In order to regulate microfinance businesses, the Microfinance Business Law was enacted in 2011. To replace this law, a new bill has recently been submitted by the Pyithu Hluttaw Banking and Financial Development Committee. The report of the bill committee has been read in the Hluttaw, and the list of MPs wishing to participate in the debate has been requested. In this bill analysis, we examine the new bill.
(1) Peculiar monitoring
A Rural Development and Poverty Reduction Working Committee led by the Vice-President was at the apex of regulatory bodies for microfinance businesses under the previous law. However, in the new bill, this national-level committee will no longer have a role. Instead, two committees – a Microfinance Supervisory Committee and a Microfinance Business Working Committee – will perform the regulatory functions. The working committee’s role has been clarified in the new law: it will be tasked with investigation of the conduct of microfinance businesses, and monitoring their compliance with the law. The Financial Regulatory Department (of the Ministry of Planning and Finance) is also tasked with new duties. The slight reduction in the number of committees and the inclusion of clearer tasks for both the working committee and the department implies a stronger role for the government bureaucracy to administer the microfinance sector, hopefully relying less on the sometimes arbitrary decisions of committees.
Curiously, the bill makes it compulsory for licensed microfinance businesses to become members of the Myanmar Microfinance Association (MMFA). If they are not members, businesses may have their licence revoked. It does not seem usual practice for a government to require businesses to be a member of specified industry association in order to operate. It also raises a question of why this further complication of microfinance business registration is being brought in, in addition to registration under the Myanmar Companies Law, and at a time when the general direction ought to be towards reducing unnecessary regulatory burdens on businesses.
The MMFA is a non-government business network that provides various trainings and workshops to its members, who currently join the organisation voluntarily. The appropriateness of formalising the role of the MMFA and linking it to the licensing and monitoring responsibilities of government, is questionable. Also currently the region/state level working committee is responsible for duties “to train and educate microfinance businesses so as to thrive”. Does this change in the law mean all training and education activities are now centralized under the MMFA?
(2) Strict and confusing business licence
For the business licence, the existing law requires submission of an application form and a feasibility study to the supervisory committee, through the working committee, which then has 30 days to reply. The new bill adds the requirement to submit a 3-year business plan through the department. In issuing the license, the working committee submits the request to the supervisory committee in 30 days, and the supervisory committee replies in 60 days. The licence will initially be temporary (for one year), but after examination of the working situation, a permanent licence can be issued later.
In principle, the required submission of a 3-year business plan and the issuance of 1-year temporary licences is not a problem. However, as with many new laws in Myanmar, decision-making authority is being conferred on a committee without clear and transparent guidelines about how decisions will be taken. Further, there is no mention of the required duration of application processing by the department. Instead of establishing clear rules and a transparent streamlined process for businesses to follow to secure their licence, government has instead opted to create a multi-level approval process which risks creating new barriers for businesses.
(3) The prospect of more active money circulation?
The new bill says that microfinance businesses have to deposit 25% of net profit in the reserved fund, until 30% of the original capital they started with has been repaid. The existing law required profits to be saved in this way until 100% of the capital has been repaid. This in effect means that more money will be in circulation in the economy.
Further changes seem to point to a more permissive business environment and have the potential to see more money/credit in circulation. For example, the existing law specifies microfinance lenders can be “local and foreign institutions, partnership firms, companies, cooperative societies, banks and other non-banking financial institutions”, whereas the new bill refers to any bodies established under the Myanmar Companies Law and the Partnership Act.
Behind the potential of more active money circulation there are some forgotten considerations. An example is the issuing of the credit only to the microfinance business members, excluding the basic class people (unlike the existing law). This is contrary to the objective of the bill which is the support in building the inclusive financial system. The next one to be considered is the fact that cooperatives and NGOs/INGOs are excluded. This could perhaps be addressed simply by adding organisations established under the Registration of Associations Law. Even though this is in line with the report of the Pyithu Hluttaw Banking and Financial Development Committee on 21st of May 2019, we should ask what the reasons are for excluding NGOs/INGOs and what the impacts on microfinance provision will likely be.
(4) Ambitious implementation
There are two main approaches in the conduct of alleviating the poverty through the microfinance business. One is the minimalist approach, whose proponents believe a microfinance business should only provide the financial service, and not other services, in order to reduce administrative and transactional costs and keep interest rates low. The second approach is ‘credit-plus’, in which not only credit but also skill development, marketing assistance, supply of inputs, and business development services are also provided. This approach is more widely accepted as supporting borrowers and ultimately ensuring loans are repaid.
The bill also broadly implies this credit-plus approach. For example, microfinance businesses will be required to comply with Client Protection Principles providing financial knowledge to its members. However, motoring and enforcement of such a provision will create an additional burden and remains to be seen whether this will be implemented in practice.