How much money did you earn last month? When was the last time you borrowed money? Have you opened a savings account? Why do you have to pay interest on a loan? With many tips and useful tools SMART MONEY MANAGEMENT A Basic Financial Literacy Booklet
TABLE OF CONTENTS 1. Why do loans cost money?......................................4 2. Which services do banks, MFIs and cooperatives offer for you?......9 3. Financial and liquidity management............................ 12 4. How to select the right loan for you............................ 16 5. Be safe and save............................................. 25 6. How to choose financial service providers....................... 29 HOW TO USE THIS BOOK Explains why something is useful and important to know Explains technical terms Summarizes the most important points you should check when making decisions/choices regarding financial services Refers you to related topics and more in-depth information If you want to apply what you have learned in this book, you can find templates in the back that you can use to practice your new skills! If you liked the topics and want to learn more: check out the back of this book where you can find additional stories and information! 2
FOREWORD At the moment, financial services in Myanmar are offered by banks, microfinance institutions and cooperatives as well as other providers. Our research has shown that the knowledge of financial services is lower in some parts of Myanmar than in others. Additionally, people from rural areas in Myanmar are particularly interested in learning more about financial services and financial management (especially for their family income and expenses). A number of institutions and people are dedicated to improve financial literacy levels in Myanmar by providing education and training. Our objective with this book is to empower people in their use of financial services by providing basic information and concepts about financial services in Myanmar. ACKNOWLEDGEMENT AND DISCLAIMER This document is supported with financial assistance from Australia, Denmark, the European Union, France, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Sweden, Switzerland, the United Kingdom, the United States of America, and the Mitsubishi Corporation through the Livelihoods and Food Security Trust Fund (LIFT). We thank their kind contributions to improving the livelihoods and food security of the rural poor in Myanmar. The views expressed herein should not be taken to reflect the official opinion of the LIFT donors. We would like to thank everyone, institutions and people, who supported this project and made this booklet possible. 3
Saving & borrowing money 1. WHY DO LOANS COST MONEY? There are many different types of financial institutions. Most relevant in Myanmar at this time are banks as well as cooperatives or micro finance institutions (MFIs). The most basic function of many financial institutions is to collect money from people who do not need their money at the moment (deposits) and lend money to those people currently in need of money (loans), preferably for productive purposes, like in this story: 4
Saving & borrowing money 5
Saving & borrowing money The bank (or cooperative or MFI) basically borrows money from people (depositors) and uses the money to give loans to other clients or members. The advantage for the depositor is that his/her money is kept safe and earns money, so-called interest, because the financial institution pays the depositor for the right to use his/her money. But the institution also charges money from the people it gives loans to and this, too, is interest. Loan interest rate 1 Deposit interest rate Operating costs 6 The interest charged from the loan recipient, the borrower, is normally higher than the interest paid to the depositor because the financial institution has to make enough money to pay the people who gave their money to the institution, pay for its own costs, put aside some money for the cases that loans are not repaid and generate enough extra money to be able to grow. Financial institutions act as financial intermediaries: they collect deposits from many people and pool these funds to issue loans. This enables financial institutions to also give loans for bigger amounts and longer maturities than the amounts and maturities of some deposits. You might have already noted that in Reserves for lost loans Profit the story above, Daw Hla Hla Oo received more money than Ko Saw Chit put into the financial institution and may have wondered why now you know the answer. The financial institution is using not just Ko Saw Chit s money but also that of other depositors. 1 Only applicable to financial institutions providing loans based on deposits only.
Saving & borrowing money It is a key responsibility of financial intermediaries to safeguard the deposits of their clients so that they have to be very careful with regard to whom they give loans. Loans have to be repaid in full and on time so that financial institutions can fulfill their obligations towards their depositors. Financial intermediaries such as banks, cooperatives, MFIs or similar fulfill an extremely important function for the economy as they help to efficiently channel money from people who do not need their money today, like Ko Saw Chit, to those who do, like Daw Hla Hla Oo. One way of doing this involves deposits and loans. Another important function of financial intermediaries is to enable money transfers, i.e. allowing you to send money from point A to point B. This can be domestic transfers, i.e. transfers within the country, as well as international money transfers for example to receive money from a relative working abroad. 7
Saving & borrowing money Licensed financial institutions, such as banks, cooperatives, MFIs, etc. have to follow government rules and are subject to control (regulation and supervision), to ensure that these institutions will keep your money safe, invest it carefully, issue loans at reliable and controlled conditions and, in this way, also increase your money over time. There are many advantages in cooperating with them: The borrower will have reliable loan conditions, i.e. the bank/cooperative/mfi can normally not just ask for the loan back as it pleases. It can also not just change other loan conditions as it wants. This makes life and business easier to plan for the borrower. Usually interest rates are also lower if you borrow from a licensed institution. 8 The depositor will have the assurance that his/her money is kept safely and that he/she will receive the deposited money plus interest after a certain amount of time (according to agreed conditions, you can find more details on these conditions here: 5. Be safe and save).
Financial services 2. WHICH SERVICES DO BANKS, MFIS AND COOPERATIVES OFFER FOR YOU? You can choose different savings and loan products from banks, MFIs and cooperatives. In this chapter, we summarize some of the most common products and services you will find in Myanmar. Accounts are used for storing money and for sending and receiving money (e.g. bill payments, receiving and repaying a loan). The most commonly used accounts for individuals include current and savings accounts (please note that not all institutions in Myanmar offer all types of accounts): A loan is money you borrow, e.g. from a bank, with a contractual obligation to repay it with interest, which is the price you have to pay for being allowed to use the money. Loans should be obtained for a specific and productive purpose, but overall, the reason for taking out a loan should be to improve your personal situation or living conditions in a manner which does not jeopardize your current or future financial status, i.e. you should use a loan for productive purposes or at least to invest in things which will not make you worse off in the future. Savings: as you know from Ko Saw Chit s story, you can save money with certain types of financial institutions. There are various options you can choose from and they basically depend on (i) how much money you can deposit, (ii) when you want to access your money that is stored at the institution and (iii) how much money (interest) you want to get paid. You will learn more about this in 5. Be safe and save. 9
Financial services THE MOST COMMON TYPES OF SAVINGS AND LOAN PRODUCTS CURRENTLY AVAILABLE IN MYANMAR INCLUDE: Save money with a licensed financial institution* Borrow money from a licensed financial institution* VOLUNTARY SAVINGS COMPULSORY SAVINGS GROUP LOANS If you are a member of a cooperative or an active borrower at an MFI licensed to accept deposits, you can also deposit money with these institutions You can withdraw your savings anytime but may need to inform the MFI in advance about the timing and amount you want to withdraw. You will receive interest on your savings with an MFI. Terms and conditions among MFIs may vary and it is important to compare different offers. At cooperatives, members typically fix regular savings amounts, interest rates and terms and conditions among themselves. You can also open a savings account with a bank. You do not need a lot of money to save with a bank a few thousand kyats can already be enough to open an account. Typically, a bank offers you different interest rates for your deposits, depending how long you put your money into the bank (you can find more details on the different interest rates here: 5. Be safe and save) If you want to borrow from most MFIs or some cooperatives, they require you to deposit a certain amount as a security measure to cover some portion in the case of a potential loan default. Some MFIs set a small amount of compulsory saving and collect every week or every month while others collect the full amount of compulsory saving by the time of loan disbursement. Most loans offered by MFIs and cooperatives are group loans. The idea of group loans is that small groups of borrowers guarantee for each other, i.e. if one group member does not pay, the other group members have to pay for this member as well as paying their own share. Since MFIs and cooperatives do not require collateral, they use this group principle as a control mechanism to make sure that loans are fully repaid. While it may be an advantage that collateral is not required for this type of loan, consider that you also have to bear the repayment risks of your fellow group members. Group loans are disbursed individually. Terms and conditions may vary according to the institution and specific loan product. 10 * Examples based on 2015 data. Note that actual product features might be subject to change.
Financial services INDIVIDUAL LOANS Banks typically offer individual loans. Individual means that you do not need to guarantee for other people s loans but you still need to provide the bank with something that will protect the bank in case you would have difficulties in loan repayment. This, typically, are collateral (usually, land or land and buildings) as well as one or more guarantor(s). The loan amounts banks can offer are higher than those MFIs can offer, although the approach of banks may be more bureaucratic than the MFI approach Some MFIs have started to offer individual small business loans in Myanmar. For these loans, you do not need to guarantee for your fellow group members. But the MFI will check the financial situation of your household and your business to see whether you can repay the loan and will also ask you to find guarantors. HP LOANS Banks (as well as some cooperatives and MFIs) offer hire-purchase (HP) loans. HP loans can be used for purchasing a limited range of items, typically for buying equipment. You can apply for this type of loan if you have some, but not all of the money to buy the item (usually, you need to have at least 30% of the purchase price although this share can be lower with some banks). The bank then buys the item on your behalf and you hire it from the bank and can use it. For this you pay. In addition, you will also start paying back the loan to the bank. The goal is that you will fully own the item once you have fully repaid (including interest, fees, commissions etc.), i.e. you purchase the item. Depending on the item in question, hire purchase contracts may run for several years. HP loans can be used for purchasing a limited range of items. Some MFIs and cooperatives also offer HP loans. Guarantor Many of us have been asked at one time or another to act as guarantor for someone else. Maybe you have looked at it as a pure formality, doing your friend or relative a favor that does not cost anything. However, being a guarantor is not a formality. It is a legal obligation that can cause hardship for you and your family if things do not go well: if the primary debtor does not fulfill his/her obligations, i.e. repay the loan on time and in full, you as guarantor will be asked to step in and take over all payments (full outstanding amount plus interest, penalties, court fees, etc.). Ask yourself the following questions before agreeing to become a guarantor: How well do I know the primary debtor? How reliable is he/she? How does the primary debtor plan to repay the loan? Does he/she have the resources to repay the loan? If something went wrong, would I be able to step in and repay the loan? What would this mean for my family, my business and life? Do I really want to accept this role? Many people feel some moral or emotional pressure to accept the role against their intuition. 11 Think carefully before you become a guarantor!