YANGON UNIVERSITY OF ECONOMICS DEPARTMENT OF COMMERCE MASTER OF BANKING AND FINANCE PROGRAMME CREDIT ACCESSIBILITY AND THE EFFECTIVENESS OF LOAN ON FAR PERFORMANCE (A Case Study of WAKEMA TOWNSHIP, AYEYARWADY REGION) CHIT SU WIN (MBF-4th BATCH) DECEMBER, 2018 CREDIT ACCESSIBILITY AND THE EFFECTIVENESS OF LOAN ON FAR PERFORMANCE (A CASE STUDY OF WAKEMA TOWNSHIP, AYEYARWADY REGION) A thesis submitted as a partial fulfillment towards the requirements for the degree of Master of Banking and Finance (MBF) Supervised by: Submitted by: Dr Tin Tin Htwe Chit Su Win Professor Roll No - 87 Department of Commerce MBF – 4th Batch Yangon University of Economics Yangon University of Economics DECEMBER, 2018 ABSTRACT The purpose of this study is to examine the relationship between credit accessibility and the effectiveness of Loan on Farm Performance in Wakema Township, Ayeyarwady Division. Both of the primary and secondary data were used in this study. There are 125 village tracts in Wakema township and random sample of 83 active agricultural farmers was obtained from 5 village tracts which represent 10% of farmers from those 5 village tracts. Face to face interview was applied with the help of structured questionnaires. Correlation and regression models were used to test whether the performance of agricultural farm is affected by credit accessibility and also if there is any relationship between the two. There is a significant positive correlation between credit accessibility with the farm yield and farm income per acre but formal low interest loan is not enough during farming seasons. Thus, credit accessibility is the most important factor for farm’s performance and need government support to get enough loan amount during farming season with low interest rates. Farmers also need the supply of certified paddy seeds, enough agricultural research and knowledge sharing about fertilizer use, crop diversification to maximize profit, and also need the quality of agricultural mechanization to improve country’s economy. i ACKNOWLEDGEMENTS First and foremost, I would like to thank Prof. Dr. Tin Win, Rector of Yangon University of Economics, for his kind support and wisdom granted to MBF students. I wish to express my sincere gratitude to Prof. Dr. Daw Soe Thu. Programme Director MBF Programme who gives time and patience for kind suggestions, guidelines and comments on the text of this paper. I am most grateful to my thesis supervisor, Prof. Dr. Daw Tin Tin Htwe, Professor, Department of commerce. The guidance and support that she gave really help me for the progression and fluency of the thesis. Especially, I would like to thank all lecturers of MBF Course for their knowledge and experiences that they shared during the course. For the field research, I would like to send my thankfulness to people in General Administrative Office staff in Wakema Township and village head and farmers for their help in providing information and my essential friend who helped me collecting data in study site. I am grateful too, my classmate who shared their experiences during studying time. ii TABLE OF CONTENTS Page ABSTRACT i ACKNOWLEDGEMENTS ii TABLE OF CONTENTS iii LIST OF TABLES v LIST OF FIGURES vi LIST OF ABBREVIATIONS vii CHAPTER 1 INTRODUCTION 1.1 Rationale for the Study 3 1.2 Objectives of the Study 5 1.3 Scope, Method and Limitation of the Study 5 1.4 Organization of the Study 6 CHAPTER 2 THEORETICAL BACKGROUNG OF THE STUDY 2.1 The Role of Agricultural Credit 7 2.2 Credit Accessibility 8 2.3 Measuring farms Performance 10 2.4 Previous Study 11 2.5 Conceptual Framework of the Study 14 CHAPTER 3 THE BACKGROUND STUDY OF AGRICULTURAL LOAN IN WAKEMA TOWNSHIP 3.1 Overview of Agricultural Sector in Myanmar 16 3.2 Myanmar Agricultural Public Expenditure Review 17 3.3 Background Description of Wakema Township 23 CHAPTER 4 ANALTSIS OF AGRICULTURAL CREDIT 31 ACCESSIBILITY AND ITS EFFECTIVENESS ON FARM PERFORMANCE 4.1 Research Design 31 4.2 Background Characteristics of Respondents 32 4.3 Credit Accessibility of Respondents 33 4.4 Farm Performance 41 iii CHAPTER 5 CONCLUSION 44 5.1 Findings 44 5.2 Suggestions 47 5.3 Needs for Further Research 48 REFERENCES APPENDIX iv LIST OF TABLES Table No. Title Page 1.1 Annual Interest Rates and Margin of MADB 4 3.1 Land Utilization of Paddy for Ayeyarwady Region Vs the Whole 17 Myanmar 3.2 Recent Agricultural Grow (%) was slower and more volatile than 18 in Other Sectors 3.3 Myanmar’s Agriculture is Still Large in National Accounts 18 3.4 Type of Loans Offered by MADB 19 3.5 Yearly Rainfall and Temperature in Wakema Township 26 3.6 Individual Income for Wakema Township 28 3.7 MADB Agricultural Loan Distribution by Crops, Value in Kyat 29 Millions 3.8 MADB Loan Distribution by Season in Wakema Township, 30 Value in Kyat Millions 4.1 Sample Respondents in the Study 32 4.2 Demographic Characteristics of Respondents 33 4.3 Number of Respondents by Average Yearly Income 34 4.4 Main Source of Income 35 4.5 Number of Respondents by Years of Rice Cultivation 35 4.6 Number of Respondents by Acres of Rice Cultivation 36 4.7 No. of Respondents by Amount of Rice and Other Crops 38 Production 4.8 Credit Accessibility from Formal and Informal Lenders 38 4.9 No. of Respondents by Receiving Adequate Loan Amount from 39 Formal Financial Institutions 4.10 Loan Readiness from Formal and Informal Lenders 40 4.11 Paddy Yield per Acre of Respondents 41 4.12 Correlation between Credit Accessibility and Farm Yield 42 4.13 Correlation between Credit Accessibility and Farm Income per 42 Acre 4.14 Regression Results for Farm Income per Acre 43 4.15 Regression Results for Farm Yield 44 v LIST OF FIGURES Figure No. Title Page 2.1 Conceptual Framework Showing Credit Terms, Credit 13 Accessibility and Performance of Agricultural Farm 2.2 Conceptual Frame Work of the Study 15 3.1 Wakema Township Map 25 vi LIST OF ABBREVIATIONS A Bank Ayeyarwaddy Farmers Development Bank ADB Asia Development Bank CBM Central Bank of Myanmar CSO Central Statistical Organization CSO Central Statistical Organization EUR Euro Dollar EUR Euro Dollar GDP Gross Domestic Product GDP Gross Domestic Product INGO International Non-Governmental Organization INGO International Non-Governmental Organization MAB Myanmar Apex Bank MADB Myanmar Agricultural Development Bank MEB Myanmar Economic Bank MFI Microfinance Institutions MIA Myanmar Industries Association MIMMU Myanmar Information Management Unit MMI Myanmar Investment MMK Myanmar Kyat MRF Myanmar Rice Federation MRSC Rice Specialized Companies NGO Non-Governmental Organization vii CHAPTER I INTRODUCTION Agricultural credit accessibility and loan effectiveness is important to boost country’s economic growth for developing country like Myanmar because seventy percent of the country’s economy depends on the agricultural sector, and the modernization of the agriculture sector is a critical element for poverty alleviation and prosperity of the country. Agricultural financing is one of the most important factors to develop rural areas in developing countries like Myanmar. Therefore, agricultural credit should not be considered in isolation but as part of an integrated process of economic development and social betterment applied in such a way that rural populations share in the results. Efficient systems of agricultural credit are necessary if agricultural make its contribution in national improvement. It is important for farmers to get agricultural credit by means of enough loan amount with low interest rates because farmers need to improve their farm performance and increase productivity by employing techniques such as the use of fertilizers, spraying their crops against pests and diseases, training labor, quality seeds and machinery. These investment need should not be financial burden and constraints to the farmers. To elimination the farmer`s financial constraints to invest in farm activities, increasing productivity and improving technologies, farmers need the agricultural credit by enough amount with low interest rates. To develop the above performance, firms need a loan which the loan accessibility and effectiveness are the important factors for the agricultural sector in Myanmar. Accessibility of Agricultural credit by farms were set by lending institutions and, in doing so, affect the performance achieved by firms. Financial institutions’ lending policies often determine the access problem: when credit terms and provision of supplementary be rejected (Guirkerger, 2006). Therefore, the performance of the firms cannot be considered in terms of profitability and productivity alone but must also take into account the fact that farm’s access to credit and how effectiveness of these loan would play a vital role in their performance. The accessibility of formal credit is still fairly constrained and not enough makes the farmers to turn more expensive and unreliable informal credit sources whose interest rates are normally higher. In Myanmar, government have to play a 1 large part in formulating development programs such as the role of agricultural credit in overall national plans and programs to support the agriculture sector. Among the government institutions supporting the agriculture sector, the Myanma Agricultural Development Bank (MADB) plays an important role. MADB is state owned and the successor to the State Agricultural Bank (SAB) established in 1953, which latterly became the Myanma Agricultural Bank (MADB) in 1976. In 2018, it has a countrywide network of 14 regional offices, 208 branches which provides short term and long-term credit to over 2 million farmers. During 2014/15, MADB provides 71% of total agricultural loan from all sources of financial institutions and it is the largest portion of agricultural loan provider in the country. Myanmar is an agricultural country and estimated that agriculture sector represents 35 to 40 percent of gross domestic product (GDP) (THE WORLD BANK GROUP, 2014, Myanmar Agricultural Development Bank: Initial Assessment and Restructuring Options) and over seventy percent of the population survives by farming agriculture and it is also a major source of income in Myanmar.