institutions are associated with lending, some microfinance companies offer additional services, such as money transfer or insurance. MFIs exist in diverse forms, ranging from small non-profit organizations to larger banks and for-profit companies as well as non-profit organizations.

Researchers and policymakers seemed to agree that the low levels of financial inclusion represent an obstacle to economic development. Myanmar is a lower-middle income economy with a GDP per capita of USD 1, 299 in 2017. Due to the fixed interest rate regulations and lack of credit assessment infrastructure, loans tend to be over-dependent on collateral. Even though the SME sector is the backbone of Myanmar’s economy and the crucial driving force behind the country’s economic development, SME loans are estimated at less than 0.2% of private bank loans at the end of 2017 because of the collateral-based lending practices. In order to expand financial inclusion and get the best outcomes, Myanmar government has been working hard to extend the outreach of financial services through micro finance. The outcomes, however, do not meet the expectations. “Financial Inclusion Roadmap 2019-2023” in coordination with UNCDF outlines a comprehensive strategy highlighting five pillars: low-income households, small and medium enterprises, saving mobilization, financial and digital literacy, and the safe and responsible use of digital financial services.

MFIs are considered one of the key financial institutions with the ability to extend outreach to individuals in rural areas as well as to the large number of micro and small enterprises within the low-income category. Since the majority of banks do not provide credit to informal MSMEs, there is a significant shortage in credit available to small and micro enterprises in, especially, rural areas.

Microfinance is also necessary to promote social welfare. Even though microfinance is in the “financial realm”, it can save social welfare costs by preventing situations in which marginalized clients should be supported by tax money. Intrinsically, microfinance is as sector in which market failure is inevitable due to insufficient financial infrastructure. In the case of low-income people, it is difficult to provide finance through traditional financial techniques due to weak creditworthiness and collateral capacity. Furthermore, it is difficult to impose a high interest rate corresponding to credit risk, leading inevitably to credit rationing. Moreover, it takes considerable time and efforts to establish risk management framework in microfinance. MFIs can address information asymmetry by strengthening screening and monitoring activities, but they require suitable budgets to implement those activities. In order to improve the sustainability of microfinance, financial support should


Development of M


ar

084

be provided in parallel with a comprehensive package including employment counseling, financial education, and debt rehabilitation. As the target of microfinance is mainly the low-income class, they are vulnerable to temporary shocks. Hence, public-supported welfare assistance together with employment counseling and financial education is necessary in connection with microfinance to support low-income people and improve their livelihood and welfare. In order to expand the funding pool, banks should participate in the system to allow MSMEs and low-income families to access bank loans. However, in order to make this happen, banks should be able to appraise the creditworthiness of potential borrowers. Hence, credit bureau system should increase its scope and coverage to low-income families to give them more financing opportunities. This paper will discuss the hurdles and challenges in establishing a resilient microfinance system and provide policy recommendations to build a microfinance system based on the Korean experiences.

The remaining part of the paper is organized as follows. Section 2 discusses the recent developments and challenges to microfinance from the perspective of Myanmar. It will briefly delineate the overall financial system of Myanmar and analyze the current state of the microfinance market and institutions in detail. We will also look into the global competitiveness of Myanmar’s financial sector in comparison with the neighboring countries to examine the gap, and review the challenges and issues raised by the academic circle and practitioners from an insiders’ perspective. Section 3 presents the development of the Korean Cooperative Financial Institutions (CFIs) and identifies the factors that determine the success or failure for those CFIs, which will be useful to avoid mistakes when a country cannot afford to waste time and resources while it is busy pursuing growth. In addition, in order to overcome the limitations of collateralized lending practices and group lending, a credit information system is important. Section 4 delineates various types of credit information systems and explains the Korean model, which has the merits of both expedience in establishment and efficiency in applications. Section 5 presents policy recommendations to establish a resilient and sustainable microfinance system in Myanmar, and the conclusions are presented in Section 6.


085

CHAPTER

02Tow


2. Recent Developments and Review of Myanmar’s Financial Markets

2.1. Recent Developments in the Financial Market and Microfinance Industry

2.1.1. Overview of the Financial Market

Myanmar’s financial system can be largely divided into banks and non-bank financial institutions. Banks include: 1) state-owned banks, 2) private commercial banks, 3) foreign banks, and 4) foreign representative offices. Non-bank financial institutions consist of: 1) insurance companies, 2) securities companies, 3) microfinance institutions (MFIs), 4) finance companies, and 5) stock exchange.

[Figure 2-2] Banking Structure in Myanmar

CBM

State-owned banks�. Myanma Agricultural Development Bank�. Myanma Economic Development Bank�. Myanma Foreign Trade Bank�. Myanma Investment and Commercial Bank

�. Asia Yangon Bank Ltd�. Asian Green Development Bank Ltd�. Ayeyarwady Farmers Development Bank�. Ayeyarwady Bank Ltd�. Construction & Housing Development Bank Ltd�. Co-operative Bank Ltd�. First Private Bank Ltd�. Global Treasure Bank Ltd�. Innwa Bank Ltd��. Kanbawza bank Ltd��. Myanmar Apex Bank Ltd��. Myanmar Citizens Bank Ltd��. Myanmar Microfinance Bank Ltd��. Myanmar Oriental Bank Ltd��. Myawaddy Bank Ltd

��. Nay Pyi Taw Sibin Bank Ltd��. Rural Development Bank Ltd��. Shwe Rural and Urban Development Bank��. Small and Medium Industrial Development Bank��. Tun Commercial Bank Ltd��. United Amara Bank Ltd��. Yadanabon Bank Ltd, Mandalay��. Yangon City Bank Ltd��. Yoma Baml Ltd��. Glory Farmer Development Bank Ltd (G Bank)��. Mineral Development Bank��. Myanmar Tourism Bank

�. ANZ�. Bangkok Bank�. Bank of Investment and Development of Vietnam�. Bank of Tokyo Mitsubishi UFJ�. E-Sun Bank�. Industrial and Commercial bank of China (ICBC)�. Malayan Banking Berhad (May Bank)�. Mizuho Bank�. Oversea-Chinese Banking Corporation (OCBC)��. Shinhan Bank��. State of India��. Sumitomo Mitsui Banking Corporation (SMBC)��. United Overseas Bank (UOB)

Domestic private banks Foreign banks branches

Source: GIZ (2018).

Assets, deposits, loans and number of branches for the SOBs, and assets and number of branches of ten largest domestic private banks are presented in <Table 2-1> and <Table 2-2> respectively.


Development of M


ar

086

<Table 2-1> Overview of SOBs (Unit: Million MMK)

MADB MEB MICB MFTB

Total Assets 1,397,940.40 7,576,196.22 3,387,507.02 3,831,914.92

Total Deposits 12,843.52 5,552,789.61 563,386.30 2,893,793.94

Total Loans 1,311,012.96 2,426,834.72 28,278.15 240,361.48

Branches 208 308 2 1

Source: CBM (2017).

<Table 2-2> Assets and Number of Branches of 10 Largest Domestic Private Banks (As of Fiscal Year-End 2017)

Name of Bank Assets (in billion MMK) No. of branches

Kanbawza 11,309 430

Ayeyarwady Bank 4,173 206

Co-operation Bank 2,713 183

Myanmar Apex Bank 1,592 86

Yoma Bank 1,535 69

Myawaddy Bank 1,664 49

Global Treasure Bank 706 130

United Amara Bank 866 74

Asia Green Development Bank 560 56

Nay Pyi Taw Sinbin Bank 445 6

Source: CBM (2017).

Myanmar’s financial market is dominated by private banks, state-owned banks and foreign banks, accounting for over 90% of total assets (around MMK42.4 trillion, or USD34.4 billion, in March 2016). This is followed by 3% occupation of microfinance institutions, and the remaining part is covered by other non-bank financial institutions, insurance companies, securities companies, and financial companies.


087

CHAPTER

02Tow


[Figure 2-3] Size of Myanmar’s Financial Sector in terms of Total Assets(Unit: %)

MFIs Insurance, Securities, Finance Companies

��

�

�

Banking

Source: GIZ (2018).

In 1950s, Myanmar’s banking industry was considered “the envy of Asia” with 10 domestically owned banks and 14 foreign-owned banks, the largest concentration of foreign banks in Southeast Asia. However, after the military took control of the country in 1963, Myanmar’s banks were nationalized and were re-liberalized only in 1992. The banking sector grew rapidly for a decade after liberalization. As a side effect of rapid growth, in 2003, the banking industry experienced a severe financial crisis that led to the collapse of three major financial institutions and resulted in economic hardship for the whole country. As an aftermath, Myanmar people turned their back on banks and formed mistrust of banks and related financial institutions.

After the 2010 elections, banking sector has undergone significant reforms. In particular, private banks were allowed to provide exchange services and the monetary policy authority was assigned to the Central Bank of Myanmar (CBM). In 2015, banking sector opened up for the entry of foreign banks. The enactment of a new Financial Institutions Law in 2016 brought the country’s banks closer to internationally accepted standards of operation and prepared the country for ASEAN integration. In 2017, the Central Bank adopted new crucial prudential regulations on capital adequacy, asset classification and provisioning, large exposure, and liquidity ratio, setting the stage for bringing the Myanmar financial sector closer to the Basel II Framework and international best practices. In 2019, foreign investors were allowed to own up to 35% of the shares of a bank, which increased the participation of the foreign in banking industry.


Development of M


ar

088

[Figure 2-4] Banking Industry Development: An Overview

��Nationalization

of all Banks

Enactment of advanced finacial law(The Anti-Money Laundering Law, Counter-Terrorism Law)

Foreign investors are allowed to ownthe shares of a bank up to ��%

Foreign banks �st bid(Industrial Bank of Korea

Kookmin / Korea Development Bank)

Myanmar coup d’état

(CBM) Released four key regulations(liquidity ratio requirement / large-exposure limit /

minnimum capital requirement / asset classification and provisioning requirements)

CBM, Seperation fromDepartment of the Treasury

(independent authority)

Private Bank liberalization

Foreign banks�st bid

Foreign banksAcquisition of first business license

Foreign banks�st bid (Shinhan Bank)

① Central bank of Myanmar separation② Allow private banks to handle foreign exchange

��

��

��.��

��.� ��.�

��.� ��.� ��.�

��.�

Only � banks allowedto operate

(MFTB, MICB, MEB)

Source: GIZ (2018).

The insurance industry is largely under-developed in Myanmar and insurance companies occupy a dominant position over profitable insurance segments such as liability insurance, third party vehicle insurance, construction risk, and some health insurance products. Though local private companies were given priority to receive insurance licenses in 2012, they can offer only limited products and are constrained by regulations. In particular, the regulation requires that the same insurance policies should be offered at the same prices. This limits competition and prevents further development of the sector.

In 2019, the Ministry of Planning and Finance took a number of measures that liberalized the insurance industry. They authorized foreign insurers to operate wholly owned subsidiaries, issued licenses to a handful of foreign insurance companies, and provided for local-foreign joint ventures of insurance providers. The announcement marks a significant step towards liberalization of the insurance industry, but tangible progress is yet to be seen. There are eleven domestic insurance companies, six joint venture insurance companies and ten foreign insurance companies in Myanmar.

Myanmar’s securities industry developed along with the Securities Exchange Law enacted in 2013. Based on this law, the Securities Exchange Commission of Myanmar (SECM) started to operate in 2014. SECM structures and regulates the capital market in Myanmar. The Yangon Stock Exchange (YSX) was launched in 2015. There are twelve securities companies and six companies listed at present.


089

CHAPTER

02Tow


<Table 2-3> Number of Listed CompaniesName of Company Listed Date

First Myanmar Investment Public Co., Ltd. (FMI) 2016.03.25

Myanmar Thilawa SEZ Holdings Public Co., Ltd. (MTS) 2016.05.20

Myanmar Citizens Bank Ltd. (MCB) 2016.08.26

First Private Bank Ltd. (FPB) 2017.01.20

TMH Telecom Public Co., Ltd (TMH) 2018.01.26

Ever Flow River Group Public Co., Ltd (EFR) 2020.05.28

Source: CBM (2017).

From 2015 onwards, the SECM and YSX disclosed more rules and regulations, in particular regarding listing criteria, dematerialization of shares, public offering, business time and brokerage fees etc. However, the infrastructure for the securities market such as clearing and settlement system, IT infrastructure, a central depository system, tax system and accounting standards remains to be developed.

Finance companies do not play a significant role as of now, but have the potential to play a crucial role in the future. The three main functions of a finance company are lending, hire-purchase and leasing. Until January 2013, there had only been one finance company, Oriental Leasing Company, which is a subsidiary of the Myanmar Oriental Bank Ltd. Between January 2013 and June 2016, fourteen additional finance companies were licensed. Finance companies are not allowed to take deposits from the public but can receive long-term loans from institutional investors and foreign financial institutions.

2.1.2. Microfinance in Myanmar

The microfinance industry in Myanmar is small but growing. MFIs are providing the financial services of credit, savings, micro-insurance, and hire-purchase for low-income households and micro and small enterprises. Myanmar’s microfinance industry took shape in 1997 with the UNDP’s Human Development Initiatives (HDI) Project that aimed at providing microfinance financial products for low-income households in Hilly Regions-Shan State, Delta Zone- Ayeyarwady Region, and the Dry Zone- Magway Region with the INGO MFIs. The project activities were initially implemented by three international NGOs (Grameen Trust in the Delta Region, GRET in Shan State, and PACT in the Dry Zone).

The enactment of the Microfinance Law on 30 November 2011 established a regulatory framework for the provision of microfinance services, allowed local and foreign companies


Development of M


ar

090

to establish private Microfinance Institutions (MFIs), and provided licenses for entities that were already servicing microfinance products. The Microfinance Supervisory Committee (MBSC), chaired by the Ministry of Planning and Finance, develops policies, rules, regulations, and directives for MFIs. The director general of the Financial Regulatory Department (FRD) is the secretary of the MBSC and FRD performs the role of the committee’s secretariat. Supervision and monitoring on MF Industry is also carried out by FRD in accordance with the MBSC’s guidance. As of February 2020, 188 MFIs2 operated in Myanmar, serving more than 5.8 million clients, with total assets of MMK3 trillion.

[Figure 2-5] Number of MFIs

�

��

��

Local

��

��

��

��

Foreign NGO INGO Partnerships

��

��

��

��

�

��

�

��

� ��

Source: MMFA (2020).

Despite the large number, MFIs in Myanmar are highly concentrated. The top 20 MFIs represent over 85% of the MFI market in terms of outstanding assets. Further, the largest MFIs are predominantly owned by international entities.

2 MFIscanbebrokendowninto11NGOMFIs,52foreignMFIs,117domesticMFIs,and8jointventureMFIs.


091

CHAPTER

02Tow


<Table 2-4> Financial Status of the Top 20 MFIs

Name of MFI

Credit Deposit

Branches PARBorrowers % of the top 20

total

Portfolio % of the top 20 total

Depositors % of the top 20

total

Portfolio % of the top 20 total

1Park Global Microfinance Fund (PGMF)

30 31 4 64 79 0.68%

2 Sathapana Limited 7 7 9 4 22 0.07%

3 Fullerton Finance Myanmar MFI Co., Ltd. 5 6 5 1 37 0.31%

4 LOLC Myanmar MFI Co., Ltd. 4 6 6 6 53 0.42%

5 Vision Fund Myanmar 6 6 10 6 51 0.10%

6 Early Dawn MFI Co., Ltd. 6 5 9 2 51 0.30%

7 Alliance Microfinance 5 5 14 3 33 0.01%

8 KEB Hana Microfinance 3 4 4 1 35 0.78%

9 ACLEDA MFI Myanmar Co., Ltd. 3 4 5 4 9 0.15%

10 BNK Capital Myanmar 5 4 6 2 20 0.06%

11 Myat Kyu Thar 5 3 7 2 25 0.10%

12 Easy microfinance 3 3 - - 16 0.14%

13 Proximity Finance 3 3 1 0 16 0.80%

14 Maha Agriculture Public Co., Ltd 1 2 1 1 30 0.15%

15 BG Microfinance Myanmar Co., Ltd 4 2 6 1 47 0.02%

16 BRAC 3 2 4 1 53 1.35%

17 Myanmar Finance International Ltd. 2 2 3 2 11 2.10%

18 Hayman Capital Co., Ltd 3 2 4 1 14 0.50%

19Advance MFI Myanmar Company Limited

1 2 - - 11 0.00%

20 Shinhan Microfinance 1 1 2 0.6 - 0.26%

TOTAL TOP 20 3180827 MMK 1,053 bln 2413866 MMK

168 bln - -



Development of M


ar

092

Along with the increase in the number of MFIs, outstanding loans and savings as well as active clients and borrowers are also increasing as shown in [Figure 2-6] ~ [Figure 2-8].

[Figure 2-6] Outstanding Loans and Savings (Unit: Billion MMK)

-��

Loans Savings

��

�,��,��,��,��,��

��

Mar �� Jun �� Sep �� Dec �� Mar ��

��

�,��,��

�,�� ,��,��


[Figure 2-7] Financial Intermediation (Unit: % of GDP)

Loans

��/��

��

��

��

��/�� /�� /�� /�� /�� /��

Deposit

Sources: GIZ (2018), IMF (2019).


093

CHAPTER

02Tow


[Figure 2-8] Numbers of Active Clients and Borrowers (Unit: Thousands)

Active BorrowersActive Clients

�,��,��,��

�,��,��,��,��,��

�,��

Mar �� Jun �� Sep �� Dec �� Mar ��

�,��

�,�� ,��

�,��

�,��

�,��

�,��

�,��

�,��

�,��


MFIs have increased financial outreach in rural areas. Before MFIs, the government-owned Myanmar Agricultural Development Bank (MADB) and the semi-private bank Myanmar Livestock and Fisheries Development Bank (MLFDB) were the sole suppliers of micro loans in rural areas. Compared to 2013, there is a huge decrease in the use of informal sources, moneylenders or family and friends as of 2018, especially in the rural areas. This can be explained by the penetration of MFIs’ activities to rural areas. Private banks show less interest in rural areas mainly due to collateral issues and interest rate cap. With this cap, banks cannot price their risk and hence tend to rely overly on collateral or generally restrict their lending. There are two direct consequences to this over-reliance on collateral. Firstly, it makes banks vulnerable to large losses in values of the collateral properties. Secondly, high collateral requirements make it especially hard for poor people who do not have adequate collateral to access bank loans. Furthermore, the interest rate cap brings a low spread between lending and deposit rates, which is fixed at 5% by CBM regulations, resulting in low profitability and lack of innovation and competitiveness among Myanmar’s financial institutions.


Development of M


ar

094

[Figure 2-9] Financial Access in Urban and Rural Areas between 2013 and 2018(Unit: %)

� ��

Banked

Urban

Rural

Urban

Rural

��

��

Other formal (non-banked) Infomal Only Excluded

Note: ‘Other formal’ refers to mainly MFIs.Source: MOFE (2013, 2018).

Through MFIs, the financial inclusion of women, who are more commonly involved in household activities and unpaid family work compared to men (2014 Myanmar Population and Housing Census) also increased.

[Figure 2-10] Financial Access for Men and Women in Myanmar between 2013 and 2018(Unit: %)

� ��

Banked

Men

Women

Men

Women

��

��




095

CHAPTER

02Tow


Though MFIs largely increased financial inclusion in Myanmar, the Myanmar Making Access Possible (MAP) 2018 survey estimated that more than 50% of people in Myanmar did not have access to formal financial services, which indicated a large unmet demand that can be tapped by MFIs in the future through new product offering and geographical expansion.

[Figure 2-11] Financial Access in Myanmar between 2013 and 2018(Unit: %)

� ��

Banked

��

��



Growth of the microfinance industry took off with the enactment of the Microfinance Law in November 2011. The law allowed local and foreign companies to establish private MFIs, and provided a licensing regime for entities that were already running microfinance operations. Within one year from the passing of the law, nearly 120 MFIs received licenses thanks to low capital requirements that made it easy for small entities to apply for a license. In the following years, a number of foreign companies and international investors entered the microfinance market, either by establishing new greenfield microfinance operations or by taking over operations of existing INGOs.

In 2016, a new regulation established by the government, giving all MFIs the ability to borrow from any local or international lenders, eased MFIs’ funding issues, which had been the main problem for the growth of MFIs in Myanmar. This fueled MFIs’ ability to attract new borrowings. In the same year, capital requirement was also increased for deposit- taking MFIs, with a view to consolidating the microfinance industry. MFIs that were unable to meet the new requirements were granted the option of merging.

In order to expand financial inclusion, the government in 2019 announced the decrease of maximum interest rate from 30% to 28%and compulsory savings from 15% to 14% while interest rates for voluntary savings remained unchanged.


Development of M


ar

096

With the government’s easing of the regulations on funding issues, it became possible for MFIs to hedge exchange rate risk by the LIFT-TCX fund while attracting funding in foreign currency. The partnership of the Livelihoods and Food Security Multi-Donor Trust Fund (LIFT) and the Netherlands-based fund TCX provides support to MFIs attracting local currency funding from international lenders. This fund provides hedging solutions for cross currencies, offering a hedging instrument at a price that is somewhat on the high end for MFIs.

Local banks like Yoma bank, AGD Bank and AYA bank leverage back-to-back arrangement for the MFIs. These developments in funding allow microfinance practitioners to access a larger pool of local and international funds to expand and meet the needs of the local population.

Greater accessibility to capital allows MFIs to develop product differentiations. Though group loans and individual loans were only available by MFIs, there are agricultural loans, hire-purchase loans especially for agricultural equipment, migration loan, garment workers’ loans, salary loans and loans for people with disabilities. Loan characteristics vary among different MFIs. In general, the size of group loans is up to MMK2 million and loan tenor up to 18 months. Individual loans have loan size up to MMK10 million and loan tenor up to 24 months.

MFIs introduced and developed individual loan products in response to the high demand from borrowers and partly because these loans are generally more profitable for MFIs in that they can implement a sound assessment of credit risk. Between 2016 and 2018, several of the larger MFIs attained profitability, as their portfolio reached a large enough size to cover operating costs at a sustainable level.

Apart from the independent services offered to clients, MFIs have been recently cooperating with NGOs like Women for the World in low-cost housing projects and financial inclusion projects. MFIs increase gender equality in financial inclusion. Women are excluded from bank loans that are provided based on property rights and wage slips, as they are more commonly involved in household activities and unpaid family work. MAP (2018) data shows that men particularly had increased access to finance from formal banks, while women tended to access finance from non-bank financial institutions. Informal lending also decreased significantly in line with MFIs’ outreach.


097

CHAPTER

02Tow


2.2. Global Competitiveness of the Financial Sector

Financial development and greater financial inclusion3 remain a challenge in not only developing countries but advanced countries as well. This applies to Myanmar as well, which endeavors to extend the outreach of formal financial services through MSMEs. The plight of low-income people and agricultural segment in rural areas is not an exception. In Myanmar, 70% of the country’s population lives in rural areas and most of them are low-income households with limited financial access. As of 2005, about 19% of the Myanmar households had access to a bank account, according to a study by the World Bank Group. The %age of adult population (15+ years) who have deposit accounts in a formal financial institution (banks and non-bank financial institutions) increased to 22.62% in 2014. The increases for Thailand, Cambodia and Vietnam are from 59.0%, 20.0%, and 29.0% in 2005 to 78.14%, 12.56% and 30.86% in 2014, respectively as shown in [Figure 2-12] and [Figure 2-13].

[Figure 2-12] Access to a Financial Account, 2005(Unit: %)

�No data ��

Source: World Bank (2021).

3 Financial inclusiongenerallymeansprovidingfinancialaccessandservicesfromformalfinancial institutionstothepeople.Inthispaper,financialinclusionisdefinedinabroadersensethatfinancialservicesfrominformalinstitutionsarealsoincludedinthecon-ceptoffinancialinclusion.


Development of M


ar

098

[Figure 2-13] Access to a Financial Account, 2014(Unit: %)

�No data ��


As of 2020, Myanmar’s financial inclusion rate was more than 48% in accordance with the MAP survey conducted by UNCDF and based on ground data collected by the FRD and confirmed by the relevant government agencies. This comprised the accounts opened at banks and other financial institutions: 11.3 million at banks, 3.1 million at state-owned banks, 2.4 million at financial cooperatives, 0.14 million at DFS agents, and 5.8 million at MFIs, considering the possibilities of over-lapping among financial institutions. At the same time, there are about 7 million life insurance policy holders and 6 million general insurance policy holders at 27 local and foreign insurance companies including Myanmar Insurance of State own Enterprise.

A country’s financial competitiveness largely depends on the conditions and environment under which the financial sector can unfold its capabilities of providing services for their clients. In this section, the analysis starts from the global competitiveness of Myanmar’s financial market based on the Global Competitiveness Index (GCI) published by the World Economic Forum (WEF).

Based on the indicators, financial markets in Myanmar have lagged behind in global competitiveness compared to the country’s main competitors (recall that the measure used in [Figure 2-13] is global ranking; hence, the higher the number, the lower is the global competitiveness). Especially, two indicators measuring availability of financial services and ease of access to loans stand out.


099

CHAPTER

02Tow


[Figure 2-14] Regional Competitiveness of the Myanmar Financial Market

Myanmar

Availability of financial services

Legal rights index

Regulation of securities exchanges

Soundness of banks

Venture capital availability

Ease of access to loans

Financing through localequity market

Affordability of financial services

Bangladesh

Bhutan

Vietnam

Cambodia

Thailand

Lao PDR

��

��


Despite its fast growth between 2010 and 2019, Myanmar’s banking sector is still relatively small compared to other Southeast Asian countries. Domestic credit as a ratio of GDP was over 25% of GDP in 2019.

[Figure 2-15] Domestic Credit Relative to GDP (Unit: %)

050

100

150

200

China

Thailand

Vietnam

Malaysi

a

Philippines

Cambod

ia

Indonesi

a

Myanmar

2010 2019


Domestic credit provided to private sectors dropped sharply during the banking crisis in 2003 and reached the pre-crisis level in 2012. The fast growth in credit experienced in recent years raises concerns regarding the stability of the banking sector, because the banks’ risk management capabilities have not been upgraded to the same extent as their credit exposure.


Development of M


ar

100

[Figure 2-16] Domestic Credit in Myanmar(Unit: % of GDP)

2525

2525

5

2000 2004 2008Year

Pre-crisis level

2012 2016 2019


The loan-to-deposit ratio of Myanmar is especially low compared to other developing countries, showing the difficulties or hurdles banks face in the process of converting deposit to loans. A low loan-to-deposit ratio implies that the financial intermediation does not function properly, which affects not only a bank’s profitability, but also the opportunity for growth in private sector as it translates into less funds available for the private sector.

[Figure 2-17] Loan to Deposit Ratios (Unit: %)

120

100

8060

40

2010 2012 2014 2016 2017Year

IndonesiaBangladesh

Papua New GuineaMyanmar

NepalThailand

Source: IMF (2019).


101

CHAPTER

02Tow


2.3. Initiatives to Upgrade the Microfinance Sector

The FRD under the Ministry of Planning and Finance is regulating and supervising the Department of MFIs in Myanmar. The FRD reviews license applications, sets accounting and reporting standards, supervises MFI operations and carries out field inspections.

As mentioned above, the government, through the FRD, already eased the required regulations for MFIs’ growth and set additional regulations for market consolidation. Besides these, FRD holds policy consultation meetings, cooperating with MMFA, in Yangon and Mandalay, the two major cities of Myanmar, to get comprehensive feedback from practitioners to be considered when drafting new microfinance law. FRD also included MMFA executive committee members and other MFIs in the 2011 meeting to discuss the amendment on Microfinance Law, in Naypyidaw. These were initiatives of the government to upgrade the micro finance industry.

The new Microfinance Law is not finalized at present, although it was unanimously approved by the Lower House of Parliament (Pyithu Hluttaw) in 2020. The goal of the new Microfinance Law is, definitely, to accelerate development of the micro finance industry, prevent clients’ indebtedness, secure the members’ privacy, restrict illegal lending firms and form a public association called the ‘MMFA’, to support MFIs (Frontier Myanmar 2020).

From private sector, the MMFA, which was established in 2013 and legally formalized in 2016, plays an increasingly important role in the development of the MFI. The MMFA, which has 119 members (as of 2019), has initiated measures to include almost all MFI practitioners as the association’s members. MMFA acts as a central agency and its activities include representing providers of microfinance services before regulators, supervisors and donors; providing training opportunities; and providing a platform to share information and best practices

In 2017, MMFA prepared a position paper requesting several changes to the MFI regulation. Executive committee members of MMFA attended the meeting, discussed the collective comments and suggested an updated draft of the Microfinance Law in 2019.

For capacity building, MMFA has developed a comprehensive training program in technical, operational, and soft skills for its members in strategic collaboration with Appui au Developpement Autonome (ADA), United States Agency for International Development (USAID) and other technical resources. Short-term (3 days) training programs providing basic knowledge in conducting micro finance services like responsible finance, risk management,


Development of M


ar

102

financial analysis, small enterprise lending, credit analysis, saving mobilization, financial and social performance analysis, preparing MFIs to access external financing, and loan officer training are opened all year round.

One-day workshop programs like “Workshop on Multiple Borrowing and Indebtedness in Myanmar”, “Policy Consultation Meeting”, “Workshop on MCIX Program”, “Micro Finance Success Asia” are conducting as needed. “Microfinance Success Asia” 2019, organized by Singapore-based HBZ Events in collaboration with MMFA offered delegates a world-class conference, a market-leading exhibition and precise networking opportunities. More than 150 participants attended the event, including Myanmar government officials and representatives from the inclusive finance area: MFIs, SME and entrepreneurship promotion agencies, community and commercial banks, technology companies, consultancy companies, financial cooperative experts, development partners as well as policy makers and regulators.

MMFA also takes part in building Myanmar Credit Info Exchange (MCIX) for MFIs in order to solve clients’ indebtedness issues. MCIX is an independent network that provides MFIs with business credit intelligence within an ethical, legal and professional framework. MCIX enables information sharing that allows for the control and monitoring of multiple, overlapping loans while protecting the privacy of clients in the interests of MFIs, clients, and the overall financial sector. MFIs participate in the MCIX program in an effort to manage and reduce the risks of clients’ over-indebtedness.

MMFA is part of efforts to develop ‘Code of Conduct for MFIs’, a compendium of collective standards and responsible practices for the microfinance institutions, with support from ADA. Along with the growth of MFIs, establishing a ‘Code of Conduct for MFIs’ is necessary and will play a more important role in future. This initial ‘Code of Conduct for MFIs’ comprises guidelines on practices for clients, employees and businesses.


103

CHAPTER

02Tow


<Table 2-5> Code of Conduct for MFIsClients

1. Encourage client education

- Financial literacy training activities

2. Fair and respectful treatment

- Avoiding client shaming

- Management of delinquency

3. Respect Privacy

- Do not share clients’ personal data, image without written permissions

4. Feedback mechanism

- Hotlines, complaint mechanism

Employees

1. Staff development

2. Fair and respectful treatment

- No discrimination on gender, ethnicity, color, religion

3. Recruitment with background check

4. Feedback mechanism

- Encourage annual Staff Climate Survey

Business / Fair Competition

1. Avoid massive poaching of employees

2. Respect intellectual property rights

3. Corporate governance

4. Product and design

- Proper due diligence of client loan

5. Transparency

- Procedures

- Rates and fees calculation

6. Responsible pricing

7. Over-indebtedness

- Data sharing → MCIX or Credit Bureau



Development of M


ar

104

2.4. Issues and Challenges in the Myanmar Microfinance Industry

Many challenges remain for Myanmar’s microfinance industry. Availability of funding has been a challenge since the inception of MFIs and is still the main challenge during this period of rapid growth of the microfinance industry. Top 20 MFIs in Myanmar are predominantly owned by international entities, meaning scarcity of funding in the domestic market inevitably favors international MFIs and allows them to have larger market shares in a high-demand market like Myanmar, as they are able to get funds from international shareholders and donors.

Although the FRD eased the regulations concerning availability of funding by giving MFIs the ability to borrow from any local or international lenders, international lending is still difficult due to the risks associated with exchange rate and interest rate. LIFT-TCX hedging service is very limited compared to the demand of MFIs. Lending from local banks is also challenging for MFIs for two reasons. Firstly, banks are still reluctant to lend to MFIs without collateral and MFIs cannot provide collateral because they themselves are not allowed to accept collateral for any loan products. Secondly, banks’ leveraged back-to-back arrangement needs MFIs to pay double borrowing costs on both the USD and MMK amounts, which increases the cost of borrowings. (Leveraged back-to-back arrangement: depositing USD in the bank and then borrowing a multiple of that amount [1.5 to 2 times] in local currency, MMK.).

In the microfinance industry, the issues and challenges can be defined as: 1) high cost of financial resources, 2) high cost of operation, 3) possibility of over-indebtedness, 4) lack of credit information sharing system, 5) limitation of out-reach to far-flung areas, 5) weakness of the financial and digital literacy programs, and 6) unfair competition among the domestic and foreign MFIs.

There are two types of financing: equity financing and debt financing. The wholesale lending rate is about 14.5% for unsecured loans and 10% for secured loans as of May 2021. The interest rates on compulsory savings at the MFIs are about 14% and 10% for voluntary saving. The cost of funding is much higher in comparison to that of developed countries. This high cost of funding creates a negative impact on the long-term sustainability of MFIs.

Most MFIs in Myanmar have to face the issue of high cost of operations given the weak technological infrastructure including digital technology. The operation cost has been about 9% to 13% depending on the areas they operate and strategy they utilize. It is higher when


105

CHAPTER

02Tow


the MFI is in the early stages of operation before they achieve economies of scale. The possibility of over-indebtedness is a reality for the time being due to the following factors:

(1) High competition in economically favorable areas like Yangon, Mandalay, Sagaing, Bago;

(2) Lack of credit information sharing mechanisms like credit bureau and credit registry; and

(3) Weaknesses in applying responsible financing and restricting abusive lending due to the high pressure on the loan officers to achieve a larger loan portfolio without proper screening for the repayment capacity of the clients.

MFIs cannot go to the far-flung areas due to the weak infrastructure such as poor transportation, communication, lack of electricity, and the high dispersion of the population living in those areas, especially in hilly regions and the regions of instability and border areas. The provision of microfinance in those areas results in high costs of operation, and the weak economic development situation makes it difficult to achieve economies of scale. The lack of proper strategy for financial and digital literacy should be addressed to empower consumers and enhance efficiency and effectiveness in provision of digital and financial services. Unfair competition occurs among domestic and foreign MFIs due to the differences of technology and methodology, funding costs, and capabilities to apply good corporate governance and nurture HR and HR management.

The approval process by the government takes a long time. Receiving approval for foreign lending from the Central Bank takes a long time that ranges between two months and six months. As a result, MFIs sometimes have to slow down or stop operations over certain periods while waiting for delayed approval for borrowings.

MFI deposits too, as funding sources, are limited under the current regulation. Only deposit-taking MFIs can use savings to finance their operations, but they are allowed to take deposits only from their members. While there is no restriction on the amount of voluntary savings that a licensed deposit-taking MFI can collect from its clients, they are not allowed to take deposits from the public.

The requirement of needing separate licenses for operations in different regions and states also constrains the growth of MFIs. MFIs are only allowed to open branches and acquire customers in specific areas for which the MFI has already obtained approval. While


Development of M


ar

106

this arrangement is likely in place to reduce over-indebtedness and market saturation, alternative options are necessary for the growth of the microfinance industry.

The restrictions upon MFIs’ activities also prove to be a hurdle to growth. According to the Microfinance Law of 2011, MFIs are allowed to disperse loans, receive deposits, borrow from local and overseas entities, and perform remittance services, insurance services and other financial business. However, only dispersing loans, receiving deposits and borrowing from local and overseas entities are allowed in practical terms.

Like any other developing countries, human resource challenges are a major constraint on the growth of MFIs in Myanmar. The shortages of a skilled labor force that can take on managerial responsibilities and a limited pool to recruit staff are obstacles to growth and innovation of MFIs. The high turnover rate of local staffs often forces MFIs to hire and train new employees, which reduces productivity and hinders the growth of microfinance industry.

With the rapid growth of MFIs in the past decade, over-indebtedness of clients is becoming important for all MFIs. The M-Cril survey (2018) showed that 40% of borrowers in Yangon had three or more outstanding loans, and that more than 30% of borrowers in Bago and Mandalay had three or more outstanding loans. Furthermore, more than 5% of borrowers in Yangon and Bago had five or more loans. This means that MFIs have no way to verify whether borrowers are already indebted with other MFIs, thus increasing the risk of over-borrowing.

The MMFA has initiated data sharing among MFIs, through a platform known as the Myanmar Credit Info Exchange or MCIX. The use of MCIX is expected to increase over time. However, the shortcoming of MCIX at present is that it lacks detailed and high-quality loan information that is necessary for an adequate assessment of indebtedness. The system only collects basic client information (e.g., the last six digits of the client’s ID number, name of institution from which a client borrows, and township). Additional information is collected and recorded only if the loan has been written off.

Lastly, limited availability of data about Myanmar’s MFIs is a constraint on the growth of the microfinance industry. Sound data are necessary for not only attracting international investors but also analyzing the situation of the microfinance industry. At present, only limited MMFA’s public and private data are available. Greater accessibility to data concerning MFIs will make the industry attractive to diversified investors, which will lead to more funding sources.


107

CHAPTER

02Tow


3. Korea’s Experience in Microfinance

3.1. Microfinance in Retrospective

3.1.1. Development of Microfinance

The development of the financial system has long been associated with economic growth and development. Empirical studies have proved the strong association between financial development and growth, some even showing that financial deepening is crucial to growth and development. With well-functioning financial market and institutions, resources can be allocated more efficiently and financial services are made more accessible, which are regarded vital to achieving sustainable economic growth and development.

Korea has established a modern and advanced financial system, consisting of a diverse range of financial institutions. Financial services have become inclusive such that nearly every Korean has access to basic financial services as well as advanced financial products such as mortgages and investment funds. Over the last 60+ years, Korea has witnessed rapid economic growth, converting an economy that was once largely poor and agrarian to an industrialized country in less than a half century. The social and economic benefits of growth are enjoyed by majority of the population. One of the keys behind Korea’s economic miracle can be explained by the performance of financial deepening within the economy. To do this, it will be critical to understand the development process of Korea’s financial system and institutions.

The period of 1945-1964 was a dark age in Korea’s financial development and shortage of funds was a chronic problem. It was the period when the economy was plagued by war and hyper-inflation. The financial sector was mostly characterized by informal credit markets. Immediately following the military coup of 1961, the new government nationalized the commercial banks by confiscating the shares of large stockholders on the ground that these shares had been acquired illegally in the previous regime. A set of policies laid out by the revolutionary government marked a clear departure from the approach of the previous regime, which had adopted private ownership of commercial banks in 1957. The government endeavored to use the financial institutions as a policy vehicle to boost industrialization. The failed privatization of commercial banks demonstrated that Korea was not ready to adopt market principles. However, land reforms in the 1950s are considered to have had a positive impact on Korea’s development, but its incipient impact brought more harm than good by expanding the informal credit markets. The Land Reform Act, enacted in 1949 with the aim of improving farmers’ livelihood by fostering self-employed farmers and


Development of M


ar

108

promoting agricultural productivity by distributing farmland to farmers, inhibited the use of land as collateral. As a result, farmers had to resort to the informal credit markets, leading to high and unsustainable debt levels in the rural sector. In response, the government invoked a debt-relief program that, however, was not large enough to have a serious impact on household debt. However, the program provides an insight into the negative social effects of informal financial markets.

The period of 1965-1982 was a hard time in Korea’s financial development as financial deepening remained sluggish during the 1970s. One of the reasons for the stagnant financial development during the period was the repression of the economy due to the heavy involvement of the government. The government’s nationalization of commercial banks and the regulation on interest rates amid hyper-inflation resulted in negative interest rates, leading to the dominance of informal markets during this period.

The interest rate adjustment of 1965 was the single most important event in Korea’s financial history, in that the liberalization of interest rates, which allowed bank rates to converge with the market rates, changed the trail of Korea’s financial development. As result of the adjustment, money moved into the formal banks. It was the first step toward institutionalizing the informal credit markets in the financial sector. The flow of money to the formal financial market can also be seen as an increase in the government’s control over finance since the banks were nationalized. The 1960s also marked the beginning of the first Credit Cooperatives (CCs) movement in Korea.4 The first credit union was established in 1960, and the concept spread quickly in urban cities and rural areas. The growth of credit unions was unique in that it was a private-led and grass-roots initiative.

In 1972, Korea faced financial distress brought on by escalating debt in the corporate sector. To prevent a debt crisis, the government carried out the Emergency Economic Measures in August 1972, helping to avert an economic crisis. The legal and regulatory reforms sought to institutionalize the informal credit markets by formalizing informal moneylenders as Non-Banking Financial Institutions (NBFIs). Informal lenders that mainly lent to large firms seeking a short-term working capital were institutionalized as Short-Term Finance Companies (STFCs). Small-scale moneylenders that lent primarily to SMEs were institutionalized into Mutual Savings and Finance Companies (MSFCs). At the same time, the enactment of the Credit Union Act sought to enhance financial inclusion among households.

4 CCsarecomposedofmember-ownerswhobothsupplyandusethefunds(principleofidentity).Incontrast,owners(shareholders)ofbanksareclearlyseparatedfromclients.ForCCs,anotherkeyfeatureistheprincipleofone-person/onevote.AccordingtotheStatementontheCooperativeIdentity,promulgatedbytheInternationalCo-operativeAlliance(ICA),aco-operativeisdefinedas“anautonomousassociation”ofpersonsunitedandworkingtogethervoluntarilytomeettheircommonneeds.“Cooperatives”arebasedonthevaluesofself-help,self-responsibility,democracy,equality,equityandsolidarity.


109

CHAPTER

02Tow


The period from 1983 to the mid-1990s witnessed the decline of the informal credit markets. Korea had contained inflation and secured macro-stability, followed by positive real interest rates. At the same time, the government’s financial liberalization drive led to the introduction of new financial products such as trust accounts in banks. The deregulation of entry barrier for new commercial banks and NBFIs led to flow of funds returning into the formal financial sector, further precipitating the decline of informal credit markets. The legislation of the real name financial system in 1993 essentially marked the end of the informal credit market’s role in the financial system.

The latter half of the 1990s was a period of rapid change in Korea’s financial system. It seemed that accidental liberalization and deregulation had NBFIs including STFCs and MSFCs undertake reformation to adapt to the new financial environment. The financial liberalization and deregulation of the 1990s created new types of NBFIs in the form of merchant banks, many of which were STFCs, during 1994-96. The expansion and inadequate supervision of merchant banks, many owned by Korea’s biggest business groups, known as chaebols, would have detrimental consequences on Korea’s economy as they played a non-negligible role in triggering the financial crisis in the latter period of the 1990’s. As with the STFCs, the MSFCs were marginalized and pushed aside by Korea’s financial development, as it was hard for their obsolete business model to survive in the new financial order. The MSFCs became mutual savings banks following a series of deregulatory measures. Unpremeditated deregulation and inadequate financial supervision paved the way for a high risk-high return equation, resulting in the mutual savings bank crisis of 2011.

Today Korea is proud of an advanced financial system where financial services are highly inclusive. However, just as in any other country in the world, extending the outreach of financial services for low-income families remains a social and economic challenge to promote financial inclusion. In Korea, the subject of financial inclusion has taken on greater weight under the steady growth of household debt and deteriorating wealth distribution. In a country like Korea that enjoyed a well-developed financial system, MFIs still have their functions and roles to play in expanding the frontier of financial outreach to groups that are not serviced and attended by the modern financial institutions.

3.1.2. Time Alignment for Comparison

[Figure 2-18] presents per-capita GDP of Korea and Myanmar to identify the periods of similar development stages for both countries. As of the end of 2019, the per-capita GDP of Myanmar stood at USD 1,407, which corresponds to that of Korea in 1979 when the per-capita GDP of Korea was USD 1,405. Apart from the per-capita income, there are other


Development of M


ar

110

similarities in both countries during these periods: a chronic shortage of funds; agriculture is the major industrial sector; nascent and premature development of the financial market; and banking services accessible only for big firms, leaving MSMEs and agrarian household to find funds mostly from private moneylenders or other small-sized un-institutional loan facilities. These similarities provide a good reason why it is appropriate to analyze financial development of Korea in the 1960s and 1970s as a starting point for discussing and finding lessons to pass on to Myanmar.

[Figure 2-18] Comparison of Per Capita GDP: Korea vs. Myanmar(Unit: USD)

35,000Year (Myanmar)

Year (Korea)

Korea

2001

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2004

2007

2010

2013

2016

2019

30,000

25,000

20,000

15,000

10,000

5,000

0

Myanmar

Source: Author’s calculation based on data from World Bank (2021).

In the following section, we will discuss representative microfinance institutions initiated and organized in the growth stage similar to the current development of Myanmar: Credit Union and Community Credit Cooperatives5. Most of the current microfinance in Korea is operated and controlled by the public sector; for this reason, it is meaningless to compare the current micro finance in Myanmar and Korea directly. Hence, this section will review the period when Korea started to develop its own micro finance brand.

5 CreditUnionsofKoreacanbecomparedwithfinancialcooperativesinMyanmarasbothofthemfunctionedasacreditcooperative.Communitycreditcooperativesaregenerallyregardedaconsumercooperativesequippedwithacreditfunction.


111

CHAPTER

02Tow


[Figure 2-19] Timeline of Credit Events and Institutions

[Major events]

1949Land reform 1960 First credit union

1962 Establishment of Agricultural cooperative chain stores1963 Established a credit union (predecessor of Saemaul Geumgo)

1972 Credit union act, NACUFK was established & STFCs and MSFCs Act1973 Fisheries cooperatives1974 KFCC was established launched1982 Community Credit Cooperatives Act

1993 Forestry cooperatives launched

2001 The Mutual Savings and Finance Company Act amendment (renamed to mutual savings banks)2002 The Act on Registration of Credit Business, etc. and Protection of Finance Users

1965Liberalization of interest rates

1972Emergency Economic Measures

1993Real-name financial transactions Act

1997Asian financial crisis

2008Global financial crisis

[Credit union]

[Consumer loan finance companies]

[Credit Cooperatives]

[Mutual Savings Bank]

1945~1964‘Dark age’

1965~1982‘Challenging time’

1983~mid 1990’seventual decline of the

informal credit markets

Mid 1990s ~ current

Source: Author.

3.2. Traditional Microfinance: CFIs

3.2.1. Credit Unions (CUs)

Credit unions were important to raising the level of financial inclusion in Korea, especially in the rural sector since 1960s. The origination and evolution of these CUs offer a rare perspective into Korea’s history of financial development and financial inclusion. In particular, the establishment of credit unions was a voluntary effort on the part of the private sector. A credit union is a not-for-profit financial institution and aims to promote the mobilization and distribution of funds based on a common bond held between individuals or groups willing to come together and cooperate. It consists of members from the same community, workplace, or organization.

The first credit union, called the Holy Family Credit Union, was introduced by Sister Mary Gabriella in 1960. This CU was established for the employees of Maryknoll Hospital and Catholic Relief Services in Busan, which is the southernmost port city in Korea. Thanks to its success, the concept was exported to the other communities within a few years. After the first CU was introduced, other CUs began to form based on the same model and principles. Sister Gabriella emphasized a policy of “Education First” in that anyone who wanted to be a member of a CU had to participate in a five-day training course. On the sixth day, candidates for the board of directors were elected. They then took a three-day special training program. The practices of the Holy Family Credit Union set an example for numerous CUs to follow.


Development of M


ar

112

Two months after the Holy Family Credit Union was established, another credit union called Catholic Central Credit Union was introduced by Father Dae-ik Jang, but it did not last long. The reasons behind the failure of this credit union were as follows:

(1) Unlike Sister Gabriella, who focused on discovering leaders and educating members, the credit union established by Father Dae-ik Jang focused on publications.

(2) Since there was no prior training for members, they joined the union simply to obtain a loan rather without a proper understanding of the spirit of the credit union.

(3) The spirit of independence among executives was weak compared to that of the Holy Family Credit Union. While Father Jang insisted that the background of unemployment of the poor and prosperity of the usurious was due to uneven wealth distribution, and credit unions should pursue social and economic reforms, Sister Gabriella sought to build national capital through thrift and savings and escape from poverty. The up close and personal approach of the credit union established by Sister Gabriella received more attention and support from the public and this approach is still valid nowadays.

Korea’s Credit Union Association (KCUA) was launched in 1964. In the early period, the KCUA garnered a considerable amount of foreign aid from international organizations, such as Credit Union National Association (CUNA) International, Asia Foundation, US Aid, etc. as shown in <Table 2-6>. The ratio of foreign aid to total revenues for KCUA reached 79% in October 1965. Despite the overseas assistance, KCUA exerted efforts to become self-sustainable at the earliest possible by increasing the CU’s membership fee.

<Table 2-6> Foreign Assistance to Korea’s Credit Unions (As of Jan 31, 1972)Source Type of assistance Amount Year

Asia Foundation Education / Establishment of new credit unions KRW 500,000 1965

CUNA Education and training US $2,500 1965

Pusan Diocese Catholic Church Education and training US $3,000 1965

USAID Education and training support KRW 35,000,000 1968

Christian Reform Mission Education and training support - 1971

1972

UNDP Education and training support - 1972

Source: NACUFOK (2012).


113

CHAPTER

02Tow


The establishment of the Credit Union Act of 1972 provided a sound legal basis, marking a turning point in the development of credit unions.6 The Act legally defined the activity of CUs, provided for the launch of the National Credit Union Federation of Korea (NACUFOK), and created a legal means of collecting unpaid loans.

The NACUFOK established the following principles of cooperatives be included in the law. First, there should be minimal government regulation, its scope limited to requirements that ensure the functioning of the industry, thereby protecting the founding principles of CUs including independence, self-reliance, and self-help. Second, the process of registering and obtaining approval for the establishment of new CUs should be simplified considering the size of CUs. Third, new members must receive education and training on cooperatives.

The CU movement had a symbolic impact on increasing financial inclusion, particularly in rural areas. For the first time in the Korean history, many poor people in rural regions were able to get access to a deposit account. Although their savings had been small, it instilled hope and confidence for a better future into Korean people. As seen in <Table 2-7>, CFIs such as MSFCs, CUs, and Credit Cooperatives were popular at the local level. Unlike region-based financial institutions like MSFCs, CUs were able to gain prominence in rural communities. Moreover, the principle of one person having one vote of cooperatives contributed to a more open society based on democracy.

<Table 2-7> Distribution of Financial Institutions by Region (As of 2021Q1)

MSFCs Credit Union Community Credit Cooperative

Number Share Number Share Number Share

Seoul 154 9.2% 107 36.9% 447 9.9%

Busan 92 5.5% 27 9.3% 288 6.4%

Incheon/Gyeonggi 308 18.4% 73 25.2% 635 14.1%

Other 1,118 66.9% 83 28.6% 3,148 69.7%

Total 1,672 100.0% 290 100.0% 4,518 100.0%

Note: Including both branches and head offices.Source: Author based on data from NACUFOK (2021) and KFCC (2021).

In the 1960s and 1970s, many developing country governments and international organizations used cooperatives as a means of eradicating poverty and pursuing economic growth, but most of them failed. Since then, international organizations have shown

6 Asthepurposeofthecreditunionmovementwasinlinewiththepurposeofthegovernment-ledeconomicdevelopmentpolicy,creditunionsreceivedthetrustandattentionofthethengovernment,whichledtotheenactmentoftheCreditUnionActin1972.


Development of M


ar

114

a negative attitude towards the role of cooperatives as a means of eradicating poverty. According to a UNRISD (United Nations Research Institute for Social Development, 1973) report, credit unions could not drive socio-economic transformation because they were too small-sized and operated inefficiently due to the incompetence of managers. Munkner (1995, 2000) argued that credit unions failed because they did not start from the bottom up.

One reason for the successful settlement of Korean credit unions was that it was initiated voluntarily by the people, followed by thorough education. Moreover, credit unions gained the trust of the government in line with the government-led economic development policy. By not staying as an organization that benefited only certain groups of people, the credit union came to play a meaningful role in the socio-economic transformation of the period. The case of the Korea Credit Union is one exemplary case that shows that in order for cooperatives to be successfully introduced and settled, objectives need to be set based on local socio-economic needs, and education, operation, and legal systems need to be made in a bottom-up manner. In particular, the government’s trust in credit unions, sans excessive interference, allowed them to work as a voluntary organization, setting a good example of the government’s stance toward cooperatives. Furthermore, securing stable funding sources by providing incentives to increase savings from the existing members and exerting continual efforts to increase new members contributed to the success of the Korean CUs. Munkner (2012) argued that the government’s policy as a friendly bystander on co-operatives is better than a policy of treating co-operatives as quasi-entities, such as the relationship between owners and servants.

3.2.2. Community Credit Cooperatives (CCs)

Since ancient times, there have been traditional customs of mutual help and community solidarity, such as kye7, in rural villages in Korea, which are common not only in Korea but also in rural villages in other developing countries. In Korea, a kye is a group where members collect in kind or money to raise money and utilize it. The introduction of the CCs is a part of the financial cooperative movement that has emerged to solve economic difficulties through solidarity and cooperation among villagers based on these traditional mutual aid practices.

Community Credit Cooperatives kicked off as a credit union established in Busan, a port city of the southern Korean peninsula. Unlike the organic expansion of CUs, the promotion

7 Thekyeisaformofrotatingcreditassociation,whichisessentiallyadevicebymeansofwhichtraditionalformsofsocialrelation-shipsaremobilizedsoastofulfillnon-traditionaleconomicfunctions.Thekyeisfoundedonasimpleunderlyingprinciple:alump-sumfund(kyefund)composedofvariablecontributions,basedonaninterestpaymentcalculation,fromeachmemberofthekye,isdistributed(or,moreproperly, loanedout),atfixedintervalsandasawhole,toeachmemberintheorderofapredeterminedsequence,byauctionorbylottery.Theholderofthefirstpositioninthesequenceisapureborrower;thelast,apuresaver.


115

CHAPTER

02Tow


of the CCs was targeted specifically for villages in rural areas as part of Korea’s National Reconstruction Movement in 1961. While CUs are essentially specialized in deposits and loans, CCs are community cooperative organizations per se. The CCs are distinguished from banks and microfinance businesses in that the CCs’ main business is to provide financial services, i.e., residents use the funds they collect for community development. By using the residents’ deposits as a source for loan, the CCs tried to build trust among the members. This also helped reduce the risk of bank runs even if there was a temporary deficit or bad debt in a CC, which could be more likely if the CC relied too much on external financing.

The members of CC save with the cooperative spirit of “I save for the whole village and everyone in the village saves for me.” Deposits saved in general financial institutions are used immediately when funds are needed, but the CC members leave them as deposits for others and use the mutual finance principle to take out loans. As the members are customers, owners, and operators of CC at the same time, they can naturally accept this principle. Savings have the function of reforming the way of life and establishing a cooperative spirit among the village members. The CC’s loan resources are a collection of one or two pennies of the members’ “squeezed out money”, which is very different from bank loan resources in that the funds are spare money. Therefore, the member does not simply borrow money, but borrows from the business capital collected for the growth of the village, and must use it faithfully with a sense of responsibility.8 Other members cooperate with the borrower member’s business because they have a sense of solidarity and want the borrowed member’s production activities to succeed at the very least for repayment of the loan. The CC promotes a thrifty saving habit, prevents waste of property, and fosters the belief that “everyone can live well if they are diligent and thrifty, and have the wisdom to achieve great things with small things.” By creating and operating CCs based on the village, the residents themselves develop economic ideas, and through this, the lives of individual residents are enriched.

In 1961, the government announced the promise of building prosperous rural villages through a comprehensive long-term economic development plan and reconstruction with the reform movement. In order to implement its slogan of rural development, the government adopted the credit union model to facilitate local community development even though the basic philosophy of the credit union based on the Christian spirit did not match with local sentiments and religious orientation. As shown in <Table 2-8>, the combined ratio of Buddhist, Protestant, and non-religious individuals in 1984 was 92%, and the ratio

8 SincethemajorityoftheCC’smemberswerepoor,itwasdifficulttomeetthegrowingdemandforloanswiththesavingstheyhadaccumulated.Therefore,theCCsolicitedinvestmentfromthewealthypeopleinthevillageguaranteeingaslightlyhigherdepositratecomparedtotherateofferedbycommercialbanks.


Development of M


ar

116

in rural areas might have been higher, demonstrating that the foundation of Catholicism is very weak in the Korean society. However, the government had a strong affinity to CUs in spite of their Catholic background as they proposed and supported local community development through education and credit cooperatives. The early CCs mimicked many of the basic principles of CUs, and even emulated the same name for the cooperatives. By the end of 1964, the number of community credit cooperatives was 81. In the early days, the community credit cooperative was named interchangeably between credit union, reconstruction bank, and village bank, but was unified as community credit cooperatives by the end of 1963.

<Table 2-8> Distribution of Religious Population of Korea in 1984(Unit: %)

Total Non-religious Buddhism Protestantism Catholic Other

10056 19 17

6 392

Source: Kang (2020).

The legacies of traditional cooperative organizations and mutual aid systems were established as an ideological basis for the CCs associated with the spirit of the National Reconstruction Movement. As the religious colors of the CUs could be objectionable to the Korean rural communities, the CCs started to differentiate by stressing that they were cooperative organizations inheriting the Korean tradition of mutual cooperation and community development.

During the 1970s, Korea saw a rapid expansion of CCs when the Saemaul Movement, or New Village Movement, was promoted as part of the government’s rural development efforts.9 The Saemaul Movement was a community driven development program that sought to enhance the income of farmers and rural living standards by promoting the principles of self-help, diligence and cooperation. Because the CCs grew during the government’s promotion of the Saemaul Movement, there has also been a strong association with the Movement. As the President directed each ministry to cooperative actively with the CC movement, the introduction and operation of CCs became a symbol of the Saemaul Movement spirit and a measure of development in rural villages.10

9 TheSaemaulMovementwasfoundedin1970bythethenPresidentParkJeong-hee.ThePresidentfirstmentionedSaemaulMove-mentattheNationalRegionalMinisters'Meeting.Itstartedasanationalpolicyforruralrevitalization.AfterthedemiseofPresidentParkin1979,theSaemaulMovementconvertedfromagovernment-directedtoacivilian-ledmovement.TheSaemaulMovementCentralHeadquarters,aprivateorganization,wasestablishedin1980,whichwasrenamedtotheSaemaulMovementCentralCoun-cilin1989,anddowngradedtoSaemaulMovementCenterin2000.

10 Sinceroughlythistime,theCCs(orvillagebanks)havebeennamedasthenewcommunitycreditcoops(ornewvillagebanks)toreflecttheirconnectionwiththeSaemaulmovement.


117

CHAPTER

02Tow


The Saemaul Movement helped to raise farmers’ income by encouraging community development projects that were assisted by the government. The government also promoted a Savings Reinvestment Program to promote the village economy. The program sought to expand income opportunities for rural households through community development projects. The idea was to provide income opportunities and increase the incentive for savings and investment, which would lead to more income and savings in turn. A village fund was created to save a portion of the profits from the projects and the savings was then reinvested to fund other, new community development projects.

The government promoted savings among rural households by recommending that around 50% of the profits be saved in the village fund. As income grew, farmers purchased shares of the CCs. This enabled accumulation and mobilization of capital through the CCs. <Table 2-9> shows how the government and village members cooperated in financing community development projects through an equal cost sharing arrangement.

<Table 2-9> Source of Financing of Saemaul Project(Unit: Billion KRW)

Period TotalGovernment support

Financed by villagesSub-total Central

GovernmentLocal

GovernmentLoan and

others

1971 12.2 (100%) 4.1 (34%) 2.7 1.4 - 8.1 (66%)

1975 295.9 (100%) 165.3 (56%) 66.6 57.9 40.8 130.6 (44%)

1979 758.2 (100%) 425.2 (56%) 125.8 101.0 198.4 333.0 (44%)

1971-1980 3,425.1 (100%) 1,733.9 (51%) 488.7 463.6 781.6 1,691.2 (49%)

Source: Author’s calculation based on data from the Ministry of Internal Affairs (2021).

According to a survey by Hong (1976), CCs helped with access to loans outside of the informal credit markets. The survey results show that 74% of the villagers counted on CCs compared to other sources of credit as shown in <Table 2-10>. CCs were able to provide loans at a lower interest rate to their members based on their creditworthiness, which could be assessed from the record of savings and loan repayments. These records would also be used to make a credit assessment of each member. Therefore, farmers did not have to depend on the informal credit markets or put up collateral to borrow money. Instead, farmers could access loans based on their creditworthiness. Many farmers were able to refinance usury loans with lower interest loans offered by the CCs (See Table 2-11).


Development of M


ar

118

<Table 2-10> Location of Farmer’s Savings based on Annual Income in 1975Greater than

KRW1.5 millionKRW0.5-1.5

millionLess than

KRW0.5 million Total

Agricultural cooperatives 5 (20%) 16 (18%) 7 (13%) 28 (17%)

Community credit cooperatives 17 (68%) 66 (76%) 41 (75%) 124 (74%)

Informal credit market 2 (8%) 2 (2%) 4 (7%) 8 (5%)

Others 1 (4%) 1 (1%) - 2 (1%)

No response - 2 (2%) 3 (6%) 5 (3%)

Total 25 87 55 167 (100%)

Source: Hong (1976).

<Table 2-11> Use of Loan from CCs(Unit: Billion KRW, as of 1975)

Purpose Amount Share (%)

Farming 8.7 41%

Non-farming 5.0 24%

Healthcare and others 2.1 10%

Education 1.4 7%

Environmental improvement / Housing improvement / environmental infrastructure construction (improvement)

1.4 7%

Refinancing usury loans 2.3 11%

Total 20.9 100%

Source: Hong (1976).

CCs provide the following services: receipt of deposits and installment deposits from members; extension of loans to members; domestic exchange services; execution of business on behalf of the government, public organizations or financial institutions; separate safekeeping; and more. Except for some services such as the discounting of bills, both CCs and CUs perform nearly the same functions.


119

CHAPTER

02Tow


Regarding operational restrictions, a CC is only allowed to borrow money from the KFCC11, the government, public organizations, or financial institutions, within the limits of the aggregate of its vested capital and reserved funds. The credit ceilings on individual borrowers cannot exceed 20% of the aggregate of its vested capital and reserved funds. Furthermore, a CC must retain a minimum of 10% of its deposits and installment deposits as repayment reserves, and must deposit half of those reserves with the KFCC.

As the scope of the Saemaul movement expanded from rural areas to urban factories, CCs have also been actively involved in their operation with support from the government. However, the prevalence of CCs did not always generate positive outcomes. By the late 1970s, CCs started to lose their independence and autonomy due to excessive reliance on the government. The government made a hard drive to establish one cooperative in every village, after it observed that villages having a CC produced better economic outcomes than villages with no CCs. The government’s coercive push led local government officials to promote the creation of CCs. As the government pushed for quantitative expansion of CCs, many of CCs became insolvent and embezzlement scandals became common, attracting public criticism. In order to address the decrease in profits due to fierce competition among CCs, many CCs lowered credit standards for lending and even attempted to invest in securities to preserve profits, resulting in a stock of bad loans and losses from investment. After peaking in 1977, CCs had to face a massive restructuring. Many insolvent and small-scale CCs were consolidated and restructured after 1978 and the Community Credit Cooperative Act was legislated to strengthen the leadership and supervisory function of KFCC, facilitate business reorganization and protect depositors. CCs and CUs are governed by different laws and supervisors, even though the operations of CCs were essentially similar to those of CUs. In fact, they shared the same location and practices. In some cases, even the members of CCs and CUs were overlapped. The lack of coordination and strategic complementation between the two micro finance institutions led to competition and inefficiencies that were not conducive to the outreach of financial inclusion.

11 ThenationalcentralagencyofCCs,knownastheKoreanFederationofCommunityCreditCooperatives(KFCC),wasfoundedin1973andaccordedlegalstatusin1983withthelegislationoftheCommunityCreditCooperativeAct.IntheearlydaysofCCs’develop-mentinKoreain1963,therewasnolegalbasistoprotectorsupporttheCCs’activities.AstheCreditCooperativeActwasenactedin1972,theCCsasatypeofacreditunionwerealsosubjecttothelaw.However,duetotheCCsfocusingtheiroperationonre-gionaldevelopmentprojects,theCreditCooperativeActcouldnotprovidefulllegalprotection.Accordingly,theCommunityCCActwasseparatelyenactedin1983tosolveproblemsthatoccurredduringtheoperationoftheCCs.Throughthis,theCCswereabletomanagecapitalstablywhileactivelycarryingoutactivitiessuchaseconomicprojectsforregionaldevelopment.


Development of M


ar

120

[Figure 2-20] Number of CC Branches

40,00

030

,000

20,00

010

,000

0

1964

Year

1972 1980 1988 1996 2004 2012 2020

Source: Author’s calculation based on data from KFCC (2021).

3.2.3. Comparison between CUs and CCs

3.2.3.1. Similarities

Both CUs and CCs placed great emphasis on the education of their members. Education was seen as an effective means of bringing about a change in public perception. In particular, continuous and intensive education was utilized to eliminate the prevalent pessimistic mindsets that had been ingrained from the experiences of the Japanese colonial era and the Civil war. The CFIs emphasized educational activities with the principle of ‘organization after education first’.

The education was largely divided into leader education and member education. Leader education was aimed to nurture leaders of CFIs, and village leaders who completed the basic leadership course acted as important players leading the development of the CFI. After completing the basic leadership course, the village leader returned to the village and held a workshop to teach the villagers directly. This was member education. By participating in the workshop, villagers acquired basic knowledge of the CFIs and became eligible to join as members of the CFI. These workshops were not limited to one-time events, but used continually as an opportunity to share information as well as provide member education and safe operation status by making them attend regular monthly meetings held at least


121

CHAPTER

02Tow


once a month. Member education was not structured as a one-way lecture or top-down information transfer, but rather as a platform for case presentation, discussion, information sharing and communication among residents. Furthermore, the member education served as a venue for information distribution, such as the delivery of government policies and the current economic status.

A. Leadership Education

Leader education was a ‘leader basic course’ camp training for village leaders who would subsequently establish and operate the CFIs. Usually, the education period was a week. The curriculum of the basic leader course consisted of leadership mindset education, instructional tips for villagers, education on successful cases of a CFI, idea and theoretical background for a CFI, and accounting practices. The leader’s basic course was conducted by a local professional instructor who had completed the prescribed training.

B. Member Education

After completing the basic leadership course, village leaders returned to their villages and held a training session for the residents. By participating in the workshop, the villagers become eligible to join as members of the CFI. The workshop addressed questions such as what the CFI was, how it was different from general financial institutions, how a village could pursue development with CFIs, and why the savings movement was important. The workshops voluntarily hosted by village leaders depended on the occupation and living conditions of villagers. It usually took place two to three hours a day after dinner for three to five days. Member education was conducted mandatorily so that participants developed a sense of accomplishment to achieve their goals with case-oriented, field-oriented, and practice-oriented content rather than theory. It was common for a professional instructor of the basic leadership course to participate as a lecturer in the workshop at the invitation of the village leader. After the establishment of CFIs, the workshops were held on a regular basis and used as a place for member education and information sharing.

3.2.3.2. Dissimilarities

The business model of CCs is different from the models of CUs in Korea, which aimed only to improve the economic and social status of its members. Instead, the CCs focused on community development to improve social and economic conditions of rural areas. Community-based social development has been given higher priority over individual member’s economic improvement.

One of the most distinctive features that differentiated the CCs from the CUs was that


Development of M


ar

122

CCs relied heavily on internal funding as a source of loans and promoted the development of non-financial communities based on the traditional concept of mutual cooperation to cultivate a sound national spirit. Due to these features, the government used CCs as a public vehicle to unite residents and facilitate social development, apart from providing a range of financial services such as savings and loans.

The other difference is that the CCs conduct not only credit but also economic business, while the CUs are mostly focused on credit business. The CC’s economic activity is largely divided into ‘purchase’ and ‘sales’ business. It is a project that demonstrates the principles of mutual help and cooperation that guide the CC. These activities continue to this day by operating welfare stores and vending machines, and selling livestock products directly.

Nowadays, the differences between the two CFIs are less pronounced. Both institutions play the role of financial intermediaries by providing financial services such as savings and loans and promote community development. Furthermore, both of them emphasize the importance of customer education on financial knowledge and decision-making.

3.2.4. Governance Structure: Central Agencies

3.2.4.1. The Korean Federation of Community Credit Cooperatives (KFCC)

The foundational goal of KFCC is to assist and supervise the management of CCs and to promote transparent operation for its sound development. KFCC is the central bank of CCs and pursues common interests with nationwide CCs through democratic and rational decision- making. Its mission is to instruct and supervise the works of CCs to improve common interests and promote sound development, and contribute to the well-being of citizens and, ultimately, the development of nation and society. The vision set out by KFCC is to develop a cooperatives group that leads mutual growth of CCs, members, and the local communities by sound and value-based management. The management based on values is a strategic management system to realize six core values upheld by the International Cooperatives Alliance (ICA), which are self-help, self-responsibility, democracy, equality, equity and solidarity.


123

CHAPTER

02Tow


[Figure 2-21] Mission of KFCC

ValueManagement

Mutual SharedGrowth

CooperativesGroup

Source: KFCC (2021).

KFCC plays the role of establishing and implementing plans for the development strategy to achieve continuous growth. KFCC operates the Head Quarter and thirteen nationwide local HQs, and realizes a community of happiness and hope through its financial network based on open management that emphasizes field-based responsible management, the specialization of human resources, and performance-oriented reforms.

[Figure 2-22] Major Works of KFCC

Management Support,Supervision & Inspection of CC

Insurance Business for CreditCooperatives & Members

Domestic & Overseas Surveysfor Long Term Development of

CC and KFCC

Education & Training forEmployees of CC and KFCC

and Public Relations

Control the Operational Fundof CC (Role as a Central Bank)

Protect Depositors to SecurePayment for Deposits &

Installment Savings

Cooperation Projects for LocalDevelopment with International

Orgaizations and Foreign Countriesand Promotion of Friendship and

Reinforcement of Cooperation with theInternational Cooperative Alliances

DepositorProtection

ReserveManagement

InternationalCooperation

Projects

InsuranceBusiness

Survey& Research

Education& Promotion

Instruction& Supervision

CreditBusiness

Source: KFCC (2021).

One of the main functions of KFCC is to establish and operate the depositor protection reserves to safeguard depositors’ savings if a member CC cannot pay back customers’ savings, should they become non-viable. The reserves have effectively guaranteed the


Development of M


ar

124

refund of savings and installment savings for depositors since 1983 under the Article 71 of the Community Credit Cooperatives Act. CCs guarantee up to KRW50 million with principal and fixed interest for each depositor as general financial institutions in accordance with the Article 46 of the Community Credit Cooperatives Act. There is another safety mechanism within CC, known as the reserve fund system to protect depositors. The surplus of nationwide CCs has been transferred to KFCC as the reserve fund. This allows customers to withdraw savings and installment savings anytime they want without fear of not getting their savings back in time. As the main source of funding in CCs is customers’ deposits, protecting customers’ saving base is of utmost importance to ensure operational continuity and stability.

3.2.4.2. The National Credit Union Federation of Korea (NACUFOK)

The National Credit Union Federation of Korea (NACUFOK) is a non-profit institution that serves as an apex organization consisting of all community CUs. As a trade association, NACUFOK represents individual CUs to the government, the regulator, and the international society. It takes charge of publicity, supervision, consulting and education. As a financial intermediary, NACUFOK relays an inter-lending service as a central financial facility, and invests the surplus funds in mutual funds, government and corporate bonds, and other securities. NACUFOK also provides a variety of mutual insurance services to its members.

Since 2004 when CUs were excluded from the deposit insurance program provided by the Korea Deposit Insurance Corporation (KDIC), NACUFOK has been providing depositor protection on shares, installment savings and checking deposits up to KRW50 million in total for principle and interest. NACUFOK endeavors to improve the CU’s competitive edge and public confidence through supervision, inspection, and training and education on risk management, accounting, and tax, etc.

NACUFOK is dedicated to support the credit union’s operation and safeguard the members’ financial stability. Its inter-lending business through which the access capital is managed to provide members with additional financial flexibility and mutual insurance business designed to improve the members’ welfare are the two most important examples of related efforts. NACUFOK takes the deposit of access capital from a credit union to loan it to another credit union with an additional financial need or to generate profit through high-yield bearing investment; this places a positive input into improving the credit union’s asset liquidity and profitability.


125

CHAPTER

02Tow


3.2.5. Relations with the Government

It should be noted that cooperation between the central office and the government is pursued under strict regulation and supervision by the government. Furthermore, there are strong government supports to facilitate community-based financial institutions. For example, the government encouraged private savings with credit unions and community credit cooperatives by providing tax benefits on interest earnings from deposits. This policy helped to mobilize funds to lend to community and union members without borrowing from banks or other financial intermediaries at a higher rate, which in turn defrayed the borrowers’ financial costs to get them out of poverty. The success of microfinance, represented by credit unions and community credit coops, can be attributed to a comprehensive cooperation between the governance structure of those institutions and the government12 even in an era when the Korean economy was under extreme stress and the credit programs mainly promoted Heavy and Chemical Industries (HCIs), which required large-scale investments, to spur the economic growth.

The operation principles of CFIs have changed over time. The basic principles under which the CUs and CCs are founded are member-owned and controlled capital, voluntary-based management, self-help, and sharing of a common bond between members. A highly fragmented regulatory framework, lack in competitiveness rising from the compassionate attitude towards CFIs, an extended presence of banks and other large financial institutions in the rural areas, MSMEs and low-income families, and the provision of government-sponsored public micro finance are factors that have contributed to the diminished role of CFIs.

4. Korea’s Experience with the Credit Information System (CIS)

4.1. The Outline of CIS

Credit information refers to the information that financial institutions use to assess the creditworthiness of individuals or corporations for financial transactions such as taking out loan, making credit cards, and providing installment finance. Credit information

12 Somecriticsregardcooperationbetweenthetwoasasignoffinancialrepression.TherearestilldebatesintheKoreanacademiccirclesonthemeritsanddemeritsofthegovernment’s involvement in interestsetting, loandirections,etc. inthemicrofinanceindustry.WhileitistruethatpolicystanceinKoreacausedmanysubsequentproblemssuchasexcessivemonetaryexpansionandeconomicconcentration,thegeneralassessmentisthatthecreditpolicyhasbeenconducivetoaccumulatingdomesticsavingsandincreasingincome.TheKoreanexperiencesuggeststhatgovernmentscanplayanimportantroleinlayingthegroundworkforinclusivefinancingtoextendtheoutreachoffinancingtothepublic.


Development of M


ar

126

includes information on credit transactions and creditworthiness. Credit information includes negative, positive and non-financial data. The examples of negative information are delinquency, default, etc. while those of positive information are loan repayment, credit transaction, credit card bill payment, etc. The examples of non-financial information are telephone bill, water/gas fee, rental payments, etc.

Credit information collected and processed through credit agencies can turn credit as an asset and loans can be provided based on the credit level of borrowers in place of collaterals. It can expand financial access for customers who accumulate credit history. Customers will avoid excessive debt since their credit records are available to financial companies. It also can help financial intermediaries to make fast and reliable decision, prevent moral hazard, manage risk and strengthen their competitiveness by offering customized financial products according to a borrower’s credit worthiness.

The credit collection and concentration system can be divided into three categories: Credit Registry (CR) model, private Credit Bureau (CB) model, and CR-CB hybrid.13 In the CR model, only banks and registered financial companies under the control of a central bank can collect and provide information. In the private CB model, not only financial companies but also non-financial companies can collect and use credit information and exchange information under certain conditions. The CR-CB hybrid model can be again divided into two models. In the first model, CR and private CBs collect information independently and provide services for their own purpose. Under this model, there is no information sharing between CR and private CB. In the second model, CR collects financial and non-financial information in a centralized manner and sells it to private CBs and private CBs in turn provide a range of credit information services based on the information both received from the CR and collected from other sources. Under this model, the CR plays the role of collecting information to sell to private CBs. Currently, Korea adopts the second model of CR-CB Hybrid to get the best of efficiency and competition. CR is important in the early stage of economic development when government intervention is active. As the financial market matures, private CBs may assume a more active role for the efficient use of information based on market principles. Hence, most advanced countries have a credit information system under which private CBs take the lead in collecting, processing and providing credit information and only a few countries manage credit information system through CR.

13 DetaileddescriptionsandexplanationsoneachmodelcanbefoundintheAppendix.


127

CHAPTER

02Tow


[Figure 2-23] Credit Information System of Korea

Legal System Support

CB DataThe utilization and protection of credit Information Act

(Positive +Negative)

Credit Data(Basic + Negative)

Public Data(Public + Negative)

Recovery Data(Credit Recovery)

Negative(Delinquency)

Insurance Data(Contract/Claims)

Credit Bureau

CreditData

CBData

[Basic Data]․ Credit/Check card․ Loan/guarantee․ Coporate loan

[Positive]․ Transactions (monthly payment, usages)․ Accounts (loan / guarantee)․ Personal data (address, cellular, phone)

[Negative]․ Delinquency (short-term)

[Negative Data]․ Default․ Bankruptcy․ Fraudulent

PublicData

[Public Data]․ National Pension․ RRN change

[Negative Data]․ Tax Delinquency․ Bankruptcy․ Court (judgment)

Financial Institution(Reciprocal)

Private MicrofinanceInstitutions(Reciprocal)

Non-FinancialIndustry

(ex: telecom, retail))

Credit RecoveryOrganizations

PublicOrganization

FinancialInstitution

InsuranceCompanies

Source: Chun (2021).

4.2. CIS of Korea

The Credit Information System of Korea was revamped to the current form after 2003 when the Korean economy experienced the credit card crisis14. Before the credit card crisis, the CIS of Korea was characterized by an expedient and outdated system run by the Credit Information Center, which is a subsidiary of the Korea Federation of Banks. Private CBs existed but provided only limited services such as inquiry information, etc. Due to the limited data collected by the central agency, credit information was not adequate to meet the needs and demands of the market. Financial companies, especially credit card companies, themselves decided to collect and share various information internally such as history of loan, delinquency, credit card, etc. Under the private credit information system, the legal bases for management and information sharing were unclear and information security was very vulnerable to outside hacking.

After the credit card crisis, the collection and use of credit information increased rapidly and the credit information system has been upgraded after 2008. Credit information collected and evaluated by credit rating agencies is categorized into individuals and companies and regulated by the “Credit Information Use and Protection Act” legislated

14 Koreaexperiencedadevastatingcreditcardcrisisin2003,leadingtoasignificantchangeinitsfinancialsystem.Amassivecreditcardlendingboomwasfollowedbyasteepdecline.Thenumberofcreditdefaultershadbeenincreasingsteadilymonthbymonththroughout2003,toreachover3.7millionbytheendof2003.Manycreditcard issuerswereonthevergeofcollapseastheystruggledwithdeterioratingassetquality,liquidityandsolvencychallenges,whichinturnexposedthebankingsectorandfinancialmarketstoasystemicrisk.


Development of M


ar

128

in 2009. For personal credit information, the Act provides the consumer rights regarding access, deletion as well as collection of information. The purpose is to ensure the consumer’s privacy and to enable greater control over self-information. On the contrary, in order to enhance transparency of corporate management and protect investors, corporate credit information is disclosed in principle, except for limited exceptional matters. Most financial companies were registered with the private CBs and the use of credit information by financial companies doubled almost every year. The CB scoring system, launched in 2012, introduced new services such as financial fraud prevention and non-movable property information, etc.

[Figure 2-24] The Development of Credit Information Infrastructure in Korea(Unit: GNI per Capita)

$30,000

$20,000

$10,000

1990 2000

Enactment ofCredit Information (1995)

Information Sharing byPrivate CB Company (2020)

2010 2020

Lending PCR․ Collection / Sharing of Limited Credit Information

PCB Vitalization․ Vitalization of Information Sharing (Increase in numbers of sharing institutions)

PCB Matured․ Increased Coverage of Collection Information (Public/Telecom info)․ More Utilization of Non-financial Intritutions

My Data?․ Open API․ Apply Available Data


The Korea Credit Information Services (KCIS)15, as the sole public credit registry, was founded in 2016 to collect, manage, and use credit information. The KCIS obtains and manages information on loans, delinquency, credit card accounts, and bankruptcy exemption from financial institutions, local governments, tax authorities, courts, and other public authorities. This information is used by financial institutions to evaluate borrowers’ debt repayment capacity and by credit rating agencies to assess individuals’ credit ratings. Financial institutions use credit scores received from credit rating agencies for screening of customers. Large institutions like banks re-evaluate the credit scores provided by rating

15 TheKCISwasestablishedin2016inaccordancewiththe'ActontheUseandProtectionofCreditInformation'inordertosafelyandcentrallymanageandefficientlyutilizecreditinformationthatwaspreviouslydistributedandmanagedbyfivefinancialassociationsandinsurancedevelopmentinstitutes,includingtheFederationofBanks.


129

CHAPTER

02Tow


agencies through their own credit scoring system, while most of NBFIs use the information as it is.

In the case of Korea, the KCIS plays a de facto PCR role as a comprehensive credit information center. By generating a centralized database that is collected mandatorily from banks and regulated financial institutions, KCIS can increase the accuracy of credit information and minimize the fragmentation of credit information. Private CBs can access the KCIS database and provide various types of credit information in response to financial companies’ needs, thereby improving the value and utilization of credit information. The general role and function of the PCR and PCBs are illustrated in [Figure 2-25]. The PCR collects and provides basic credit information to private CBs. The private CBs collect more detailed credit information as well as non-credit information to service their members who are mostly financial institutions. While the KCIS collects and manages limited credit information, private CBs extract a wide range of information depending on their operational scope. Compared to other major countries, the Korean CBs have limited access to telecommunication and utility bill information, which is becoming more and more important in evaluating credit ratings in a digitized world.

[Figure 2-25] PCR-CB Model

(Public) Credit Registry Private Credit Bureau

BenefitFocus

Role

DATAProvision

DATAType

Challenges

Assurance of financial stabilityMonitoring credit risk of

the banking sector

Provision of assessment

Enhancing efficiency in lending

․ Monitor total exposure․ Provide basic statistics․ Supervisory

․ Credit rating & reports․ Value added services․ Channel for consumers

․ Basic & public information․ Limit to financial institutions

․ Detailed information (Positive + Negative)․ Wider coverage of industry

․ Requires continuous investment in system and service development

․ Members’ hesitant to provide information → Delay in full information provision

MandatoryContract Base

(Reciprocity / Exclusivity)

Minimaze fragmentInformation

Quick Establishment ofCredit Infrastructure

Improved Credit RiskManagement


Another characteristic of the Korean CIS is the selective use of negative and positive credit information. While negative credit information such as bankruptcy is used for approval or rejection of the proposed loan or card, positive credit information such as loan/


Development of M


ar

130

guarantee, credit card usage is used to determine the size of loan. Periodic deletion and correction of negative credit information provides individuals with opportunities to improve their credit and with incentives to manage their credit actively.

<Table 2-12> Coverage of Credit InformationType Year Registry Detailed Information

Negative Information

1982

PCR

The caution level for the negative information could be indicated by the colors (yellow/orange/red)

2001 Bankruptcy information(Over 90 days delinquency)

2002 PCB Short-term delinquency information

PositiveInformation

1995

PCR

Information on loans over KRW30 million and information on the establishment of credit

1998 Information on loans over KRW20 million

1999 Information on loans over KRW10 million

2001 Guarantee information

2002 Information on loans over KRW1

2002 Cash advance information

2005 PCB Credit card usage record

Source: NICE (2019).

The current credit information system of Korea is appraised as an essential instrument to improve financial accessibility and financial inclusion for low-credit and low-income people. As personal credit ratings have become common, the public is largely aware of the importance of credit management. A culture of managing personal credit lowers systemic risk for the financial market as the public are more mindful of their credit history and regard credit as an intangible asset. The CIS has had a significant impact on the development of the household financial market, and has especially contributed to lowering systemic risk. Collateral-based lending makes financial institutions vulnerable to losses in the value of the collateral when the economy is in recession. Even worse, collateral requirements make it especially hard for small borrowers that do not have adequate collateral to access loans. However, a well-functioning credit information infrastructure can contribute to reduce those risks by strengthening the financial soundness of households and addressing external shock preemptively, hence limiting the transmission of external shocks to household finance. Furthermore, the government can constantly monitor the market in cooperation with private CBs with regard to household debt conditions and maintain a stable household financial market based on timely assessment of the market. With CIS improvements,


131

CHAPTER

02Tow


financial companies have been able to expand household credit loans in a stable manner, and as a result, credit loans have been expanded to small borrowers, intruding on the traditional business sphere of private money lenders.

<Table 2-13> classifies the list of countries with/without PCR and CBs. The PERC recognizes PCR as an affiliated organization of a central bank. According to this classification, KCIS is treated as PCB rather than PCR.

<Table 2-13> Countries with/without PCR and CBIs PCR existent?

Yes No

Are CBs existent?

Yes

Argentina, Brazil, China, Ecuador, Indonesia, Germany, Malaysia, Morocco, Nigeria, Pakistan, Peru, Philippines, Portugal, Spain, Uruguay, Vietnam

Australia, Canada, Cambodia, Denmark, Hungary, India, Japan, Israel, Ireland, Italy, Kenya, Mexico, Netherlands, New Zealand, Norway, Poland, Russia, Saudi Arabia, Singapore, South Africa, Sri Lanka, Sweden, Switzerland, Taiwan, Tanzania, Thailand, UK, US

No

Afghanistan, Albania, Algeria, Angola, Bangladesh, Belgium, France, Iraq, Libya, Mongolia, Oman, Qatar, Tunisia, Turkey, Togo, Yemen

Luxemburg, Myanmar, Republic of Palau, South Sudan

Source: NICE (2019).

5. Policy Recommendations towards a Sustainable Microfinance Industry in Myanmar

Myanmar has been trying hard to transform from a centrally-directed financial system into a democratic and market-friendly structure. The development of the private sector is essential for strengthening the sustainability of Myanmar’s economy. As data is very scarce and hard to access for domestic reasons, policy recommendations proposed in this report might not be timely and some might be already in operation or in the process of implementation.

5.1. Extending the Scope and Role of the Credit Information System

The absence of a well-functioning credit bureau has affected the nature of lending. Most of bank lending is collateral-based as information on the creditworthiness of borrowers is limited and fragmented. Lack of borrower information has also affected the capacity


Development of M


ar

132

of financial institutions to assess risks and, hence, resulted in these institutions adopting conservative lending policies. Credit cannot be allocated efficiently due to informational asymmetry and, hence, the risk of lending cannot be priced effectively. With the introduction of a credit bureau, clients understand the consequence of not paying loans or of paying on a regular and timely basis. This will increase awareness and literacy regarding financial products and decisions and the risks of over-indebtedness for the Myanmar population, as they will gradually recognize credit ratings as an asset.

Korea’s credit information infrastructure is established based on the public CR-CB (PCR-CB) hybrid Type 2 model. This model makes it possible to take advantages of speedy establishment in credit registry and innovation from market competition among private CBs. In a situation where the accumulation and quality of credit information is both insufficient and unreliable, it is desirable that public institutions play the central role of collecting and organizing credit information. However, the public entities alone cannot be sufficient to facilitate the use of credit information. It is desirable to induce active participation of private CBs to produce valuable credit information.

The type of legal system is important in the development of the PCR and CB system. In countries such as USA, UK and Canada whose legal background is common law, the role of the government in shaping credit information infrastructure is limited and only private CBs take lead in providing credit information. In those countries, CBs were created out of the market demand for credit information agencies that were specialized in assessing credit worthiness of business counterparts and conducive to lowering credit risk. In the case of countries with a civil law tradition, such as France, Italy and Spain etc., the government’s involvement in the credit information system is pronounced in the early stage of economic development and, hence, these countries prefer to establish PCR to collect and disseminate credit information. In the case of Germany, its credit information infrastructure is composed of PCR and CB, but this structure is not as active as that of Korea.

In the early stage of economic development, the role of PCR is important in allocating credits as credit information has a public good property. Many developing countries implemented a fixed-interest rate policy. Under this environment, the private sector has no incentive to collect credit information as financial intermediaries cannot price their risk properly and tend to rely on collateral for their lending. Hence, strong will and policy initiative of the government is essential to overcome the inertia against change and to introduce a credit information system into the market along with a gradual liberalization of interest rates. At this stage, the PCR is more of a substitute rather than a complement to private CBs. With the progress of financial liberalization along with economic development,


133

CHAPTER

02Tow


the incentives and needs for voluntary information exchange and sharing increase among financial companies, as credit becomes valuable assets in profit making.

The Korean CR-PCB model has been benchmarked by many Southeast Asian countries, Vietnam in particular, and this model has helped these countries to upgrade their credit information system. The National Credit Information Center (CIC) of Vietnam, a public non-business organization, started credit registration operation in 1992 as an internal organization under the State Bank of Vietnam (SBV), the central bank of Vietnam. The CIC performs the function of national registration: collecting, processing, storing and analyzing credit information; preventing and limiting credit risks; scoring and rating the credit of legal entities and individual persons; and providing credit information products and services in accordance with the provisions of the State Bank and the relevant laws. Banks provide CIC with information about the loans, the borrowers’ names, and the loan payment process. CIC then aggregates the information into a unified database that reflects the credit history of each individual or business. Then, when issuing credit to a certain person, the bank accesses the CIC system and checks their information before making a final decision.

Under the Financial Institutions Law of 2016, the CBM issued a license to establish a credit bureau in May 2018. As a result, the Myanmar Credit Bureau (MCB), a joint venture between the Myanmar Banking Association (MBA) and Singapore’s Asian Credit Bureau Holdings, was launched as the first credit rating agency with approval from the CBM. The launch of the MCB would be the first step forward to widening financial accessibility and enhancing financial sustainability as the credit evaluation will initiate and accelerate credit-based lending practices in contrast to the current lending practices based on collaterals. The credit bureau will collect credit information of individuals and companies to provide credit ratings. It will sell this data to financial institutions to facilitate sound lending decisions. IFC has been supporting the bureau’s collection of data on credit history and taxation and is assisting the bureau to build the required regulatory capacity at the CBM. With relaxation of collateral requirements by the CBM and banks stepping towards cash-flow based lending, the MCB will help increase access to finance and reduce credit risk to lenders.

Local banks and MFIs encounter problems with appraising the creditworthiness of potential borrowers. The credit information infrastructure of Myanmar is highly underdeveloped. Although the CBM granted a license to the MCB, it will take time until its database becomes relevant for banks. Company and land registries also exist but are not available online, making it difficult for lenders to check whether a certain collateral property has been already used to take out another loan or otherwise impaired. A register of moveable asset pledges is current under development. Furthermore, financial statements


Development of M


ar

134

provided by companies are often not reliable and international auditing firms are not allowed to operate in Myanmar under the current regulations.

In a country where a credit bureau is not yet in operation and financial figures provided by potential borrowers are often inaccurate, lending is per se very risky for banks and the potential profit margins can quickly vanish due to a higher %age of defaults on interest payments. From this perspective, it seems crucial to allow financial institutions to appraise their risk and charge higher interest rates for higher-risk borrowers.

Along with the launch of the MCB, the Myanmar Microfinance Association (MMFA) also built a platform called the Microfinance Credit Information Exchange (MCIX) for collecting and sharing credit information, with the support of “TritsaWorks” in October 2018. According to MMFA’s website, information on more than 2.2 million customers from 57 MMFA member institutions is being shared through the MCIX platform as of the end of 2020, but MCIX has not acquired official approval from the FRD yet. It is highly desirable to establish a legal basis for collecting and sharing customer information in the upcoming revised MBL and subsequent directives, which could lead to a more extensive and advanced system for collection and evaluation of credit information for analyzing customer credit and repayment capabilities.

Given the nature of the current two-tier regulation framework in Myanmar, consolidating the credit information and scoring systems that are currently divided by financial sector into a new system split by financial function would take at least several years. However, this is a necessary direction to move forward to deepen the outreach of financial inclusion. The scope and operation of the credit bureau should extend services to non-bank credit providers such as MFIs, cooperatives etc. to better identify and differentiate serviceable borrowers from vulnerable applicants with multiple loans. A credit bureau would provide information on multiple borrowing from different credit providers and hence allow lenders to obtain a more comprehensive view of borrowers’ credit exposures. In the meantime, before extending the outreach of credit bureau to microfinance segments, alternative credit information-sharing initiatives should be pursued to facilitate the supply of funds.

In addition to the extended coverage of the credit bureau, the interest ceiling has discouraged banks from offering non-collateralized loans or extending credit, particularly to MSMEs and the poor families in rural areas, as they are unable to charge necessary risk premiums. Combined with the floor on deposit rates, the resulting interest rate spread is low, making it difficult to cover operating costs and credit risks, and thereby encouraging banks


135

CHAPTER

02Tow


to concentrate on large credit portfolios that require lower administrative and monitoring costs. The CBM should revise the interest rate policy to address these challenges, which are hindering the growth of bank credits, and have constrained product innovation and expansion. For the expansion of formal microcredit, the FRD should allow more interest rate flexibility, such as varying lending rates by region and sector.

The Myanmar Microfinance Association (MMFA) is in the process of launching a credit information sharing platform to share client information between MFIs, to address the need for more credit information. Myanmar’s credit bureau is in a slow transition, but they need continued effort. Moving forward will also require technological transformation. Successful transition from collateral-based to credit and future cash-flow-based lending practices would give Myanmar the chance to make rapid progress and to accelerate the journey towards a modern banking system.

5.2. Enhancing the Role and Responsibility of the Central Agency

Governance structures refer to a series of institutional devices that can monitor and supervise risk and ensure efficiency in decision making to maximize the value of an institution. To improve the efficiency and management capacity of each member institution, the Korean government established national central agencies of CU and CC. The central agencies of these institutions, named as KFCC and NACUFOK, were created in 1973 as the law for each institute was enacted in the early 1970s. After establishment of these agencies, local offices of CUs and CCs succeeded in building good alliance with the central agency. The reasons to set up central agencies are as follows:

First, as the number and size of local CUs and CCs increased, they played a significant role for local financial institutions. Most member institutions were not managed efficiently and local workers did not receive adequate education and training to run the institution. The government recognized that appropriate guidance and supervision were necessary to prevent a systemic problem, which would undermine the members’ confidence.

Second, in order to create the economies of scale, the government allowed local credit unions and credit cooperatives to share their experience and knowledge.

Third, it established provident or reserve funds to uphold the members’ confidence on the local institutions. Once member institutions established such a fund to share the risk in the case of bankruptcies, local CUs and CCs could attain greater financial stability and be less vulnerable to runs.


Development of M


ar

136

In an effort to build an apex institution, MMFA was established in 2013 under the initiative of the Financial Regulatory Department of MOFP. Currently, MMFA is run by an Executive Committee and a secretariat consisting of two teams: operation and finance. The role of MMFA is to organize members’ meetings, working group meetings, and work with local and international development organizations for capacity building training, seminars and conferences. The governance structure of MMFA is shown in [Figure 2-26].

[Figure 2-26] Governance Structure of MMFA

Members

General Assembly of Members

MMFA Executive Committee

MMFA Secretariat Chief ofStaff

ChiefFinance

Chief Operation

TechnicalAdvisors


The scope of MMFA seems to be quite limited as most of its operation is to provide training and seminars. For the MMFA to play a larger role in the development of MFIs, it is necessary to assign more roles and responsibilities to expand its scope and depth. At the time of writing this report, the political atmosphere of Myanmar is unstable and it is very hard to get detailed information on the operation coverage and governance structure of MMFA, other than information provided on the internet homepage of MMFA. This report presents why central agencies were set up and what their major assignments are in Korea. We believe that Myanmar faces similar concerns and problems on how to organize the fragmented MFIs and increase their capacity as a well-functioning and sustainable financial institution. The recommendations for the central agency can be summarized as below.

First, the central agency guides, monitors and supervises the financial and managerial activities of the local MFIs. With this role and function, the apex agency could prevent the deterioration of local MFI’s financial statements in advance and take preemptive action to prevent undermining of the public’s confidence.

Second, the central agency takes charge of the education and training programs for the workers and members of local MFIs. The apex agency develops customized training


137

CHAPTER

02Tow


and education programs for the local workers and its members and disseminates them nationwide to create unified principles and practices in the industry.

Third, the central agency needs to establish an Information and Communication Technology (ICT) system and allow the member institutions to utilize it. Despite the rising importance of ICT infrastructure, individual member MFIs are unable to create their own systems owing to the high costs. The apex agency may install the systems and allow local members to use them at an affordable cost, and provide education and training to facilitate the utilization of the system.

Fourth, the central agency designs a longer-term development plan for the microfinance industry and leads its implementation. It is hard for local MFIs to make a development plan and implement it since they do not have enough capacity or financial and human resources to design it. The central agency should make comprehensive development plans every 5 to 10 years and implement them, allowing each local member institution to have its own differential development plan based on the blueprint laid out by the agency.

Fifth, the central agency allows inter-lending among MFIs. The central agency relays financial resources from surplus MFIs and redistributes them into deficit MFIs in an effort to raise the efficiency and coordination of the system.

Sixth, the central agency sets up provisional funds or reserves to reinforce and restore the confidence on individual MFIs, especially deposit-taking units. This would help more people to save their money with MFIs and provide them a sense of being part of a society by engaging in financial activities through membership of the local MFIs.

6. Conclusion

Financial inclusion is creating a system that allows financially marginalized individuals and micro- and small enterprises to access financial services at reasonable costs. Improving financial inclusion consists of two parts: 1) expansion of supply, by increasing the opportunity for financial access and 2) expansion of demand by educating people to understand the role of financial services. In this regard, microfinance has a significant meaning in developing countries, as financially marginalized individuals and MSMEs, with lack of collaterals, have difficulty in getting credit at formal financial institutions. The Economic and Social Commission for Asia and the Pacific (ESCAP, 2006) pointed out that MFIs are essential tools of financial inclusion as well as key components for inclusive


Development of M


ar

138

financial development. As international experiences have continuously proven the benefits of microfinance to society, microfinance has caught the interest of many Southeast Asian countries and it could expand the outreach of financial services to those who cannot access to traditional financial institutions due to lack of collateral or sufficient credit worthiness.

In this report, we provided a brief history of two traditional CFIs in Korea, which are CUs and CCs, and how they have evolved to meet the needs and circumstances of the times. It is undeniable that the government’s support and involvement contributed to the success of Korea’s microfinance industry during the 1960s and 1970s. With the support from and cooperation with the government, the CFIs were able to make aggressive moves to expand the scope of their business territory.

Based on Korean experiences, this study proposes two policy recommendations: 1) a well-functioning central agency empowered with law and regulations and 2) a broad-based credit bureau embedded with a CR-PCB system. In order to organize the fragmented efforts of individual MFIs and to create economies of scope, central agencies are established to manage entire businesses in a more efficient manner. The central agencies may create provisional funds to protect depositors from bankruptcy of member MFIs and provide, as return, a stable business environment by reducing the likelihood of bank-runs. Furthermore, the scope of a credit bureau should be to broaden its member base to non-bank financial intermediaries including MFIs. Currently, it is understood that the MCB and MMFA are operating independently in collecting and processing credit information in Myanmar. The current fragmented credit information system should be integrated into a CR-PCB where public CR centrally collects and processes credit information and provides them to private CBs that will compete freely in the market to make the best use of credit information.

The credit information infrastructure is also very important in digitizing financial services. Even though the digital transformation of financial services in Myanmar is at a nascent stage, it holds the potential to upgrade financial inclusion by expanding financial accessibility to the areas with limited reach of formal financial providers, based on increasing mobile phone penetration. The efforts to establish digitization of financial services should be accompanied by data security, consideration of the privacy problem and credit rating etc. Hence, it is urgent to make a reliable and robust credit registry and bureau system to expedite the digitization process. Considering that Korea built a high level of credit information infrastructure in a short period, it is highly advisable to consider the Korean type hybrid structure as a possible model in designing the credit information infrastructure. We wish that this report serves as a starting point for discussions on further strategic directions.


References

139

CHAPTER

02Tow


Bank of Korea. “Financial System in Korea,” 2018.

CBM. “Financial Position of Banks, Finance Companies and Foreign Bank Branches,” 2017.

Chun, Hyun Woo. “The Credit Bureau System of Korea,” NICE Information System. 2021.

Connor, B. ‘’Microcapital Brief: South Korean Government Launches Sunshine Microfinance Loan Program under Smile Microcredit Bank for Low-Income Households,” MicroCapital Affairs. 2017.

Cull, Robert. “Microfinance and Economic Development,” Policy Research Working Paper 8252, World Bank Group. 2017.

GIZ. “Myanmar’s Banking Sector in Transition: Current Status and Challenges Ahead,” Banking Report. 2018.

Hong, Hyun-Sun. “A Study on the Development of Rural Financial Associations in Korea: Focus on Village Funds in North Cheonra Province,” M.A Thesis, School of Public Policy, Seoul National University. 1976.

IMF. “Monetary and Financial Statistics,”2019.

Kang, Wal-Gu. “Identity and Future of Community Credit Cooperatives,” KFCC Research Paper, (Eds.). 2020.

KFCC. “Main Business,” https://www.kfcc.co.kr/eng/kfcc/kfccMainRoles.do. Accessed on May 31, 2021.

Kim, Joon-Kyung and K.S. Kim. “Institutionalization of the Informal Credit Market and Financial Inclusion in Korea,” in KDI School and Ministry of Strategy and Finance (Eds.), 2012 Modularization of Korea’s Development Experience. 2012.

Lee, Choong Lyol. “Enhancing Financial Accessibility of SMEs through Microfinance Institute,” 2016/17 Knowledge Sharing Program with Guatemala. 2017.

Ministry of Internal Affairs. “Current Status of New Village Fund,” https://www.index.go.kr/potal/main/EachDtlPageDetail.do?idx_cd=2851. Accessed on Mar. 25, 2021.

MMFA. “Myanmar Microfinance Annual Report,” 2019.


Development of M


ar

140

MMFA. “Myanmar Microfinance Association Newsletter,” 2020.

MMFA. “Governance Structure,” https://www.myanmarmfa.com/en/governance-structure. Accessed on June 20, 2021.

MOPE. “Myanmar: Financial Inclusion Roadmap 2019-2013,” in collaboration with UNCDF. 2018.

MOFE. “Myanmar Making Access Possible,” 2013.

MOFE. “Myanmar Making Access Possible,” 2018.

Munkner, H. H. “Cooperation of Cooperatives in the Future, Institute for Cooperation in Developing Countries,” Marburg Consult for Selbshilfeforderung, Maburg. 1995.

Munkner, H. H. “Cooperation as a Remedy in Times of Crisis,” Maburg Studies on Cooperation and Cooperatives. IFG Maburg. 2012.

NACUFOK. “30-year History of Korea’s Credit Union Movement,” 2012.

NACUFOK. “Brief History,” http://www.cu.co.kr/english/cm/cntnts/ cntntsView.do?mi=100317&cntntsId=1102. Accessed on May 31, 2021.

NICE Information System. “White Paper on Domestic and Overseas Credit Bureau,” 2019.

PERC. ‘’The Case for a Public Credit Registry in India: Additional Evidence for Consideration,” 2018.

Rodrik, Dani. “Goodbye Washington Consensus, Hello Washington Confusion: A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform,” Journal of Economic Literature, Vol. 44(4), pp.973-987. 2006.

Rubana, M. “Microfinancing in Bangladesh: Impact on Households, Consumption and Welfare,” Journal of Policy Modeling, Vol. 30, No. 6, pp. 1083-1092. 2008.

World Bank. ‘’General Principles for Credit Reporting,’’ 2011.

World Bank. ‘’World Development Indicators,’’ 2015.

World Bank. ‘’World Development Indicators,’’ 2020.

World Bank. “Our World in Data,” https://ourworldindata.org/grapher/access-to-a-financial-account-or-services. Accessed on Mar. 30, 2021.

Wydick, B. “The Effects of Microenterprise Lending on Child Schooling in Guatemala,” Economic Development and Cultural Change, Vol. 47, No. 4, pp. 853-869. 1999.


Appendix

141

CHAPTER

02Tow


Basic Models of Credit Reporting1

1. Credit Registry Model

In this model, banks and other regulated financial institutions act as data providers, transmitting data to the credit registry, generating a database that centralizes information from all creditors. In most cases, the database is managed by the central bank, or in some cases another supervisory authority for the financial sector, which also sets data requirements to be fulfilled by regulated institutions. It should be noted that data subjects are not able to access and dispute errors regarding information collected exclusively for supervision.

In a credit registry, users are usually only able to access consolidated information concerning prospective customers (i.e. information reflecting financial obligations undertaken with the other creditors reporting to the registry). Frequently the credit registry collects historic data although such data is not always distributed back to the end users.

In this type of model, services for users are seldom developed. When detailed information at account level is provided back to the regulated financial institutions, consumers/data subjects frequently have the same rights as in credit bureau models. However, when information is provided back to regulated financial institutions in a consolidated manner or de-personalized, those rights do not necessary apply.

[Appendix Figure 2-1] Typical Model of a Credit Registry

Data Providers Service Providers Products Users

Other Regulated Financial Institutions

Banks

Supervisory Unit Central Bank

Statistics Unit Central Bank

Reports

Credit RegistryDatabank

Debt classification

Banks / OtherRegulatedFinancialInstitutions

Consumers


1 Thissectionisbasedon‘’GeneralPrinciplesforCreditReporting’’ofWorldBank(2011).


Development of M


ar

142

2. Credit Bureau Model

A credit bureau system is usually more complex than that of a credit registry, mostly because it involves various types of data sources as well as a greater variety of users. Apart from banks and other financial institutions, sources of information in this case include other non-financial credit card companies, retailers and suppliers extending trade credit. Furthermore, non-traditional sources of information like data on payments associated with utilities or telecom services are also included to bolster information on “thin filers.”

From the users’ perspective, entities other than banks and financial institutions are usually able to access the service. This often includes the data subjects, who can access their reports and other products and services based on the data held on them as regular users. Data subjects are also able to access the data held on them free-of-charge one or more times per year, and request correction of errors.

The representative country adopting this model is the US. Personal credit information is collected and processed through for-profit private CBs. There are three large credit information companies, Experian, Equifax, and TransUnion, and more than 2,000 CBs in the USA.

[Appendix Figure 2-2] Typical Model of a Credit Bureau


Consumers

Employers

Insurance Companies

Landlords

Retailers and credit card issuers

Non regulated Financial Institutions

Regulated Financial InstitutionsReportsBanks Financial

Institutions Telecomcompanies UtilitiesRetailers Credit cardissuers

Other PublicRecord

Repositories

CourtJudgements

CreditBureau

Credit Scoring

Anti Fraud

Portfolio Monitoring



143

CHAPTER

02Tow


3. CR-CB Hybrid Model

3.1. Hybrid Type 1

A credit registry and one or more credit bureau can co-exist without any type of formal interaction between the different service providers. The credit registry collects data from banks and other regulated financial institutions, and provides data back to those institutions, as well as uses the information for supervisory purposes. This information is used by regulated financial institutions and by other organizations within the central bank or the financial supervisory authority.

The credit bureau(s) may collect data from a variety of sources besides the banks and regulated financial institutions and provide several products and services to a wider range of users. Information collected by CBs includes credit reports, credit ratings, fraud prevention, portfolio monitoring, court litigation, bankruptcy etc.

On the side of users, this system frequently provides information to a large number of users including the bank supervisors and other units within the central bank, banks and financial institutions, micro-finance institutions, telecoms and utilities, insurers, and when permitted even landlords and employers. In this model, services are frequently developed by the credit bureaus and offered to the final users together with the reports.

[Appendix Figure 2-3] Typical Model of a CR-CB Hybrid: Type 1


Statistics UnitCentral Bank

Non-regulatedFinancial Institutions

Credit Card Issuers

Retailers

Telecoms / Utilities

Central Bank

Consumers

Credit RegistryDatabank

Creditbureau 1

Creditbureau 2

Creditbureau 3

Reports

ReportsCons

umer

s / C

redi

t App

lican

ts

Bank / RegulatedFinancial

Institutions

Non-regulatedFinancial Institutions

Credit Card Issuers

Debt Classification

Credit Scoring

Anti Fraud


Retailers

Telecoms / Utilities

Public Records

Court Judgments

Supervisory UnitCentral Bank

Banks / RegulatedFinancial Institutions



Development of M


ar

144

3.2. Hybrid Type 2

In this model, there is a hierarchical order between CR and CBs and they do not compete with each other. A public authority in charge of financial supervision typically plays the role of CR. It collects information from banks and other regulated financial institutions in a centralized manner and provides the information to one of more CBs. CR does not directly serve the end users other than CBs. The CBs may collect data from a variety of sources besides the CR and provide several products and services, such as credit reports, to end users.

[Appendix Figure 2-4] Typical Model of a CR-CB Hybrid: Type 2


CB 1

CB 2

CB 3

CB 4

Banks / OtherRegulatedFinancialInstitutions

Non-regulatedFinancialInstitutions

Other creditors(retailers, telecoms, utilities, etc.)

Other datasources Consumers

Credit Scoring

Anti Fraud


Banks

FinamcialInstitutions

MFIs

Telecoms

Other creditors

Central Bank

Consumers

Service RegisterReports



Public Microfinance and the Debt Relief System: Korean ExperiencesJi-YunLee(KoreaInclusiveFinanceAgency)Sung-Min Cheon (Korea Asset Management Corporation)UNaingMinLatt(MinistryofPlanning,FinanceandIndustry)

1. Introduction2.TheLocalFinancialEnvironmentofMyanmar3. Inclusive Finance in Korea4. Conclusion

C H A P T E R

03

KeywordsMicrofinance,DebtReliefSystem,InclusiveFinance,PublicFinance,Myanmar


147

CHAPTER

03Public M

icrofinance and the Debt Relief System: Korean Experiences

Public Microfinance and the Debt Relief System: Korean ExperiencesJi-YunLee(KoreaInclusiveFinanceAgency)Sung-Min Cheon (Korea Asset Management Corporation)UNaingMinLatt(MinistryofPlanning,FinanceandIndustry)

Summary

This is one of the projects within the 2020/21 KSP with Myanmar. The main purpose of this study is to introduce Korean experiences implementing two public programs - public microfinance and the debt relief system – to support financially marginalized households. While a variety of public microfinance products exist, this study focuses on introducing “Miso Credit” and “Sunshine Loans,” which are two of the main public microfinance products in Korea. In addition, the debt relief system, as a measure of support to individuals in difficulty due to excessive debt, is also discussed in this study.

We begin by examining the local financial environment of Myanmar and subsequently discussing Korean experiences with inclusive finance. In Myanmar, households and the self-employed can utilize more financial services in the informal sector than formal financial services. Most Myanmar people, who are living in rural and semi-urban areas strongly rely on informal financial services. When they need money urgently, they agree to pay a high interest rate to informal money lenders even though they can utilize regulated finance such as banks or microfinance institutions.

The microfinance sector was quickly booming in Myanmar after the enactment of the Microfinance Business Law in 2011. Currently in the Myanmar microfinance sector, there are two main types of loans: individual and group loans. For both loans, collateral cannot be taken from clients and MFIs need to make sure to conduct credit risk assessments on their clients before they deliver their loans to the customers.

According to the FinScope Survey 2018, the total adult population is estimated to be 34.3 million in Myanmar as of the Myanmar Population Census 2014 and there are currently 5.88 million active microfinance business clients. The ratio of microfinance usage to the


Development of M


ar

148

population is 17.14% in Myanmar.

Due to the high level of risk in the MFI sector, most banks will not accept requests for loans from MFIs, even if they provide collateral. As such, the Ministry of Planning, Finance and Industry (MoPFI) and Central Bank of Myanmar (CBM) have been encouraging the banking sector to support loans for MFIs.

Public microfinance in Korea has been introduced in a similar context. Inclusive finance market faces chronic excess demand because private finance institutions decline to provide loans to low-income class people who lack of collaterals. As the issue of financial exclusion due to low credit ratings and among the low-income class refuses to disappear, the government introduced public microfinance to provide funding to the low-income and vulnerable classes who cannot obtain loans from the private financial market.

The government has introduced a variety of public microfinance products differentiated by target, funding structure, supporting institutions, etc. Currently, there are five products in public microfinance: Miso Credit, Sunshine Loans, Sunshine Loan 17, Sunshine Loan Youth, and the New Hope Seed Loan. However, this report covers only Miso Credit and Sunshine Loans, which are two of the main public microfinance products.

Miso Credit provides unsecured loans to small business owners who cannot obtain loans from formal financial institutions such as banks due to their low income and/or low credit ratings. Miso Credit is classified into (1) loans to small business owners, (2) loans to business implementing & supporting agencies, and (3) small loans to traditional market merchants. The sources of funding for Miso Credit are the interest revenues from dormant deposits and donations. Each source is used for different loan projects.

Sunshine Loans provide living expenses to wage earners with either an annual income of less than 45 million won and a credit rating of seven to ten or wage earners with an annual income of less than 35 million won. Sunshine Loans can be obtained from mutual credit and savings banks. KINFA provides a 90% guarantee on Sunshine Loans. The interest rate on the loans can be freely determined by each Sunshine Loan provider with an upper limit of 10.5%.

Sunshine Loans are managed with a fund that is raised by contributions from the Lottery Fund, under the control of the central government and Sunshine Loan providers. The government decided to secure the guaranteed funding of Sunshine Loans through a ‘50:50’ joint contribution between the government and Sunshine Loan providers.


149

CHAPTER

03Public M


After introducing public microfinance in 2010, Miso Credit and Sunshine Loans provided 3.0 billion dollars and 20.2 billion dollars, respectively, to the low-income class experiencing difficulty obtaining loans from banks.

KINFA was established for the purpose of minimizing the inconvenience of users by simplifying the financial products managed by several institutions and integrating and managing the funds as well as using the limited funds more effectively. Moreover, there is a need to reinforce non-financial support, such as financial education and consulting, etc., in addition to the existing financial support.

As a measure of support for individuals in difficulty due to excessive debt, debt relief programs have been implemented to supplement the public microfinance system. The Korean debt restructuring system began in earnest when an economic crisis in 2002 churned out debt delinquents and required the authorities to delve into the matter of credit recovery services, including the establishment of a bad bank that exclusively offers debt restructuring as a means of relief. A “bad bank” refers to a temporary financial institution that collects and disposes of non-performing assets of financial companies to resolve non-performing loans through public funds. The bad bank program 1) provides opportunities for the personal rehabilitation to debt delinquents to help rebuild their credit and 2) improves the asset soundness of financial institutions by efficiently resolving distressed debt held in large volumes by financial institutions.

The bad banks in Korea consist of two programs: Hanmaum Finance as the first and Heemang Moah as the second program. Hanmaum Finance provided new loans to debtors who applied voluntarily to the credit recovery service so that debtors could repay their original overdue debt and thus improve their credit ratings from being debt delinquents. Heemang Moah supported credit recovery by acquiring the loans and conducting debt restructuring through long-term amortization of up to eight years and interest exemptions. These bad bank debt restructuring programs played a significant role in reducing the number of debt delinquents.

The microfinance market in Myanmar is in its early stages and cases of policy intervention through the establishment of bad banks as in the case of Korea are unknown. However structural problems in the microfinance market such as the lack of new loan management and handling capabilities, along with the global economic recession due to the COVID-19 pandemic, have aroused concerns of large-scale insolvency. Indeed, the NPL ratio of the microfinance market has increased more than four times from below 1% in 2019 to 4.27% as of the end of 2020.


Development of M


ar

150

The preparation of a debt relief system through debt restructuring may need be considered, so as to manage over-indebtedness in the household sector and prevent large-scale NPLs. With regard to NPL problems, they need to be approached from the public policy view because insolvency is often a problem attributable not only to the individual. It may be necessary to establish a bad bank as a public institution that can cover various MFIs and the financial industry, through which the effectiveness of credit recovery support may be maximized.

Based on Korea’s various experiences, policy implications for Myanmar can be summarized as follows: first, it should be noted that Korea’s economic conditions and financial market structure are quite different from those of Myanmar. In order to launch public microfinance programs, the Korean government had to mobilize a considerable amount of funds through dormant deposits and insurance as well as cooperate actively with banks and private companies. Considering Myanmar’s current economic development stage and limited domestic financial resources, the full-fledged introduction of Korean-style public MF or a similar debt relief system would be premature for Myanmar in the near future.

Second, in the case of Korea, most of the microfinance institutions in the private market are non-profit institutions, so Korea had a relatively favorable environment for the government to introduce and implement public MF. On the other hand, commercial-based private MFIs have already entered finance market of Myanmar. Therefore, private MFI market may be crowded out when introducing public microfinance.

It is clear that it is important for Myanmar to meet the financial demands of the low-income class by vitalizing the existing MFI industry. However, public inclusive finance is also required considering the role of government, which is to identify vulnerable classes and provide financial support for them. Operating the public microfinance and debt relief programs together is meaningful in that it is possible to provide support according to the economic situation of the financially marginalized who are excluded from the formal financial sector. Especially, demand for public microfinance and debt management may increase considering the global economic depression, COVID-19, and other economic issues. Therefore, a comprehensive review of related conditions is required in order to introduce these systems in the mid to long term, and such aspects are the target of this report.

Based on Korea’s experiences, we suggest the following recommendations. First, consideration of financial resources is required in-advance. It is necessary to introduce a public microfinance system and a public microfinance institution to support MFIs and improve loan accessibility for small business owners and the low-income class. Especially,


151

CHAPTER

03Public M


low-income people’s credit should be reinforced to help them qualify to use MFI loans by developing policy-inclusive finance guarantee products. The role of a public microfinance institution is important for overseeing the development and management of public microfinance products and non-financial services, etc.

At the same time, the concern over excessive loans may grow as the microfinance market size expands, and under the downward economic growth trend worldwide due to the COVID-19 pandemic, it seems inevitable that more defaults and delinquent debts will occur. Bad banks can be considered an option by the public sector to respond to market failures in this aspect.

Lastly, for Myanmar to have inclusive finance and a debt relief system like Korea, a variety of development factors for the finance market are required as well as more financing resources. Therefore, we should begin from introducing non-financial services which are relatively easy to finance resources and establish policies. After that, implementing step-by-step support for policy-inclusive finance and the debt relief system is required.

1. Introduction

Inclusive finance policy in Korea is mainly targeted at the financially marginalized; in other words, low-income households. In this respect, its purpose is in line with that of the microfinance industry in Myanmar, in that both countries have introduced policies in an attempt to prevent low-income households from being underbanked and excluded from the private market.

Inclusive finance policies implemented in Korea can be largely categorized into two types: public microfinance programs aimed at supplying low-interest loans to underbanked households and debt relief programs to mitigate the financial burden from excessive consumer debt. These programs are designed to support households according to their economic conditions, the progress of which can be divided into four stages as shown in [Figure 3-1] below.

Each program organically operates to support households with financial and non-financial services throughout each stage. Through public microfinance programs, the financially marginalized who cannot obtain loans from banks due to a lack of collateral and low credit rating are provided the opportunity to generate income through economic activities financed by the programs. Non-financial support, such as education and consulting,


Development of M


ar

152

is also provided in order to help these households build a sustainable economic future.

When a debtor is unable to repay their obligations due to their economic situation deteriorating or there is further credit impairment, and thus their loan is classified as a non-performing loan (NPL), the debtor is given support through debt relief programs that adjust the principal of the loan and extend the repayment period. These programs are implemented to help the debtor terminate their overdue loans and provide an opportunity to overcome their financial problems and enhance financial inclusiveness.

[Figure 3-1] Overview of an Inclusive Finance Policy

Under-banked

Public Microfinance ProgramsDebt Relief Programs

Deteriorationof Economic

StateDefault Credit

Impairment

ProgramProgram

FinancialServices

Non-financialService

Debt RestructuringPrograms

Credit GuaranteeDebt Concentration

and Adjustmentthrough Bad Banks

Lending

Micro-Insurance

Finance Education

Consulting

Source: Author.

The main purpose of this study is to introduce Korean experiences implementing two public programs - public microfinance and a debt relief system – to support financially marginalized households. While a variety of public microfinance products exist, this study focuses on introducing “Miso Credit” and “Sunshine Loans,” which are two of the main public microfinance products in Korea. In addition, the debt relief system, as a measure of support for individuals in difficulty due to excessive debt, is also discussed in this study.

2. The Local Financial Environment of Myanmar

2.1. Financial Market

The informal lending system is one of the traditional and prospering businesses in Myanmar. Although formal financial services are trying to fulfill customer needs, the informal financial sector is still very active and earns a high return, playing an important


153

CHAPTER

03Public M


role in Myanmar. The interest rate for informal lending depends on the type of collateral and the loan amount in relation to the forced-sale value. The time period for repayment is within three to five months, but sometimes can be extended. Still, many informal borrowers cannot manage to repay their loans during the required period and they must eventually sell off their property such as bicycles, gold, or land below the market price to meet their obligations with informal money lenders. This is one of the pain-points for informal money borrowers in Myanmar.

The main reason for this is that it is easier to utilize informal financial services than regulated finance. That is, the households and self-employed can use more financial services in the informal sector than formal financial services. There are terms and conditions for regulated finance according to the rules and regulations. The households and the self-employed also have to declare personal information such as presenting their National Registry Card (NRC) and other documents to prove they are genuine residents. On the other hand, they lack financial education and literacy, have weak financial awareness, and are often do not qualify for regulated financial services. In the end, they have to use informal financial services even though they know it is more expensive and riskier than the formal financial sector. Most people in Myanmar, especially those who live in rural and semi-urban areas, have to rely on informal financial services. Even though it is possible to lend money from MFIs in urgent need, they are willingly to pay high interest to informal money lender because it is convenient and adjacent.

Informal financial services are more expensive than regulated finance. For example, low-income households have to pay high interest rates to get loans from informal money lenders. According to interviews with members of low income households, the interest rate was 5% or 10% per month for collateralized loans and 20% per month for non-collateralized loans. This is a very high interest rate and there was no system to solve controversies. Sometimes borrowers experienced fierce collection by the informal money lenders such as having their property taken away when they could not pay back their loans. This situation gets households into loan-traps and can even intensify, leading to more suffering for low-income households in Myanmar.

However informal financial services still remain very important for people in Myanmar as they continue to play an important role in complementing the formal sector. Around 50% of adults use some form of informal financial services, 28% use both formal and informal financial services, and 21% use only informal services.


Development of M


ar

154

<Table 3-1> Informal Lending System in MyanmarCategory Informal Lending System

Interest rate 36-96% per annum, 20-60% per month (depending on the collateral type)

Loan amount 30-80% of forced-sale value

Repayment period Daily, weekly, monthly, three to five months

Collateral Land, buildings, gold and gems, bicycles, etc.

Source: FinScope Survey (2014).

2.2. Banking Industry

There are three main types of banks in Myanmar: state-owned banks, semi-governmental, and private banks. There are a variety of deposits in the banking sector such as call deposits, current, fixed, and savings. The interest rate for deposits in banks and regulated financial companies are not very different but they can set their maximum interest for more competition. The majority of low-income households in Myanmar are not able to get credit or loans from the banking sector because of collateral requirements. They do not have enough collateral for a mortgage from the banks. Banks can provide overdraft loans for up to one year and term loans for up to three years. Different loan products have different units and the most popular loans include development loans for specific projects, standard commercial loans, housing loans, and retail products loans. In addition, banks have been creating more customized loans to meet their customers’ demands such as hire purchase loans, education loans, and short-term loan products where a customer offers their deposit account as collateral.

Most of the borrowers who can utilize the banking system in Myanmar take out overdraft loans using collateral. The private banking system is more convenient and appropriate than state-owned bank services and many people in Myanmar are recommended to utilize the services of private banks because state-owned banks have weak financial services and poor technology. Several banks only lend using overdraft facilities, and some industry and construction project estimates put overdraft lending at 75 to-80% of the banking sector’s total loan portfolio.

In the past few years, hire purchase loans were very popular and several banks offered hire purchase products and housing loans. Some private banks (Yoma Bank, AYA Bank, CHID Bank) and some regulated finance companies have been delivering hire purchase products and home loan products to their customers. For housing loans, 30% is required for a down payment and the loan term is up to 15 years for condos and up to 10 years for apartments.


155

CHAPTER

03Public M


[Figure 3-2] Housing Loans by State and Private Banks(Unit: Million MMK)

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

-

2013Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2013 2013Housing loans (state)

2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017Housing loans (private)

Source: FMR (2018).

<Table 3-2> Deposits and Credit Functions of Banks in MyanmarCategory Contents

Total public & private bank assets MMK 72 trillion

Total private banks loan portfolio MMK 23.93 trillion

Total private banks deposits MMK 36.91 trillion

Maximum bank lending rate (Secured loans) 10% p.a.

Maximum bank lending rate (Unsecured loans) 14.5% p.a.

Average deposit interest 5% p.a.

Loan period Usually one year, 3-5 years, 10-15 years

Collateral land, buildings (not apartments), machinery, gold and jewelry, deposits

Loan amount 30-60% of forced-sale value of the collateral for land and buildings, 80% for gold

Source: Central Bank of Myanmar (2020).

2.3. Microfinance Sector in Myanmar

The microfinance sector was quickly booming in Myanmar after the enactment of the Microfinance Business Law in 2011. UNDP has been operating the microfinance program


Development of M


ar

156

with international development NGO (PACT, GRET and Save the Children) and Grameen Bank since 1997. For the purpose of rural development and poverty reduction, the Microfinance Business Law was enacted on November 30, 2011 and local and foreign MFIs have been granted microfinance business licenses to operate their businesses.

The MFIs provide financial services to low-income households for the service sector (20%), the trade sector (39%), the agriculture sector (26%), and the livestock and fisheries sector (10%). The FRD (The Financial Regulatory Department) has started tier management and the risk-based supervision of MFIs by classifying MFIs by the size, ownership, governance, sustainability, speed of growth, risks, and performance. There are currently 188 MFIs, with 33 in tier one, 47 in tier two, and 108 in tier three.

The key challenges for local MFIs are a lack of funding, weak IT systems and Management Information Systems (MIS), deposit-taking constraints, market concentration and competition issues, and a lack of credit information. In fact, funding is still the biggest constraint to growth for local MFIs and most of the funding and resources from international development partner organizations go to the large international MFIs. In the case of funding sources, foreign MFIs are procuring funds from their parent companies, but the local MFIs are mostly being managed with individuals’ capital.

There is high risk in the MFI sector because it has poor and vulnerable clients. In addition, there are many weak points in some MFIs such as institutional weaknesses, financial sector risks, and poor knowledge about the intricacies of the industry. For these reasons, most banks will not accept loan requests from MFIs even if they provide collateral. As such, MoPFI and the Central Bank of Myanmar (CBM) have been encouraging the banking sector to support loans for MFIs. In 2017, the Livelihood and Food Security Trust Fund (LIFT Fund) and Yoma Bank initiated MFI local currency lending with typically one-year renewable loan terms. Still, a minimum of 40% USD cash collateral is normally required.

Currently in the microfinance sector, there are two main types of loans: individual loans and group loans. According to the Microfinance Business Supervisory Committee (MBSC) Directive (1/2017), the maximum loan size for individual and group loans is 10 million MMK. For both types, MFIs are not allowed to take collateral from clients and they need to make sure to conduct credit risk assessments on their clients before they deliver their loans to customers. The main examples of loan products are agricultural loans, enterprise loans, hire-purchase, loans for disabilities, and garment worker loans.


157

CHAPTER

03Public M


There are different types of loan repayment methods at different MFIs varying from once a week, twice a week, once in two weeks, and once in three weeks to once a month and others. Most MFIs have already explained the terms and conditions of the repayment methods to their clients who are applying for loans before they make loan distributions.

<Table 3-3> Deposits and Credit Functions of Microfinance in Myanmar

Category Contents

Type of MFIs Deposit taking MFIs, Non-deposit taking MFIs

Type of loans Group loans, Individual loans

Financial products Credits·Loans, Deposits·Savings, Hire-purchased, Micro-insurance, Mobile financial services

Interest rate for loans 28% p.a. (effective method)

Interest rate for voluntary saving 10% p.a.

Interest rate for compulsory saving 14% p.a.

Loan period 5 weeks, 10 weeks, 5 months, 10 months, 1 year

Collateral requirements MFIs cannot take any collateral from clients

Loan amount Maximum 10 million (MMK)

Services charges or fees Not more than 2% of loans (in a one-year period)

Prudential requirements Solvency ratio: 12%, Liquidity ratio: 25%


[Figure 3-3] MFI’s Data for Total Loans Outstanding and Savings(Unit: Million MMK)

2,57

9,59

5

359,

897

303,

455

1,05

1,65

5

1,37

7,32

0

2,27

1,25

9

335,

41386

4,35

0

155,

027

466,

433

9,41

1

26,7

42

57,4

41

23,4

50

145,

635

75,3

11

271,

522

90,0

52

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21

Total Loan Outstanding Total Saving / Deposits

Source: Ministry of Planning and Finance (2021).


Development of M


ar

158

According to a FinScope Survey in 2018, the total adult population was estimated to be 34.3 million, similar to the Myanmar Population Census of 2014. There are currently 5.88 million active clients of microfinance business, so the microfinance usage percentage of the total population is 17.14% in Myanmar. Regarding the data from the FRD, the total number of active clients of MFIs has been increasing from 574,085 in 2012-13 to 5,955,746 in 2020-21. The total number of MFIs increased from 74 to 188, the total loans outstanding increased from MMK 26.7 billion MMK to 2,579.6 billion MMK, and total saving·deposits increased from 9.4 billion MMK in 2012-13 FY to 359.9 billion MMK in 2021-21 FY.

2.4. Policy Finance and Myanmar’s State-Owned Banks

2.4.1. Financial Service & Products from SOBs

There are four state-owned banks in Myanmar. Myanmar Economic Bank (MEB), Myanmar Agriculture Development Bank (MADB), and Myanmar Investment and Commercial Bank (MICB) were established under the socialist Union of Burma Bank Law in 1975, and Myanmar Foreign Tread Bank (MFTB) was organized in 1990 to stimulate the growth of industry and production.

<Table 3-4> State-Owned Banks’ Financial Products and Services and Outreach AreasCategory MEB MFTB MICB MADB

Branches 300 branches Only headquarters Only headquarters 205 branches and agency offices

Financial products and services

Banking servicesSavingsDepositsLoansCreditSubsidized loans to other banksRemittances

Foreign exchange accountsAll government departmentsAll state economic enterprisesSome private companiesSome individuals

Currency businessBanking services to private companies including foreign joint ventures

Seasonal loans for crop cultivationTerm loans to acquire farming machinery and equipmentRural savings mobilization

Financial services outreach areas

Can provide financial services in rural areas where 70% of Myanmar’s population lives

75% of foreign exchange transactions by value are made through MFTB, while MICB accounts for the other 25%

Organizations from both the public and private sectors

Can provide financial services in rural areas, bank loan disbursement reached MMK 558 billion in FY 2012-2013

Source: GIZ (2013).

2.4.2. Case Study on MADB Loans to Farmers

Especially in the agricultural sector, the loans issued by SOBs to farmers amounted to over 70% of the total loans as of December 2019. In comparison, private banks issued only 2%


159

CHAPTER

03Public M


of their outstanding loans in this sector1. This point highlights that SOBs are supporting more loans to farmers than the private banks in Myanmar. However, most farmers are not getting loans and financial services efficiently and appropriately from public financial institutions. Farmers are still facing difficulties as MADB credit has limitations for farmers who do not have a land title deed or farm on leasehold lands.

According to a FinScope Survey (2018), MADB loans are used in a variety of ways. For example, the main purposes of the loans are for buying agricultural materials, fertilizers, seeds, or machinery and to cover living expenses, medical expenses, etc. Credit from MADB is the main source of finance for farmers (formal and informal). Approximately 62% of farmers get access to these loans, compared to only 52% of the total population. For saving, farmers are more likely to use informal methods such as buying gold and jewels or breeding cows and pigs.

However, MADB has not been providing enough financing for all farmers and some farmers have reported that MADB loans are insufficient compared to their requirements for farming. Regarding a 2018 MAP Survey, only 22% of farmers with less than four acres of land have access to bank credit, compared to 51% of farmers with more than 10 acres2. This point proves that most small farmers have been depending on informal financial services to a great extent for their businesses in Myanmar.

[Figure 3-4] Purposes of Loan from MADB(Unit: %)

Purchase of Agricultural inputs Such as ...

77

Purchase ofAgricultural

inputs such asSeeds / Fertilizer

48

AgriculturalEquipmentPurchase

23

LivingExpenses

7

MedicalExpenditure(Emergency)

5

Education / Training

(School Fees)

0 10 20 30 40 50 60 70 80 90

Agricultural Equipment purchase

Living Expenses

Medical Expenditure (Emergency)

Education / Training (School Fees)

Source: FinScope Survey (2018).

1 CBMQuarterlyFinancialStatisticalBulletin,2019VolIII.2 MakingAccessPossible(MAP),FinScopeSurvey(Myanmar),2018.


Development of M


ar

160

<Table 3-5> MADB Loan ConditionsMADB Loans for Farming

per One Acre (MMK)Real Cost of Farming per

One Acre (MMK)Types of Loans from

MADB Loans Periods

150,000 MMK (Paddy)100,000 MMK (other crops)

Interest rate 8.5%

400,000 MMK250,000 MMK Seasonal loans Eight months

Group guarantees

Source: Making Access Possible (2018).

3. Inclusive Finance in Korea3

In Korea, inclusive finance policies have contributed significantly to expanding the outreach of financial services to households. This report aims to introduce public microfinance programs and debt relief programs as a means of enhancing financial inclusion. Such polices have been strategically implemented after the Korean government secured the necessary financial recourses and have shown successful results in supplementing the market and improving the welfare of low-income households.

3.1. Public Microfinance

3.1.1. Background of Introducing Public Microfinance

As a result of the restructuring following the Asian financial crisis in 1997, there were huge changes in how assets were managed by private financial companies. As the prohibition on providing loans to certain industries was lifted in January 1998, the financial companies were able to manage their lending businesses freely, without being regulated by the government. Therefore, banks began to provide more loans to high-quality small and medium-sized companies and high-credit households—thus shifting their focus away from large companies. On the other hand, the savings banks whose main clients were small and medium-sized companies and households began to target borrowers with a relatively higher credit risks.

The banks began to be more careful with household loans after the liquidity crisis affecting large credit card companies of 2003, hence the funding to individuals without collateral or with a low credit rating decreased. However, the mutual credits and the savings banks responsible for providing funds to the low-income class did not perform their own

3 ConsideringthefinancialdevelopmentenvironmentofMyanmar,additionalresearchisrequiredaboutwhetherKorea'spolicy-in-clusivefinanceexperiencemaybehelpfulforthedevelopmentofMyanmar'smicrofinance.ThereasonisthatweneedMyanmar'sfeedbackaboutwhethercomparingKorea'spolicy-inclusive finance,whichhaswelfareattributesandMyanmar'smicrofinancewhichhasbankattributes,ispossible.However,duetocommunicationdifficultiescausedbyMyanmar'spoliticalcircumstances,webasedthisreportonKorea'sexperiences.


161

CHAPTER

03Public M


functions. When the domestic economy recovered after 2005 and as real estate prices rose, the savings banks focused on high-risk project financing. Therefore, the ratio of small loan lending decreased 1.7%p from 21.0% at the end of 2005 to 18.3% in June 2007. The mutual credits gradually increased the ratio of secured lending to avoid the default loss from household loans.

Decreased funding to the low-income class by private financial companies caused the growth of regulated money lenders specializing in high-interest rate loans to people with a low credit rating. The people who used regulated money lenders experienced difficulties with the high interest rates, which became a social problem. While the financial companies decreased lending to the low-income class, the global financial crisis aggravated their financial difficulties. The low-income class who were unable to obtain loans from financial companies turned to regulated money lenders or illegal private money lenders, but they ended up experiencing even more financial difficulties due to the high interest rates and excessive collection methods.

There are approximately 1.57 million people using regulated money lenders and the size of the market is estimated to be 15 trillion won. The estimated number of illegal private lending users is 410,000.

[Figure 3-5] Trend of Credit Union Loans(Unit: Billion KRW, %)

80,000 25Credit Loan (Left)

Secured Loan (Left)

Ratio of Credit Loans against Total Loans (Right) 20

15

15

5

0

70,000

60,000

50,000

40,000

30,000

20,000

10,000

-’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Source: Author on the basis of Credit Unions (2020).


Development of M


ar

162

[Figure 3-6] Trend of the Use of the Regulated Money Lenders(Unit: 100 Thousand people, %)

300 100

90

80

70

60

50

40

30

20

10

0

250

200

150

100

50

0

User

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2’10

4944

39 34.927.9

24

’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19

Maximum limit of interest rate

Source: FSS (2021).

3.1.2. Financial and Non-Financial Services of Public Microfinance

3.1.2.1. Purpose and Targets for Support

In the private financial market, a high interest rate is levied to the low-income class when they seek funding, due to the high risk of default. Inclusive finance market faces chronic excess demand because private finance institutions decline to provide loans to low-income class people who lack of collaterals. Insufficient funding for the low-income class leads to a decrease in consumption and production in the market, which ultimately leads to a decrease in jobs and economic activity. Members of the low-income class who lose their jobs cannot repay their existing loans and end up becoming defaulters and welfare beneficiaries, which in turn becomes an additional social cost. As the issue of financial exclusion due to the low credit ratings of the low-income class refuses to disappear, the government introduced public microfinance to provide funding to the low-income and vulnerable classes who cannot obtain loans from the private financial market.

Similar to other government support programs, public microfinance clearly defines the support standards. Generally, public microfinance targets people with (1) a credit rating of seven to 10 and an annual income of less than 45 million won (45,000 USD) or (2) an annual income of less than 35 million won (35,000 USD). As of 2020.Q1, there were approximately four million people with a credit rating of seven to 10, or 10% of all credit rating holders. Moreover, the annual income requirement of less than 35 million won is similar to the median income of a two-person household in 2021, which was 37 million won.


163

CHAPTER

03Public M


Currently, there are five products in public microfinance: Miso Credit, Sunshine Loans, Sunshine Loan 17, Sunshine Loan Youth, and the New Hope Seed Loan. However, this report covers only Miso Credit and Sunshine Loans, which are two of the main public microfinance products.

3.1.2.2. Financial Services of Public Microfinance

A. Miso Credit

Miso Credit provides unsecured loans to small business owners who cannot obtain loans from formal financial institutions such as banks due to a low income and/or low credit rating. Miso Credit is classified into (1) loans to small business owners, (2) loans to business implementing & supporting agencies, and (3) small loans to traditional market merchants.

The loans to small business owners target people with a credit rating of seven to 10 or people below the second-lowest income bracket. Specifically, people without a credit rating also qualify for the loan. The loan is supposed to be used for starting a business, operating a business, facility improvement, etc. The interest rate for the loan is a single fixed rate of 4.5%, without regard to the credit rating or income, which is significantly low considering that the interest rate for the bank’s personal credit loans (new loans) was 3.3% as of the end of 2020.

The business implementing & supporting agencies consist of non-profit corporations that conduct lending businesses, such as start-up support to the low-income class, credit recovery support, social financing, etc. Miso Credit provides indirect support to small business owners, the low-income class, and social enterprises by providing funding to these business implementing & supporting agencies.

Small loans to traditional market merchants are a loan product for small stores at the traditional market, which provides 10 million won per store at an annual interest rate of 4.5%. According to Song and Lee (2014)4, 48% of the merchants in traditional markets use private money lenders in order to obtain working capital, and of these people, 87.5% have been rejected for a loan by a formal financial system. Therefore, the purpose of the Miso Credit small loans to traditional markets helps small merchants avoid being exposed to a very high interest rate from private money lenders. This loan is characterized as indirect financing, where the association of merchants is the lender providing loans to the small merchants who are members of the association.

4 Song, Ji-YongandLeeHee-Sook.“FinancialManagementandtheUseofthePrivateLoanoftheSelf-EmployedintheTraditionalMarket”,FinancialPlanningReview7(4),2014,21~42.


Development of M


ar

164

<Table 3-6> Miso Credit Loan Requirements and the Source of Funding

Category Small Business Owners The Business Implementing & Supporting Agency

Traditional Market Merchants

Source of funding Donations Interest revenues of dormant

depositsInterest revenues of dormant deposits

Target

Small business owners: persons with a credit rating at the seven to 10 level or below the second-lowest income bracket

Start-up support: small business owners with a low credit rating and a low incomeCredit rating recovery support: persons who have made repayment faithfully for nine months or longer for credit recovery or persons who have completed repayment within three years

Small merchants within the traditional markets

Fund usage

Small business owners: starting a business, operating, facility improvement, emergency living expenses

Different depending on the agency implementing business -

Loan interest rate

Small business owners: 4.5% per year

Start-up support: 3~6.5%Credit rating recovery support: 2~4%

Up to 4.5%

Loan duration Small business owners: 4~5 yearsStart-up support: Up to five yearsCredit rating recovery support: up to five years

Up to two years

Source: Author.

The sources of funding for Miso Credit are the interest revenues from dormant deposits and donations. Each source is used for different loan projects. Banks, savings banks, and insurance companies contribute their dormant deposits to KINFA pursuant to the Microfinance Support Act and an agreement on the contribution of the dormant deposits. KINFA uses the interest revenues of dormant deposits to support the business implementing & supporting agencies and traditional market merchants. On the other hand, the loans to small business owners are financed with the donations made by the financial industry and conglomerates. The donations are reallocated to the Miso Foundation, which was established by the financial industry and conglomerates. The Miso Foundation, in turn, freely and directly uses these donations for the loans to small business owners.

As of the end of 2020, the total amount of funding for Miso Credit was 1.7 trillion won, consisting of 1.5 trillion won from dormant deposits and 0.1 trillion won in donations.

B. Sunshine Loans

Sunshine Loans provide living expenses to wage earners with either an annual income of less than 45 million won and a credit rating of seven to ten or wage earners with an


165

CHAPTER

03Public M


annual income of less than 35 million won. Specifically, the person must be employed for three consecutive months or longer as a full-time employee or temporary employee. People without a credit rating can also obtain loans.

Sunshine Loans can be obtained from mutual credits and savings banks. KINFA provides a 90% guarantee on Sunshine Loans. The guarantee is only partial to prevent the moral hazard of the Sunshine Loan providers and to improve their ability to conduct credit evaluations.

The interest rate on the loans can be freely determined by each Sunshine Loan provider, within an upper limit of 10.5%. A reasonable profit is guaranteed to the Sunshine Loan providers so that they can provide Sunshine Loans proactively. According to the data released by Financial Services Commission (FSC) in July 2010, the upper limit of the interest margin for Sunshine Loans was 6.38% for the mutual credits and 8.99% for the savings banks. Savings banks had a higher interest margin because people with a higher risk of default used the savings banks more than the mutual finance companies.

<Table 3-7> Sunshine Loan Requirements and the Source of FundingSource of Funding Target Fund Usage Loan Interest Rate Loan Duration

Contributions by the Lottery Fund and Sunshine Loan providers

Wage earners Living costs A maximum of 10.5% Up to five years

Source: Author.

Sunshine Loans are managed with the funds raised by contributions from Sunshine Loan providers (mutual credits and savings banks) and the Lottery Fund under the central government. The goal of Sunshine Loans is to provide up to 10 trillion won (~10 billion USD) during the first five years of the program. A total of 2 trillion won (~2 billion USD) is necessary over a five-year period considering the loan default rate and the operating multiplier. Therefore, the government decided to secure the guaranteed funding of Sunshine Loans through a ‘50:50’ joint contribution between the government and the Sunshine Loan providers.

The mutual credits and savings banks contributed 1 trillion won (~1 billion USD) over a six-year period. However, the amount will be allocated between the mutual credits and savings banks at a 40:10 ratio, respectively, as the credit size of the mutual credits is approximately four times larger than that of the savings banks.

The local and central governments contributed 1 trillion won (~1 million USD) over a five-year period. The central government contributed 120 billion won (~120 million USD) over a


Development of M


ar

166

period of five years from the Lottery Fund. The local governments will contribute 80 billion won (~80 million USD) each year, but the ratio between the local governments is determined by considering the public interest, benefits to the local residents, financial capability of local governments, etc.

C. Major Accomplishments

After introducing public microfinance in 2010, Miso Credit and Sunshine Loans provided 3.0 billion dollars and 20.2 billion dollars, respectively, to low-income people who had experienced difficulty obtaining loans from banks. There were 260,00 loan applications for Miso Credit and 2,072,000 for Sunshine Loans.

<Table 3-8> Public Microfinance Support Performance Trends (2008~2020)(Unit: Thousand cases, Billion KRW)

Category ~2015 2016 2017 2018 2019 2020 Total

Miso Credit*No. of cases 101.0 28.7 31.1 29.0 29.5 31.9 260.2

Amount 1,307.4 347.8 392.5 354.9 305.8 334.4 3,042.8

Sunshine Loans

No. of cases 753.2 203.8 251.7 253.7 292.7 316.8 2,071.9

Amount 6,478.1 1,828.6 2,979.9 2,602.8 3,027.2 3,317.0 20,233.6

Note: *Miso Credit: Sum of loans to small business owners.Source: Author.

The gender proportion of Miso Credit is 38.0% women and 62.0% men, while the gender proportion of Sunshine Loans is 41.7% women and 58.3% men.

<Table 3-9> Loan Performance of Policy-Inclusive Finance by Gender (2008~2020)(Unit: Billion KRW, %)

CategoryMiso Credit Sunshine Loans

Cumulative Sum Proportion Cumulative Sum Proportion

Loan amounts

Men 1,887.0 62.0 11,791.7 58.3

Women 1,155.7 38.0 8,442.0 41.7

Overall 3,042.8 100 20,233.6 100.0

Source: Author.

The proportion of Miso Credit by age is 32.3% for 40s, 30.2% for 50s, and 18.5% for 30s. The proportion of Sunshine Loans by age is 34.0% for 30s, 24.3% for 40s, and 23.7% for 20s.


167

CHAPTER

03Public M


<Table 3-10> Loan Performance of Policy-Inclusive Finance by Age (2008~2020)(Unit: Billion KRW, %)



Loan amounts

20s 148.2 4.9 4,793.3 23.7

30s 563.2 18.5 6,878.3 34.0

40s 981.8 32.3 4,917.3 24.3

50s 918.4 30.2 2,733.7 13.5

60s 367.7 12.1 844.0 4.2

Over 70 63.4 2.1 67.0 0.3

Total 3,042.8 100.0 20,233.6 100.0

Source: Author.

The proportion of Miso Credit by income is 16.8% for 35-40 million KRW, 14.6% for 20-25 million KRW, and 12.9% for 25-30 million KRW. The proportion of Sunshine Loans is 25.5% for 20-25 million KRW, 22.2% for 15~20 million KRW, and 17.5% for 25~30 million KRW.

<Table 3-11> Loan Performance of Policy-Inclusive Finance by Income (2008~2020)(Unit: Million KRW, %)



~10 million KRW 27.0 0.9 586.7 2.9

10~15 million KRW 85.2 2.8 2,158.1 10.7

15~20 million KRW 201.9 6.6 4,496.7 22.2

20~25 million KRW 444.7 14.6 5,164.1 25.5

25~30 million KRW 394.0 12.9 3,547.3 17.5

30~35 million KRW 170.1 5.6 2,437.9 12.0

35~40 million KRW 510.0 16.8 1,251.1 6.2

40~45 million KRW 223.1 7.3 591.9 2.9

45~50 million KRW 235.1 7.7 - -

Over 50 million KRW 367.6 12.1 - -

Etc. 384.1 12.6 - -

Total 3,042.8 100.0 20,233.6 100.0

Source: Author.


Development of M


ar

168

Members of the low-income class who obtained loans from savings banks and regulated loan companies were able to reduce their interest expenses by using public microfinance, as the interest rate on the loans were reduced by 6.6%-21.5%p.

<Table 3-12> Comparison of the Interest Rate on Credit Loans from Public Microfinance and Financial Companies (2020)

(Unit: %)

Category Miso Credit Sunshine Loans Savings Banks Regulated Money Lenders

Interest Rate 2.5~4.5 Up to 10.5 17.1 24.0

Source: Author on the basis of the Bank of Korea (2021).

3.1.2.3. Non-Financial Services of Public Microfinance

A. Financial Education

Financial education is conducted so that consumers’ understanding of finance is increased to help make logical financial decisions and overcome financial difficulties. Borrower education is available for people using public microfinance products, including Miso Credit and Sunshine Loan Youth, etc., institution-connection education for people using the Ministry of Health and Welfare’s asset creation program and home visiting education for adolescents and the elderly. Education is also available to reinforce the consultants’ abilities to counsel the low-income class on financial issues. The special feature is providing interest rate benefits upon completing financial education, etc. to public microfinance users in order to help avoid issues such as excessive debt or default.

<Table 3-13> Financial Education SystemProgram Target Method

Education for the low-income class

Borrower education Borrowers of public microfinance loans Online

Institution-connection education

Students requested by relevant institutions, including government agencies, etc.

Online, home-visit

Home-visit education Low-income, adolescents, college students, the elderly, etc.

Online, home-visit

Staff education

Reinforcement of counseling on financial issues for the low-income class

Consultants for the low-income class Online, group

Internal teacher training KINFA home-visit education teachers Online, group

Source: Author.

Financial education is composed of topics related to the prevention of financial problems, the logical use of financial instruments, resolving financial issues, public microfinance, and


169

CHAPTER

03Public M


starting a business. Another special feature is providing customized education by changing the topic or details depending on the characteristic of the students, such as college students, the elderly, borrowers of public microfinance, etc.

<Table 3-14> Financial Education TopicsClassification Topic Details

Rational consumption and savings

Financial planning

Understanding income and expensesNeeds for financial planningChecking my financial planningStep-by-step financial planning

Rational consumption and savings

Rational decision-makingAccumulating a large sumEstablishing my savings goal Preparing necessary funds over time

Credit and debt management for your lifetime

Credit management

Need to manage creditHow to inquire about my credit ratingElements of credit evaluationHow to manage my credit and know-how

Debt management

Optimal debt levelPrinciples of debt managementDebt repayment strategyHow to use credit cards

Crisis-prepared financial life 119

Financial fraud prevention and risk management

Understanding the risks in a household economyPreparing emergency fundsTypes of financial fraud and casesResponding to financial fraud

Preparation to successfully start a business

Start-up strategy and fund management

Understanding starting a businessTips on preparing to start a businessCharacteristics of business and commercial districtsStart-up finance and fund management

Public finance in difficult times Public microfinance system Public microfinancing

Borrower relief systems

Source: Author.

B. Consulting

Management diagnosis and customized business solutions by professional management consultants are provided to Miso Credit borrowers, including support for their efforts to improve the business environment. Management diagnosis is segmented by business type and consulting area, and consulting is provided to customers based on the results of the diagnosis and resolution on the issues.


Development of M


ar

170

<Table 3-15> Business Type and Areas of Consulting

Business type (12)

Restaurant business, convenience store·supermarket, clothing wholesale & retail, cosmetics wholesale & retail, other wholesale & retail, beauty, dry cleaning, automobile-related business, IT-related business, entertainment, culture & sports-related business, other service business, miscellaneous

Areas (10)Commercial district & location analysis, feasibility analysis, management diagnosis, promotion & marketing, store operations, franchise, customer service, interior and exterior design, tax & accounting, online store (e-commerce)

Source: Author.

3.1.3. Public Microfinance Network

3.1.3.1. The Korea Inclusive Finance Agency

The Korea Inclusive Finance Agency (KINFA) was established with the implementation of the Microfinance Support Act in September of 2016. The Microfinance Support Act supports ordinary people’s financial wellbeing and debt settlement for individual debtors by establishing KINFA and the Credit Counseling and Recovery Service.

The role of KINFA is to minimize the inconvenience of inclusive finance users by simplifying inclusive policy financial products managed by many institutions. Other roles are to integrate funds for public microfinance products and use the limited funds more effectively. Since 2008, some public microfinance products experienced inefficiencies including redundant target recipients, etc. The reason was that management of the products was carried out by several institutions including the Korea Federation of Credit Guarantee Foundation, KAMCO, Miso Credit Central Association, Happy Fund, etc.

Moreover, there were needs to reinforce non-financial support, such as financial education and consulting, in addition to the existing financial support. The consulting function was reinforced so small business owners could improve their business environment by receiving management diagnosis and business solutions from professional consultants. Financial education is also provided to the low-income class so that they can select and use appropriate financial products and improve their financial understanding.

The major businesses of KINFA are (1) providing loans and credit guarantees; (2) providing counseling, education, and information related to the financial lives of ordinary people; and (3) the management of dormant deposits. KINFA plays the role of developing and managing public microfinance products including Miso Credit, Sunshine Loans, Sunshine Loan Youth, Sunshine Loan 17, etc. The funds for these products are dormant deposits, lottery funds, the remaining funds of Happy Fund, and contributions from financial


171

CHAPTER

03Public M


companies, etc. All financial products except Miso Credit are guarantee products; therefore, KINFA guarantees the loans by the banks (Sunshine Loan 17, Sunshine Loan Youth), savings banks, and mutual credits (Sunshine Loans). Moreover, as mentioned earlier, KINFA also provides non-financial services such as consulting and financial education. KINFA is also providing a service to inquire about and pay back dormant deposits in order to find the original owners of the dormant deposits and dormant insurance proceeds contributed by individual financial companies.

KINFA has a diverse supply network for financial and non-financial services. A total of 50 Financial Inclusive Centers are in operation nationwide, and the microfinance call center and visiting counseling services, etc. are provided to people who cannot visit the center.

As mentioned above, Miso Credit is provided through the Miso Credit Foundation and corporations, the traditional market association of merchants, and implementing & supporting agencies. Sunshine Loans are provided through savings banks and mutual finance companies, and Sunshine Loan 17 and Sunshine Loan Youth are provided through banks.

KINFA consists of four divisions (management innovation, financial business, financial support, customer support), 12 departments, and three offices. Happy Fund is also an affiliate of KINFA.

[Figure 3-7] KINFA Organization

Chairman

Public Affairs &Communications Office

Vice Chairman

Performance &HR Office

ManagementInnovation Division

Financial BusinessDivision

Financial SupportDivision

Customer SupportDivision

Planning &CoordinationDepartment

ManagementSupport

Department

DigitalInnovationDepartment

FinancialPlanning

Department

CyberFinamce

Department

FinancialBusiness

Department

FinancialEvaluation

Department

CreditManagementDepartment

LoanCounselingDepartment

Self-HelpPlanning

Department

CustomerConsulting

Department

FinancialEducation

Department

Auditor

Audit Office

Source: Author.


Development of M


ar

172

3.1.3.2. The Financial Inclusive Center

The Financial Inclusive Center was established to resolve issues for people using public microfinance, such as having to visit several different institutions or using funds at a higher interest rate due to not being completely aware of a proper product, etc. At the Financial Inclusive Center, people can use financial and non-financial services of institutions related to small loan finance, such as KINFA, the Credit Counseling and Recovery Service, Happy Fund, etc.

The major functions of the Financial Inclusive Center are: (1) financial support, (2) debt settlement support, and (3) comprehensive counseling. Counseling and applying for Miso Credit, Sunshine Loans, and Sunshine Loan 17 are possible. An individual workout, pre-workout, etc. are supported so any borrowers with excessive debt can recover economically.

3.1.4. Comparative Analysis of Public Microfinance in Myanmar & Korea

Myanmar has no public finance institution for low-income households. As such, there is no policy finance institution that can be compared to Korea’s KINFA. However, in consideration of the fact that Myanmar’s major industry is agriculture, MADB, which provides agricultural finance, can be compared with and analyzed against KINFA.

MADB provides funds in the form of group loans to farmers from one of its 205 branches nationwide. The purpose of the funds is the purchasing of seeds, fertilizers, and farm equipment as well as living expenses, etc. On the other hand, KINFA provides financial and non-financial services to low-credit and low-income people experiencing difficulty using the formal financial system. Financial services include loan products, such as Miso Credit and guarantee products, such as Sunshine Loans. Miso Credit provides start-up and operating loans to small business owners. On the other hand, Sunshine Loans target workers and do not stipulate the purpose of the funds.

<Table 3-16> Comparison of Public Microfinance in Myanmar and Korea

ClassificationMyanmar Korea

Myanmar Agricultural Development Bank (MADB) KINFA

Target Farmers90% of loans are for paddy farmers

Low-credit, low-income people and the vulnerable class having difficulty using the formal financial system

Financial services

Seasonal loans for crop cultivationTerm loans to acquire farming machinery and equipmentRural savings mobilization

Loans (Miso Credit)Guarantees (Sunshine Loans, Sunshine Loan 17, Sunshine Loan Youth)


173

CHAPTER

03Public M


<Table 3-16> Continued

ClassificationMyanmar Korea

Myanmar Agricultural Development Bank (MADB) KINFA

Non-financial services -

Financial educationSmall business consultingCredit, debt consultingEmployment supportConnecting financial and welfare services

Supplying institution 205 branches

50 Financial Inclusive CentersMiso Credit: Miso Credit branches, traditional market merchants association, institutions implementing private businessesSunshine Loans: Savings banks, mutual finance companiesSunshine Loan 17, Sunshine Loan Youth: Banks

Purpose of loans

Purchases of agricultural input such as seeds/fertilizerAgricultural equipment purchaseLiving expenses

Miso Credit: Start-up expenses, operating funds, etc.Sunshine Loans, Sunshine Loan 17, Sunshine Loan Youth: Living expenses, etc.

Loan amount (Paddy) 400,000 MMK per acre(Other crops) 250,000 MMK per acre

Miso Credit: Up to 70 million KRWSunshine Loans: Up to 15 million KRWSunshine Loan 17: Up to 12 million KRWSunshine Loan Youth: 7~14 million KRW

Loan maturity Eight monthsMiso Credit: Up to six yearsSunshine Loan, Sunshine Loan 17: Up to five yearsSunshine Loan Youth: Up to 15 years

Guarantee Group guarantees KINFA guarantee

Source: Author.

3.2. Debt Relief System in Korea

3.2.1. Background of the Debt Relief System

With the outbreak of the credit card crisis in Korea, large-scale individual debts in the household sector began to emerge as a risk factor for the financial system. As a measure to support individuals in difficulty due to excessive debt, debt relief programs were implemented in addition to the public microfinance system. However, unlike public microfinance, which aims to supply new low-interest loans to the financially marginalized who are unable to use the services of financial institutions, the debt relief program is a method of financial inclusion provided afterwards, through such means as direct adjustments of the outstanding debt and repayment period when a debt is long-term overdue and becomes insolvent. In other words, the debt relief system covers the latter part of finance, carried out in an effort to provide the financially marginalized with an opportunity to overcoming their financial issues and alleviate inequality.


Development of M


ar

174

In order to understand debt restructuring as a measure for debt relief, it is necessary to define the term “debt delinquent5”. The term refers to debtors who have difficulty repaying their debts and are insolvent for a long term. Once they are classified as a debt delinquent, debtors face social and economic disadvantages, including limitations even on basic financial activities such as opening a bank account.

The Korean debt restructuring system began in earnest when the credit card crisis in 2002 churned out debt delinquents on a large scale. The crisis started when the Korean government strongly encouraged individuals to use credit cards6 in an attempt to stimulate household consumption and secure tax revenues after the Asian Financial Crisis of 1997. Excessive competition followed in the credit card industry as credit card institutions began issuing credit cards and loans indiscriminately in order to attract more clients. As a result, credit card transactions surged and the number of credit cards per person also increased. Cash advance services also increased dramatically and by 2002 the total credit card loan size reached KRW 413 trillion.

<Table 3-17> Usage of Credit Cards(Unit: Trillion KRW)

Category 2001 2002 2003 2004

Total usage 480.4 669.8 517.3 368.0

Credit sales 175.5 257.0 240.7 229.9

Cash advances 304.9 412.8 276.6 138.1

Source: KAMCO (2013).

The credit card institution crisis started to spread throughout the financial market and the cumulative problems including the escalation of the delinquency rate became observable in the indicators. By the end of 2003, the delinquency rate in the credit card industry reached 14.1%, while the real delinquency rate including loans for repayment reached up to 28.3% and the proportion of the loans classified as substandard and below reached 11%.

<Table 3-18> Delinquency Rate of Credit Card Institutions(Unit: %)

Category 2001 2002 2003 2004 2005 2006 2007

Delinquency rate (overdue over one month) 2.6 6.6 14.1 9.0 5.9 4.0 3.2

Delinquency rate including loans for repayment - - 28.3 18.3 10.1 5.5 3.8

Substandard and below loan ratio 1.3 4.0 11.0 6.2 9.7 5.6 3.7


5 InApril2005,theterm“creditdelinquent”,whichreferstodebtorsofbanksorcreditcardinstitutionswithpaymentsofoverKRW300,000overdueforoverthreemonths,wassubstitutedwithamorecomprehensiveterm“debtdelinquent”thatreferstodebtorswhohavedifficultyrepayingtheirdebtsandareinsolventforalongterm.

6 Variouspoliciestoencouragetheuseofcreditcardswereannouncedsuchasremovingthe50%limitoncashloansforcreditcardinstitutionsinFebruary1999andliftingtherestrictionsoncashadvanceservicesinMay1999.


175

CHAPTER

03Public M


3.2.2. Debt Relief System

The outbreak of the credit card crisis and rapid increase in the number of debt delinquents called for authorities to delve into the matter of credit recovery services7, including the establishment of a bad bank that exclusively offers long-term amortization as a means of relief. The debt restructuring services through a bad bank in the form of a public institution were since launched. The fundamental rule of the service is to first acquire claims on overdue consumer debts, reach out to the debtor, and then conclude an agreement on debt restructuring.

Proven as an advanced method in the U.S. and Europe, a “bad bank” refers to a temporary financial institution that collects and disposes of non-performing assets of financial companies to resolve non-performing loans through public funds. The bad bank program 1) provides opportunities for personal rehabilitation to debt delinquents to recover their credit on their own, and 2) improves the asset soundness of financial institutions by efficiently resolving distressed debt held in large volumes by financial institutions. In other words, this program alleviates the burden of fierce collection from financial institutions (or creditors) for debt delinquents and restores their status in the financial system to engage in economic activities as usual. In addition, the program allowed financial institutions to recover non-performing loans faster and more cheaply than existing practices, thus reducing costs and swiftly recovering their asset soundness. This, in turn, contributed to sound economic development in Korea by 1) normalizing the household economy as one of the pillars of the national economy and 2) streamlining the financial system as the bloodline of the economy.

The bad banks that were established to resolve the mass non-performing loans after the credit card crisis consisted of two programs: Hanmaum Finance and Heemang Moah.

<Table 3-19> Comparison of the Hanmaum Finance and Heemang Moah ProgramsCategory Hanmaum Finance Heemang Moah

Establishment date May 20, 2004 May 13, 2005

Type of company Stock company according to the Commercial Act Limited company according to the Asset-backed Securitization Act

Eligible recipientsMultiple borrowers with a loan principal amount of less than KRW 50 million, overdue for over six months as of March 10, 2004

Eligible non-applicants of Hanmaum Finance

Method of supportNew loans for repaymentRepayment in a lump sum or installments of up to eight years

Debt restructuringRepayment in a lump sum or installments of up to eight years

Source: Author on the basis of KAMCO (2012).

7 Theterm“creditrecoverysupport”inKorea,encompassesnotonlyprivatedebtrestructuringthroughdebtconcentrationtoabadbankbyapublicinstitutionbutalsotothelegaldebtreliefsystemthatsupportseconomicrecoverysuchasindividualrehabilita-tionandbankruptcyproceduresconductedbyacourt.However,thisresearchwillcoveronlythecreditrecoverysupportprovidedthroughbadbanks.


Development of M


ar

176

3.2.2.1. The First Bad Bank Program, Hanmaum Finance

A. Background

In the course of economic recovery after the Asian Financial Crisis, the number of debt delinquents increased sharply due to the surge in household loans and the indiscriminate issuance and use of credit cards. Hanmaum Finance was established to promote the stability of the financial market by concentrating and efficiently clearing the NPLs of financial institutions. It also had the purpose of the early resolution of multiple debts, which was a common characteristic of household loans after 2000.

B. Establishment Process and Structure

[Figure 3-8] Structure of Hanmaum Finance

FinancialInstitutions

in Agreement

Agreement

Contribution

Stocks,dividends

Repayment ofthe original

overdue

Release“delinquent”

creditinformation

Loancontract

Newloans

Provide loans(for funding)

Entrust assetmanagementBanks Bad Bank

(HanmaumFinance)

KAMCO

Debtor

Credit cardinstitutions

Insurancecompanies, SPC

Savings banks,Community creditcooperatives etc.

KAMCO

Other FIs

※ The actual payment of the new loans is directly given to the creditor financial institutions according to the valuation price of the original loans.


The Hanmaum Finance program was initiated upon the formation of the steering committee and the main issues for the program were discussed and adjusted. The steering committee was composed of financial institutions including major banks and credit card companies as well as KAMCO, the public institution selected to operate the program. After receiving applications from financial institutions for one month starting from April 2004, the “Agreement Between Creditor Financial Institutions on the Establishment and Operation of the Bad Bank” was concluded with 620 institutions participating in the program. The financial institutions in the Agreement included banks, credit card institutions, insurance companies, savings banks to SPCs, etc.


177

CHAPTER

03Public M


<Table 3-20> Financial Institutions in the Agreement for Hanmaum Finance (As of the Establishment Date)

Category Banks Credit card & insurance companies

Community Credit

cooperatives

Agricultural cooperatives Others Total

Number of institutions 17 12 83 491 17 620


Hanmaum Finance is a shell company registered as a credit financial institution, established in the form of a stock company according to the Commercial Act. Management of the loans and assets was entrusted to a public institution, KAMCO. Hanmaum Finance received applications from debtors and concluded new loan contracts in the form of long-term installment repayments. The new loans were used to repay the existing overdue loans at the financial institutions under the agreement. As soon as the loan contracts were concluded, the credit information related to the debtors’ default was released, thereby restoring their credit.

The participating institutions received shares of Hanmaum Finance worth the amount excluding the valuation price of the original loan from the outstanding amount, and then received dividends based on the recovery performance of the new loans.

C. Source of Funding

Loans were borrowed from KAMCO, which was the public institution entrusted with the asset management. Upon application from the debtors, existing overdue loans were paid for by issuing a new loan, the payment of which Hanmaum Finance paid directly to the creditor financial institution in cash according to the valuation price assessed by accounting firms. This payment was covered through collections on the new loans. For the remainder of the outstanding loans that had not been paid in cash, the creditor institutions received shares of Hanmaum Finance, which was a stock company, and were provided dividends. The total size of the new loans for repayment was KRW 2 trillion, 10% of which (KRW 0.2 trillion) was paid in cash.

D. Content of the Support

Hanmaum Finance refinanced debtors who applied voluntarily to the credit recovery service so that debtors could repay overdue debt, and thus improve their credit ratings from being debt delinquents. New loans were given to eligible debtors indebted with a principal amount of less than KRW 50 million from more than two financial institutions. The program was provided upon application temporarily for six months from May to November in 2005.

Through the program, loans were provided to individual debtors who had bad credit


Development of M


ar

178

ratings with multiple debts to repay their existing loans to the creditor financial institutions, thereby resolving bad credit. The loans were to be subsequently resolved through long-term installments. By doing so, the program played a role in efficiently resolving the NPLs of financial institutions and enhancing their asset soundness.

<Table 3-21> Performance of Hanmaum Finance(Unit: Thousand persons, Trillion KRW)

Category ApplicantsPerformance Total principal

amount of loansInitial cash

paymentRecipients Amount of support

Hanmaum Finance 184 184 2.0 2.0 0.2


3.2.2.2. The 2nd Bad Bank Program, Heemang Moah

A. Background

The introduction of Hanmaum Finance had an impact on the problem of debt delinquents, but its effect gradually decreased due to the economic downturn. It was suggested that additional support was needed for debtors who had not applied for Hanmaum Finance. Therefore, as a follow-up, the second bad bank program, Heemang Moah, was commenced as a joint collection organization to support credit recovery for those who had failed to apply for the first bad bank program but still had a strong will to repay their overdue debts.

B. Establishment Process and Structure

[Figure 3-9] Structure of Heemang Moah

ParticipatingFinancial

Institutions

Banks Bad Bank(HeemangMoah SPC)

KAMCO

Debtor Debt collectionagencies

Credit cardinstitutions

Insurancecompanies

Hire-purchasefinance companies

KAMCO

Savings banks, etc.

Loan

Debtrestructuring

Repayment(in long-terminstallments)

Cash,subordinatedbonds, stocks

Issuesecuritized bonds

Provideloans

Direct collectionif the debtor

does not applyfor debt restructuring

Conduct debtrestructuringand manage

the debtcollectionagencies



179

CHAPTER

03Public M


Heemang Moah was launched in 2005 as a follow-up to Hanmaum Finance to support credit recovery through debt restructuring for debtors who missed applying for the former program, which ran temporarily. To this end, a steering committee for the establishment of a joint collection organization was started in January 2005 and Heemang Moah Limited Company was initiated in April of the same year. Unlike Hanmaum Finance, which was a stock company, Heemang Moah is different in that it is a limited company (SPC) established in accordance with the Asset-backed Securitization Act.

<Table 3-22> Financial Institutions that Participated in Heemang Moah (As of the Establishment Date)

Category Banks Credit card companies

Hire-purchase finance companies

Insurance companies Others Total

Number of institutions 13 5 4 2 6 30


C. Source of Funding

Heemang Moah was funded by issuing asset-backed securities (ABS) that were all purchased by the public institution KAMCO. The loans of the financial institutions in the agreement with Hanmaum Finance that had not been applied for during the temporary operation period were the only target of support, and they were purchased at the valuation price calculated by accounting firms. The purchase was paid through cash or issuing shares of stock and any excess profits thereafter was distributed to the financial institutions as dividends, as was in the case with Hanmaum Finance.

Out of all the target loans for purchase, the principal amount of which was KRW 13.7 trillion, the actual purchase price was only KRW 0.6 trillion. The purchase was financed by issuing securitized bonds.

D. Content of the Support

Heemang Moah services were only provided to eligible non-applicants of Hanmaum Finance, whose loans had been transferred to Heemang Moah. The program supported long-term amortization of up to eight years and interest exemptions depending on the debtor’s application. The program had additional benefits where payment of 10 to 20% of the principal could be delayed if the debtor had faithfully repaid according to the newly adjusted schedule after the debt restructuring contract.

The establishment of Heemang Moah allowed financial companies to reduce their collection costs by unifying their debt collection channels while reducing the burden


Development of M


ar

180

from the collection activities for the debtors and providing an opportunity for swift credit recovery.

<Table 3-23> Performance of Heemang Moah(Unit: Thousand persons, Trillion KRW)

Category Eligible recipients

PerformanceTotal principal amount

of loansInitial cash

paymentRecipients Amount of support

Heemang Moah 1,260 644 6.3 13.7 0.6


3.2.2.3. Benefits and Necessity of Debt Relief Programs

The debt relief programs after 2004 aimed to devise a comprehensive plan focusing on restraining the increase of debt delinquents and supporting credit recovery. While support for debt delinquents with loans at a single financial institution was provided by each creditor institution by extending the maturity of the loan, bad banks were established to maximize the supporting effect for debt delinquents with multiple loans through debtor-oriented and effective credit recovery support.

As various measures including the bad bank programs of 2004~2005 were actively implemented, the number of debt delinquents began to increase, after reaching its peak of 3.72 million people in 2003.

[Figure 3-10] Number of Debt Delinquents per Year(Unit: 10 Thousand persons)

400

300

200

100

0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



181

CHAPTER

03Public M


The bad bank debt restructuring programs played a significant role in reducing the number of debt delinquents. Hanmaum Finance provided loans for repayment for 184,000 persons (KRW 2 trillion in total debt) who had applied for the program among the eligible debt delinquents, which reached 1,115,000 persons (KRW 13.9 trillion in total debt) by May 2004. Heemang Moah gave non-applicants of Hanmaum Finance an opportunity for debt restructuring by acquiring their overdue debts of KRW 13.7 trillion (1,260,000 persons) from approximately 30 financial institutions including KB Kookmin Bank and others.

<Table 3-24> Performance of the Bad Banks per Year(Unit: 10 Thousand persons, 100 Million KRW)

Category Performance Before 2011

The most recent 10 years Total

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -

Hanmaum Finance

Recipients 18.4 - - - - - - - - - - 18.4

Amount 20,045 - - - - - - - - - - 20,045

Heemang Moah

Recipients 48 2 1.6 3.7 2.6 2 2 1.6 0.7 0.1 - 64.4

Amount 43,297 3,400 2,379 5,412 2,165 1,912 1,967 1,678 984 172 0.1 63,366.1


In particular, bad banks have provided a mutually beneficial situation to both creditors and debtors8. The creditor financial institutions were able to recover their loans without any collection activities while the debtors were able to repay their overdue debts and return to regular economic activities.

3.2.3. Comparative Analysis of Debt Relief in Myanmar & Korea

The microfinance market in Myanmar is in its early stages and cases of direct policy intervention in the market through such means as the establishment of bad banks, as in the case of Korea, are unknown. Therefore, there are limitations to directly comparing the current situation in Myanmar with the debt relief system in Korea.

However, as will be discussed below, structural problems in the microfinance market such as the lack of new loan management and handling capabilities, along with the global economic recession due to the COVID-19 pandemic, may cause large-scale insolvency. This is in line with Korea’s situation in the past, in which the need for a debt relief system was emphasized and has since expanded continuously. Such government policies for preventing the increase of debt delinquents were needed because the debt problem (collapse) of the working class is not only a problem from an individual perspective, but at the same time

8 KoreaInstituteofFinance,WhitePaperonHouseholdDebts(2013)


Development of M


ar

182

can have immense ripple effects on the market. In particular, it can be said that there are similarities between the current microfinance market in Myanmar and Korea’s case, in that a large-scale market collapse may be inevitable due to systematic and environmental problems from such limitations as weak IT systems and the lack of credit information.

3.2.3.1. Current Status of NPLs in the Microfinance Market of Myanmar

Since the enactment of the Microfinance Business Law, the microfinance industry has expanded significantly as can be inferred from [Figure 3-2]. The number of total loans outstanding has increased close to 100 times from MMK 26.7 billion to nearly MMK 2.6 trillion. While these figures suggest that the financial inclusiveness of the formal financing sector has notably improved, it is necessary to be wary of the escalating NPL ratio that may increase as the microfinance industry continues to develop. Given that the availability of debtor information is limited, it may be difficult for MFIs and regulators to manage risks and implement measures for debtor protection.

However, despite such extraordinary expansion, concern over insolvency is also growing as the microfinance market is feeling the effects of the COVID-19 global pandemic. The NPL ratio of the microfinance market has increased more than four times from below 1% before the economic crisis caused by COVID-19, to 4.27% as of the end of 2020, as shown in [Figure 3-11].

[Figure 3-11] NPL Ratio from 2018 to 2020(Unit: %)

5

4

3

2

0.81 0.84

1.52

3.884.27

1

0

Dec.18

Feb.19

Apr.19

Jun.19Aug.1

9Oct.1

9Dec.

19Feb

.20Apr.2

0Jun.19

Aug.20

Oct.20

Dec.20

Source: Author on the basis of MoPFI FRD (2021).


183

CHAPTER

03Public M


3.2.3.2. Reasons for Rising NPL Levels

A. Exogenous Factors

Exogenous factors include the economic recession caused by the global pandemic, seasonal variations, etc. One of the main reasons for the NPL ratio escalation in 2020 is that some clients have not been resuming their businesses because of the pandemic and could not earn income to repay their loans. Moreover, lockdowns have affected not only debtors’ incomes but also microfinance institutions’ business activities. Debt collection is usually conducted by loan officers through visits to the villages where the debtors are residing, but containment measures have caused the MFIs to be unable to collect their claims. Other common reasons include seasonal variations resulting in crop price fluctuations affecting household incomes and causing defaults in agricultural loans, as well as policy uncertainty among the authorities.

B. Structural Factors

Another important issue is the lack of analysis on the clients’ repayment capabilities prior to issuing a new loan. Loan officers of MFIs have not been conducting risk assessments or flexibility studies on their new clients before they delivered the loans and have only focused on getting more clients in new outreach areas. This issue may also be attributable to data deficiencies as there is no official credit bureau or credit rating system to provide information for supporting lending decisions. As of May 2021, 57 MFIs are sharing credit information through a platform called MCIX (Microfinance Credit Information Exchange), the use of which is limited because it has not received official approval of its use by the authorities. Most MFIs have to instead achieve information on client characteristics and loan histories from the village head or ward leader of the area, or provide group loans to rely on the guarantors for repayment. These factors may lead to an increase in debtors with multiple loans from the group loans or lead to large-scale insolvency issues especially in the wake of the COVID-19 pandemic.

4. Conclusion

Based on Korea’s experiences, policy implications for Myanmar can be summarized as follows: first of all, it should be noted that Korea’s economic conditions and financial market structure are quite different from that of Myanmar. In order to launch public microfinance programs, the Korean government had to mobilize a considerable amount of funds through dormant deposits and insurance, as well as cooperate actively with banks and private


Development of M


ar

184

companies. Considering Myanmar’s current economic development stage and limited domestic financial resources, the full-fledged introduction of Korean-style public MF or a similar debt relief system would be premature for Myanmar in the near future.

Second, in the case of Korea, most of the microfinance institutions in the private market are non-profit institutions, so Korea has a relatively favorable environment for the government to introduce and implement public MF. On the other hand, commercial-based private MFIs have already entered finance market of Myanmar. Therefore, private MFI market may be crowded out when introducing public microfinance.

It is clear that a priority issue for Myanmar is to meet the financial demand of the low-income class by vitalizing the existing MFI industry. However, public inclusive finance is also required considering the role of government, which is to identify the vulnerable classes and provide financial support.

Operating public microfinance and debt relief programs together is meaningful in that it is possible to provide support according to the economic situation of the financially marginalized who are excluded from the formal financial sector. Demand for public inclusive finance and debt management may increase considering the global economic depression, COVID-19, and other economic factors. Therefore, a comprehensive review of related conditions is required under the goal of introducing these systems in the mid to long term, and such aspects are the subject of this report.

As such, it is necessary to introduce public microfinance policies as a means to support MFIs and improve the loan accessibility of small business owners and the low-income class. In particular, the recommendations for public microfinance are as follows. First, to introduce policy inclusive finance, consideration of financial resources is required. In the case of Korea, raising sustainable resources became possible by amending the Microfinance Support Act in 2021, after 13 years of introducing policy-inclusive finance. In the past, Miso Credit had a crisis where its additional resources (dormant deposits) were threatened to be suspended by a supreme court decision. Sunshine Loans were expected to be provided for five years because contributions from lottery funds and finance companies was limited. Limited resources for policy microfinance became more sustainable as resource-contributing companies expanded to all finance companies offering household loans. Considering these Korean experiences, social agreement on financing resources is required between the private sector and government when introducing policy-inclusive finance in Myanmar.

Second, government-led financial education has to be promoted. Apart from the


185

CHAPTER

03Public M


introduction of policy-inclusive finance, the introduction of financial education is also required. Although financial access for the people of Myanmar is being enhanced, the number of people using banks or MFIs is still limited and private finance is widespread. Considering this landscape, the promotion of government-led financial education is required.

Financial education is useful in that individuals, finance companies, and government all benefit. The advantages of financial education are as follows. Financial education helps low-income people choose appropriate financial products and make rational financial decisions, which leads to decreases in the interest burden of loans. As people’s understanding of financial products improves, finance markets for deposits, investments, and insurance may develop. Social costs can also decrease by preventing financial fraud, over-debt, and old-age poverty.

Banks and companies may provide financial education as a social responsibility. However, a variety of education programs appropriate for the development stage and environment of individuals is required. Also, as mentioned, financial education should be provided as a government program because education is considered a public good that affects individuals, finance companies, and the government.

Since 2016, MOPI has been developing a ‘financial literacy booklet’ and distributing copies to MFI customers. MOPI should diversify the target of financial education to students, youth, rural residents, urban workers, etc., and provide customized education for them. There is also a need to diversify the education into direct lectures with professional instructors, online lectures, and the distribution of games and textbooks.

Third, the government should develop guarantee products for low-income people. Loans for agriculture, which is the main industry of Myanmar, are provided by the national bank MADB. MADB loans have the advantage of being able to be used for buying agricultural machinery and materials or for living expenses. Since 70% of its loan portfolio is agricultural loans, MADB is considered to have a positive track record addressing the excessive demand from peasants. However, introducing policy-inclusive financial guarantee products is required in order to reduce financially excluded class such as low-income urban workers and self-employed people.

By providing guarantees to low-income people who have the ability to pay back their loans but lack collateral, they should be able to get loans from MFIs. Even though there is a way of developing policy for small-amount loans, introducing guarantee products must be strongly considered since it can provide lots of loans with fewer financial resources.


Development of M


ar

186

The guarantee system can be classified into ‘mutual guarantees’, ‘public guarantees’, and ‘loan guarantees’ by operating method. Since Myanmar does not have a long microfinance history, the environment to accept ‘mutual guarantees’ that are voluntarily developed and operated in same industry and ‘loan guarantees’ that provide guarantees without institutions in charge of the guarantees does not yet exist. Therefore, introducing ‘public guarantees’ that are managed by institutions that provide guarantees is needed for them to operate systematically and intensively.

Meanwhile, since guarantees supplement the credit of individuals, evaluating the credit scores of individuals is fundamental. Therefore, before introducing a guarantee system, utilizing a ‘credit bureau’ that can concentrate on credit data owned by MFIs and give a credit score to individuals is needed. The CB is explained in detail in chapter 2.

<Table 3-25> Comparison of Credit Guarantee SystemsCategory Public Guarantee Mutual Guarantee Loan Guarantee

Operator Independent guarantee institution Association Banks

Guarantee provider Independent guarantee institution Association Banks and the government

Target Unspecified firms Member firms Unspecified firms

Confidence High Low Middle

Guarantee amount High Low Middle

Supervising institutions Government, Guarantee institution

Government, Member firms

Government, banks

Example country Korea, Japan, Taiwan Germany USA

Source: Korea Credit Guarantee Fund, Credit Guarantee Systems of Countries Abroad (2006).

Loans should be managed by MFIs that provide loans to low-income people. MFIs are optimized institutions for providing loans for low-income people since they have the ability to evaluate local residents by their quantitative and qualitative data. Certain methods to let MFIs provide policy-inclusive finance products by deciding interest rates independently within a boundary should be considered. The guarantee coverage rate against a loan should be determined at a high rate to induce MFIs to actively provide loans in the early period of introducing policy-inclusive finance. However, after individual credit data is collected and the evaluation ability of MFIs is enhanced, the guarantee coverage rate against a loan should be gradually decreased.

Resources of guarantees should be co-funded by the government and private sector


187

CHAPTER

03Public M


providing policy-inclusive finance. Introducing special guarantee products is also recommended in the case of banks and conglomerates funding resources.

Fourth, a policy-inclusive finance institution has to be built. In the long term, it can comprehensively manage the development and operation of policy-inclusive finance products and non-financial services, etc. In cases of limited financial resources and policy finance products in the early period of the introduction of policy-inclusive finance, government banks such as MADB, which has similar functions, can play this role. However, considering the inefficiency caused by the diversification of financial products and resources and the overlap of targets, the establishment of a policy-inclusive finance institution is recommended.

The policy-inclusive finance institution should perform the role of operating non-financial services that are not provided by the government and banks, as well as developing and operating policy-inclusive finance products. To prevent policy inclusive finance users to face problem of overdue loans, pre-cautionary measures should be provided. Financial education should be provided to help individuals choose appropriate loans. Long-terms efforts should be made through basic education on financial planning, rational consuming, choosing finance products, and managing debts. In addition to providing consulting, enhancing the revenues of self-employed people is needed.

Lastly, another important role of the public microfinance institution is vitalizing the MFI market. The role of the public microfinance institution in the financial market should be limited to a guarantor, and loan counseling and evaluation should be left with MFIs to improve their ability to evaluate loans. Through these steps, the side-effects of crowding out the market by the public microfinance institution will be lessened as well.

Other than the public microfinance programs, the preparation of a debt relief system through debt restructuring may also need be considered, so as to manage over-indebtedness in the household sector and prevent large-scale NPLs. To introduce such a program, it needs to be understood that insolvency is not a problem attributable to only an individual and it seems inevitable that more defaults will occur amid the unprecedented global economic downturn caused by the COVID-19 pandemic.

The Korean bad bank programs can be considered as an active measure by the public sector to respond to market failures in this aspect. In order to launch such programs where a public institution acquires loans and interlinks them to debt restructuring, there needs to be an institutional basis such as legislation on loan sales or guidelines on the acquisition rate


Development of M


ar

188

of the public sector, in cooperation with policymakers. Consideration for specific operational guidelines so that such programs function appropriately to supplement market failure with the adequate balance between protecting both the creditor and the debtor will be needed.

However, it should be noted that in order to introduce Korea’s debt restructuring programs, it is essential to be able to evaluate individual debt size and repayment capacity, and for this purpose, a system for the collection and sharing of credit information is needed. At present, there is no official credit information bureau in Myanmar. Considering that the debt restructuring program in Korea was only implemented after the credit information collection and sharing system had started operating stably, it is recommended to establish a system for the collection, assessment, and sharing of individual credit information. Such a system is not only the foundation for the debt relief system but also necessary to promote the stable development of the microfinance market. Thus, Korea’s knowledge on this topic and measures for technical assistance were covered in depth in Chapter 2, Toward Sustainable Microfinance.

With regard to NPL problems, approaching this from the public policy point of view is necessary rather than from a commercial point of view because NPL problems affect many MFIs and the financial industry, which may have different interests in the matter. It is necessary to establish a bad bank as a public institution that can cover various MFIs and the financial industry, through which the effectiveness of the economic recovery support may be maximized.

There are other methods of debt restructuring other than the bad bank programs that are mainly discussed in this report. Such methods include individual rehabilitation9 conducted by a court and debt restructuring through an intermediary institution.10 However, among these various methods, debt restructuring through a bad bank is recommended because debt concentration is considered more effective.

However, policymakers must be aware of the limitations of bad bank programs. Despite being recognized for having successfully stabilized the Korean NPL market, concerns of moral hazard has continuously been raised over the debt relief system. Moral hazard that can be caused by the debt relief program can be largely divided into two types: before applying and upon receiving the support.

9 Individualrehabilitationallowsadebtortoredeemacertainamountoftheirdebtsaccordingtoaplan(forfiveyears)byacourtrul-ing,andiffaithfullyimplemented,thedebtorisexemptedfromtheremainingdebt.

10 Theindividualdebtworkoutprogramisaclassicexampleofdebtrestructuringthroughintermediationwherethedebtrestructur-ingagreementisconcludedthroughnegotiationsandadjustmentsbetweenfinancialinstitutionsfollowingthedebtor’sregistrationwiththeintermediaryinstitution.


189

CHAPTER

03Public M


Before applying for support, the debt relief program may act as an incentive to take out debts indiscriminately and excessively, and not to repay these debts based on the belief that the debtor can apply for public support. While receiving support, the debtor may be induced to not faithfully reimburse their debts, taking advantage of the fact that public institutions cannot conduct fierce debt collection. Therefore, it is necessary to take measures to mitigate such a moral hazard during the process of introducing the debt relief system in consideration of the situation before and after the support for debt delinquency.

In Korea, eligible recipients are carefully selected according to a specific standard based on the debtor’s income, asset size, loan size, etc. In addition, setting the maximum amount for debt restructuring to prevent excessive and indiscriminate debts can also be considered as a countermeasure.

Prior to introducing the debt relief programs, it should be made certain that when a debtor does not repay their obligations, it causes severe social and economic problems and it is necessary to develop social awareness and agree that providing a debtor with the opportunity for debt reimbursement and economic self-reliance is a measure for increasing social utility.

For Myanmar to establish an inclusive finance system like Korea, various financial market development factors are needed in addition to financing resources. Therefore, beginning with non-financial services, which are relatively easy to fund and establish, should be considered. After that, implementing step-by-step support for policy-inclusive finance is required.


Development of M


ar

190

ReferencesCentral Bank of Myanmar. “Quarterly Financial Statistics Bulletin,” 2019 Vol. I & II, 2019.

Central Bank of Myanmar. “Quarterly Financial Statistics Bulletin,” 2020 Vol. I & II, 2020.

Central Bank of Myanmar’s Directives for Interests, 2020.

Credit Union. Credit Union Statistics, 2015~2020.

Duflos, Eric, Paul Luchtenburg, and Li Yan Chen. Microfinance in Myanmar Sector Assess-ment, IFC, 2013.

Financial Regulatory Department. Microfinance Business Supervisory Committee Directive, January 2019.

FinScope Survey in Myanmar, 2014.

FinScope Survey in Myanmar, 2018.

FMR | Myanmar Financial Services Report, 2018.

FSS. “Results of the Moneylender Survey”, press release, June 25, 2021.

GIZ. Myanmar Banking Sector in Stormy Water, 2020 GIZ Banking Report 5th Edition, January 2021.

GIZ. Myanmar’s Financial Sector : A Challenging Environment for Banks, 2013.

Kang, Ho-suk and Hye-ri Jung. BOK Issue Paper Series No.2013-6 Current Status of Individual Debt Relief System, Bank of Korea, 2013.

KDI. The Korean Economy Six decades of Growth and Development, 2011.

Koo, Jung-Han, Kyobok Lee, and Seok Ki. Current Status and Improvement of Domestic MF, KIF, 2016.

Korea Asset Management Corporation. 50 Years History of Korea Asset Management Corporation, 2012.

Korea Asset Management Corporation. Current State of Debt Defaulters and Directions for Support, 2013.


191

CHAPTER

03Public M


Korea Asset Management Corporation. Business Statistics of 2020, 2021.

Korea Credit Guarantee Fund. Credit Guarantee Systems of Countries Abroad, 2006.

Korea Institute of Finance. White Paper on Household Debts, 2013.

Making Access Possible (MAP). Financial Inclusion Diagnostic, November 2018.

Microfinance Data from Financial Regulatory Department, Ministry of Planning and Finance.

MOPFI. MBSC Directives No.1/2019, www.mopfi.gov, 2019.

Myanmar Financial Inclusion Roadmap, 2014-2020.

National Assembly Research Service. Current State of Debt Defaulters and Directions for Improvement of Supporting Policy, 2009.

Sogang University Research & Business Development Foundation. A Study on the Effect of Support for Low-income Households through Debt Restructuring, 2014.

Song, Ji-Yong and Lee Hee-Sook. “Financial Management and the Use of the Private Loan of the Self-Employed in the Traditional Market”, Financial Planning Review 7(4), 2014, 21~42.

Supreme Court of South Korea. Statistics from Jurisdiction Yearbook, 2019.

UNCDF. Making Access Possible: Financial Inclusion Diagnostic, 2018.

UNCDF and Finmark Trust. FinScope Myanmar 2013, 2014.


Ministry of Economy and Finance (MOEF) Sejong Government Complex, 477, Galmae-ro, Sejong-si 30109, Republic of KoreaTel. 82-44-215-7747 www.moef.go.kr

Korea Development Institute (KDI)Namsejong-ro, 263, Sejong-si 30149, Republic of KoreaTel. 82-44-550-4114 www.kdi.re.kr

Knowledge Sharing Program (KSP)www.ksp.go.kr

2020/21 KSP Policy Consultation ReportDevelopm

ent of Microfinance through Strengthening

Legal Role and Supervisory Capacity Building in Myanm

ar

2020/21 ksp policy consultation report - knowledge sharing

Documents