Container ship in Latakia, Syria
By Peter Feuilherade
This article was first published in The Middle East magazine, London, December 2013 issue
The microfinance industry provides small loans and other financial services including savings, insurance and money transfer systems which are essential for low‑income households and small enterprises which are excluded from formal banking systems. These informal lending and borrowing organizations enable users to manage cash flows to finance day-to-day living, invest productively and respond to financial shocks. In recent years, microfinance in some parts of the world has experienced a transformation from what was originally a socially motivated movement to a broader portfolio of financial services, of which payments and savings are becoming the main products
The Washington-based Center for Financial Inclusion at Accion ranks Latin America and the Caribbean as the best region in the world for microfinance, followed by Sub-Saharan Africa, Asia, Eastern Europe and Central Asia, and lastly the Middle East and North Africa (MENA). The World Bank notes that microcredit accounts for just 0.2% of the MENA region’s gross domestic product, and lending by microfinance providers reaches only 1.8% of the adult population, half the rate of South Asia, Latin America and the Caribbean. Even in Morocco, which has MENA's most developed microfinance sector, microcredit loans account for just over 1% of total bank credit, compared with 7% in Latin America and the Caribbean and 5% in Africa.
Historically, most MENA microfinance programmes date from the mid‑1990s, but the sector has made little headway in the region. MENA continues to be the smallest microfinance market worldwide, in terms of both borrower outreach and gross loan portfolio. The reasons include poor regulation and perceived weak risk management, exacerbated by recent political events and social upheaval.
According to a market profile by the Washington-based Microfinance Information Exchange, which provides data and analysis on some 2,000 microfinance institutions (MFIs) worldwide, in the six MENA countries which reported data in 2012 there were some 1.2 million active borrowers, with a gross loan portfolio of 742 million US dollars. Within the region, microfinance markets are in different stages of development. The number of borrowers in 2012 ranged from 674,302 in Morocco and 209,861 in Tunisia to 36,726 in Lebanon and 20,331 in Iraq. Egypt had 141,299 borrowers, while Jordan had 101,089. Other growing microfinance markets include Yemen, with more than 82,000 borrowers at the end of 2012, and West Bank and Gaza, with about 43,000 active clients.
Many experts believe that insufficient supervision and regulation have held back the growth of microfinance in MENA countries. A 2013 report by the Economist Intelligence Unit (EIU) on the global microfinance business environment noted that the regulatory environment in MENA had seen few changes during the previous year. Morocco updated its Microfinance Associations Law and additional rules and regulations are forthcoming. "The main impact of the Law has been to encourage consolidation among smaller microcredit associations (MCAs). However, some microfinance professionals have criticised the Law because it does not assist MFIs in transforming into commercial banks, nor does it assist MFIs that would prefer to remain NGOs," the EIU report commented. In Egypt, a long‑awaited update to the 2002 NGO Law that also regulates MFIs operating as NGOs is still under consideration, while legislation specific to the microfinance industry "has been delayed repeatedly due to political turmoil," the report added.
In the view of Hoda Salman, MENA representative for the Netherlands-based microfinance investment manager Triple Jump, "many MFIs have difficulty securing commercial funds due to weak MFI structures and capacities, restrictive NGO regulations or political and economic instability that can render local currency rates on foreign commercial debt unaffordable". A major hindrance to growth in the sector, she adds, is "the absence of microfinance-specific regulations in many MENA countries, which prevents NGO MFIs from transforming into for-profit companies and/or deposit‑taking institutions".
Peter McConaghy, a World Bank microfinance analyst, agrees that a lack of regulation to support the robust growth of MFIs is to blame for the low levels of microfinance penetration in the MENA area. While noting that each country in the region poses unique challenges, he argues that "the inability of MFIs to accept deposits in many of the region’s markets, underdeveloped financial infrastructure, and low levels of financial literacy among potential beneficiaries all contribute to the limited microfinance outreach in the region."
Potential to expand
But despite microfinance in MENA being undeveloped, it has the potential to expand in a region where, as the World Bank notes, "political and social transitions in countries across MENA are placing additional economic pressure on firms and households". Unemployment levels are higher than in all other world regions and youth unemployment, at 25%, is a particularly pressing public policy issue.
TechNavio, an international technology research and advisory company, forecasts that the global microfinance market will grow at a Compound Annual Growth Rate (CAGR) of 16.61% over the period 2012-2016, with one of the key factors contributing to this growth being the increased focus on untapped markets.
ln Yemen, for instance, with only 7% of Yemenis possessing a bank account, long-latent demand among the population for financial services would seem to make the country an ideal market for microfinance. Analysts also see substantial room for growth of the microfinance industry in Lebanon, particularly in rural areas.
In many MENA countries, despite the increasing use of technology, mobile and correspondent banking is still in the pilot stage. There is great scope for the development of microfinance mobile phone services enabling the transfer of money, although central banks across the region have yet to extend their regulations to cover such innovations.
Philippe de Fontaine Vive, the European Investment Bank Vice‑President of Innovation, believes that for microfinance to expand in the MENA region, significant institutional and capacity building efforts are needed, at all levels including regulatory and supervisory capacity, and especially for smaller MFIs, in order to increase client outreach.
"Financial institutions need to strengthen their capacity to expand their offer of credit and ultimately also other financial services such as deposits. Microfinance remains limited and very few MFIs offer financial services beyond basic credit. Following the recent events in the region, expectations in microfinance as a means to fight unemployment, increase social inclusion, and provide access to finance to the 'very base of the pyramid' are high," he added.
For Hoda Salman of Triple Jump, in addition to the ongoing political and economic instability and insecurity in many of the ‘recovering’ countries, the main challenges for the microfinance industry in MENA lie in the area of regulation. "A conducive microfinance regulatory framework would allow MFIs to provide a wider range of financial services and access more sources of capital (such as equity), amongst other things, to reach more low-income, yet economically active, people," she argues.