SPECIAL REPORT: The Place of MFIs in the Financial Inclusion Ecosystem of the Mekong Region

TheBanking With the Poor Network roles of MFIs in financial systems vary significantly from country to country, even within the Mekong region. Somphone Sisenglath, Managing Director of Ekphatthana Microfinance Institution, described the Lao industry as “very young,” with the median MFI just three years old. Most MFIs operate in the capital, Vientiane, while 80 percent of the population is rural. Since it often takes an hour to travel between villages, it is very expensive to serve people in these areas.

Ko Ko Maung, Division Director at Myanmar’s Ministry of Planning and Finance, explained that in Myanmar “the government bank serves all areas of the country, especially farmers. Plus we have cooperative societies expanding across the 60,000 villages of the country.”

Anya Berezhna, Regional Manager for Symbiotics, said “in Cambodia, we see more and more credit going into the capital city.” To balance this, Leonie Lethbridge, the CEO of ANZ Royal, Cambodia, said “we work with MFIs to extend our own footprint. We have a partnership here with HKL [Hattha Kaksekar Limited] extending our outreach.” Robin Gravesteijn, Data Management Specialist at the United Nations Capital Development Fund, said “we’ve had a strong increase in access over the past 10 years. Since then, this sector has moved really fast. For the first time last year, we had more depositors than borrowers.” Ms. Lethbridge argued that “microfinance is not fundamentally about loans…. It’s very important that people have the capability to save and to move money to run their daily lives.”

Ms. Berezhna asked the panelists whether the trend of Cambodian MFIs converting into banks would spread within the region. Mr. Sisenglath responded “for now, the requirement to become a bank is quite high, needing maybe USD 60 million in capital. No MFI [in Lao PDR] qualifies for that. Maybe in five to 10 years.” Ms. Lethbridge argued that high barriers to entry are important because it is too hard for regulators to supervise a large number of tiny institutions. However, she argued that it is good for MFIs to offer savings. “Does that make MFIs competitors to banks? Typically no, because of the different [employee] skills and target markets – and the cost structures in serving those different types of markets.…” She described MFIs and banks as “complementary.”

On the topic of capital requirements and other regulations, Mr. Maung said that “we got help from Cambodia.… Then we got technical assistance from ADB, UNCDF, the World Bank and other stakeholders.” However, the landscape in Myanmar is still in the early stages, with no credit bureau, no microinsurance and foreign MFIs barred from raising domestic funds. Microloan interest rates are capped at 30 percent per year, and foreigners investing in hard currency are limited to annual returns of 8 percent. Although the focus in Myanmar currently is on group loans, some micro, small and medium enterprises have been able to access individual loans, and the Ministry is considering additional regulation to protect depositors.

While Lao PDR also lacks microinsurance, Ekphatthana is working now to launch loan insurance, pending regulatory approval. Regarding the design of new products,
Mr. Gravesteijn said “we’ve got a lot of data, but we’re not always using it to the fullest potential.” He suggested that further segmentation can be beneficial. For example, a woman is likely to need different products depending on whether she is single, managing a household and/or running a business. Mr. Gravesteijn noted that women who have more control of household decisions save more money. In contrast, Mr. Maung argued “financial literacy is very important, but it is difficult to change behavior. Men do not like to save money.”

Ms. Lethbridge said “one of the financial lynchpins that is weak in many markets including Cambodia is the ability for people to understand money and the choices they have. However limited the cash flow may be, it’s important that they understand it. We do a lot of financial education…. Inculcating [good savings habits] at a young age is important.”

Mr. Sisenglath agreed: “If they open their first savings account at age 40, it is hard to change their minds. In 2011, we started training teachers to teach children about money. Students were not interested. So we partnered with a media company and created a game and TV show that airs on Saturdays. We had a video contest. Kids turned in a 3-minute video and voted on Facebook for the winner…. To go further, we created ‘Smart Financial Centers’ in schools with students acting as managers and tellers at 52 schools. 40,000 kids are enrolled now.”

Building brand affinity at a young age can be important. Mr Gravesteijn reports that in Cambodia, “exit rates” are high. After repaying a microloan, 28 percent to 39 percent of borrowers terminate their relationship with their MFI. This is expensive; it costs five times as much to land a new client than to retain an existing one. To boost customer retention, there may be simple answers like increasing loan size. Other options may be more expensive, but less likely to lead to over-indebtedness. As an example, Mr. Gravesteijn stated that “at IMON International in Tajikistan, staff tried giving women four days of enterprise training. This group had a 5-percent higher retention rate.”

With countries in Mekong region at very different stages of financial sector development, there are myriad opportunities to borrow impactful ideas from neighboring markets as well as from countries across the world.

In anticipation of the recently announced Asia-Pacific Financial Inclusion Forum, which will be held in Hanoi, Viet Nam, on March 21 and March 22, 2017, MicroCapital is publishing this story as part of a series from the Banking with the Poor Network‘s Mekong Financial Inclusion Forum, which was held in July 2016. The Foundation for Development Cooperation engaged MicroCapital to assist in documenting the event.

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