Since taking power in 2011, the new semi-civilian government has transformed Myanmar’s economic, political and social landscape by developing a market-oriented economy, inviting foreign investment and promoting local business.
Despite the government experiencing considerable success through the reform process, Myanmar’s small and medium enterprises (SME), which play a pivotal role in the development of a country, remain underdeveloped and ill-prepared ahead of the launch of the ASEAN Economic Community (AEC), which is to be implemented in 2015 – highlighting the urgent need to improve the sector to boost competiveness.
Although Myanmar, along with Cambodia, Laos and Vietnam, has been given an extension to enter the AEC until 2018, the country has an enormous task in preparing SMEs so that they can compete on a level playing field and deliver the expected economic benefits of entering the regional trade bloc.
Despite Myanmar’s SME’s imminent immersion into the AEC, they are far from ready to compete on equal footing because they continue to operate based solely on independent resources and continue to have severely restricted access to capital, technology, business infrastructure and the ability to expand into new markets.
The dire need for capital
Creating effective channels to obtain capital, which is considered the most vital need among SMEs, remains difficult and SMEs are faced with numerous obstacles in order to fulfil the financial requirements.
“We can get loans of around 30 percent of the value of the collateral property, so if we plan to build a factory worth K600 million as security, we can only borrow around K180 million. We can perform better if we can increase investment with loans from banks. If we can’t take out more in loans, we can’t increase production and improve our competitiveness,” Daw Khin Thein Win, managing director at Min Htete Kaung Manufacturing Co, told Myanmar Business Today.
Despite efforts from the government to overcome these obstacles, the number of banks lending to SMEs remains small. The state-run Small and Medium Industrial Development Bank (SMIDB), and now Yoma Bank, are lending to SMEs compared to over 20 banks providing a basket of financial options to support SMEs in Thailand, which has largely contributed to that country’s economic growth.
Last week the World Bank’s private lending arm, International Finance Corporation (IFC), agreed to loan Yoma Bank $5 million to boost the bank’s capital profile so they can more cheaply lend to the country’s capital-starved SMEs. If successful, the IFC may increase the loan to $30 million over the next couple of years.
SMIDB borrows from the Myanmar Economic Bank (MEB) at an interest rate of 8.25 percent, which they in turn disburse to SMEs at a rate of 8.5 percent.
“The bank can provide loans only up to the amount it gets through government loans. Collaboration from other international organisations remains scarce. Additionally, business management, data and record keeping practices of the industrial businesses are weak, creating problems for the bank to efficiently inspect how the loans are being utilised,” U San Thein, a senior consultant at SMIDB, told Myanmar Business Today.
Although the bank currently issues loans to SMEs, the number of recipients is limited because the majority of SMEs are unable to secure because they are unqualified. SMIDB said it plans to issue K20 billion ($20 million) in SME loans during the 2014-15 fiscal year – double from K10 billion in loans disbursed to 62 companies during the last fiscal year.
“The more loans we secure, the better. Most SMEs don’t have their own facilities. Meanwhile, the government also has to assume risk in granting loans,” U Myat Thin Aung, chair of Hlaing Tharyar Industrial Zone, told Myanmar Business Today.
Interest rate and collateral
Yoma Bank’s Executive Chairman and CEO, Serge Pun, said that his bank is willing to lend to SMEs that lack sufficient collateral. “If we feel comfortable that your business is a viable one, that will have cash flow that is capable of repaying the loan within a certain reasonable period of time, we want to lend to you even if your collateral is insufficient.”
Businesses are interested in obtaining loans from SMIDB because the interest rate is lower, but that the loan that is actually issued is much lower than the value of the collateral property is undercutting their potential. Finance minister U Maung Maung Thein hinted in late June that Myanma Insurance Office will conduct a trial run on issuing loans without securities in order to provide more opportunities for SMEs.
“We will try to provide small loans and promote SMEs ahead of the region-wide free trade system. As we discussed on securities for loans, we will find a way out for SME’s,” said U Thet Naing Win, general director of Myanmar Microfinance Bank, one of the state-run banks.
Businesses can take out more than the allowed amount with the credit guarantee card, where the Credit Grantee Department acts as the guarantor, he said. However, that kind of loan is risky because it does not require any security, he added.
There is no word yet on the interest rate Yoma Bank will use to lend to Myanmar’s SMEs.
Gov’t and foreign support
GIZ, the German Society for International Cooperation, is providing training on controlling loans, systemising banking processes to improve local banks in order to ensure the development of SMEs.
Currently, the Central Department of Small and Medium Industrial Development, under the Ministry of Industry, provides a variety of support mechanisms for SMEs, including technical training in building databases, advice and information for startups, streamlining registration, access to finance, online services to connect with the ASEAN SME Portal, connecting local and foreign SMEs and founding an export consortia of SME team clusters.
The country’s SMEs need urgent assistance in developing and scaling their businesses in order to compete in regional markets when Myanmar enters the AEC in 2018. The government’s ability to support the country’s SME’s acquisition of capital will ultimately determine if they will be successful or fail to compete against their stronger regional rivals.