MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Judith Brandsma and Laurence Hart World Bank Institute and World Bank, Middle East and North Africa Region, Finance, Private Sector, and Infrastructure Group The views expressed in this report are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to the members of its Board of Executive Directors or the countries they represent. Contents Preface v Acknowledgments vii Executive Summary 1 The Recent Evolution and New Challenges of Microfinance 5 What is microfinance? 5 Features of sustainable microfinance 6 Savings and microfinance regulation and supervision 9 The limits of microfinance: challenges for the future 10 Microfinance in the Middle East and North Africa 13 Key features 13 Survey findings 19 The future of microfinance in the Middle East and North Africa 25 Microfinance Developments by Country 29 Egypt 29 Jordan 31 Lebanon 33 Morocco 34 Tunisia 36 West Bank and Gaza 37 Yemen 40 Enhancing Institutional Capacity: What Progress Has Been Made? 43 Improving skills 44 Training needs associated with spinning off 44 International, regional, and local training initiatives 45 Bibliography 49 Boxes Box 1 When should a microfinance institution mobilize voluntary savings? 9 Box 2 Applying Islamic finance to microfinance 17 Box 3 Spinning off for sustainability--the case of Save the Children 22 Box 4 Microfinance and Yemen's Social Fund for Development 41 Box 5 The Marrakech microfinance workshop:cooperating with the competition 44 IV MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Figures Figure 1 The poverty alleviation toolbox 6 Figure 2 Share of active microfinance clients in the Middle East and North Africa by country, 1997 and 1999 20 Figure 3 Number of active microfinance clients in the Middle East and North Africa bycountry, 1997 and 1999 20 Figure 4 Institutional form of microfinance providers in the Middle East and North Africa, 1999 21 Figure 5 Share of female microfinance borrowers in the Middle East and North Africa by country, 1997 and 1999 23 Figure 6 Share of rural microfinance borrowers in the Middle East and North Africa by country, 1997 and 1999 23 Figure 7 Proxies for poverty among microfinance borrowers in the Middle East and North Africa, 1999 24 Figure 8 Uses of microfinance loans in the Middle East and North Africa, 1999 24 Figure 9 Active microfinance clients in the Middle East and North Africa, 1999 and 2004 (projected) 25 Figure 10 Market shares of different types of microfinance institutions in the Middle East and North Africa, 1997 and 1999 26 Figure 11 Microfinance and other lending in Jordan, 1997 and 1999 32 Figure 12 Microfinance and other lending in Lebanon, 1997 and 1999 33 Figure 13 Microfinance and other lending in the West Bank and Gaza, 1997 and 1999 38 Figure 14 Distribution of microfinance training needs by country, 1999 45 Tables Table 1 Examples of how clients use loans to reduce vulnerability 11 Table 2 Microfinance programs and unemployment lending programs in the Middle East and North Africa, 1999 19 Table 3 Number and market share of best practice microfinance institutions in the Middle East and North Africa, 1999 25 Preface T his report analyzes microfinance in The main source of information for this Microfinance has the Middle East and NorthAfrica and report was a comprehensive survey of 51 great potential offers recommendations on how to microfinance programs that together account further develop the industry. The report, for more than 95 percent of the known pro- in the Middle aimed at policymakers, donors, and practi- grams in the region.The survey was similar to East and North tioners, is part of a series on microfinance one done in 1998 for Making Microfinance Africa published by the World Bank's Middle East Work in the Middle East and North Africa. and North Africa Region. Included in this The authors did not compare the data from series are: the recent survey (which assessed the indus- · Making Microfinance Work in the Mid- try as of the end of 1999) with the data from dle East and North Africa (1998). the previous survey (which assessed the indus- · Commercial Banking and Microfinance try as of the end of 1997).The main reason is in Egypt: National Bank for Develop- that the 1997 survey suffered from a few qual- ment (1998). ity problems. It was the first time many pro- · AnApplication of Islamic Banking Prin- grams had filled out a comprehensive technical ciples to Microfinance (1998). questionnaire, and many had problems pro- · Spinning Off for Sustainable Microfi- viding the financial data requested. At that nance:Save the Children Federation into time many programs were not used to finan- JWDS, Al Majmoua, and FATEN (1999). cial evaluation indicators such as portfolio at The last three publications were cospon- risk, financial cost coverage, and return on sored by the Regional Bureau forArab States assets.This was partly because best practices of the United Nations Development Pro- were not as widely disseminated in the Mid- gramme.The first three reports are available dle East and NorthAfrica as they are today. in English andArabic and can be downloaded The survey data from 1999 are better than at http://www.worldbank.org/html/extdr/ the data from 1997.More programs are imple- offrep/mena/Micro_finance/default.htm.The menting best practices, so more are able to series,and especially its translation intoAra- complete detailed questionnaires.In addition, bic, has been very well received. more programs have recognized the value of Relative to other regions,microfinance is such surveys, generating industry data--and a young industry in the Middle East and North hopefully in the future, industry standards. Africa.The oldest program is barely 10 years That the two surveys are not comparable is not old, and most programs date from the mid- a problem because the more recent ques- 1990s.Between the end of 1997 and the end tionnaire not only covered programs'status as of 1999 the industry nearly doubled--from of the end of 1999, it also covered previous 90,000 active clients to almost 170,000.Yet the years,making comparison and trend analysis potential for microfinance is enormous,and possible.Hence the authors were able to com- today's microfinance intermediaries meet less pare the 1999 data with the 1997 data col- than 5 percent of the region's demand. lected in the most recent questionnaire. V VI MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Many programs that completed the ques- such programs were available for Egypt,Jor- tionnaire did not fit the best practice defini- dan,Lebanon,Tunisia,and theWest Bank and tion of microfinance--that is,the provision of Gaza,but not for Morocco andYemen. financial services to the entrepreneurial poor. Finally,one more category emerged:very Instead,they offer very small investment cap- small business lending programs.These pro- ital loans to the unemployed. The primary grams have learned from microfinance best mandate of these programs is to reduce unem- practices and have adapted the lessons to ployment,not necessarily to sustainably pro- lending to very small businesses that are not vide financial services to the poor.Given the necessarily owned and managed by the poor considerable size (measured in number of but that employ the poor.Several of these pro- clients and outstanding loan portfolios) and grams are implemented through commer- overall bad performance of these programs, cial banks.This type of lending program was we have placed them in their own category: found in Jordan,Lebanon,and theWest Bank unemployment lending programs. Data on and Gaza. Acknowledgments T his report would not have been pos- International and Inas Al Gamal from the sible without the cooperation of World Bank office in Cairo for helping us microfinance programs and organi- out at the last minute.We are also grateful to zations operating in the Middle East and Mona Mubarak from the National Bank for North Africa.These programs not only par- Development in Egypt and Gheda Whaly of ticipated in a comprehensive survey on their the Social Fund for Development. operations, they also met with us and Maha Keramane worked many late nights answered our telephone calls, faxes, and to enter and analyze the data and prepare the emails.The survey was funded by theWorld figures.The report was edited by Paul Holtz Bank Institute, the World Bank's Thematic and laid out by Garrrett Cruce, both with Group for Micro and Rural Finance,and the Communications Development Incorporat- World Bank's Middle East and North Africa ed, and the cover was designed by James Region. Quigley from the World Bank Institute.The The survey was implemented by six local Arabic translations were made byAbdel Sha- partners in the region:KaisAl Iriani inYemen, bana of the World Bank with the assistance Michael Cracknell inTunisia,Maha Khatib in of Yasser El Gammal of the Human Devel- Jordan,Reda Mamari in Lebanon,Fouzi Mour- opment division of theWorld Bank's Middle ji in Morocco, and Alex Pollock in the West East and North Africa Region. Bank and Gaza.These local partners worked Finally,the outcomes of this report would tirelessly to collect information and help not have been the same without the contri- respondents fill out the questionnaire.More- butions of Rafika Chaouali (World Bank,Mid- over,our partners provided invaluable back- dle East and North Africa Region, Human ground information about their countries. Development Group), who conducted the Without their continued support and first survey in early 1998 and who kindly patience,the survey would never have accu- provided useful information and feedback; mulated the wealth of information that forms Jacques Baudoui andYasser El Gammal (World the core source of this report. In Tunisia we Bank, Middle East and North Africa Region, also received kind assistance from Madame Human Development Group); and Robert Mansour of BanqueTunisienne de Solidarité. Christen (regional coordinator for the Mid- We would like to extend our thanks to dle East and NorthAfrica in the Consultative Magdi Moussa of Environmental Quality Group to Assist the Poorest). VII Executive Summary Microfinance--helping the ly active poor run small economic activities Less than entrepreneurial poor help and businesses.But less than 5 percent have 5 percent themselves access to financial services. This"absurd gap"between the supply of of the world's Microfinance is the provision of financial ser- and demand for microfinance services is economically vices to the entrepreneurial poor.This defin- far too large to be filled by government and active poor ition has two important features:it emphasizes donor funds. But such funds are not need- a range of financial services--not just credit-- ed, because a growing number of microfi- have access to and it emphasizes the entrepreneurial poor. nance institutions have shown that poor financial services Credit for business activity is just one of people are bankable and that banking with the financial services needed by the poor.The the poor can be profitable and sustainable. poor also need credit for emergencies or The poor are willing to pay the high inter- life-cycle needs, and they need savings and est rates associated with microfinance in deposit services. But people who need sav- return for quick, convenient, and contin- ings do not necessarily need credit,and peo- ued access to well-designed financial ser- ple who need credit do not necessarily need vices. Simply put, the absurd gap can be savings.Moreover,savings are important not filled only through a substantial increase in only as a service for the poor, but also as a the number of sustainable and profitable source of funds for microfinance institutions. microfinance institutions. The entrepreneurial poor are defined as people who can increase their incomes Features of the industry in the through economic activities that can move Middle East and North Africa them closer to or even above the poverty line. The entrepreneurial poor do not need assis- Microfinance is a young industry in the Mid- tance for themselves,but they may need help dle East and North Africa. The oldest pro- setting up or managing activities that will gram, that of the Alexandria Business increase their incomes. In particular, they Association, started in Egypt just over 10 need help accessing the resources required years ago. In other parts of the world, espe- to develop these activities. Credit is one of cially Asia and Latin America, microfinance those resources. By contrast, the nonentre- institutions have been around for several preneurial poor--the extremely poor-- decades. So, in developing microfinance, require assistance simply to survive. practitioners and policymakers in the Middle Providing financial services to the entre- East and North Africa can learn from other preneurial poor increases household income, regions while adapting programs to their reduces unemployment,and creates demand own environments. for other goods and services--including nutri- The region's emerging microfinance indus- tion, education, and health services. More try differs from those in other parts of the than 500 million of the world's economical- world: 1 2 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA · Expectations are too high:microfinance is Microfinance indicators in the Middle not a panacea for or solution to unem- East and North Africa, 1997 and 1999 ployment. Indicator 1997 1999 · Microfinance is narrowly defined: most microfinance institutions only offer cred- Number of microfinance it for business activities and do not offer programs 60 51a savings or deposit services. Number of · Governments are interested in regulating active clients 90,237 168,817 microfinance,and several countries have Outstanding loan portfolio $44,624,285 $77,673,301 passed laws on microfinance.Such efforts Average outstanding risk jeopardizing the industry's healthy loan balance $495 $460 Between development. Share of female clients (percent) 31 46 1997 and 1999 · Second generation issues may slow the Share of rural clients industry's growth. Many microfinance the region's (percent) 18 21 institutions are experiencing crises after Leading provider Egypt Egypt microfinance rapid initial growth and need time to con- Second leading solidate and restructure. provider Jordan Morocco industry nearly · Islamic finance methodologies are being a. The number of microfinance programs fell because doubled, from applied by new microfinance programs, some of the programs included in the 1997 count were reclassified as unemployment lending programs. about 90,000 and existing programs that use Islamic Source: World Bank surveys of microfinance institutions. finance--some of them very large--have active clients to become more visible. almost 170,000 · Emerging lending programs for very small The average outstanding loan balance businesses are being implemented by com- dropped slightly, from $495 in 1997 to mercial banks that apply best practices $460 in 1999.This happened for two rea- from microfinance to the financing of sons. First, new programs began by offer- these businesses. ing small initial loans--loans that will · Unemployment lending programs have increase with timely repayment. Second, many clients and large loan portfolios and women accounted for a larger share of are often confused with microfinance borrowers (46 percent, up from 31 per- programs. cent), and women are usually poorer and This report draws heavily on two World need smaller initial loans. Bank surveys of microfinance institutions in As in 1997, most of the region's microfi- the region,one assessing developments as of nance programs are local nongovernmental the end of 1997 and the other as of the end organizations (NGOs),foundations,or coop- of 1999.Between 1997 and 1999 the region's eratives.Egypt's National Bank for Develop- microfinance industry nearly doubled, from ment is still the only bank in the region about 90,000 active clients to almost 170,000 actively engaged in microfinance.Although (see table).Egypt remains the region's leading more private banks are making small loans, provider but has lost market share.Morocco they are considered very small business lend- is second,having experienced dramatic growth ing programs.The absence of government- since 1997--from fewer than 4,000 active sponsored microfinance programs has not clients to more than 42,000.But other coun- hindered the industry's development. tries,such as Lebanon and theWest Bank and Of the 60 microfinance programs surveyed Gaza,saw their microfinance industries stag- in 1997,2 were fully sustainable and 8 were nate or even shrink.This was mainly because close to it.Together these 10 programs served microfinance players in these countries went about 80 percent of the region's active micro- through restructuring and consolidation as finance clients--important because clients they faced second generation issues. want continued access to financial services. EXECUTIVE SUMMARY 3 Another 10 programs were small but had as Number and market share of best practice microfinance their main objective the sustainable provi- institutions in the Middle East and North Africa, 1999 sion of microfinance.All these programs were Number of Market share of implementing best practices. Most of the Number of best practice best practice region's remaining programs were in bad Country institutions institutions institutions (percent) shape and not implementing best practices. Egypt 17 8 90 These patterns still hold:most of the region's Jordan 8 3 36 (66)a active clients are served by programs imple- Lebanon 5 3 91 menting best practices (see table). Morocco 7 3 90 Tunisia 6 1 55 West Bank and Gaza 3 2 96 The future of the industry in Yemen 4 4 100 the Middle East and North Total 51 24 88 Africa a. The market share of Jordan's 3 best practice programs increases to 66 percent if the sam- ple excludes the microcredit program of a large government agency that does not imple- All the programs surveyed were asked how ment best practices and in effect gives grants, not loans. Source: World Bank survey of microfinance institutions. many active clients they expected to serve within five years--that is,by the end of 2004. Active microfinance clients in the Middle East and North Their goals were ambitious: together they Africa, 1999 and 2004 (projected) expect to serve more than 422,000 active 200,000 2004 clients by that time (see figure).And assum- ing that new programs are established--for 150,000 instance,nine more foundations are being set up in Egypt following theAlexandria Business Association model--the region's microfi- 100,000 nance industry could end up serving more than 500,000 clients. 50,000 1999 Are these expectations realistic? Perhaps not. One reason is that there appears to be a limit to the size and growth of NGOs that 0 Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen only grant credit.The 10 programs that in and Gaza 1997 were fully sustainable or close to it Source: World Bank survey of microfinance institutions. today serve 63 percent of active clients,down from 80 percent. The 10 programs that in 1997 were small but seeking full sustain- 5,000 clients in 1997 to 33,000 in 1999-- ability now serve 20 percent of the market, growth of more than 600 percent. up from less than 6 percent.Finally,a few new There are several reasons for the disap- programs have emerged with full sustain- pointing growth of the 10 market leaders. ability as an objective.They serve just 6 per- Some underwent restructuring and consoli- cent of clients but are expected to grow dation as a result of crises.A few others seem rapidly in the next few years. to be resting on their laurels:they are sustain- The 10 leading programs lost market share able and are the darlings of donors but seem because they did not grow as quickly as the to lack the drive to reach more poor people. formerly small but currently sizable pro- Some,especially those in small markets,have grams.The 10 leading programs grew from narrow market niches and serve one target 71,000 active clients in 1997 to 105,000 in group with one loan product.They may have 1999. Though this 47 percent growth is to diversify to grow, targeting other groups respectable, it appears low given the large and introducing new financial products. unmet demand for microfinance. By con- Finally, slow growth may be caused by a trast,the formerly small programs grew from lack of funds for onlending.Most of the mar- 4 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA ket leaders still depend on donor funds.But For programs to reach the scale of micro- they do not need to.They could start raising finance institutions in other parts of the commercial funds for onlending by,say,bor- world, they must raise funds commercial- rowing from banks. Some donors have not ly--including taking deposits.This will also encouraged their programs to pursue this enable them to broaden their approach to route--they too are resting on their laurels. microfinance,moving beyond credit for busi- Some programs in the region have tried to nesses. By mobilizing savings and deposits, raise funds commercially but have encoun- they will be able to serve thousands more tered legal and regulatory obstacles. In bor- clients. rowing from banks for onlending,having the In many cases mobilizing commercial legal form of an NGO can be an impediment funds for onlending will require transform- To grow, because it lacks transparency and account- ing from an NGO into a private company, ability. Banks will generally be unwilling to bank, or nondeposit-taking financial inter- programs must lend to NGOs, especially if they cannot sue mediary.But even more important will be the raise funds them.Two of the region's ten leaders have transition from a program to a locally owned commercially-- changed legal form, from NGOs to private and managed institution.Donors and practi- companies,in order to borrow commercial- tioners alike should be prepared for the array including taking ly.But these changes were recent,so it is too of new training needs that may arise for pro- deposits early to tell whether the companies will now grams that decide to transform into a new be able to borrow from banks. legal entity and institutional form. One of the ten leaders tried to change Policymakers,meanwhile,should be pre- into a bank,which would make perfect sense pared to create legal environments that are because as a bank it could collect savings and appropriate for prudent but growing micro- deposits.But the $30 million minimum cap- finance.This may well be the greatest chal- ital required for banks (in this case in Egypt) lenge facing the region's microfinance was too much of a financial obstacle. industry over the next few years. The Recent Evolution and New Challenges of Microfinance T his section offers an overview of the it, and people who need credit do not nec- The poor need basic concepts and target groups of essarily need savings. Moreover, savings are a variety of microfinance. It elaborates on the important not only as a service for the poor, best practices underlying sustainable micro- but also as a source of funds for microfi- financial services finance and reviews recent research on the nance institutions. impact of microfinance.Readers familiar with the basic concepts of microfinance could The entrepreneurial poor skip this section. The development community distinguishes between two groups of poor people: those What is microfinance? who can increase their income by them- selves and those who cannot.Members of the Microfinance is the provision of financial first group can engage in economic activities services such as savings, deposit, and credit that can move them closer to or even above services to the entrepreneurial poor.Micro- the poverty line. Members of the second finance activities usually involve: group have no capacity to undertake any · Small loans,typically for working capital. economic activity, either because they lack · Informal appraisal of borrowers and invest- skills or because they are destitute (UNCDF ments. 1996). · Substitutes for collateral such as group Members of the first group are called the guarantees or compulsory savings. entrepreneurial poor or economically active · Access to successive and larger loans based poor. The households of the economically on repayment performance. active poor may have some assets (such as · Streamlined loan disbursement and mon- land),and some members may be employed itoring. or run a microbusiness. These households · Secure voluntary savings products (Ledger- have"reliable income,freedom from pressing wood 1998). debt,sufficient health to avoid incapacitating This definition has two important fea- illness, freedom from imminent contingen- tures: it emphasizes financial services--not cies,and sufficient resources (such as savings, just credit--and it emphasizes the entre- non-essential convertible assets and social preneurial poor. entitlements) to cope with problems when they arise"(Hulme and Mosley 1996). Financial services Members of the second group are called The poor need a variety of financial services, the extremely poor. Lacking economic via- of which credit for business activities is just bility (the ability to meet basic needs such as one.They also need credit for emergencies food, shelter, and clothing) and economic or to fund life-cycle needs,and they need sav- security (the ability to protect household ings and deposit services. But people who assets and income from shocks),these house- need savings do not necessarily need cred- holds live below the minimum subsistence 5 6 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA level.TheWorld Bank considers people poor those about to enter the lower-middle-income if they live on less than $1 a day,and extreme- category.The middle column shows the finan- ly poor if they live on less than $0.75 a day. cial services that are typically suitable for the About two-thirds of the people defined as different income levels, with microcredit poor are extremely poor. appropriate for both lower-middle-income Microfinance targets the entrepreneurial individuals as well as most of the economically poor.The entrepreneurial poor do not need active poor--including some below the offi- assistance for themselves,but they may need cial poverty line.Microsavings can even reach help setting up or managing economic activ- the lowest levels of the economically active ities that will eventually increase their poor,some well below the poverty line.The income.In particular,they need help access- third column shows nonfinancial poverty Providing ing the resources required to develop those alleviation tools that are appropriate for peo- financial services activities. Credit is one such resource.The ple below the poverty line and essential for nonentrepreneurial poor--the extremely the extremely poor.These tools are funded by to the entre- poor--do require assistance for themselves, direct subsidies and grants. preneurial simply to survive. The distinction between these two groups Features of sustainable poor increases of poor people can help policymakers better microfinance household allocate resources.In The Microfinance Rev- income, reduces olution, Marguerite Robinson offers a"pover- Providing financial services to the entrepre- ty alleviation toolbox"for policymakers (figure neurial poor increases household income, unemployment, 1).The first column shows three income lev- reduces unemployment,and creates demand and creates els:lower middle income,economically active for other goods and services--especially demand for poor, and extremely poor.The economically nutrition, education, and health services. active poor category is wide ranging, from More than 500 million of the world's eco- other goods and those living just above extreme poverty to nomically active poor run micro and small services Figure 1. The poverty alleviation toolbox Income Commercial Subsidized poverty level financial services alleviation programs Standard commercial Lower bank loans middle and full income range of savings Interest- services bearing savings Commercial accounts for microloans Economically small savers active poor Official poverty line Poverty programs for such purposes as food and water, medicine and Extremely nutrition, poor employment generation, skills training, and relocation THE RECENT EVOLUTION AND NEW CHALLENGES OF MICROFINANCE 7 businesses. But less than 5 percent have cial microfinance institutions can make access to financial services. financial services available on a large scale. This "absurd gap" between the supply of And only profitable microfinance institu- and demand for microfinance services is far tions can cover their operational and finan- too large to be filled by government and donor cial costs. Operational costs include asset funds.But such funds are not needed,because depreciation, loan losses, and the adminis- growing numbers of successful microfinance trative costs of making very small loans-- institutions have shown that the poor are costs that are high for even the most bankable and that banking with the poor can efficient microfinance institutions.Financial be profitable and sustainable.The poor are costs are the commercial costs of funds willing to pay the high interest rates associated such as savings,bank loans,and bond issues. with microfinance in return for quick, con- Only sustainable microfinance institutions Only sustainable venient,and continued access to well-designed that can attract commercial sources of funds microfinance financial services.Simply put,the absurd gap will be able to grow and serve more poor institutions can only be filled through a substantial increase people. Moreover, attracting commercial in the number of sustainable and profitable funds will free such institutions from that can attract microfinance institutions. depending on donor and government funds, commercial Since the 1980s microfinance has grown which are often unreliable,politically moti- substantially.It has also undergone a revolu- vated,and come with many strings attached sources of funds tion, moving from government- or donor- (such as cumbersome monitoring and will be able subsidized credit delivery systems to reporting requirements). to grow and self-sufficient institutions providing com- Donor and government funds should be mercial microfinance.Credit schemes subsi- used to subsidize new and growing microfi- serve more dized by donors and governments try to nance institutions for purposes such as start- poor people reduce poverty by providing credit, often up costs, staff training, exposure to best along with complementary services such as practices,technical assistance,and develop- skills training and programs for literacy, ment of management information systems. numeracy,health care,nutrition,family plan- Subsidizing final borrowers is not accept- ning, and the like. Under this approach, able because it undermines sustainability. known as the poverty lending approach Subsidizing institutions is necessary but (Rhyne 1998), donor and government cred- should be based on well-defined and mutu- it is provided to poor borrowers,typically at ally agreed performance contracts. By tak- below-market interest rates. ing this approach,donors and governments Such credit is intended to help the poor-- can reallocate scarce funds to poverty alle- especially the poorest of the poor--over- viation programs that help extremely poor come poverty and gain empowerment. people access social, health, and education Except for mandatory savings sometimes services. required as a condition for receiving a loan, Commercial institutions working in the the mobilization of local savings is normally formal financial sector have begun to prof- not a significant part of the poverty lending itably meet the enormous demand for small approach to microfinance (Robinson 2001). loans and savings. The Microfinance Rev- Many of these schemes have low repayment olution discusses five features of sustain- rates and high arrears, and so deplete their able microfinance institutions operating capital. They need continued injections of on a large scale: knowledge of commer- donor and government funds simply to main- cial microfinance and its clients, institu- tain their client base. tional ownership, good organization and This approach is not sustainable if the management, human resource develop- goal is to reach hundreds of millions of ment,and corporate philosophy.These are poor people.Only profitable and commer- reviewed below. 8 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Knowledge of commercial tralization: at every level of the organiza- microfinance and its clients tion--from loan officer to outlet to branch-- Owners, boards, managers, and staff of self- people are held accountable for their sufficient and sustainable microfinance insti- performance and responsibility for perfor- tutions know their business and have a wide mance is decentralized.Moreover,managers range of skills. They know the economic, are committed to profitably delivering micro- political,legal,and social structures and prac- finance services to a large number of poor tices of the areas they serve.They are famil- clients. Good managers ensure that their iar with regulations and maintain open institutions have: channels of communications with regula- · Effective asset-liability management. tors and policymakers.They have intimate · Products and services that are in demand Sustainable knowledge of the operations and dynamics and that are priced for institutional sus- microfinance of the local markets where their clients oper- tainability and client affordability. ate.They have intimate understanding of the · High loan repayment rates. institutions extent and types of demand for microfinance. · Monthly profit and loss statements and share common They know their clients--including their balance sheets issued for every outlet pro- businesses and household dynamics. They viding financial services. features have financial expertise,including the capac- · Effective cash management. ity to manage portfolio risk and liquidity and · Well-designed and well-implemented sys- to maintain simple and transparent account- tems of staff recruitment,evaluation,pro- ing,reporting,and management information motion, and incentives. systems that provide timely,well-chosen infor- · Service locations and operating hours that mation.Finally,they treat poor clients as val- are convenient for clients. ued, respected customers. · High-quality supervision,internal control, and external audit. Institutional ownership · Appropriate management information sys- Sustainable microfinance institutions can tems and staff trained in their use. have a mix of owners,including representa- · Suitable security systems. tives of the business and banking commu- nities,donors,governments,nongovernmental Human resource development organizations (NGOs),and so on.These own- Because microfinance is labor-intensive, ers share an understanding of and commit- human resource development is a top pri- ment to sustainable microfinance.They define ority. Sustainable microfinance institutions the microfinance institution's mission,estab- have well-defined recruitment policies and lish an effective governance structure, and career tracks, as well as appropriate com- appoint a governing board. They mandate pensation packages for staff at all levels. that the institution set interest rates and fees There is a culture of accountability and per- that enable it to cover all costs and risks and formance-based incentives at all levels.Train- that ensure profitability.Board members act ing and management development are as commercial shareholders and can access essential. additional capital if needed and help the institution avoid or overcome bureaucratic Corporate philosophy and political obstacles. Though corporate cultures vary by country, culture,institutional type,and so on,the basic Good organization and management philosophy is much the same,and success in Organizational and managerial structures dif- microfinance is based on the same standards: fer within and across countries.But sustain- trust,incentives,commitment,simplicity,and able microfinance institutions share common standardization, along with service, trans- features such as accountability and decen- parency,flexibility,accountability,profitabil- THE RECENT EVOLUTION AND NEW CHALLENGES OF MICROFINANCE 9 ity,staff training,and knowledge of the local have to reward the savers. Studies in Latin market. America have shown that mobilizing savings can be prohibitively expensive and does not Savings and microfinance always provide a stable source of funds regulation and supervision (Schmidt and Zeitinger 1996). Borrowing from commercial banks or accessing whole- To reach scale--and hence more poor peo- sale sources of funds--instead of the funds ple--sustainable microfinance institutions of thousands of little savers--can be more must have access to commercial sources of effective and efficient. funds. These sources include savings, bor- Microfinance regulation and supervision rowing from banks, and local and interna- are issues only when microfinance institu- tional capital markets.Savings are important tions start taking deposits and savings--that To reach scale, not just as a source of funds,but as a service is, other people's money. But in most devel- sustainable that is needed but largely unmet. Efforts to oping countries the absence of special licens- mobilize savings should be made with cau- ing and supervision for microfinance microfinance tion, however, because they involve other institutions is not a binding constraint to the institutions must people's money.Not every microfinance insti- development of microfinance.Rather,the bot- have access to tution should collect voluntary savings:cer- tleneck is the scarcity of microfinance insti- tain conditions have to be met beforehand tutions that can operate profitably enough to commercial (box 1). pay a commercial cost for a large portion of sources of funds Although some argue that mobilizing sav- their funds without decapitalizing themselves. ings is the only way for microfinance insti- It is irresponsible to license a microfinance tutions to achieve scale, caveats exist. institution to take deposits if it cannot pass Mobilizing savings can be expensive: pro- this test (Christen and Rosenberg 1999). grams incur administrative costs in mobiliz- Although the number of fully sustainable ing and maintaining savings, and they also microfinance institutions remains small,it is Box 1. When should a microfinance institution mobilize voluntary savings? As a source of commercial finance for micro- voluntary savings should be under govern- credit institutions, voluntary deposits have ment supervision.This requires a government generated a lot of interest in recent years. that is willing to modify its banking supervi- Locally mobilized voluntary savings are poten- sion so that the rules for microcredit institu- tially the largest and most immediately avail- tions are appropriate for their activities, and able source of finance for some microcredit to ensure that the supervisory body is able to institutions.Mobilizing such savings also helps monitor these institutions effectively. meet the vast unmet demand for local sav- The third consideration concerns the his- ings services in developing countries. tory,capability,and performance of the micro- Three conditions should be met before a credit institution.Before mobilizing voluntary microcredit institution starts to consider mobi- public savings,a microcredit institution should lizing voluntary savings.First,profitable mobi- have exhibited consistently good management lization requires an enabling macroeconomy, of its own funds. It should be financially sol- appropriate laws and regulations,political sta- vent,maintaining a high rate of loan recovery bility, and suitable demographics. and earning attractive returns. A good track The second consideration concerns the record is important because in many countries supervision of institutions providing microfi- low-income people have entrusted their nance.To protect their clients,especially depos- savings to small, unsupervised financial itors, financial institutions that mobilize institutions--only to lose their life savings. Source: CGAP 1997a. 10 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA growing.Still,donors interested in taking an · Microfinance services are used for a vari- equity stake in sustainable microfinance insti- ety of purposes, of which credit for an tutions are fighting over the same small piece enterprise is just one of many. Moreover, of the microfinance pie (Christen and Rosen- money is fungible--and fungibility is good. berg 1999). In most countries a sustainable Flexibility in the use of loan funds enables microfinance institution could raise the cap- borrowers to allocate funds to their best ital needed to use an existing form of finan- advantage.This flexibility is key in efforts to cial license. The supply of donor funds reduce vulnerability. The nagging concern available for this purpose exceeds the demand of the 1980s that poor borrowers would from viable microfinance institutions. consume rather than invest their loans--and Microenterprise therefore have no way to repay them--has development is The limits of microfinance: almost universally been proven unfounded. only one use challenges for the future As table 1 shows, most loan funds are used for a wide range of investments. of microfinance The poverty alleviation toolbox in figure 1 Thus microenterprise development is only services shows the limits of microfinance. Microfi- one use of microfinance services. Left to nance mainly benefits the entrepreneurial their own devices, clients use financial ser- poor--those just above and just below the vices for a wide range of purposes, such as poverty line.But microfinance is no panacea: building human,physical,financial,and social many poor people,especially the extremely assets and diversifying income sources.This poor,do not benefit from it.These limits cre- permits people to smooth income and con- ate challenges for microfinance practitioners sumption as well as raise income.With access and policymakers. to money,they can better manage cash flows. Moreover,delivering financial services to The old fear that clients will waste (donor) the entrepreneurial poor may not lead to a resources by investing in activities that they sustained increase in their incomes, but would have engaged in anyhow reflects a nar- rather may reduce their vulnerability to row view of household money management shocks and economic stress.A recent study strategies.Such substitution frees up money carried out for theWorld Bank's World Devel- that the household can use in other ways,pre- opment Report 2000/2001:Attacking Pover- cluding the use of other,more negative strate- ty analyzed the extent to which sustainable gies. Fungibility is not the problem for microfinance programs reach poor house- microentrepreneurs,it is the solution.Finan- holds and reduce poverty.The microfinance cial services help poor people secure lump institutions in the study had to have been in sums when they need them, from time to operation for at least five years, be opera- time, for different purposes (Rutherford tionally sustainable or close to it, and offer 1999).They need these lump sums to fund voluntary savings. Together these institu- life-cycle needs and emergencies,or to grasp tions had more than 2.1 million active bor- an opportunity such as investing in a microen- rowers and many more savers. The study terprise. Thus microcredit for microenter- found that: prise investment is just one of the many · Most microfinance clients are vulnerable reasons a poor person sometimes needs to nonpoor and moderately poor. secure a lump sum of money. · Microfinance services do not necessarily Good financial services help the poor con- increase income,but they do increase the vert a series of (often irregular) savings into range of options open to the poor to pro- lump sums of cash. These services could tect themselves against shocks. Microfi- include a savings service that allows bor- nance services are better at protecting rowers to save first and take the resulting clients from risk than at helping them to lump sum later,a loan that allows borrowers cope with a loss. to take the lump sum as an advance against THE RECENT EVOLUTION AND NEW CHALLENGES OF MICROFINANCE 11 Table 1. Examples of how clients use loans to reduce vulnerability Loan use Examples To build income base · To diversify income sources · To increase working capital · To engage in nonseasonal income-generating activities · To diversify by starting a new enterprise To build asset base · To repair, maintain, or improve a house · To repair, maintain, or improve business premises · To repair a productive asset (such as a boat) · To buy new furniture · To buy fixed or productive assets for a business · To join a rotating savings and credit association (ROSCA) · To acquire basic infrastructure (such as water and electricity connections) · To build a track record for credit · To buy land · To invest in education (say, paying school fees) · To invest in health (say, paying medical expenses) · To maintain reciprocal social networks (say, lending to relatives) · To fulfill a social obligation To manage cash and resources · To manage cash flow to cover daily household spending following sickness, death, or natural disaster · To support loss of income due to death or unemployment · To increase creditworthiness · To pay off debt future savings, an insurance service that taking loans,there is a need for better finan- allows borrowers to take a lump sum when cial products to allow extremely poor clients it is needed in exchange for a continuous and their households to build up all kinds of stream of savings, or some combination of assets. these (Rutherford 1999). To date the microfinance industry has This approach to microfinance--making paid little attention to clients'risk,apart from money available to the poor when they need focusing on the risk of nonrepayment. Ill- it for whatever purpose--may allow for cre- ness, death, and the loss of an income earn- ative solutions to some of the limits to micro- er can quickly erode improvements in the finance, such as the exclusion of the quality of one's life.From a client perspective, extremely poor. Microfinance services play health and life insurance are top priorities. an important role in smoothing and diver- Making easily accessible and flexible loans, sifying sources of income. These services emergency loans,flexible savings,and insur- also increase income, but such effects ance available to respond to these basic depend on the initial endowments of client needs can only be seen as a win-win strate- households. Because the extremely poor gy for both microfinance institutions and have fewer assets and face more risks when clients. Microfinance in the Middle East and North Africa A s noted,microfinance is a young indus- vices. For instance, women often need per- The region's try in the Middle East and NorthAfrica. mission from their husbands to take a loan microfinance The region's oldest program, that of or go to a group meeting.In other cases they the Alexandria Business Association, started are legally barred from signing loan contracts industry differs in Egypt just over 10 years ago.In other parts or opening bank accounts.Thus some believe from those in of the world,especially Asia and Latin Ameri- that targeting women would be counter- other parts of ca,microfinance institutions have been around productive. As a result the percentage of for several decades.Microfinance institutions female microfinance clients is far lower in the the world and policymakers in the Middle East and North Middle East and North Africa than in other Africa are in the unique position of being able parts of the world.But this situation is slow- to learn from other regions while adapting the ly improving (see below). design and implementation of programs to their own environments. Key features The dimensions of poverty in the Middle East and North Africa differ from those in The region's microfinance industry differs other developing regions. First, the region from those in other parts of the world: has much less abject poverty.In other devel- · Expectations are too high:microfinance is oping regions many poor people die of not a panacea for or solution to unem- hunger or suffer severe food shortages.This ployment. is rare in the Middle East and North Africa. · Microfinance is narrowly defined: most Only two countries in the region (Djibouti microfinance intermediaries only offer andYemen) have per capita incomes below credit for enterprises and do not offer $1,000.All the other countries in the region savings or deposit services. are middle-income countries. · Governments are interested in regulating Still,those middle-income countries have microfinance,and several countries have substantial pockets of poverty, with big dif- passed laws on microfinance.These efforts ferences between regions and groups.Pover- risk jeopardizing the healthy development ty is often far more common in rural than in of microfinance. urban areas,but there are generally far more · Second generation issues may slow the poor people in urban areas--especially in the industry's growth. Many microfinance slums surrounding major cities such as Cairo institutions are experiencing crises after or Casablanca. Moreover, women appear to rapid initial growth and need time to con- be more disadvantaged in the Middle East and solidate and restructure. NorthAfrica than in other parts of the world. · Islamic finance methodologies are being Some donors and people in the region applied by new microfinance programs, have argued that the social and cultural cir- and existing programs that use Islamic cumstances of women in the region make it finance--some of them very large--have difficult to provide them with financial ser- become more visible. 13 14 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA · Emerging lending programs for very small Discussions with managers of the region's businesses are being implemented by com- leading programs confirm this. Several of mercial banks that apply best practices these programs target women who have from microfinance to the financing of been clients for a few years and who have these businesses. built a sustainable one-woman business activ- · In terms of active clients and loan funds, ity that contributes to household income. unemployment lending programs are big Other sources of household income may players in the Middle East and NorthAfrica include wages, pensions, and the like. But and are often confused with microfinance due to increased unemployment in some programs.These programs use an approach countries (such as Gaza and Lebanon), the similar to the poverty lending approach female microentrepreneur has become the Access described in the previous section. only source of household income.The hus- to financial band, son, or brother of the microentrepre- Expectations are too high neur may have been laid off or could not find services helps Governments and policymakers in the region work.Some women have brought their fam- poor people expect too much from microfinance. This ily members to the programs,asking for loans may be partly due to the fact that microfi- for them. The programs have had to turn avoid becoming nance has become trendy.The hype appears them down because they did not have entre- even poorer to be at an all-time high,fueled by well-mean- preneurial skills and would be better off ing but damaging initiatives that have even working for others instead of managing their declared access to credit to be a human right. own business. Some donors and practitioners are over- selling microfinance,and this does not con- Microfinance is one of many tools for alle- tribute to a balanced and informed policy viating poverty. As noted,microfinance is a dialogue and setting of priorities. powerful tool for certain groups of poor peo- Governments in the Middle East and North ple: those just below the poverty line (the Africa face increasing unemployment,espe- moderately poor) and those just above it cially among young people, and some poli- (the vulnerable nonpoor). While microfi- cymakers have latched onto microfinance nance may increase income,its main impact as a solution.Other policymakers,sometimes is reducing a poor person's vulnerability to as a result of donor pressure, see microfi- external shocks and economic stress.To put nance as the solution to poverty. In both it bluntly, access to financial services helps cases they are wrong. poor people avoid becoming even poorer. Many poor people,especially the extreme- Microfinance is not a solution to unem- ly poor,may not benefit from microfinance. ployment.The main development objective of But practitioners should develop financial microfinance is financial intermediation--that services, especially savings and insurance, is, increasing poor people's access to finan- that could help the extremely poor build up cial services.Creating jobs or reducing unem- an asset base--which over time could enable ployment is not the main objective,although them to grasp an economic opportunity jobs may be created indirectly.But these jobs when it arises. are not numerous and are often limited to retaining the employment (or income-gener- Microfinance is narrowly defined ating capacity) of the microentrepreneur.More- Microfinance programs in the Middle East and over, microfinance mainly targets existing North Africa mainly offer credit for enter- businesses or microeconomic activities.Help- prise investment.But as noted,such credit is ing unemployed people, who are often not just one of the many financial services that good entrepreneurs,set up a business is incom- poor people need.They also need credit for patible with microfinance best practices. other purposes--especially emergency cred- MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 15 it--and women in particular would also ben- tions (of which there are fewer than 10) efit from savings and deposit services.Because start taking savings and deposits would reg- of the region's narrow definition of microfi- ulation be justified.Until then,microfinance nance, many potential clients, especially institutions need to experiment, innovate, women, are excluded. and grow. That the region's microfinance Only two of the region's programs,one in industry nearly doubled between late 1997 Lebanon and one inYemen,mobilize volun- and late 1999 in an unregulated environ- tary savings.The claim that savings are lim- ment shows that regulation is not needed. ited by legal and regulatory constraints is The region's microfinance programs are wor- not entirely valid, because these programs ried about their governments'intentions.To offer savings as a true service--depositing the quote a leading program in Egypt,"better no saved funds in banks in the names of their regulation,than bad regulation."It is no sur- Governments clients.Hence the savings are legal and auto- prise that several microfinance institutions should not matically fall under bank supervision. have changed their legal status from NGO to A lack of savings and deposit services may private company.Fear of government inter- regulate today's explain why some countries,such as Egypt, vention has been one of the reasons for microfinance have a small share of female borrowers.Rec- doing so. industry ognizing this, the leading Egyptian microfi- nance program has started village banking Second generation issues may slow programs in which groups of women save the industry's growth and receive credit.Although some of these A microfinance program is like a new busi- savings are compulsory (that is, a condition ness. Like any new business, it has an of getting loans),women are also free to save organizational evolution (or sometimes rev- only and not get credit. olution) curve.After an initial startup period, Some programs do permit emergency many microfinance programs experience loans, such as for medical emergencies or rapid growth.Management systems are sim- roof repairs, but often only on an excep- ple (the owner or manager can often over- tional basis. Some of the Islamic programs see all activities), accounting is basic, and described below offer such loans (called has- loan portfolio management is easy because san loans) on a regular basis,however. staff members usually know all borrowers personally. Governments are interested in But as a program expands, management regulating microfinance layers have to be developed. Loan officer Partly because of unrealistic or incorrect expec- supervisors and area managers need to be tations (sometimes as a result of donor pres- recruited.Branches may be set up.And loan sure and microfinance hype), governments portfolio management can no longer be done have become increasingly interested in micro- manually.A management information system finance. A bureaucrat's automatic response becomes crucial, as do asset-liability man- would be to regulate the industry. But this agement, internal controls, and audit and could be dangerous,because regulation could financial management.The organization will stifle innovation and sustainability.For exam- need to adapt and may face a period of slow ple,a 1999Tunisian law on microcredit could growth while it restructures and consoli- stunt the growth of the industry,though it is dates managerial and administrative systems. too early to tell whether that will happen. It often will also fine-tune or redesign loan Morocco has passed a similar law,and Egypt products based on feedback from clients, may also regulate the industry. and it may introduce new products. Governments should not regulate today's In some cases these organizational changes microfinance industry. Only when the are inspired by a crisis such as the departure region's few capable microfinance institu- of a managing director or the discovery of 16 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA fraud. Several programs in the Middle East Muslim scholars believe that this additional and North Africa have experienced fraud amount,called al-riba, is prohibited,although because their internal management systems there are subtle differences in interpreta- were unable to cope with rapid growth.Fraud tion.But in general,earning money through created serious shocks for the staff,managers, lending is considered haram--in discord and boards of these organizations--but they with the Islamic code. all came out stronger, wiser, and better pre- Thus it is not surprising that most Islam- pared.(In fact,the changes in organizational ic finance strategies have tried to remove all development,structures,and professionalism forms of fixed nominal interest rates. (Mus- that resulted were so remarkable that one lim scholars make no distinction between Many would almost hope for every program to nominal and real interest rates;it is assumed programs are experience some fraud in order to expedite that all interest rates are real and so are con- too dependent organizational development.) In this context, sidered to hamper investment and employ- managers of Moroccan microfinance pro- ment.) But the abolishment of fixed interest on their leaders grams that have seen dramatic growth should rates does not mean that no remuneration is exercise caution. paid on capital.To the contrary,profitmaking Succession will become an issue in the is acceptable in Islamic society as long as region.The directors of some leading pro- these profits are not unrestricted or driven grams have been around for a while.Some are by the activities of a monopoly or cartel. ready to retire,while others will soon pursue Islam deems profit,rather than interest,to be other opportunities.As is the case around the closer to its sense of morality and equity world, many programs in the Middle East because earning profit inherently involves and NorthAfrica are too dependent on their sharing risks and rewards. Profitmaking leaders,who often have been visionary pio- addresses the Islamic ideals of social justice neers in their countries.Visionaries and pio- because both the entrepreneur and the lender neers are sometimes good creators and bear the risk of the investment. innovators but not good managers.As a result The most common forms of Islamic"lend- some of them may not have paid enough ing" are mudaraba, murabaha, and attention to succession.Thus a capable sec- musharaka (box 2).Under a mudaraba con- ond-line management team,with one or two tract the financier provides the capital and members being groomed to take over, may the entrepreneur the labor and expertise. not be in place. Profits and losses are shared at a predeter- During a crisis or organizational restruc- mined rate. Murabaha is a common instru- turing,growth will slow or may even reverse. ment for short-term financing based on the Once organizational issues are resolved, conventional concept of purchase finance or growth will recover until the next organiza- cost plus markup sales.(These two concepts tional crisis,such as a change in legal status. are described in more detail in the section on This is normal. country experiences,particularly in the sec- tion onYemen.) Musharaka is an equity par- Islamic finance methodologies are ticipation contract in which two or more becoming more common partners contribute to the capital and exper- An important Islamic commitment is the tise of a project.Profits and losses are shared denouncement of usury--the lending of according to the amounts of capital invest- money at exorbitant interest rates.1 Accord- ed.These transactions have traditionally been ing to the literature, in the pre-Islamic era used for medium- and long-term investments. riba--literally translated as excess--referred In Yemen all microfinance programs to the practice of lending.Debtors had to pay except one use Islamic finance techniques. a fixed amount above the principal borrowed Overall the experience has been good.This from lenders for the use of the money.Most approach increases the operational costs of MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 17 Box 2. Applying Islamic finance to microfinance Mudaraba. Under this model the From a microfinance perspective this Murabaha.This model is similar to microentrepreneur and the microfinance model has several drawbacks, the most trade finance in the context of working program are partners,with the program important being the uncertainty of the capital loans and leasing in the con- investing the money and the entrepre- profit. But profits fluctuate even in the text of investment capital loans. The neur the labor and expertise. Profit is best microfinance programs.A second microfinance program literally buys shared according to an agreed percentage, drawback is the burden of loan admin- the goods and resells them to the entre- though the profit is unknown.In effect, istration and monitoring.Even if the prof- preneur for the cost of the goods plus the microfinance program takes equity in it is known, the borrower has to repay a markup for administrative costs.The the microenterprise through the loan: a different amount each period (and the borrower repays in equal installments. initially the program may own 100 per- loan officer has to collect different This model is much easier for bor- cent of the shares and so would be enti- amounts).The lack of simplicity--relative rowers to understand and for microfi- tled to 100 percent of the profit. But as to equal installments--confuses bor- nance programs to administer. each loan installment is paid, the entre- rowers and loan officers.The margin of Moreover, the concept automatically preneur "buys back" the shares. Hence error is considerable given that a single provides collateral for the program with each installment the entrepreneur loan officer often manages 100­200 because the program owns the goods earns more profit and the program less. borrowers. until the last installment is paid. Issue Mudaraba (profit sharing) Murabaha (buy-resell) Most applicable for Fixed assets Working and investment capital Cost to borrower Higher because of higher profit share of program Lower due to higher risk Initial borrower acceptance Higher Lower because model is similar to fixed interest rates Risk to borrower Lower if no predetermined minimum profit is allowed Higher Risk to program Higher if no predetermined minimum profit is allowed Lower Administrative costs High given the complexity of the repayment schedule Initially high because of the high volume of buy-resell transactions. Administration and monitoring are simple, however, due to equal installments Enforcement Difficult because of possible lack of transparency in Easy; program owns goods until last determining profit installment is paid Source: Dhumale and Sapcanin 1998. making loans, and some borrowers--who ner.A good example is Lebanon's Monetary are savvy entrepreneurs all over the world-- Housing Institution, a private organization have started to ask for commercial loans. with about 5,000 active clients. Half the Still,the provision of financial services based clients have emergency loans of less than on Islamic principles meets a demand unmet $1,000 with a six-month maturity;the other by other programs. half have working capital loans of less than Some countries have had large-scale Islam- $10,000 for businesses. ic finance programs for quite some time. These programs were not included in the Lending programs for very small survey conducted for this report because of businesses are emerging a lack of complete and reliable data.Although Several programs in the region--the Coop- these programs often have a low profile,they erative Housing Finance (CHF) program in offer valuable services in a professional man- Jordan and Lebanon,the U.S.Agency for Inter- 18 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA national Development (USAID) program in working capital loans that usually increase theWest Bank and Gaza,and the Internation- with timely repayment. al Finance Corporation­World Bank­Dutch But many of the programs covered by the government project in the West Bank and survey do not fit the traditional definition of Gaza--are applying lessons from microfinance microfinance.Instead they offer small invest- best practices to small business finance.These ment capital loans to the unemployed.The lessons include: mandate of these programs is to reduce · Decentralizing decisionmaking on loans. unemployment--not necessarily to provide · Evaluating loan requests based on cash sustainable financial services to the poor. flow and character rather than assets and These programs are referred to as unem- documents. ployment lending programs. Profits will · Developing client relationships and inti- In some Middle Eastern and NorthAfrican encourage banks mate industry knowledge while imple- countries these programs have more active menting loan screening and monitoring clients than do microfinance programs and to continue systems as well as client tracking systems. have much larger outstanding loan portfolios. lending to small · Making loan officers responsible for grant- In addition,they have received far more fund- ing loans as well as collecting repay- ing from governments and donors. Data on businesses ments--and paying them based on their these programs were available for Egypt,Jor- performance in these areas. dan,Lebanon,Tunisia,and theWest Bank and · Setting interest rates and fees that reflect Gaza but not for Morocco andYemen.Yemen costs and risks. had one such program but it is being closed. All these programs are being implement- In Morocco data were not available. Else- ed by private commercial banks.In Jordan and where, most of these programs lack appro- Lebanon only working capital loans are priate information systems and were unable offered to small businesses,while in theWest to provide basic information.Hence data are Bank and Gaza both working capital and of poor quality and should be interpreted as investment capital loans are offered. One indicators rather than hard facts. bank offers investment capital loans only Although they vary between and within after a small business has established a good countries, in general the investment capital track record of repaying working capital loans provided by these programs are small loans. Repayment rates are high, and some relative to the investment capital loans made banks are already making profits from this by commercial banks.At the end of 1999 the type of lending. Profits will provide a key average outstanding balance of microfinance incentive for banks to continue this type of programs was $460; the average for unem- lending after donors have departed. One ployment lending programs was $4,262 (table bank has set up a new legal subsidiary to spe- 2).The maturities of the unemployment loans cialize in this type of lending,while another range from 1 to more than 10 years,with an bank is doing so. average of 2­3 years. In most cases a grace period of three months to one year is offered. Unemployment lending programs Unemployment lending programs share are big players several key characteristics: The survey conducted for this report sought · The target group is unemployed workers, to analyze microfinance developments in young people, or both, and the business the Middle East and NorthAfrica,with micro- activities funded are usually new activities. finance defined the traditional way as the · Most loans go to men. provision of financial services to the entre- · Interest rates are subsidized. preneurial poor.As noted,the region's micro- · Loans are often combined with compul- finance industry uses a narrow definition of sory training or technical assistance. microfinance, mainly offering credit: small · Programs are managed by large govern- MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 19 Table 2. Microfinance programs and unemployment lending programs in the Middle East and North Africa, 1999 West Bank Total Indicator Egypt Jordan Lebanon Morocco Tunisia and Gaza Yemen or average Number of microfinance programs 15 8 5 7 6 3 4 48 Number of unemployment programs 1 3 11 .. 5 5 0 25 Number of active microfinance clients 90,897 17,777 4,438 42,571 3,251 7,264 2,619 168,817 Number of active unemployment clients 40,000 5,320 6,330 .. 22,575 1,537 -- 75,762 Outstanding microfinance portfolio (U.S. dollars) 47,629,087 17,599,098 2,018,103 6,008,185 1,808,181 2,136,267 474,380 77,673,301 Outstanding unemployment portfolio (U.S. dollars) 200,000,000 25,009,450 8,676,971 .. 85,000,000 4,193,339 -- 322,879,760 Average outstanding balance of microfinance loans (U.S. dollars) 524 990 455 141 556 294 220 460 Average outstanding balance of unemployment loans (U.S. dollars) 5,000 4,701 1,371 .. 3,765 2,728 -- 4,262 Female microfinance clients (percent) 25 47 95 76 64 100 26 46 Female unemployment clients (percent) 20 25 23 .. 20 44 -- 21 .. Not available; -- Not applicable Source: World Bank survey of microfinance institutions. mental or quasi-governmental organiza- that position has been taken over by Moroc- tions or by small charitable NGOs. co, which saw the number of clients jump · Programs often lack appropriate infor- from just over 4,000 in 1997 to more than mation and management systems. 42,000 in 1999 (figure 3). Hence it is not As a result of these characteristics, most surprising that Morocco was the main con- programs have low repayment rates and high tributor to the growth of microfinance in loan losses. the region. In some countries, however, the microfi- Survey findings nance industry hardly grew or even shrank. In Lebanon and theWest Bank and Gaza this The survey conducted for this report focused was mainly due to the second generation on the growth,institutional forms,clients,and issues described above. Key players under- sustainability of the region's microfinance went consolidation and restructuring but institutions. are now poised for rapid growth.Tunisia's industry hardly grew because local NGOs Growth (associations) were awaiting the passage of The microfinance industry in the Middle East the 1999 law on microcredit. and NorthAfrica almost doubled between the The outstanding loan portfolio in the Mid- end of 1997 and the end of 1999,from 90,000 dle East and NorthAfrica grew from $44.6 mil- active clients to almost 170,000. Egypt lion in 1997 to $77.7 million in 1999.But the remains the leader in the region but has lost average outstanding loan balance dropped market share:from 68 percent of active clients from $495 in 1997 to $460 in 1999--main- in 1997 to 53 percent in 1999 (figure 2). ly because of the entry and rapid growth of While Jordan was in second place in 1997, new programs.A microfinance program usu- 20 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Figure 2. Share of active microfinance clients in the Middle East and North Africa by country, 1997 and 1999 1997 1999 Tunisia 2% Yemen 2% Egypt Lebanon 3% 68% West Bank and Gaza 4% [Yemen 0%] Jordan Egypt 11% 53% Tunisia 1% Lebanon 4% Morrocco Morocco 25% 5% West Bank and Gaza 8% Jordan 14% Source: World Bank surveys of microfinance institutions. Figure 3. Number of active microfinance clients in the groups (Lebanon), and associations Middle East and North Africa by country, 1997 and 1999 (Morocco,Tunisia). · International NGOs, which often do not 100,000 1999 have to comply with local NGO laws (as inTunisia,where an international NGO is 80,000 exempt from the 1999 law on microcre- dit). 60,000 · Banks. Only banks that engage in micro- finance on a voluntary basis without fac- 40,000 ing government pressure or serving as a 20,000 conduit for government lending programs 1997 are included in this category. Banks that 0 channel funds under government pres- Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen sure or mandate are included in the gov- and Gaza ernment category (below). Source: World Bank surveys of microfinance institutions. · Private companies--microfinance pro- grams registered or reregistered (see ally starts with small initial loans, and only below) as private shareholding compa- with timely repayment do borrowers get nies. larger loans.With many new clients the aver- · Government agencies, including quasi- age outstanding balance could fall.Hence it governmental agencies such as social is not surprising that Morocco,which had the funds,with the determining factor being most new clients, also had the lowest aver- whether they are under government con- age outstanding balance ($141). trol or pressure. · United Nations agencies such as the UN Institutional forms Relief andWorksAgency (UNRWA) in Jor- Microfinance providers in the region take dan,Lebanon,and theWest Bank and Gaza one of six institutional forms: and the UN Children's Fund (UNICEF). · Local NGOs,including foundations (as in In 1999 more than 70 percent of the Egypt), cooperatives (Yemen), charitable region's active microfinance clients were MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 21 served by local NGOs (figure 4)--about the Figure 4. Institutional form of microfinance providers in the same as in 1997. Egypt's National Bank for Middle East and North Africa, 1999 Development is still the only bank in the Percentage of active clients region that engages in microfinance on a 100 large scale.Morocco's Fondation Banque Pop- 90 ulaire has started microlending, however. 80 Although more banks have become active, 70 they are classified under very small business 60 programs because they have different target 50 groups than do traditional microfinance pro- 40 grams (see below). The banks engaged in 30 this type of lending are fully private, and it 20 is promising that the private sector is becom- 10 ing involved in microfinance and very small 0 Average Egypt Jordan Lebanon Morocco Tunisia West Yemen business finance. Bank and The same is true for the emergence of Gaza United Nations agencies Government agencies private companies. In Jordan two private companies have been established solely to Private companies Banks International NGOs Local NGOs engage in profitable and sustainable micro- Source: World Bank survey of microfinance institutions. finance (see figure 4).In Jordan and theWest Bank and Gaza two former Save the Chil- more social and charitable organizations, dren programs--the Jordanian Microfund such as the former Save the Children pro- forWomen and Palestine for Credit and Devel- grams in Jordan,Lebanon,and theWest Bank opment (FATEN)--were transformed into and Gaza or the UNRWA microfinance pro- privately owned and managed microfinance grams. Although these institutional forms companies.Both are market leaders in their may be appropriate in the early stages of a countries. microfinance program,they are likely to hin- There are good reasons for private com- der the program's development as a financial panies to provide microfinance. Doing so intermediary.The corporate cultures in the helps avoid excessive government interfer- parent program and the microfinance pro- ence. Moreover, private companies have far gram may differ or even conflict (between more transparent governance than,say,NGOs. giving grants and offering loans).The parent The shareholders of a private company are program's managerial and administrative sys- accountable and liable for achieving the com- tems often do not allow best practices appro- pany's objectives--the board members of priate for microfinance,such as loan portfolio an NGO are not. management based on aging of arrears,cash It is difficult if not impossible for NGOs to accounting,loan enforcement,performance- borrow money from banks for lending to based incentives,and a general business atti- microentrepreneurs. Banks are wary of tude.Finally,it is difficult for a microfinance extending such loans because they cannot program based in a larger, socially oriented sue NGOs in cases of default.But they can sue organization to raise commercial funds-- private companies. Moreover, private com- whether taking deposits or borrowing in panies can make profits,which are crucial for local capital markets. sustainability and help build capital. NGOs Hence spinning off a microfinance pro- often cannot earn profits.Most important,pri- gram from its parent organization may be vate companies have a business orientation-- the only way to achieve financial and insti- a condition for sustainable microfinance. tutional sustainability.That is what the Save Many microfinance programs in the Mid- the Children programs in Jordan, Lebanon, dle East and North Africa are part of larger, and theWest Bank and Gaza did:all three were 22 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Box 3. Spinning off for sustainability--the case of Save the Children The joint provision of social services and for their survival.Financial sustainability could microfinance by the same organization usually only be achieved if the programs were able to does not work. Often the objectives, culture, directly access commercial funds. This was and managerial and operational systems of not possible under Save the Children,an inter- the larger social program clash with those of national NGO,so the programs had to become the microfinance program. For instance, a locally owned and managed entities. More socially oriented parent organization may have important,however,was institutional sustain- a charitable outlook,give grants to the needy, ability. Under Save the Children the three employ social workers and rely on volunteers, microfinance programs were not institutions. and use a cash-based budget system.But a suc- Crucial administrative and managerial skills-- cessful microfinance program needs a business treasury and fund management, personnel orientation, business-oriented loan officers management--were lacking.The legal sepa- paid based on performance, and financially ration of the programs created a tremendous oriented administrative and budget systems.It sense of local ownership, pride, responsibili- also needs a governance structure that provides ty,and accountability essential for institution- strategic direction, ideas, and solutions to al sustainability.Staff are now able to shape the ensure the longevity of the program. future of their institutions. These clashing objectives and operations Spinning off proved to be a long and rather may result in institutional schizophrenia that difficult process.Among the daunting issues permeates the entire organization.On the one were the timing of the spin-off,legal decisions hand,the organization provides grants to the on the legal and organizational forms of the poor.On the other,it provides loans for which new entities, funding issues such as transfer- repayment is strictly enforced.The clients of ring donor agreements, ownership and gov- the social program are beneficiaries,while the ernance issues such as selecting boards of clients of the microfinance program are clients directors and determining appropriate roles for who buy a service they value.A good social different levels of governance, staffing issues worker is not necessarily a good loan officer, and changing or building corporate cultures, and vice versa.The confusion of staff,donors, and psychological issues relating to the and clients is often reflected in poor repayment "divorce"from the parent institution. rates and high delinquencies--undermining Spinning off is a strategic choice--one that the sustainability of the microfinance pro- makes sense only if it is done in the context gram.Thus programs that provide both social of another strategic choice:achieving full sus- and financial services should manage their tainability.Because managing a program is not programs separately, with different adminis- the same as managing an institution,the main trative procedures, recruitment, staffing, and lesson from the Save the Children spin-offs may sometimes even names. be that if full sustainability is the prime objec- Three former Save the Children programs tive, it may be best to set up a microfinance in Jordan (the Jordanian Women's Develop- program as an independent institution right ment Society),Lebanon (Al Majmoua),and the from the start. In Jordan, for example, USAID West Bank and Gaza (Palestine for Credit and has decided to support only programs that Development,or FATEN) show that separating are legally independent entities.In some cases programs may not be enough to ensure finan- this requires programs applying for USAID cial and institutional sustainability. Instead, support to set up separate legal entities to spinning off the programs was a prerequisite own and manage the program. Source: Dhumale,Sapcanin,and Brandsma 1999. spun off into locally owned and managed opment Microfinance under the Social Fund organizations (box 3). for Development in Egypt and the National Government agencies play a small role in Aid Fund in Jordan. Neither program is per- microfinance. Only Egypt and Jordan have forming well. The absence of government government programs: Community Devel- programs has not hindered the development MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 23 of the region's microfinance industry. Gov- Figure 5. Share of female microfinance borrowers in the Middle ernment agencies play a much bigger role in East and North Africa by country, 1997 and 1999 unemployment lending, serving 86 percent Percentage of active clients of the beneficiaries of these programs. 100 Clients 80 As noted, microfinance institutions in the Middle East and North Africa take a narrow 60 approach, offering only credit for business 1999 activities.Among the region's nearly 170,000 40 1997 active clients in 1999,fewer than 2,000 were savers--and all were women. Many poor 20 people need savings and deposit services, especially women,so a large part of the poor 0 is excluded. Given this imbalance, the fol- Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen and Gaza lowing analysis focuses on borrowers. The share of female borrowers grew from Source: World Bank surveys of microfinance institutions. 31 percent of active clients in 1997 to 46 per- cent in 1999--an increase of about 50,000 Figure 6. Share of rural microfinance borrowers in the Middle women.As with microfinance clients gener- East and North Africa by country, 1997 and 1999 ally,Morocco was the main contributor to this Percentage of active clients growth.Its Zakoura program targets women 60 exclusively,whileAlAmana serves both men 1999 and women. Together these programs 50 increased their female client base by more 40 1997 than 21,000.New entrants that target women exclusively were another reason for the 30 growth. Egypt has the smallest share of female 20 borrowers (figure 5).Recognizing this short- 10 coming,some of Egypt's successful microfi- nance institutions have started targeting 0 Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen women with savings and credit services. and Gaza Many of the potential clients are in rural areas.Yemen has also increased its share of Source: World Bank surveys of microfinance institutions. female borrowers with the entry of a new program that targets women with savings To proxy the poverty of borrowers, we and credit services. compared the average outstanding loan bal- The share of borrowers in rural areas ance in a country with that country's GDP rose from 18 percent in 1997 to 21 per- per capita and income poverty line (figure 7). cent in 1999.This small increase is not sur- The reasoning is that the poorer people are, prising because many microfinance the smaller will be the loans they take.This institutions start in densely populated urban approach follows that used by best practice areas,moving to rural areas only when they microfinance programs, which look at the have achieved scale and become more effi- household income of borrowers (not the cient.Egypt and Morocco have the region's project for which the loan is intended) to smallest shares of rural borrowers--in determine repayment capacity and so loan Morocco the share dropped from 20 to 10 size. Programs that do not follow best prac- percent (figure 6). tices--such as unemployment lending pro- 24 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Figure 7. Proxies for poverty among microfinance who around the world are among the poor- borrowers in the Middle East and North Africa, 1999 est. Many programs targeting women use Percent group lending, in which women in groups take individual loans but guarantee each 400 Average Average other. Jordan and Yemen, with average loan 350 loan balance loan balance balances close to average GDP per capita,risk as percentage as percentage 300 of GDP per capita of poverty line not targeting the poor. 250 Finally, what are loans used for? Many microfinance borrowers are active in trade 200 (figure 8). Again, the view that trade "does 150 not add value"is a development bias.Ahmed, 100 an entrepreneur in Yemen, is illustrative. He 50 lives in a slum area outside Hodeidah city 0 and runs a small grocery story that would be Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen classified as retail-trade.His clients appreciate and Gaza his services.The location of his shop saves Source: World Bank survey of microfinance institutions. them time and money (it takes an hour to walk to town to buy goods or costs 100 rials to take Figure 8. Uses of microfinance loans in the Middle East the minibus). In addition, Ahmed splits the and North Africa, 1999 goods bought into small quantities.Poor peo- Percentage of active clients ple cannot afford to buy a gallon of cooking 100 oil or a kilogram of sugar--but they can afford a few ounces or 200 grams. According to 80 Ahmed's clients,his business adds value. 60 Sustainability Of the 60 microfinance programs included 40 in the 1997 survey, 2 were fully sustainable and 8 were well on their way to that goal.Ten 20 programs were very small but had as their main objective the sustainable provision of 0 microfinance. Most of the remaining pro- Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen grams were in bad shape and not following and Gaza best practices.The authors of Making Micro- Services Trade Industry Agriculture financeWork in the Middle East and North Source: World Bank survey of microfinance institutions. Africa optimistically assumed that perhaps 20 of those programs would change their grams--do not pay attention to the house- approach.That proved not to be the case. hold's repayment capacity and often give Together the 2 sustainable programs and overly large loans. This is irresponsible the 8 that were well on their way served because it not only puts the borrower at a about 80 percent of active clients.This was higher risk of increased poverty,it also jeop- important because clients want continued ardizes the existence of the program because access, and this was expected to be avail- of high arrears and loan losses. able for this 80 percent of clients. Even Lebanon,Morocco,and theWest Bank and though many other programs were wasting Gaza have the deepest targeting:their micro- donor funds and many of their clients were finance clients are poorest relative to those expected to lose continued access, the in other countries.This was also the case in authors were not especially worried because 1997. Not surprisingly, these countries also most clients were served by best practice have the largest shares of female borrowers, programs. MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 25 This is still true today:most of the region's Table 3. Number and market share of best practice microfi- active microfinance clients are served by nance institutions in the Middle East and North Africa, 1999 programs that follow best practices (table Market share 3).There are fewer programs labeled micro- Number of of best practice finance than in 1997,mainly because in 1999 Number of best practice institutions some programs were reclassified as unem- Country institutions institutions (percent) ployment lending programs.This is because-- Egypt 17 8 90 despite their claims to the contrary--they are Jordan 8 3 36 (66)a not engaged in microfinance. Lebanon 5 3 91 Morocco 7 3 90 The 10 programs that in 1997 were fully Tunisia 6 1 55 sustainable or well on their way now serve West Bank and Gaza 3 2 96 63 percent of the region's active clients.The Yemen 4 4 100 10 programs that were small in 1997 but Total 51 24 88 sought full sustainability serve 20 percent a. The market share of Jordan's 3 best practice programs increases to 66 percent if the sam- of the market (almost 33,000 clients), up ple excludes the microcredit program of a large government agency that does not imple- ment best practices and in effect gives grants, not loans. from less than 6 percent in 1997.Finally,a few Source: World Bank survey of microfinance institutions. new programs have emerged with full sus- tainability as an objective.Today they serve Figure 9. Active microfinance clients in the Middle East only 6 percent of clients, but that share is and North Africa, 1999 and 2004 (projected) expected to grow rapidly in the next few 200,000 years. 2004 The future of microfinance 150,000 in the Middle East and North Africa 100,000 All the programs surveyed were asked how many active clients they expected to serve 50,000 1999 within five years--that is,by the end of 2004. Their goals were ambitious:together the pro- 0 grams expect to serve more than 422,000 Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen clients (figure 9). Assuming that new pro- and Gaza grams will also be established--for instance, Source: World Bank survey of microfinance institutions. in Egypt nine more foundations are being set up using theAlexandria BusinessAssociation model--the microfinance industry in the Morocco's leading microfinance programs Middle East and North Africa could serve may have been too optimistic in their pro- more than 500,000 clients by the end of jections, possibly because of their dramatic 2004. recent growth.They probably reasoned that Are these expectations realistic? Maybe if they went from 4,000 to more than 42,000 not.First,the forecasts for programs in Moroc- active clients in less than two years (between co and Tunisia are unrealistic. As noted, 1997 and 1999), why should they not grow Tunisia's 1999 law on microcredit will like- to 180,000 clients in five years? Morocco's ly hamstring its emerging industry.Programs programs are effective and are implementing will have trouble building sustainable port- best practices,but it may take them more than folios because they probably will not be able five years to achieve this ambitious goal. to cover their costs. They are expected to Some can be expected to face crises because deplete their capital quickly, causing the recent growth may have been too fast.Their industry to shrink. organizations and managerial and adminis- 26 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA trative systems may have to catch up with the they did not grow as fast as the formerly recent growth, and some consolidation and small but currently sizable programs.The 2 restructuring can be expected--temporari- sustainable and 8 nearly sustainable programs ly slowing them down. saw active clients increase from 71,000 in A second but much more important rea- 1997 to 105,000 in 1999.This is respectable son to expect slower growth is that there growth of 47 percent but, given the large appears to be a limit to the size and growth unmet demand, appears low. Former small of NGOs and foundations that only grant cred- and still beautiful programs grew from 5,000 it.This point is illustrated by the changing mar- clients in 1997 to 33,000 in 1999--growth ket shares of different types of microfinance of more than 600 percent. There appears to institutions.These types are fully sustainable, The rather disappointing growth of the 10 be a limit to the nearly sustainable,former small and beautiful market leaders can be explained by a com- size and growth (programs that in 1997 had few clients but bination of factors.Some underwent restruc- sought full sustainability and have since turing and consolidation as a result of crises. of NGOs and grown),new small and beautiful (programs set Others seem to be resting on their laurels: foundations that up since 1997 with full sustainability as their they are sustainable and are the darlings of only grant credit objective),and worst practice. donors but do not seem to have the drive to The market share of the leaders--fully reach more poor people. Some, especially sustainable or nearly sustainable programs-- those operating in small markets, have nar- has fallen (figure 10).The market share of for- row market niches and serve one target mer small and beautiful programs has group with one loan product and may have increased.They are not small anymore, but to diversify to grow, targeting other groups they are still beautiful.New small and beau- of poor people and introducing new finan- tiful programs just started but,based on the cial products. growth of the former small and beautiful Finally,limited sources of funds for onlend- programs,can be expected to increase mar- ing may be an important reason for the slow ket share rapidly.The share of worst practice growth of the market leaders. Most of the programs has fallen. leaders still depend on donor funds,but they Why did fully sustainable and nearly sus- do not need to.They could start raising funds tainable programs lose market share? Because for onlending commercially by,for instance, borrowing from banks.Some donors have not been creating incentives for the programs Figure 10. Market shares of different types of microfinance they support to do so.They have also been institutions in the Middle East and North Africa, 1997 and 1999 resting on their laurels. Percent Some programs have tried to raise funds 50 commercially but have run into legal and regulatory obstacles. In borrowing from a 40 bank for onlending,having the legal form of 1997 an NGO can be an impediment because it 30 1999 lacks transparency and accountability. As noted,a bank can be expected to be unwill- 20 ing to lend to such a legal form,especially if it cannot sue that legal form. Two of the 10 region's ten leading programs have changed legal form,from NGO to private company,in 0 order to borrow commercially.These changes Fully Nearly Former New Worst sustainable sustainable small and small and practice were recent,so it is too early to tell whether beautiful beautiful these companies will now be able to borrow Source: World Bank surveys of microfinance institutions. from banks. MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 27 One of the 10 leaders tried to become a To raise funds commercially,most current bank, which would make sense because as leaders and some emerging leaders will have a bank it could take deposits and savings.But to change legal form. Policymakers in these the $30 million in minimum capital required countries have to create legal environments of a bank (in this case in Egypt) was too appropriate for prudent but growing micro- much of a financial obstacle. finance.This may be the biggest challenge for If the region's credit-granting NGOs are to the region's microfinance industry over the achieve the scale of microfinance institu- next few years. tions in other parts of the world, they will have to raise funds commercially, including Note taking deposits.As noted,this move will also 1.This section draws heavily from Dhumale and enable them to move beyond their narrow Sapcanin (1998). approach to microfinance. By mobilizing deposits and savings, they will be able to serve thousands more clients. Microfinance Developments by Country T his section reviews key microfinance the market leader,and the National Bank for Most Egyptian developments in each country that Development program,which has almost as microfinance participated in the 1999 survey. many active clients as theAlexandria Business Unemployment lending and very small busi- Association.TheAlexandria BusinessAssoci- institutions ness lending programs are also covered for ation is known around the world as a best follow best countries where information was available: practice model of efficiency:its operational practices Egypt,Jordan,Lebanon,Tunisia,and theWest cost of making a loan is 8 percent of every Bank and Gaza. Yemen has no unemploy- Egyptian pound lent,one of the lowest rates ment lending or very small business lending in the world. With help from USAID, the programs, and no data were available for Alexandria BusinessAssociation's model has Morocco. Again, the quality of the data on been replicated around Egypt.Five new foun- unemployment lending programs was not dations have been set up since the associa- always optimal and should be interpreted tion started, with the foundation in Cairo with caution. being the most successful and taking the third market position.(The five foundations Egypt are the Egyptian Small Enterprise Develop- ment Foundation in Cairo, the Small Enter- Egypt leads its Middle Eastern and North prise DevelopmentAssociation of Port Said, African neighbors in microfinance.It has the the Assiut Businessmen Association, the highest number of active clients:an estimat- Skarkeya BusinessAssociation for Community ed 91,000 in 1999,with an outstanding port- Development, and the Dakahleya Business folio of almost $48 million--up from 60,000 Association for Investors and Community in 1997 with a portfolio of $30 million.More Development.) important is that most Egyptian microfinance The National Bank for Development is a institutions (except the Social Fund for Devel- private commercial bank that has built a sus- opment's community development program) tainable and profitable microcredit portfolio. follow best practices. They have excellent The program is implemented through 43 loan portfolios and loan portfolio manage- branches,with 2 branches fully dedicated to ment systems, solid and loyal customers (as microfinance.By the end of 1999 the program reflected in high repayment rates and high accounted for less than 5 percent of the retention rates),and financial management and bank's lending--but contributed more than accounting practices that may be better and 30 percent of its profit. more transparent than those in Egypt's pub- lic banks.As a result several of Egypt's micro- Constraints to outreach, growth, and finance institutions are fully sustainable,and market penetration others are close to achieving that goal. Egypt's microfinance industry has several The most successful programs are the characteristics that appear to limit its con- Alexandria Business Association, which is tinued growth: 29 30 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA · Market penetration is low.Egypt harbors does not have its own version of a BancoSol huge potential demand for microfinance, or Bank Rakyat Indonesia.Bolivia's BancoSol yet its market penetration rate is among is a well-known example of a microfinance the lowest in the region.Less than 5 per- NGO that became a licensed microfinance cent of the poor--fewer than 100,000 commercial bank. In terms of clients, it is people--receive financial services. The Bolivia's largest bank.Bank Rakyat Indonesia industry could support 2­3 million clients. is a state-owned bank with millions of · Microfinance is narrowly defined. Most microsavers and borrowers and more than of Egypt's microfinance programs offer 3,600 branches. Because of its high-quality only credit for business activities. As a portfolio,it is one of the few banks in EastAsia Egypt's result thousands of potential beneficiaries that was not affected by the region's recent microfinance are excluded: those needing finance for financial crisis. institutions are other purposes (such as credit for con- Although most of Egypt's microfinance sumption or emergencies) and those need- institutions have impressive track records, essentially a ing savings,deposit,and insurance services. they are essentially a network of successful network of Egypt's NGOs and foundations are not but scattered initiatives.The main donor for successful allowed to collect savings and deposits. these programs, USAID, has recognized this · Most clients live in urban areas. More and has started implementing an $85 mil- but scattered than 80 percent of Egypt's microfinance lion follow-on program, establishing 9­15 initiatives clients live in urban areas such as Cairo and more foundations. But representatives of capital cities of other governorates Egypt's successful microfinance institutions (Alexandria,Assiut,Sharkeya,Dakahleya). and of USAID acknowledge that the most This is not surprising:although in relative this initiative will achieve is a larger network terms poverty is higher in rural areas, in of successful but scattered initiatives.More- absolute terms most poor people live in over,considering how much time and money urban or semiurban areas.In addition,it is was spent building the initial network of more advantageous for a microfinance successful microfinance institutions, it institution to start in urban areas because remains to be seen whether developing new it will be able to build up a large volume programs will be cost-effective and whether of clients quickly and so benefit from it will contribute to a substantial and sus- economies of scale. These benefits can tainable increase in market penetration. then be passed on to clients. Some of Egypt's most successful microfi- · Most clients are male. Three-quarters of nance institutions may be able to take Egypt's microfinance clients are male.The deposits in the future.That would make them main reason may be that Egyptian micro- less dependent on donors and enable them finance institutions mainly offer credit for to provide a financial service that is needed businesses--a financial service that many but not offered.It would also enable them to women, especially the poorest, may not grow.The only way for these institutions to need. Another reason is that most of take deposits would be to transform into Egypt's microfinance programs do not tar- commercial banks.But the minimum capital get women exclusively. requirement for a commercial bank in Egypt · Growth seems to have leveled off. The ($30 million) is too steep for a microfinance most successful programs have a stable institution. client base, but in recent years did not Governments elsewhere have created spe- grow much beyond that base. cial legal forms and lowered minimum cap- Experts are puzzled that Egypt, despite ital requirements for microfinance the presence of highly successful programs, intermediaries that take deposits.They are has such low market penetration. Microfi- either self-supervised or supervised by a nance professionals often ponder why Egypt small autonomous unit of microfinance MICROFINANCE DEVELOPMENTS BY COUNTRY 31 experts. The Egyptian government should no monitoring,and subsidized interest rates) consider creating a special legal form for weaken state-owned institutions financially deposit-taking microfinance institutions.This and make them forever dependent on gov- move would contribute to the development ernment or donor funds. of the microfinance industry, though not as The following factors will make the dif- much as well-designed initiatives with the for- ference between a successful transformation mal financial sector. and a failed one: · A stable macroeconomic environment. A suggestion for jumpstarting · Strong leaders to steer reforms, backed development by unwavering political support. The most expensive and time-consuming · Considerable financial and human capital If Egypt is part of efforts to reach hundreds of thou- support from the government and exter- sands of microfinance clients in Egypt (includ- nal agencies. to jumpstart ing those in rural and remote areas) is the · Liberal financial sector policy that allows microfinance investment in building up physical and admin- banks to design their own products and development, istrative infrastructure--that is,a branch net- price them according to cost recovery work. In addition, hundreds of millions of principles. the formal finan- dollars are needed for onlending in order to · Complete operational autonomy,with no cial sector must reach hundreds of thousands of clients.Donor government mandates on lending targets get involved funds are abundant in Egypt, which helps or population groups. explain why its successful microfinance pro- · Large investment in strengthening staff grams have not had the drive or the desire through training,merit-based recruitment, to become commercially funded microfi- and performance incentives. nance institutions.But donors are unlikely to · Clear and transparent financial reporting be willing or able to foot the bill for the and accountability (CGAP 1997b). funding gap,which is estimated to be at least Two of these elements are especially cru- $0.5 billion--if not $1 billion. cial:strong political support and considerable If Egypt is to jumpstart microfinance devel- financial and human capital support. Suc- opment and offer financial services to most cess is most likely if the transformation occurs poor people cost-effectively and sustainably, within the broader context of devolving the the formal financial sector must get involved. government's control of the financial sector. The formal financial sector has an adminis- Experience elsewhere shows that political trative and physical infrastructure and is a opposition to reforming state-owned devel- ready source of funds for onlending.In terms opment banks, particularly in areas such as of potential outreach (measured in number of removing interest rate subsidies and rigid branches), the postal savings network and targeting of certain population groups, can PBDAC have the greatest, most immediate prove insurmountable. potential.Both organizations also have a ready supply of savings and deposits for onlending. Jordan But it is difficult if not impossible to trans- form a state-owned entity into a sustainable Although Jordan's role as the region's second microfinance intermediary. The well-inten- largest provider of microfinance has been tioned objective of state-owned (develop- overtaken by Morocco, Jordan's industry ment) finance institutions--reaching the remains active--with eight microfinance neediest people--is often subjected to polit- programs,three unemployment lending pro- ical influences. Politicized mandates place grams, and one Islamic lending program. undue emphasis on credit outflows instead New programs implemented using best prac- of loan recovery.Poor lending practices (such tices show promise for the industry's future as weak borrower selection criteria,little or development. 32 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Microfinance programs.This only increases the likelihood Jordan's microfinance industry grew about 40 of nonpayment. Many of the organization's percent between 1997 and 1999,from almost clients should have been given grants (for 13,000 active borrowers to almost 18,000 (fig- social reasons) or would have benefited from ure 11). The outstanding loan portfolio savings services. Given the program's fun- jumped from $11.4 million to $17.6 million. damental flaws,it is no surprise that it expects The average outstanding loan balance to see a drop in active clients over the next dropped slightly, probably due to the entry few years. of three new players,all funded by USAID and Aside from this program, Jordan's largest implementing best practices. Being young program is the Microfund forWomen.Like its The future programs and relatively new to the business, cousin in theWest Bank and Gaza,FATEN,the of Jordan's they have started with small initial loans to program did not grow in recent years for microfinance enable clients to build up track records. two reasons.First,it spun off from its parent Almost half the clients are female,and a sim- organization,Save the Children,into a local- industry looks ilar share lives in rural areas. ly managed and governed NGO--a neces- promising The largest microfinance player in Jordan sary step for financial and institutional is a government organization that does not sustainability. Second, it had to deal with target the entrepreneurial poor but rather the fraud that occurred because of rapid early destitute poor, the handicapped, and other growth.The fund emerged from this experi- marginalized groups.The organization's repay- ence stronger and wiser and is well on its way ment rate is the lowest in the country because to sustainability and increased outreach. repayment is not routinely enforced and Jordan has several new programs,all fund- because many borrowers should not have ed and assisted by USAID and implementing received loans in the first place, as they are best practices, with potential for sustain- not creditworthy or are too poor to benefit ability and growth.It is hoped that USAID will from loans.Some borrowers may be willing have learned from recent experiences in Jor- but often are not able to pay,and having a loan dan and other Middle Eastern and North puts them in debt--possibly increasing pover- African countries, and not only emphasize ty.Although the program targets the poorest, growth targets but, more important, institu- its average outstanding loan balance is one tional development. It is encouraging that of the highest of Jordan's eight microfinance USAID helped set up these programs as sep- arate,independent legal entities,which will contribute to their institutional development. Figure 11. Microfinance and other lending in Jordan, 1997 and 1999 The future of Jordan's microfinance indus- try looks promising, with one experienced Number of active clients best practice player and several runners-up. 20,000 1999 These programs together expect to serve more than 35,000 active clients by 2004. 15,000 Even if fewer clients are reached--which 1997 may be advisable given the risks of rapid growth--these programs are poised for sus- 10,000 tainability and outreach. 5,000 Unemployment and very small business lending Jordan has three programs with characteris- 0 Microfinance Unemployment Islamic loans tics of unemployment lending programs:the loans (small business) loans large Development Employment Fund, a Source: World Bank surveys of microfinance institutions. quasi-governmental organization; the pro- MICROFINANCE DEVELOPMENTS BY COUNTRY 33 gram of the Industrial Development Bank;and banking program--the only program in the small UNRWA program. Although the Lebanon that also takes savings. The out- Development Employment Fund also acts as standing loan portfolio increased 70 per- a wholesale funder of microfinance pro- cent,from $1.2 million to $2.0 million.This grams, providing loans to NGOs and other jump mainly occurred because the new organizations for onlending to microentre- entrant offered larger initial loans (about preneurs, only its direct lending program is $400) and because repeat clients of the considered here. Despite the willingness of market leader,Al Majmoua,are getting larg- the fund's managers to change and restruc- er successive loans. ture,Jordanian politicians have been unwill- As in 1997, Lebanese microfinance pro- ing to commit to such a restructuring. grams have deep outreach, targeting very Lebanese The Industrial Development Bank's pro- poor people.The average outstanding loan gram is also mixed,with some characteristics balance is well below the poverty line.Hence microfinance of an unemployment lending program as it is not surprising that 95 percent of clients programs have well as a small enterprise lending program. are female,though this is down from 99 per- deep outreach, The program is shrinking. cent in 1997. The share of clients taking Together Jordan's three unemployment group loans also fell,from 93 to 82 percent. targeting very lending programs have about 5,500 active This is mainly due to the new entrant,which poor people clients and an outstanding loan portfolio of offers individual loans.In addition,to diver- almost $25 million. Most clients are male. sify its portfolio Al Majmoua also started offering individual loans to women who Islamic finance thrived in its group lending program. The A large player in Jordan's microfinance mar- share of rural borrowers stayed at about 40 ket that was not included in the 1997World percent. Bank survey is the Orphans' Fund Manage- The limited growth in Lebanon's microfi- ment and Development Association. It nance industry can be explained by the orga- appears to be set up along the lines of nizational growth curve common to Lebanon's Monetary Housing Institute,mak- microfinance institutions (see above). Like ing working and investment capital loans many new businesses, microfinance institu- using Islamic finance principles and making tions often experience rapid growth after a emergency and consumer loans. It claims startup period.Soon,however,they need to 15,000 active clients and a loan portfolio of $25 million. Figure 12. Microfinance and other lending in Lebanon, 1997 and 1999 Lebanon Number of active clients At first glance,Lebanon's microfinance indus- 8,000 try appears crowded,with more than 19 pro- grams.But only 5 offer traditional microfinance; 6,000 most of the rest are unemployment lenders or 1999 very small business lenders. 1997 4,000 Microfinance Between 1997 and 1999 the number of 2,000 active clients in Lebanon's microfinance industry grew 16 percent, from 3,838 to 0 4,438 (figure 12).The main contributors to Microfinance loans Unemployment and this limited growth were a new entrant in very small business loans the market and the expansion of a village Source: World Bank surveys of microfinance institutions. 34 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA adapt and may face a period of slow growth flaws endemic to unemployment lending while they restructure and strengthen man- programs (see above, in the section on key agerial and administrative systems.Loan prod- features of microfinance in the region).As a ucts often need to be fine-tuned or redesigned result their future looks bleak. Their main based on feedback from clients, and new constraint to growth is not a lack of funds for products may be introduced. These devel- onlending but a lack of capacity to provide opments seem to have occurred in Lebanon. loans efficiently and sustainably. Now, however, three of the country's five programs say that they are ready to engage Islamic finance in sustained growth,together aiming to reach Not covered in the preceding analysis was the As the region's more than 18,000 active clients by the end Monetary Housing Institution,an organization microfinance of 2004.As the region's young microfinance that provides loans based on Islamic finance industry industry develops,other Middle Eastern and principles. The main reason for the exclu- NorthAfrican countries will likely have expe- sion is the unreliability of the data. Still, the develops, other riences similar to Lebanon's. institution is a serious player in Lebanon's countries will market for microfinance and very small busi- likely have Unemployment and very small ness finance. business lending Half of the institution's portfolio of 4,500 experiences Of Lebanon's 13 unemployment and very borrowers is made up of hassan loans--loans similar to small business lending programs, just one extended without interest to pay for emer- focuses on very small businesses.This recent- gencies such as school fees,weddings,funer- Lebanon's ly established program follows microfinance als, or roof repairs. These loans have a best practices and provides working capital six-month maturity. The other half of the loans that increase with continued repay- portfolio is for working capital loans under ment. It differs from the country's microfi- $10,000 for very small businesses. nance programs in that it offers larger initial The Monetary Housing Institution pro- loans and works through a local commer- vides needed services.Unlike unemployment cial bank. The 12 unemployment lending lending programs, it would be able to lend programs basically offer investment loans to more if it had more funds because it appears unemployed, displaced, or other marginal- to be well organized. Hence the bottleneck ized groups. is not the institution's capacity to disburse but There are striking differences between the lack of funds for onlending. The main the clients of Lebanon's microfinance pro- sources of funds for onlending are savings and grams and the clients of unemployment and deposits,which are put in a noninterest-bear- very small business lending programs.While ing bank account. most microfinance clients are female, most of the clients of the other programs are male. Morocco Most microfinance clients live in urban areas, while most of the clients of the other pro- Morocco's microfinance industry has grown grams live in rural areas.The reason may be dramatically,from 4,290 active clients in 1997 that many unemployment lending programs to more than 42,000 in 1999.Zakoura andAl are funded by donors or other groups that Amana,two programs funded by USAID and require the programs to lend only in rural implementing best practices,accounted for areas. more than 80 percent of the growth. The All the unemployment lending programs outstanding loan portfolio jumped from use subsidized interest rates,although a few $760,000 to more than $6 million,while the offer rates close to--but below--comparable average outstanding loan balance fell from rates charged by commercial banks. In dif- $177 to $141.The share of female borrowers ferent ways, they all suffer from the same stayed around 75 percent,while the share of MICROFINANCE DEVELOPMENTS BY COUNTRY 35 rural borrowers dropped from 20 to 10 per- ulates that by April 2000,all Moroccan insti- cent. tutions providing microcredit were to be It is surprising that Morocco's two biggest acting according to the law. programs saw a decrease in the average out- The following steps are to be taken under standing loan balance. This could indicate the law: that the programs have targeted poorer peo- · Organizations that offer services (such as ple needing smaller loans.But both programs health care or education) in addition to also have a high percentage of repeat bor- microcredit have to separate microcred- rowers.Hence the access to larger successive it into a microcredit association. loans that comes with timely repayment may · The associations have to be audited annually. not be a major incentive for microfinance bor- · The associations have five years to become Overly rapid rowers in Morocco, because they may not sustainable,though it is unclear what will need larger loans. happen if they do not. growth can Experience around the world, including · The associations are exempt from import backfire dramatic examples in the Middle East and and value added taxes for five years, and NorthAfrica,shows that programs can grow private persons or organizations making too fast.A tenfold increase in the number of donations to the associations can deduct active clients in less than two years could be these donations from their taxable income. dangerous if it is not backed by appropriate · A Federation of Microcredit Associations organizational development,including inter- will be created. nal controls and audit, management infor- · The Ministry of Finance will set the max- mation systems, management systems, and imum nominal interest rate. branch networks. Overly rapid growth can · The maximum loan size is 50,000 dirhams backfire--as in Jordan and the West Bank ($500). and Gaza,where the leading programs expe- · The associations cannot take deposits and rienced massive fraud that caused financial savings. losses and damaged their reputations. Both Separating microcredit from other activi- programs recovered,but the experience set ties and pursuing sustainability are worth- them back two years. while objectives. Experience elsewhere In addition to its two big programs, shows that providing social or education ser- Morocco has two other microfinance pro- vices together with financial services does not grams that appear promising.TheAMSSF Sol- work. idarité sans Frontières is implementing best It could be damaging, however, for the practices and aiming for scale and sustain- Ministry of Finance to set the maximum nom- ability.The program of the Fondation Banque inal interest rate.But only the nominal inter- Populaire was created to provide sustain- est rate is mentioned in the law, and able microcredit through the bank's branch- associations are not forbidden from charging es. Although the program is only being fees. Hence they may find ways around the implemented through 5 branches, imple- nominal interest rate ceiling and may be able mentation through the full network of 14 to charge effective interest rates that are high branches could reach thousands of clients. enough to cover costs. These clients could also save through the The ceiling on loan size does not allow bank's network. clients of microcredit programs to grow. In April 1999 the Moroccan parliament And because of the ceiling, a major incen- passed a law on microcredit associations. If tive to repay--access to larger loans--is implemented in an uninformed manner,the missing.Finally,forbidding associations from law could hinder the development of Moroc- taking deposits and savings will exclude co's microfinance industry because it sets many poor people who do not need or want interest rates and loan ceilings.The law stip- credit. 36 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Tunisia ings from the general public.The law autho- rizes the Ministry of Finance to set loan ceil- With the fewest active clients,Tunisia remains ings, terms, and conditions (including the among the region's least active countries in interest rate),as well as repayment schedules. microfinance. The government's influence The interest rate is fixed at 5 percent a year, is quite strong,through regulation of the sec- and the ceiling is set at 1,000 dinars ($787). tor (including a new law on microcredit) The maximum repayment period is three and support to programs that provide sub- years.Associations are not allowed to charge sidized loans to the unemployed. fees or commissions and can lend up to 10 percent of their portfolios for consumption Tunisia's law Microfinance loans that have a ceiling of 300 dinars. on microcredit From 780 in 1997, the number of active The BanqueTunisienne de Solidarité (BTS) could impede microfinance borrowers almost quadrupled is designated as the main source of funds to 3,251 in 1999.The main contributor to this for onlending.The BTS assumes 80 percent the development growth was Enda Inter Arabe, the largest of the risk of nonpayment.The BTS is creat- of a healthy microfinance program in Tunisia imple- ing a guarantee fund through a compulsory microfinance menting best practices. 2 percent contribution on the loans distrib- The outstanding loan portfolio increased uted to associations.The law on microcred- industry almost eightfold,from $233,000 to more than it also stipulates that associations are $1.8 million.Hence the portfolio grew faster responsible for training beneficiaries. Inter- than the number of clients.As a result the aver- national NGOs, like Enda Inter Arabe, are age outstanding balance grew from $298 to exempt from the law. $556. This does not necessarily mean that The Tunisian government is requiring that fewer poor people were targeted.The increase an association be established in each of the mainly occurred because Enda InterArabe has country's 257 delegations (subprefectures).By many repeat clients who because of timely the end of 1999 three associations were active, repayment get access to larger loans. together serving nearly 1,000 clients. By May The share of female clients increased from 2000,20 associations had been authorized and 52 percent in 1997 to 64 percent in 1999,main- 9 had received BTS loans for onlending.These ly because Enda InterArabe increased its share loans ranged from 25,000­450,000 dinars. of female clients to almost 70 percent. Rural Tunisia's law is an example of one that borrowers increased from 13 to 29 percent. could impede the development of a healthy microfinance industry in any country for the The law on microcredit following reasons: The most important--and potentially detri- · Setting a very low interest rate may make mental--microfinance development in it impossible for microfinance institutions Tunisia was the July 1999 passage of a law on to recover costs. As a result they may microcredit and microcredit associations.To quickly deplete their capital. Moreover, provide microcredit, an association (a local borrowers often consider government form of NGO) must be authorized by the funds to be grants and so are unlikely to Ministry of Finance. Authorization comes repay them.This is even more likely if a only after consideration by an advisory com- country has a tradition of massive loan mittee composed of representatives of the forgiveness programs such as those often ministries of finance,interior,social affairs,and observed in agriculture. economic development,as well as two mem- · Setting loan ceilings will not allow for bers with NGO experience. flexibility and growth. Some borrowers The law describes the conditions under will need bigger loans than others. In which associations can provide microcred- addition,access to larger successive loans it.Associations are not allowed to collect sav- gives borrowers a key incentive to repay. MICROFINANCE DEVELOPMENTS BY COUNTRY 37 Without this incentive, repayment may · Unacceptably high transactions costs for be low. borrowers and lenders. · Barring microfinance intermediaries from · Ineffective guarantees. taking deposits could result in continued · A weak bankruptcy law. dependence on government and donor · An insufficiently competitive,public sec- funds. Moreover, an important target tor­dominated banking system. group, the poorest, would be neglected. · Lack of adequate followup by banks of The poorest are often too poor to bene- their FOPRODI loans. fit from credit because it will put them in Other factors also contributed to the failure, debt. The poorest, among them many including slow loan processing and dis- women, can often be better served with bursement, inadequate staff training, and Since 1998 the savings and deposit services tailored to unduly restrictive bank legislation. their needs. Tunisia's newest and largest unemployment BTS has granted The microcredit law is well-intended,but loan provider is the BTS,established in Decem- more than it may stifle the innovation and experimen- ber 1997 with capital of 30 million dinars ($26 22,000 loans tation essential for the development of million).Just under two-thirds of the capital is Tunisia's microfinance industry. Moreover, held by the private sector;the rest is held by worth a total of under the law it will be difficult for microfi- the public sector.The BTS provides loans to indi- 100 million nance programs to become sustainable-- viduals who have a university or vocational dinars and programs that implement best practices diploma or are seeking reintegration in the and aim for sustainability may not be able to framework of economic restructuring, who compete. have a profession,and who are willing to set up a business. Loans are generally less than Unemployment lending 10,000 dinars but can be increased to 20,000 Tunisia has a long history of government dinars for borrowers with a university degree. programs intended to create jobs (or reduce The loan period ranges from six months to unemployment),help disadvantaged groups seven years with up to a one-year grace peri- (such as farmers), or develop certain indus- od.The interest rate is 5 percent.Loans can only trial sectors or geographic areas.These pro- be used for investment in assets,not for work- grams have not been very successful. An ing capital.Moreover,borrowers can only buy example is the Fund for the Promotion and new equipment.Trade is excluded. Decentralization of Industry (FOPRODI), Since its began operating in 1998, the established in 1974 to encourage new entre- BTS has granted more than 22,000 loans preneurs by providing capital to small and worth a total of 100 million dinars.The aver- medium-size enterprises, to help decentral- age loan dropped from 6,200 dinars in 1998 ize industry away from coastal regions, and to 3,700 dinars in 1999. One of every two to lower unemployment. Loans were to be applications is approved,and the BTS claims provided through banks,mainly state-owned. a 45-day approval process.Almost half the The fund was wound up in 1997, having loans go to borrowers between the ages of largely failed to achieve its objectives.About 18 and 29.The overall repayment rate is 62 half of the fund's loans were in default, and percent, but this could increase as more the cost per job created was twice the world loans come out of the grace period. The average ($11,000 compared with $5,800). BTS also lends to microcredit associations The fund failed for the same reasons as many for onlending to microentrepreneurs. of the world's well-meaning government ini- tiatives intended to promote employment West Bank and Gaza by providing credit (through public banks or directly): Although theWest Bank and Gaza is the small- · Poorly designed incentives. est country in the Middle East and North 38 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Africa, it is among the region's leaders in Given the high population density,especial- terms of the number of programs making ly in Gaza,it is not surprising that 77 percent small loans.With 16 programs,it has just one of clients live in urban areas. fewer program than Egypt,the largest coun- TheWest Bank and Gaza is the only coun- try in the region.But as in Lebanon,the bal- try in the region that experienced a drop in ance is skewed--only three of these programs microfinance clients between 1997 and 1999, are engaged in traditional microfinance.The from about 7,500 to 7,300 (figure 13). (The other 13 programs offer unemployment outstanding loan portfolio grew, however, loans,very small business loans,or small and indicating larger loans among repeat bor- medium-size enterprise loans.Another unusu- rowers.)The main reason for the drop is that The microfinance al feature of the market is that five of the pro- FATEN underwent crucial restructuring and programs in the grams engaged in very small business lending consolidation. FATEN spun off from its par- West Bank and and small and medium-size enterprise lend- ent organization (Save the Children),becom- ing are run by private commercial banks,all ing an independent, locally owned and Gaza have the following best practices. managed private company--an essential step deepest outreach toward financial and institutional sustain- in the region Microfinance ability. FATEN also had to deal with fraud The largest of the three microfinance pro- issues that arose when rapid growth in clients grams,Palestine for Credit and Development was not backed by appropriate organiza- (FATEN), controls about 70 percent of the tional changes. FATEN emerged from both market.All three programs follow best prac- experiences stronger and is now well posi- tices and target only women, mainly with tioned to capitalize on its experience and mar- group loans. At the end of 1999 the com- ket position. bined outstanding loan portfolio was $2.1 mil- Another reason for the drop in clients is lion.The microfinance programs in theWest that theWest Bank and Gaza may have a lim- Bank and Gaza have the deepest outreach in ited market for microloans that target the the region:their clients are among the coun- poorest. FATEN's main competitor in Gaza, try's poorest citizens.The average loan bal- the group-guaranteed lending and savings ance is $294,which is 18 percent of GDP per program sponsored by the UN Relief and capita and 42 percent of the poverty line. Works Agency (UNWRA), grew very little, and it was not undergoing structural changes. This could indicate market saturation. Figure 13. Microfinance and other lending in the West Bank FATEN hopes to diversify its loan portfo- and Gaza, 1997 and 1999 lio, offering individual as well as consumer Number of active clients loans.Doing so would enable it to achieve the 8,000 19971999 volume and scale needed for full operational and financial sustainability. The UNRWA, through its Micro Enterprise Credit program 6,000 and Small Scale Enterprise program, started to diversify a couple years ago. The main 4,000 constraint to the UNRWA's full sustainability is its institutional setup,being lodged in a larg- er bureaucracy.Despite the competition and 2,000 possible market saturation,the three micro- finance programs in theWest Bank and Gaza 0 expect to reach about 25,000 active clients Microfinance Very small Small and loans business loans medium-size by 2004.This number includes new target enterprise loans groups such as very small businesses and Source: World Bank surveys of microfinance institutions. consumers. MICROFINANCE DEVELOPMENTS BY COUNTRY 39 Very small business and lending. The programs claim that together unemployment lending they will reach more than 13,000 active The three very small business lending pro- clients by 2004. grams in the West Bank and Gaza are the UNRWA Micro Enterprise Credit program in Small and medium-size enterprise the West Bank, the USAID-funded microcre- finance dit program with the Bank of Jordan, and Five programs in the West Bank and Gaza the Arab Bank in the West Bank. All three target small and medium-size enterprises programs offer working capital loans and (those with fewer than 50 employees). At have adapted lessons from microfinance to the end of 1999 the programs had almost very small business finance (see also below, 1,200 clients and an outstanding loan port- Lessons from in the section on finance for small and medi- folio of $9.1 million, with an average out- um-size enterprises).The initial loan size is standing balance of $7,800. More than a microfinance substantially larger than in traditional micro- quarter of clients were female. have been used finance programs. And with timely repay- Three of the five programs are imple- in other lending ment, loans can reach $5,000­10,000. mented through commercial banks under a At the end of 1999 these three programs project sponsored by the World Bank,Inter- programs in had about 6,500 clients,up from 1,200 at the national Finance Corporation,and Dutch gov- the West Bank end of 1997.The UNRWA Micro Enterprise ernment.The three banks--the Arab Bank, and Gaza Credit program was the main contributor to Commercial Bank of Palestine, and Jordan this growth.In 1999 the outstanding portfolio National Bank--offer investment capital loans of the very small business programs was $6.3 of up to $30,000 to small businesses. The million.Only 5 percent of clients were female, maturity is up to three years.Interest rates and and less than 10 percent lived in rural areas. fees are high enough to cover costs. The The average outstanding loan balance was unique feature of these programs is that they about $1,000 in 1999.The three programs are apply lessons from microfinance to small on the road to operational and financial cost business finance. coverage and together expect to serve more The businesses financed are dynamic and than 15,000 active clients by 2004. sustainable, and many operate in markets The five programs offering investment with growth potential. Examples include: capital loans target unemployed or other · A woman-owned business producing large marginalized groups.Hence the label unem- garments. Cheap imports from Asia pro- ployment lending programs is appropriate. duce only smaller sizes; thus this entre- As in other countries where this type of pro- preneur has found a market niche with gram has unemployment reduction as its ready and growing demand. mandate rather than the sustainable provision · An entrepreneur making neon signs--the of financial services to the entrepreneurial first and only source of such signs in the poor, interest rates are subsidized--and in West Bank. some cases are almost lower than the infla- · An entrepreneur making locally produced, tion rate. processed,and packaged sauces,jellies,and At the end of 1999 these five programs had herbs. about 1,500 active clients, almost twice the · A physician setting up a medical testing lab number at the end of 1997.The average out- for a variety of tests that before could standing loan balance was about only be taken in Israel. $2,800.Almost half of the clients were female, Financing businesses run by experienced mainly because three of the programs target entrepreneurs creates more sustainable jobs only women.Almost half the clients lived in than helping unemployed people set up busi- rural areas, mainly because two of the pro- nesses (which are likely to fail). By March grams are engaged in agricultural or rural 2000 this project had helped create 1,100 40 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA jobs--about 2 per business financed,exclud- nerable groups, especially the poor. The ing the owner.This is in line with international fund seeks to reduce poverty by improving experience. But given the dynamism of the living conditions and providing income-gen- businesses financed,many can be expected erating opportunities. A demand-driven to become repeat borrowers and create more mechanism is used to deliver two main jobs.Even more important is that two of the activities:community development services three banks are already making profits from such as health clinics, basic education this lending, giving them a major incentive (including classrooms for girls), and small to continue the program after theWorld Bank public works; and income generation pro- and International Finance Corporation with- grams and microfinance. Yemen draw. In fact, the three banks expect to Many microfinance experts have argued experienced finance 3,000 small businesses by 2004. that social funds should not engage in micro- the region's One of the two other small enterprise finance, mainly because the provision of programs,the UNRWA Small Scale Enterprise social (often grant-based) services does not fastest growth program,also implements lessons from micro- mix well with the provision of financial ser- in microfinance finance. vices.And while social funds are technically autonomous, they are often under political Yemen pressure and cannot afford to be seen as charging"excessive and exploitive"interest It is no surprise thatYemen,which only intro- rates. duced microfinance in 1997, experienced Yemen's social fund was aware of these the region's fastest growth--from 250 active drawbacks but decided to provide microfi- clients in 1997 to more than 2,600 in 1999. nance while addressing some of the flaws The outstanding loan portfolio is about of doing so seen in other social funds.The $500,000 and the average loan balance is provision of microfinance was a strategic $181.After Morocco,this is the second low- choice because the social fund considers est average balance in the region. But if in poor people's access to financial services to Morocco the low average balance is the result be an important component of the country's of a dramatic increase in the number of new social safety net.Access to financial services clients,inYemen it reflects the fact that it is increases poor people's coping options and the poorest country in the region, with a so reduces their vulnerability to external GDP per capita of about $263 and a pover- shocks. The Social Fund for Development ty line of $46. established a separate team, the Small and Yemen's share of female borrowers Micro Enterprise Development unit, with increased from 1 percent in 1997 to 26 per- separate accounting,recruitment,and other cent in 1999. Its share of rural borrowers managerial elements (box 4). also increased, from 10 to 27 percent.The The team's achievements are remarkable largest program has about 2,000 active clients because all local implementation capacity-- and aims to reach 7,500 by 2004. that of the team and that of the intermediaries Yemen's four microfinance programs have implementing the programs--had to be built two unique features.First,all are implemented from scratch. This proved to be a unique by the Social Fund for Development. Sec- opportunity.Yemen was not tainted by"worst ond, three of the programs--including the practice"experience,so the team could build largest--use Islamic finance techniques. best practices right from the start. Political pressure emerged,and there were even ques- The Social Fund for Development tions raised in parliament. But the Social The Social Fund for Development was estab- Fund for Development has withstood this lished in 1997 as part of efforts to mitigate pressure, mainly due to its achievements in the effects of government reforms on vul- the field. MICROFINANCE DEVELOPMENTS BY COUNTRY 41 Box 4. Microfinance and Yemen's Social Fund for Development Yemen's Social Fund for Development has a experience, the fund was able to follow best Small and Micro Enterprise Development unit practice standards from the start. The main that aims to increase poor people's access to lessons from the first phase were: financial services by developing financially · There is large demand for microcredit for and institutionally sustainable microfinance economic activity,and borrowers are will- institutions.It also aims to increase poor peo- ing and able to repay. ple's incomes by developing income-generat- · There is also large demand for microsavings ing projects. In both cases the social fund services, especially among very poor supports eligible intermediaries or creates women. new locally owned and managed intermedi- · The poor also need other financial ser- aries (such as NGOs or cooperatives) that deliver these services to the poor. vices, such as credit for consumption and Assistance to the intermediaries includes insurance for events such as funerals and technical and financial assistance. Financial weddings, as well as life insurance. assistance covers operational costs until an · Microfinance intermediaries with the intermediary can cover these costs from inter- potential to become sustainable require est and fee income.The fund also provides loan intensive support because capacity has to funds, which are lent to the intermediaries be built from scratch;a long time horizon (not given as grants) to instill financial disci- is needed. pline from the start.Technical and financial · It has proven difficult to find eligible and assistance is contingent on the intermediaries trustworthy intermediaries. meeting time-based performance benchmarks. · The likelihood of building a sustainable The loans made by microfinance institutions and the loans made by income-generating pro- microfinance intermediary is highest in jects are priced according to best practice for- urban areas,where the potential for reach- mulas and include the cost of funds. ing scale is highest. The Social Fund for Development develops · Many regions (especially remote and isolated a microfinance institution when an area's poten- rural areas) harbor demand for microfi- tial demand is high enough to justify the invest- nance,but the demand is too limited to jus- ment in technical and financial support required tify the high investment required to develop to build a sustainable program.In areas where a microfinance intermediary. there is clear demand but where high volumes · Islamic finance principles can be applied of active clients can never be reached,income- to microfinance and income-generating generating projects are set up. services. But, especially with microcredit, During the first phase of the social fund (1997­2000), four microfinance intermedi- Islamic finance principles may not be sus- aries and six income-generating projects were tainable because the transactions costs may set up. Because Yemen had no microfinance be too high. Islamic microfinance and south Yemen: people in the south had As noted,Islamic finance techniques can be fewer problems with interest rates.) applied to microfinance--but there are draw- Clients'initial preference was for mudara- backs, especially higher transactions costs ba (profit sharing) because it was closer to for borrowers and lenders (see box 2).A few the principles of Islam.This preference also years ago, when Yemen's microfinance pro- reflected clients'familiarity with similar mech- grams were being designed,most prospective anisms used by suppliers and other sources borrowers rejected interest rates,saying they of informal finance.But clients recognized the were haram--in discord with the Islamic potential conflict between the borrower and code. (There was, however, a notable differ- the microfinance program in determining ence between prospective clients in north the profit.A few did not like profit sharing 42 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA because they were reluctant to reveal their the sales price of the fattened animal profits. Many prospective borrowers initial- because markets are very active around ly expressed doubts about murabaha (buy- Ramadan. resell) because it appeared too similar to the Over time,more borrowers asked for the forbidden practice of fixed interest rates. murabaha product because its equal repay- They liked the simplicity of the model,how- ments enabled them to manage their house- ever. hold and business cash flows more easily.The Prospective borrowers and local religious programs ended up buying goods for the leaders understood that a microfinance pro- borrowers of both loan products because in gram would incur costs and that these costs many parts of Yemen even the handling of Most of Yemen's had to be recovered if the program were to money is considered haram.This approach programs use grow.They had no problems paying for these created high transactions costs for the bor- Islamic finance costs. rowers and the programs.Loan officers had Yemen's microfinance programs started to visit shops or markets with borrowers,who techniques by offering both loan products.As was fore- knew best what to buy.The logistics of doing seen,applying the profit-sharing model was this for a few hundred borrowers are cum- administratively burdensome. Moreover, bersome--doing it for a few thousand clients borrowers did not always understand the is mind-boggling.The programs had to include repayment schedule (which had unequal these costs in the price of the loan,whether installments), and loan officers had to jug- a higher profit-sharing percentage or a high- gle dozens of borrowers, each with differ- er markup. ent schedules. Surprisingly, determining Unforeseen problems arose with profits was less difficult.The dynamics of the accounting for profits.A traditional micro- microbusinesses receiving financing were finance program takes and accounts for relatively straightforward, and as the pro- profits each time a repayment comes in. grams gained experienced they also learned Given the Islamic philosophy,Yemen's pro- how to judge business cash flows. For grams could account for profits only after instance,everybody in a community knows the last installment of a loan was paid. In the price of a baby sheep or goat that is effect, this put the profit in the last install- bought for fattening in order to be sold ment, which is highly risky. Fortunately, just before the Eid holidays. Everybody Yemeni accountants found creative solu- knows the cost of fodder for fattening and tions to this problem. Enhancing Institutional Capacity: What Progress Has Been Made? A good microfinance program com- structures needed to provide viable finan- Learning needs mitted to providing quality financial cial services to large numbers of clients.Sev- change but services to a growing number of eral constraints were identified as major poor people on an ongoing basis should be obstacles to the industry's development: never stop able to: · The absence of clear missions and goals. · Reach a large number of clients. · The limited capacity of managers and staff · Provide financial products and services at (in terms of number and skills). competitive prices.This implies high oper- · The lack of internal procedures for mea- ational efficiency and the lowest possi- suring performance. ble transactions costs to clients. In September 1998 the World Bank Insti- · Mobilize the financial and technical tute organized a four-day workshop in Mar- resources required to achieve its goals. rakech, Morocco, for microfinance To perform these functions,a microfinance practitioners from the region (box 5).This program must have dedicated and compe- first-ever gathering of regional practitioners tent managers, well-trained and motivated discussed the findings of the 1997 survey.In staff,and internal procedures and systems-- addition, information on microfinance best including information technology--that practices (such as CGAP focus notes) was enable it to achieve self-sufficiency while pro- made available inArabic.The workshop gen- viding affordable financial products.A micro- erated country action plans for achieving finance program constantly needs to build its sustainable development of microfinance, institutional capacity through internal and to be replicated by individual institutions.In external training,learning by doing,and tech- addition, there was agreement that training nical assistance. A microfinance program's and technical assistance, adapted to the learning needs evolve from basic bookkeep- region's needs, were needed to build the ing, portfolio management, and loan officer capacity of microfinance institutions and training and incentives to fraud control,inter- help them implement best practices. nal and external auditing, financial and trea- The 1999 survey found that more of the sury management, diversification, and region's programs are implementing best prac- accessing commercial funds.Learning needs tices--as indicated by the capacity to cover change but never stop. operating costs and to reach more clients. The 1997 World Bank survey of microfi- Among other things, this notable improve- nance institutions in the Middle East and ment is due to better and wider dissemination North Africa highlighted the lack of institu- of and exposure to best practices, the emer- tional capacity in most of the region's pro- gence of new programs (such as banks and pri- grams--a shortcoming that endangered their vate companies) operating according to sound sustainability and growth. Many programs business principles, and the transformation were not implementing best practices and did of some programs into independent institu- not have the administrative and governance tions dedicated to microfinance. 43 44 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA Box 5. The Marrakech microfinance workshop: cooperating with the competition The September 1998 World Bank Institute anisms that follow borrowers' track records workshop on microfinance originally sought over time. Moreover, networking at the coun- to help individual institutions develop strate- try level can inform the policy dialogue. gies for building capacity in order to achieve The unwillingness to cooperate was most sustainability.But many participants were hes- pronounced in Lebanon, Morocco, and the itant to share information on their programs, West Bank and Gaza. In other countries for- so the objective of the workshop was changed mal or informal networks of microfinance Training to developing strategies to strengthen the programs actively cooperate.The best-known industry at the country level. example is the EgyptianAssociation of Micro needs vary Encouraging cooperation among microfi- and Small Enterprise Development programs, widely nance competitors is precarious,and the indi- which associates microfinance programs at vidualism described above is not surprising. the working level.While some Egyptian pro- (For a few participants,the workshop was the grams harbor fierce competitors among man- first time they had sat in the same room as aging directors,their staff members cooperate their competitors from across the street in their and share information. Similarly, Jordan's home countries.) But such individualism can Access to Microfinance and Improved Imple- undermine the development of a country's mentation of Policy Reform (AMIR) program microfinance industry.Sharing basic information brings together several microfinance insti- on issues such as bad borrowers can only help tutions and promotes best practices among the industry,and could foster credit rating mech- them. Improving skills of 3,the importance of each identified train- ing need;the results are shown in figure 14. Providing easy access to training and tech- nical assistance is an important part of Training needs associated with efforts to help microfinance institutions spinning off build their institutional capacity.The 1997 survey highlighted the lack of suitable train- Many of the region's microfinance programs ing in microfinance best practices in the are part of larger institutions such as inter- region and the need for more tailored tech- national NGOs or governmental or quasi- nical assistance. By 1999 some donor-sup- governmental organizations (such as social ported initiatives had emerged (see below) funds or state-owned development banks). and more managers had been exposed to Such structures can limit growth, and after best practices through overseas training. reaching a certain level of development a But there is still a pressing need for more microfinance institution should consider training and technical assistance adapted spinning off or transforming into a separate to local needs. legal entity.Among the reasons: The 1999 survey found that training needs · The need for internal rules or procedures vary widely.This is not surprising given that that might conflict with the parent orga- new microfinance programs need basic train- nization's other activities or objectives. ing while older programs are facing second (For example, microfinance institutions or third generation issues associated with require extensive internal controls to pre- larger, more complex organizations. Older vent delinquency and fraud.) programs need far more tailored training and · The need for a clear identity,separate from specialized technical assistance.Respondents the parent organization,to avoid sending were asked to rank,from a low of 1 to a high clients mixed signals (as can happen when ENHANCING INSTITUTIONAL CAPACITY:WHAT PROGRESS HAS BEEN MADE? 45 a microfinance program is part of a social Figure 14. Distribution of microfinance training needs fund). by country, 1999 · The need to access commercial financial Percent resources. 100 It is not easy to spin off and transform from a program into a locally owned and 80 managed institution. The three successful spin-offs in the region--Al Majmoua in 60 Lebanon, the Jordanian Microfund for Women, and FATEN in the West Bank and 40 Gaza;see box 3--faced difficulties and expe- rienced slow growth while the transition 20 was under way.Cutting the cord from a par- ent organization that provided funds and 0 Yemen assistance can be difficult. A short, well- Jordan Lebanon Morocco Tunisia West Bank (96) (33) (46) (3) and Gaza (39) planned transition is crucial. (123) Those transitions succeeded partly Program Incentives for Targeting because of the involvement of program evaluation loan officers and outreach staff and newly established boards of direc- Accounting Product Fraud tors. Their empowerment and sense of and budgeting development management ownership made them fight to achieve Delinquency Management infor- Portfolio their goals.This owner-like response can be management mation systems management fostered by giving staff shares in the new Note: Numbers in parentheses are number of respondents in each country. institution.Other important factors for suc- Source: World Bank survey of microfinance institutions. cess include appropriate timing, proper regulation, and strong involvement of all International, regional, and partners. local training initiatives Although many of the region's microfi- nance programs are lodged within larger, Since the 1997 survey several initiatives have more socially oriented organizations--mak- been introduced to bolster microfinance ing a spin-off inevitable if their goal is finan- training in the region. cial sustainability--survey respondents did not identify the training needs associated International initiatives with an institutional transformation. This Since 1997 donors have sponsored the par- could be because they do not envisage a ticipation of microfinance practitioners and spin-off or, more likely, because many pro- government officials in well-known training gram managers do not fully appreciate the programs such as the Boulder Institute's in many "invisible" services that their parent Colorado, Southern New Hampshire Uni- organization provides. These services versity's Microenterprise Development Insti- include basic payroll management and tute (MDI), and previously the Harvard human resource recruitment and manage- Institute for International Development's ment as well as specialized services such as (HIID's) in Massachusetts.To date more than fund raising, donor relations and report- a hundred individuals from the Middle East ing, and legal council.As the Save the Chil- and NorthAfrica have attended the Boulder dren spin-offs show,managing a program is course,and in the summer of 2000,35 of the not the same as managing an institution. program's 120 participants were from the Substantial training needs may arise and region.Thus donors are willing to help micro- should be planned for if a program hopes finance institutions access best practices. to spin off. Because the costs of doing so are signifi- 46 MAKING MICROFINANCE WORK BETTER IN THE MIDDLE EAST AND NORTH AFRICA cant--averaging $10,000 per participant for 47 participants completed the basic course. the Boulder program--the relevance to the The courses are usually spread over two region's needs must always be verified,espe- months and take place after business hours. cially since the language barrier remains an In the summer of 2000 the basic course was important obstacle. Given the importance provided full time over a two-week period to of empowering local staff and developing make it more convenient for participants remote programs, it is worth investigating from neighboring countries. Course fees whether such funds should be used to repli- range from $400­500.The initiative aims to cate and offer such programs in the region. achieve 75 percent sustainability by the end Most of the participants in the Boulder and of 2000 and full sustainability by the end of Several sources MDI programs, which are given in English, 2001. provide useful have come from Egypt,Jordan,and Lebanon. training in Many microfinance program staff in theWest The CGAP Microfinance Capacity Bank and Gaza andYemen do not speak Eng- Building Initiative microfinance lish and so face a language barrier.The lan- Since 1997 the Consultative Group toAssist guage barrier is also high for staff from the Poorest (CGAP) has been forging part- Morocco and Tunisia. nerships with training institutes around the world to provide financial management cours- Regional initiatives es to microfinance institutions.Having iden- Several regional initiatives have emerged. tified the insufficient skills of microfinance Some have been tested and implemented,oth- managers and staff as the main constraint to ers are still at the embryonic stage.The most the industry's development, the CGAP ini- promising is the Sustainable Microfinance tiative seeks to enhance performance through Training Program delivered by Jordan'sAccess training. to Microfinance and Improved Implementa- The courses have proven highly replica- tion of Policy Reform (AMIR) program in ble within a framework provided by CGAP. collaboration with the Jordanian Institute of After identifying partner institutes, CGAP Banking Studies. provides course content,technical assistance The program, a four-year project funded to adapt that content,and quality control to by USAID,is the first initiative that provides ensure success. To date CGAP has imple- training inArabic focusing on best practices mented courses in East Asia (China and the and on establishing financially self-sustainable Philippines), South Asia (India), and Africa microfinance institutions. It consists of two (Kenya and Senegal).CGAP is exploring the courses. The basic course covers market possibility of implementing similar partner- analysis,product design and lending method- ships in the Middle East and NorthAfrica.For ologies, accounting basics, loan portfolio more information, see "MFI Services" at monitoring, and the like. The advanced http://www.cgap.org. course, for managers of microfinance insti- tutions, covers sustainability, credit and risk Local initiatives management,growth management,savings, Many institutions in the Middle East and tools for building a strong organization, North Africa are developing training direct- human resource management,business plan- ed at loan officers and mid-level staff. Many ning,management information systems,and are based in Egypt,where institutions like the the like. Alexandria BusinessAssociation and the con- Each course involves 70­75 hours of train- sulting firm Environmental Quality Interna- ing and hosts 20­25 participants. In 1999 tional are providing training in Arabic for the program trained 52 practitioners in the loan officers and supervisors.This training is basic course and 16 Jordanian specialists in open to participants from other countries.For the advanced course.In the first half of 2000, this type of audience, the regional gap ENHANCING INSTITUTIONAL CAPACITY:WHAT PROGRESS HAS BEEN MADE? 47 between demand and supply has been agers with a private sector or banking back- tremendously reduced by such training. ground. Such a background generally To serve a higher-level (managerial and enhances a program's business orientation administrative) audience, networks like and quest for sustainability.But getting such Egypt'sAssociation of Micro and Small Enter- managers is hard,and keeping them is often prise Development are trying to use nation- harder.Most microfinance institutions'finan- al institutions to build on existing training cial means are limited--especially when they centers and in-house training providers,using stop receiving donor funding--and man- their facilities and skills to develop programs agers may be drawn to the higher wages and,with donor support,to get internation- offered by the private sector. The same is al experts to deliver courses.To date,however, true for many of the valuable staff members no major initiative has emerged. a microfinance program spends time and effort training. 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