A unique partnership was created between Cordaid Investments (impact-first investor), The Livelihoods and Food Security Trust – LIFT (donor) and TCX (private sector), in which financial security was combined with social impact in Myanmar. As a result, Cordaid Investments committed 10 million € in loans to develop and strengthen the Myanmar microfinance sector. In 2017, we thus reached almost 59.000 micro-entrepreneurs, including many smallholder farmers.
The collaboration between Cordaid Investments and LIFT started in 2016. Back then, Cordaid Investments was looking to start operations in Myanmar. In this country, the microfinance market is underdeveloped and the adult population uses the informal sector to access finance.
We believe that our investments can make a difference in one of the poorest countries in South and South East Asia.
The majority of potential clients for microfinance institutions live in rural areas. But without funding, the MFIs cannot expand to rural areas. In 2012, it was estimated that the demand for microcredit was nearly a billion dollars.
Making investments, despite the risks
Cordaid Investments made an analysis of the country and identified several risks. The most important ones were political, regulatory and financial. Despite these risks, Cordaid Investments – as impact investor that works towards financial inclusion and fighting poverty in fragile and conflict-affected states – decided to make the first investments. We believe they can make a difference in one of the poorest countries in South and South East Asia.
Providing funds, just in time for the planting season
As Cordaid Investments is in a better position to manage currency risks than our investees, we make our investments in local currency whenever possible. In that sense, Myanmar represented a big challenge for us. Not only the expected devaluation of the Myanmar Kyat was high but also the government imposed a cap on the interest rate that foreign investors could charge.
This innovative blending solution took a lot of creativity and collaboration from the three parties involved.
Hedging was not an option because it would have outpriced us. Due to all these factors we experienced losses in our first investment in Myanmar. On the positive side, with our investment, our partner could provide the funding to the small farmers just in time for the planting season.
Seeking innovative solutions
We wanted to keep supporting the microfinance sector in Myanmar, but incurring losses was not sustainable. After looking for different options and long discussions, we partnered with LIFT, a donor consortium that aims to improve the lives of rural people in Myanmar, and TCX, that started to provide hedging against the Myanmar Kyat volatility.
This innovative blending solution took a lot of creativity and collaboration from the three parties involved. LIFT contributed with grants to cover not only the currency risk but also to provide capacity building to the MFIs. TCX provided the expertise for the hedge. As a result, Cordaid Investments disbursed €10 million in loans between end 2016 and mid 2017 to support 4 MFIs. In this way, we reached 58,814 micro-entrepreneurs in 2017, including many thousand smallholder farmers.
(featured image: smallholder farmer (with child), client to one of the MFIs supported by Cordaid Investments. © Cordaid / Melina van Scharrenburg)