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Number 25 MICROFINANCE IN THE ARAB WORLD: THE CHALLENGE OF FINANCIAL INCLUSION Shamshad Akhtar, Douglas Pearce 1 (iii) A competitive and prudent regulatory framework backed by an effective Introduction: Financial inclusion is about infrastructure and sound risk management introducing justice and equity in financial frameworks; and systems and focuses on: (iv) Community organizations imbued with a culture of encouraging social mobilization (i) Extending financial services to previously and business development. excluded populations and micro- entrepreneurs; and The State of Microfinance in MENA: MENAs (ii) Empowering the poor and low income microfinance industry, though slow to get off populations that have largely been the ground, has been growing at about the excluded from access to financial services; same rate as global microfinance since 2006. and Still, microfinance in MENA reaches only half (iii) Extending access through provision of the proportion of the working population that it holistic services ranging from credit reaches in South Asia or Latin America. In fact, delivery to deposits, insurance and based on a sample of 9 countries, the MENA pensions and other financial services. region, as per Microfinance International Exchange (MIX) data, has barely 2.5 million In the Arab World, where levels of financial active borrowers versus 39 million in South exclusion have been exceptionally high, Asia and about 11-12 million each in Latin financial inclusion is critically important in America and East Asia. The market coverage dealing with the significant employment ratio in MENA is about half of that in South challenge. A corner stone of financial inclusion Asia and Latin America. More specifically, strategies is the development of a sustainable within the region, Morocco has the largest microfinance industry. Experience from around outreach with 1.2 million borrowers, Egypt and the world demonstrates the need to ensure that Jordan rank second and third respectively, and microfinance is backed by: Syria and Yemen have introduced progressive microfinance regulations. In West Bank and (i) A proper vision, strategy and an Gaza, credit information bureaus have opened architecture with building blocks for the with a number of agencies supporting outreach. industry so that it operates as a financially and socially sustainable business; In the MENA region, more so than in other (ii) Financially viable alternative channels and regions, financial sector development has not mechanisms for delivery; encompassed financial inclusion as a key goal. For instance, only an estimated 1 percent of total bank credit in Egypt goes to Micro and 1Shamshad Akhtar, Vice-President, Middle East and Small Enterprises (MSEs) and more than 2 North Africa Region, The World Bank; Douglas Pearce, Senior Private Sector Development Specialist, million MSEs have no access to finance. The Middle East and North Africa Region. The Quick region has fewer loan accounts and fewer Note benefitted from inputs by MNA FPD Sector deposit accounts per population as well as Manager Simon Bell. fewer branches than all regions except sub- Saharan Africa. Moreover, banking systems in progress is uneven. Some examples are the region have a narrow client base and end illustrative of trends in the region: up lending primarily to the public sector or to the larger corporate sector. Consequently, (i) The Egyptian Financial Supervisory microfinance in the region is limited in scale, Authority (EFSA) oversees all Non Bank products, and capacity. Financial Institutions (NBFIs) with commercial banks enjoying lower reserve NGOs and Financial Services in MENA: requirements for MFI-loans; NGOs only offer credit products and are unable (ii) In Morocco, the Ministry of Finance (MOF) to meet savings and other financial service has primary responsibility over needs. They are also limited in expanding their microfinance but the 2006 Banking Law operations by a lack of investment delegated supervisory responsibilities to opportunities, with investors deterred by a lack the Central Bank (CB). However, the 1999 of regulatory and supervisory clarity. As a microcredit law prohibits microcredit result, postal savings banks, post offices, and associations from taking deposits and limits state banks continue to be primary providers of individual credit to 50,000 MAD. The MOF non-credit services ­ principally savings and and the CB have issued new rules on loan payment services - for low income households classification and provisioning, and in 2009 in the region. the CB issued a new directive on governance, risk management and internal The Regulatory Framework: Provided controls for MFIs. The Federation Nationale Governments allow it, regulators can catalyze des Associations de Microcredit (the the microfinance sector and encourage Micro microcredit industry association) is Finance Institutions (MFIs) to move from being developing a code of ethics; just credit providers towards becoming more (iii) Syria now allows ,,Social Financial Banking holistic financial services providers. While there Institutions offering a range of financial are different views on the regulation and services, including deposits. The CB supervision of MFIs, it is generally agreed that licenses, regulates and supervises the benefits of regulation outweigh its costs. microfinance banks; and This is largely because: (i) regulatory oversight (iv) Yemeni legislation now allows for the facilitates deposit mobilization for MFIs that establishment of microfinance banks. serve as a source of low cost financing; (ii) depositors in MFIs are given regulatory There are, however, still countries with no clear comfort; (iii) regulations define the licensing supervisory responsibility or regulatory requirement of MFIs and mandate adequate frameworks for microfinance. Indeed, a number capital buffers and guidelines for risks; and (iv) of countries in the region still have interest rate regulations define parameters for client and caps that apply to microfinance, impacting the product risks, while allowing for regulation of performance of the sector given the high branchless and mobile banking. Flexibility for transaction costs associated with micro- MFIs to operate with a broader mandate and businesses. The region has among the most the ability to engage in resource mobilization restrictive regulations in the world for allows them to grow and develop a sustainable branchless banking. Flexibility in this area will business. Of course, appropriate consumer help multiply the outreach. protection measures would be needed to provide oversight on the MFIs and to protect Financial Infrastructure: MENA lags behind their clients as needed. Latin America and the OECD countries on measures of financial infrastructure, and ranks Regulatory Structures in MENA: The latest lowest globally on the issue of legal rights. The CGAP survey has found that 40% of countries legal and institutional framework for secured around the world now have either central transactions, including procedures for collateral banks or other regulators regulating MFIs. enforcement also needs strengthening. Rather While MENA is adapting to this practice, the than state directed credits or subsidized programs, government investments in June 2010 · Number 25· 2 supportive financial infrastructure would lower (iii) Recognition that strong public private costs and risks for microfinance lending on a partnership involves empowering larger scale. Credit information in the region regulators to develop and enforce on clients/active borrowers is improving in prudential regulatory and supervisory quality and availability with the establishment frameworks suitable for microfinance and of credit registries and credit bureaus. Any that the government develops a supportive gaps in information sharing can be costly as financial infrastructure and legal evident from a recent microfinance crisis in frameworks. Meanwhile, the private sector Morocco where MFIs managed to register an 11 should focus on developing market-based fold increase in their loan portfolios between solutions to meet outreach goals; and 2004 and 2007. In the absence of a proper (iv) Recognition that consumer protection and information database, MFIs competed with financial literacy need to be promoted if each other for the same clients in the same necessary with supportive regulations and market (39% of clients had multiple capacity building. borrowings), and without appropriate risk management capacities to prevent client over- Approaches and modalities to financial indebtedness. One of the leading Morocco inclusion: MFIs had a portfolio with 30% of Non Mobile and branchless banking: This would help Performing Loans (NPLs) and had to be reduce cost and induce efficiency in financial merged with a stronger institution. transactions, particularly as market penetration rates for mobile phones in the Arab world are This case is not unique to Morocco; Bolivia much higher than those for bank accounts. In underwent a similar microfinance crisis a the wake of regulator issues, MENA has been decade before and emerged with a stronger slow to catch up and it has less than half the microcredit system afterwards. Other MENA number of ATMs per population relative to countries may also be at risk unless NGO Eastern Europe and Central Asia, and less than microfinance institutions are integrated into a fifth than observed in OECD countries. For formal credit information systems used by the example, Egypts central bank issued wider financial sector. The Palestinian regulations that now provide regulatory space Monetary Authority has taken a lead in for mobile phone payments, use of electronic requiring microfinance institutions to upload money and the use of service agents, while lending and borrower data and to verify offering consumer protection, dispute current debts of potential clients into their resolution, anti-money laundering, and IT credit information system. Arrangements to do security. Introduction of such regulations has so are under development in 6 MENA allowed countries in the region to introduce E- countries, but are not yet finalized. wallet cards to be used to withdraw cash, pay bills, recharge airtime, make deposits, and for Lessons on developing financial inclusion money transfers. Examples include Egypts strategies: A few elements are critical to keep in Vodafone Cash offered with HSBC, Mobicash in perspective while developing financial Morocco by Maroc Telecom with Attijariwafa inclusion strategies: Bank and Banque Central Populaire, and Mobile Money in Yemen, by MTN with the Cooperative (i) Recognition of prevailing country financial Agricultural Credit Bank. structure and practices as well as institutional, legal and regulatory Electronic payments of salaries and pensions frameworks; through bank accounts and smart cards hold (ii) Recognition that "financial inclusion" enormous potential for increasing financial requires broader consultation of the inclusion. The Egyptian CBs Payroll and Government and regulators with private Pensions Initiative uses the payments system market participants, microfinance for government payroll and pensions. Up to 12 operators, standard setters, industry million individuals are expected to start associations, organizations such as CGAP receiving their monthly payments through and the World Bank; ,,basic bank accounts and debit cards within 3 June 2010 · Number 25· 3 years, a dramatic increase in financial inclusion. offer services such as transfers, payments, debit The Government also makes 30,000-40,000 cards, overdrafts, and mortgage loans. procurement-related transactions every day, mostly through checks sent to MSEs that could instead be made through the financial system. The World Bank and Microfinance: The World Basic bank accounts: providing savings and Bank has a range of initiatives to promote payments services and thereby establishing microfinance and is currently working on financial records for low-income customers are developing a Microfinance Facility for the Arab also being provided in Morocco, including the World. These initiatives could play a key role in ,,Hissab Bikhir account offered by Attijariwafa supporting the transition to a financial sector Bank, and the ,,Popular account offered by that provides a range of financial services to a Banque Central Populaire, promoted through majority ­ rather than only a minority ­ of firms the banks microfinance association. and households. The Bank supports policymakers and regulators in providing the Islamic Micro Finance: Leading countries for regulatory environment and financial Islamic microfinance in MENA include infrastructure that is essential to scaling up Lebanon (26,000 active clients) and Saudi microfinance. Last year, MENA received 4 Arabia and Yemen with 7,000 clients each. In loans totaling $1.3 billion in support of financial Egypt, Bank Misr plans to introduce Islamic inclusion. The Bank offers policy advice, microfinance activities in its 33 Islamic technical assistance, research, and capacity- branches, and also to develop a mudaraba building support to many countries in the Arab (profit sharing agreement) product. In Yemen, World, in partnership with the IFC and CGAP. Tadhamon Islamic Bank has an MSE division and in the UAE, Noor Islamic Bank and Global experience suggests that in developing Emirates Post Holding Group plan to establish microfinance in MENA, the Bank and its a company offering Sharia-compliant financial partner countries need to achieve a balance services to low income clients. Currently, between control and oversight, as well as Indonesia, Bangladesh, and Afghanistan between subsidies and market-driven account for 80 percent of Islamic microfinance. development. Mainstream financial sector involvement on a commercial basis needs to be Leasing, Factoring, Insurance: Leasing and encouraged, while balancing growth and factoring can help overcome information innovation in financial services with sufficient asymmetries and lower the cost and risk of attention to risk management. Commercial lending to MSEs. There is significant scope for sustainability is important but not sufficient. growth of leasing and factoring in MENA, To scale up, one also needs to focus on social given the right legal and tax frameworks to sustainability ­ built on better informed encourage these financing modalities. microfinance consumers and responsible and Moreover, microcredit NGOs can play a responsive financial sector policies. valuable role as agents linking people to insurance policies ­ as we are starting to see in Contact MNA K&L: Emmanuel Mbi, Director, Strategy and Operations, some countries in the region. Middle East and North Africa region David Steel, Manager, Operations, Middle East Utilizing Postal Systems: These can provide and North Africa region networks for expanding large-scale access to Regional Quick Notes Team: banking services, covering rural populations, Omer Karasapan, Roby Fields, Hafed Al-Ghwell, the self-employed, and people with irregular and Aliya Jalloh incomes. For example, the Moroccan Tel #: (202) 473 8177 government is creating a new Postal Bank, and The MNA Quick Notes are intended to summarize lessons learned from MNA and other Bank Knowledge post offices currently provide savings and Learning activities. The Notes do not necessarily passbooks and checking accounts via 17,000 reflect the views of the World Bank, its board or its branches to over 4 million people. The Postal member countries. Bank will target low income individuals and June 2010 · Number 25· 4