The small loan opportunity

Microfinance has got off to a slow start in the Middle East, hampered by a lack of regulatory support and government backing, but the potential for growth is huge. Published in MEED, 10 December 2014

Microfinance may involve small loans, but they can have a big impact. Take for example the $200m that the UAE’s Khalifa Fund for Enterprise Development has agreed to provide to Egyptian businesses. The deal was signed in Cairo in late November and will see Egypt’s Social Fund for Development lend the money in poorer and more remote areas of the country.

Hussain al-Nowais, chairman of the Khalifa Fund, says it should be enough to support 100,000 projects and help to provide up to 120,000 jobs over the next six years.

The move will add to Egypt’s position as one of the leading markets for microfinance in the Middle East. There are 77 microfinance institutions (MFIs) across the region, according to the Washington-based Microfinance Information Exchange (MIX). Between them they have close to $1.6bn in outstanding loans extended to 2.8 million people. Egypt is one of the most active markets, with 16 institutions, more than 1 million borrowers and about $275m in outstanding credit.

Despite the impression that such figures give of a vibrant industry, the sector is still somewhat underdeveloped in the Middle East and North Africa (Mena) region.

The microfinance sector in the Mena region is the most underdeveloped in the world, with the lowest active number of borrowers, the smallest outstanding portfolio, and the lowest number of MFIs per million people,” says Mohamed Khaled, Mena programme manager for microfinance at the International Finance Corporation (IFC), the private sector arm of the Washington-based World Bank.

“Lending by microfinance providers reaches only 1.8 per cent of the adult population. This is half the rate of South Asia or Latin America and the Caribbean. Even in Morocco, the country that has made most progress in developing the industry, microcredit loans barely exceed 1 per cent of total bank credit, compared with 7 per cent in Latin America and the Caribbean and 5 per cent in Africa.”

There are several reasons for the weakness of microfinance in the Middle East. One is political instability, which can dissuade some providers from entering the market. Rupert Scofield, CEO of US-based microfinance specialist Foundation for International Community Assistance (Finca), which operates in 22 countries, including Jordan, says his firm was on the verge of expanding into Egypt and Syria before the protests broke out there in 2011. With political stability returning to Egypt, Finca is starting to reconsider a move into that country, but Syria remains out of the question.

“We’ve worked in countries where there have been some guerrilla movements,” says Scofield. “That doesn’t trouble us. But we can’t operate in a situation of full-scale war.”

MFIs that were already up and running in some of the unrest-hit countries have come under pressure. In Tunisia, for example, Enda Inter-Arabe found that many of its clients were unable to make payments on time during the upheaval. In the end, it turned to the IFC, which gave it a local currency loan worth $6.5m.

Cultural issues are another factor. In many parts of the world, microfinance has often begun with loans to women running small businesses. The restricted role of women in Arab countries does not preclude that from happening, but it can make it harder, according to industry executives.

According to data from Sanabel, a network of regional MFIs, the proportion of female borrowers is as high as 90 per cent in Jordan and above 60 per cent in Bahrain, Egypt, Sudan, Tunisia and Yemen. In Iraq, by contrast, the proportion stands at just 19 per cent.

Some lenders are actively trying to target female borrowers. Soha Soliman, managing director of Egypt’s Social Fund for Development, says 25 per cent of the $200m provided by the Khalifa Fund will be lent to women-led enterprises. And in December 2013, Dubai-based Grameen Jameel, which operates in 10 countries around the region, provided a $2m loan to the Microfund for Women in Jordan to help it expand.

However, the biggest single factor explaining the limited reach of MFIs in the region is the lack of supportive regulation, according to the IFC’s Khaled, although he says the situation is starting to improve in some places.

“The inability of MFIs to accept deposits in many of the region’s markets, underdeveloped financial infrastructure such as credit bureaus and asset registries, and low levels of financial literacy among potential clients all contribute to the limited microfinance outreach in the region,” he says.

“The exception to this is in Syria and Yemen, which have more progressive regulatory frameworks. It is also in the process of changing elsewhere in the region, with regulators in Palestine, Tunisia, Egypt and Morocco now issuing microfinance-specific laws. However, the results of these changes have yet to be seen.”

Industry executives often echo these criticisms. For example, Amro Abouesh, CEO of Egypt’s Tanmeyah Micro Enterprise Services, told the MEED Invest in Egypt conference held in Dubai on 27 November that the microfinance sector has struggled to win support from the government.

“We have had frustrating discussions with the government about microfinance,” he said. “They say: ‘Why do we need to have non-banking institutions in this sector?’ We say: ‘We are best-placed to solicit savings from the streets’.”

Despite all these hurdles, microfinance has made inroads into most countries in the region. Sanabel has about 90 members in 12 countries, from the Abyan Savings & Credit Programme in Yemen to Vitas in Lebanon.

But there are some good reasons why governments should offer more support to the sector. Among the most important is that it provides a useful alternative to banks, which often appear uninterested or unable to reach large swathes of society.

As it stands at the moment, the banking sector in the region is still often a minority pursuit. In Yemen and Sudan, fewer than 10 per cent of people aged above 15 have a bank account, while in Egypt and Iraq the proportion is 10 and 11 per cent respectively, according to the World Bank Findex database. In many other countries, including Algeria, Jordan, Lebanon, Mauritania, Morocco, Syria, Tunisia and the West Bank & Gaza, fewer than half of adults have a bank account.

The situation is different in most Gulf states. Saudi Arabia has a banking penetration rate of 46 per cent, but among the other five GCC countries, the proportion varies from 60 per cent in the UAE to 87 per cent in Kuwait, while the figure for Iran is 74 per cent.

This issue of access to financial services matters because otherwise it can be either impossible or extremely expensive to gain access to credit. That in turn undermines the ability of the entrepreneurial poor to launch or expand a business and improve their lives.

“Microfinance is a key tool that can help enhance access to finance to the unbanked, especially for those segments that are normally marginalised, including youth and women,” says Khaled. “Expanding access to finance through the development of strong microfinance sectors can improve household welfare, spur household enterprise activity, reduce vulnerability and, ultimately, offer greater opportunity to low-income households.

“Microfinance is also critical to expanding private sector development. Microfinance can address financing gaps, help promote a culture of innovation and entrepreneurship among the youth, and provide an alternative to the jobs they are more accustomed to.”

Even with the weak levels of official support, opportunities for MFIs are improving as a result of the spread of smartphone technology, which is enabling wider access to financial services. In Algeria, for example, just 33 per cent of those aged over 15 have a bank account, but 39 per cent use their mobile phone to receive money. In Sudan, the situation is even more pronounced. Just 7 per cent of people have a bank account, but 45 per cent use their phone to receive money and 30 per cent to send it.

This offers a cheap way for microfinance companies to deliver loans and receive instalments as a borrower repays the loan. In some cases, a user’s phone bill can even provide a useful credit reference. For example, US and Tanzania-based First Access has developed a credit scoring system for customers without bank accounts, based on their mobile payment history.

“The record of mobile payments can serve as a credit history for both seller and buyer, providing one of the building blocks needed by banks to finance them,” says George Bodo, head of banking research at pan-African bank Ecobank. “This has enabled SMEs [small-to-medium-sized enterprises] to raise microfinancing without the need for collateral or bank guarantees.”

How useful such services are depends to some extent on the size of the loan. In many instances, microfinance loans are for just a few hundred dollars, which can be approved in a few days and repaid over the course of perhaps a year. In other instances, the loan amounts can reach into six figures - a level that might, in other contexts, be defined as small business lending rather than microfinance.

“We have identified that there is an opportunity in loans for small, family-owned businesses in traditional industries such as small stores, beauty services and tailoring,” says John Yancura, CEO of Finca’s Jordan subsidiary. “This is where we’ve achieved a lot of our growth in the past couple of years. Currently, our maximum loan size is about $28,000. We’ll probably try to keep it there for the time being. There are other Finca subsidiaries that go over $100,000 and that’s still considered micro. It’s all about perspective.”

Should the size of loans available in Jordan and other countries start to rise, it will be a sign that the industry is growing in a healthy way. Other elements to look out for will be greater variety of products on offer, including savings, insurance cover, money transfer services and so on.

For now, however, the region is still at the stage of laying down its foundations. Whether it succeeds in meeting its potential in the future will be determined to a large extent by the ability and willingness of the region’s governments to offer enough support and create the right regulatory environment.