In Myanmar, banks require collateral in the form of property before they are able to extend loans to start-ups and SMEs which do not have a proven financial track record. While these measures are prudent for the banks, many promising businesses are not able to obtain the financing they need to grow, which, in turn, holds back further economic development.

“Under the current economy, secured loans are necessary for financial prudence. But when a businessman wants to invest in his business and needs capital, he faces difficulties if he does not own properties he can use as collateral. For further economic development, we need to also allow unsecured loans,” said Dr Aung Thura, CEO of Thura Swiss, which provides consultancy services to the Yangon Stock Exchange.

Lack of capital

Currently, local banks extend loans at interest rates ranging between 8.5 percent and 13pc. The local banks began offering SME loans at8.5pc interest in 2015. Since then, the Japan International Cooperation Agency (JICA) and KfW Development Bank from Germany have also launched SME loans.

But qualifying for loans is notoriously difficult in Myanmar. To qualify for an SME loan, businesses must obtain recommendations from the SME Development Department and Republic of Union of Myanmar Chamber of Commerce and Industries (UMFCCI). The borrower must be a UMFCCI member and be up and running for at least two years to be eligible for a recommendation.

Together with its financial statements and business plan, the borrower can then apply for a JICA SME loan through local banks like Apex Bank, AYA Bank, Cooperative Bank, Myanmar Citizens Bank and the Small & Medium Industrial Development Bank.

P2P lending

While this has helped to alleviate the capital constraints for some businesses, many others still struggle to attain the necessary capital, particularly entrepreneurs who are just starting out.

To get around the financial constraints, borrowing from family members and peers is common. Take Ma Khin Yadana, a dress shop owner in Yangon. After losing her savings when a business decision went wrong, she sought help from other entrepreneurs on Facebook who were willing to invest in her start-up by extending credit via a peer-to-peer (P2P) lending system. In return, the funds would be paid back at a hefty interest rate.

“I don’t want to go on like this. But if I go to a bank for a loan, none of them will lend to me. Banks only want to give loans to people with collateral. It is impossible for people like us. I have started my business like this and have to repay debts at 10pc interest rate monthly. That’s 120pc yearly,” said Ma Khin Yadana.

In fact, a rising number of businesses have resorted to P2P lending for funds to build up their businesses. Without any guarantees of success though, many entrepreneurs ultimately end up in debt. Others fall prey to fraud. Last year, The Myanmar Times reported at least three cases of fraud involving fake promises of repayments with up to 30pc interest.

Why banks don’t lend

To ease financing restrictions and encourage more growth, the Central Bank of Myanmar (CBM) said November that a maximum of three years would be given to banks to recover the overdraft loans that make up the bulk of their lending. The original deadline was January 2018, six months after the regulations were introduced in July.

The CBM will now allow banks to keep debt in the form of overdrafts – most of which were made on open-ended, preferential terms with customers – at 50pc of their loan books by July 2018 and 20pc by 2020. In December, the CBM went on to allow foreign banks to extend financial assistance to local exporters.

Notably, loans unsecured by collateral were also permitted, subject to approval by the lender and depending on the cash flow and industry of the borrower, a vice governor of the CBM and deputy minister from the Ministry of Planning and Finance told The Myanmar Times.

But local banks also face constraints when lending to the public. For one, the banks can only offer loans commensurate with deposits. “Commercial banks are responsible for preserving the savings of the public. Each time we lend, we are taking a risk,” said U Pe Myint, senior adviser to CB Bank.

Indeed, Myanmar’s overdraft loans are estimated to amount to $9 billion currently, representing about 70pc of local banks’ total lending, according to Reuters.

“Banks do offer loans without collateral but these are typically extended to large companies with low risk of default. But banks are not at liberty to lend to everyone due to the high risk of default,” he added. Just last week, Ayeyarwaddy Bank issued letters to credit card holders with outstanding payments, urging them to repay their debts.

“This is Myanmar’s big problem. People do not pay back what they owe. While it is true that businesses need loans without the burden of collateral, but banks also have a lot at stake when deciding who to lend to,” U Pe Myint said.

Banks, businesses must buck up

For unsecured loans to work in Myanmar, lenders and borrowers must buck up. “To offer unsecured loans, the banks should restructure their risk management procedures, making them more robust. They should hire qualified analysts who can read the financial statements of potential borrowers and who understand the nature of their businesses so that forecasts can be made to gauge the possibility of future profits or losses,” said Dr Aung Thura.

“In the past, the central bank completely disallowed disbursements of unsecured loans. But now, they are making exceptions. They recognise the small-scale industries cannot give collateral. So, we need to get better at analysing the prospects of the various businesses and industries,” said U Mya Than, a banking expert.

U San Thein, another banking expert, agreed.”We’ll have to improve our credit analysis department and provide proper training to our staff,” he said

Businesses should do their part, too. For example, companies need to be able to prepare and display their financial statements and be able to provide answers to questions regarding the statements raised by the banks.

“The banks will be extra cautious when evaluating the authenticity of the financial statements. If any figures appear dubious, they will not be inclined to extend the loan. We’ve encountered many businesses that desire capital but which do not have data that is up to standard,” said Dr Aung Thura.

“The majority of companies in Myanmar do not want to prepare statements as they’re worried about costs being high. But if a company wants to search for outside investors or just receive a loan from banks, the best way for it is to do so is to have the required statements and data.”

While the CBM allowing banks a freer hand in managing and disbursing capital is a major development, it will take time for the industry to adjust and implement the necessary changes needed to provide greater capital access. For now at least, unsecured loans approved by the banks are still out of reach for many.

Source: https://www.mmtimes.com/news/myanmar-takes-small-steps-towards-providing-greater-liquidity-smes.html