23076 December 1998 Jand Nordt,' A'')aa l a e l gs R a g _ _1,91O MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA Judith Brandsma and Rafika Chaouali Private and Financial Sector Development Group Human Development Group Middle East and North Africa Region World Bank 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 vi Executive Summary 1 The Importance of Microfinance 5 What are microenterprises and who are microentrepreneurs? 5 What is microfinance and why is it important? 7 What is the best way to develop microfinance institutions? 8 What role can commercial banks play in microfinance? 9 Microfinance in the Middle East and North Africa 13 Poverty in the region 13 Barriers to the development of a healthy microfinance industry 13 Where do things stand? 15 The sustainability performance box 22 Building Institutional Capacity in the Region's Microfinance Institutions 25 What is institutional capacity? 25 Areas to focus on 26 Building skills with training 27 What Next? 29 Developing more and better microfinance programs 29 What should governments do? 34 What should donors do? 34 What should practitioners do? 36 Annexes Annex 1 Financing gap and outreach gap for microfinance in the region 37 Annex 2 Institutions that participated in the World Bank's microfinance survey 38 Bibliography 40 IV MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA Boxes Box 1 Differentiating between two groups of poor people 7 Box 2 Financial dynamics and profitability in a microenterprise: The case of Sahar 8 Box 3 Guiding principles for microfinance best practice 9 Box 4 When should a microfinance institution mobilize voluntary savings from the public? 11 Box 5 Egypt's National Bank for Development: A model of best practice and private participation in microfinance 17 Box 6 To regulate or not to regulate? 35 Figures Figure 1 The potential demand for microfinance is much greater than the supply... and the financing gap is enormous 15 Figure 2 Egypt has the most microfinance borrowers... as well as the largest outstanding loan portfolio 16 Figure 3 Many types of institutions are involved in microfinance 17 Figure 4 Group lending is more common than individual lending 18 Figure 5 Though some microfinance programs target women, a majority of borrowers are men 19 Figure 6 The region's microfinance programs mainly reach urban residents 19 Figure 7 The sustainability performance box 23 Figure 8 Most of the region's microfinance institutions are not fully devoted to microfinance activities 27 Tables Table 1 Distinguishing features of microenterprises and small enterprises 6 Table 2 Outreach of microfinance intermediaries worldwide 10 Table 3 Status of microfinance efforts in the Middle East and North Africa 14 Table 4 Examples of best practice microfinance in the Middle East and North Africa 21 Table 5 Microfinance institutions assess their training needs 28 Table 6 Microfinance institutions assess local training 28 Table 7 Outreach and funding potential of the formal financial sector 32 Preface T his report analyzes microfinance in the sources (including the microfinance organi- Middle East and North Africa and zations themselves), and interviews with task makes recommendations to improve managers and Bank staff involved in micro- current practices and narrow the gap between finance. demand and supply. The main source of infor- The countries covered in detail are mation was a comprehensive survey-the first Egypt, Jordan, Lebanon, Morocco, Tunisia, of its kind-of 60 microfinance programs in the West Bank and Gaza, and Yemen. (Data the region. (These 60 programs represent for Tunisia should be interpreted with cau- about 90 percent of the region's microfinance tion, however, as they may be unreliable.) In activity.) If funding is available, the database some cases-especially when discussing the generated by this survey will be updated reg- need for microfinance and the financing ularly. Over time this database will allow the gap-Algeria, Iran, and Syria are also assessment of microfinance industry trends included. and financial indicators specific to the region. Although many microfinance programs Other information was derived from inter- cover both microenterprises and small nal World Bank reports (including staff enterprises, the survey included only the appraisal reports and back-to-office reports microenterprise components of these and memorandums), a variety of external programs. v Acknowledgments T his report would not have been pos- * Nasser Shraideh, coordinator of Micro sible without the cooperation of 60 and Small Business Development in the microfinance programs and organi- Social Productivity Program under the zations operating in the Middle East and Ministry of Planning in Jordan. North Africa. These groups not only partic- * Dina Abdel Wahab and Earl Wall of the ipated in a comprehensive survey on their Egyptian Small and Micro Enterprise operations and challenges, they were also Association. always open to meet with us or answer our These partners collected information and telephone calls, faxes, and emails. helped the respondents complete the ques- The survey was funded by the World tionnaires. Without their continued support Bank's Economic Development Institute and and patience the survey would never have implemented through seven local partners in accumulated the wealth of information the region: that formed the core source of this report. * Mongi Bedoui, microfinance consultant in The survey data were entered and analyzed Tunisia. by Amela Sapcanin and Rahul Dhumale, who * Fouad Benjelloun of Al AmanaNVITA in worked many late nights to meet the dead- Morocco. line. The report was edited by Paul Holtz and - Kais Al Irijani of the Small and Micro laid out by Garrett Cruce, and the cover was Enterprise Development Department of designed by Laurel Morais, all with the Social Fund for Development in Communications Development Incorporated. Yemen. Finally, the authors are grateful to * Reda Mamari, managing director of Al Nemat Shafik, director of the Private and Majmoua in Lebanon. Financial Sector Development Group, * Alex Pollock, senior adviser to the United and Jacques Baudouy, director of the Nations Relief and Works Agency Human Development G-oup in the Middle (UNRWA) Income Generating Program in East and North Africa R-gion at the World the West Bank and Gaza. Bank. VI Executive Summary M icrofinance is a powerful devel- There are many types of microenterpris- Providing financial opment tool-one that can reach es. At one end of the spectrum is, for exam- services to the the poor, raise their living stan- ple, the woman who sells vegetables. She entrepreneurial dards, create jobs, and contribute to economic operates her microenterprise for just a few poor increases growth. Yet of 60 microfinance programs sur- hours a day because she has other responsi- household veyed in the Middle East and North Africa, bilities, such as taking care of her children. Only 10 have achieved or are close to achiev- At the other end of the spectrum is the small income, reduces ing full sustainability. At least $1.4 billion is enterprise that employs several workers. aneates needed to reach the region's (conservatively Though microenterprises create jobs and and creates estimated) 4.5 million entrepreneurial poor contribute to GDP, they are often constrained demand for other who require microfinance. Developing the by lack of access to financial services. goods and microfinance industry in the Middle East and Providing financial services to the entrepre- services North Africa will require building local capac- neurial poor increases household income, ity, increasing the efficiency and sustainabil- reduces unemployment, and creates demand ity of microfinance programs, and engaging for other goods and services-especially the formal financial sector. nutrition, education, and health services. What is microfinance and why is it Microfinance best practice important? Experience worldwide has shown that the Microfinance programs provide financial ser- poor are bankable and willing to pay a pre- vices-such as credit, deposit, and savings mium for quick, reliable, and convenient services-to the entrepreneurial poor that are financial services. Successful microfinance tailored to their needs. Good microfinance institutions have also demonstrated that, programs are characterized by: when managed in a business-like manner, * Small, usually short-term loans, and banking with the poor can be profitable and secure savings products. sustainable. Several principles guide micro- * Streamlined, simple borrower and invest- finance best practice. ment appraisal. * Alternative approaches to collateral. * Quick disbursement of repeat loans after timely repayment. To become sustainable, microfinance insti- * Above-market interest rates to cover the tutions-whether credit unions, cooperatives, high transactions costs inherent in nongovernmental organizations (NGOs), or microfinance. banks-need to cover their costs of lending. * High repayment rates. If microlending costs are not covered, the * Convenient location and timing of institution's capital will be depleted and the services. continued access of microenterprises to finan- 1 2 MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA cial services-and even the existence of the more poor people require access to financial microfinance institution-will be in jeopardy. services. These potential borrowers need at least $1.4 billion in microloans; today the region has less than $95 million in out- Avoiding subsidies standing microloans. This large financing gap Microentrepreneurs do not need subsidies or does not include the additional funding need- grants-but they do require rapid and con- ed to build sustainable microfinance insti- tinued access to financial services. Besides, tutions and increase outreach. microlenders cannot afford to subsidize bor- More than 60 microfinance programs are Microfinance rowers. Subsidies imply that government or active in the Middle East and North Africa. institutions have donor funds are a form of charity, which dis- Most are run by NGOs and quasi- learned that they courages borrowers from repaying. governmental organizations, including state- Moreover, microfinance institutions have owned banks operating under government cannot depend learned that they cannot depend on gov- pressure and serving merely as windows for on governments ernments and donors as reliable, long-term credit delivery. Only one private bank in the and donors sources of subsidized funding. region is engaged in microfinance. as reliable, long- Egypt contains 66 percent of the region's term sources . . active borrowers. But its outreach gap-that of subsidized Promoting outreach and demand-driven is, the share of potential borrowers not being funding service delivery served-of 95 percent is among the highest Successful microfinance institutions increase in the region. In other words, Egypt iS serv- access to financial services for growing num- ing 5 percent of market needs. The West bers of low-income clients, offering them Bank and Gaza, by contrast, has tapped 23 quick and simple savings and loan services. percent of the market, leaving an outreach Loans are often short term, and new loans are gap of 77 percent. based on timely repayments. Loans are based Less than 40 percent of the region's active on borrowers' cash flow and character borrowers are women, though there are large rather than their assets and documents, and differences between coantries and pro- alternative forms of collateral (such as peer grams. Programs such as Save the Children pressure) are used to motivate repayment. target women exclusively, while programs that target both men and women tend to reach mainly male borrowers. Across the region, less than 15 percent of microfinance It takes time and commitment to build a sus- goes to rural areas, though there are sharp tainable microfinance program. Thus mixing differences among countries. In Tunisia and the delivery of microfinance services with, for Yemen microfinance is predominantly rural; example, the provision of social services and in Egypt, Jordan, and Lebanon it is mainly technical services is inadvisable because it urban. Most programs, however, serve sends conflicting signals to clients and pro- high-density areas. Group lending is the dom- gram staff. inant lending methodology in the region. There is a correlation between the aver- Microfinance in the Middle East age loan size and the depth of poverty of the and North Africa groups targeted. Only the poor and poorest and North Africa will bother to take very srzall loans, incur the The Middle East and North Africa contain transactions costs associated with such more than 60 million poor people-defined loans (such as participating in group meet- as those living on less than $2 a day-of ings), and pay high interest rates. A com- which just 112,000 have access to financial parison of average loan si.e, GDP per capita, services. At the very minimum, 4.5 million and income poverty lines reveals that EXECUrIVE SUMMARY 3 Morocco and the West Bank and Gaza have matically deplete loan capital and cause a loss the deepest outreach-that is, they reach the of borrowers. Programs that cover more than poorest borrowers. This result is not sur- 100 percent of their operational costs do not prising given that most of the active bor- depend on donors to cover operational costs rowers in these countries are women. but do require funds for onlending. Programs Most programs in the region lack basic that cover their operational costs and finan- information on their performance. They do cial costs (measured as imputed costs of cap- not know, for example, the number of active ital) are financially or fully sustainable. borrowers or the outstanding loan portfolio. Sustainability cannot be achieved without Even more programs do not know the qual- some minimum level of outreach. Only when ity of their loan portfolio (as measured in a microfinance institution has a certain num- Many terms of arrears and portfolio at risk). Most ber of borrowers can it reap economies of rograms also do not know their operational and finan- scale, which enable it to lower costs. Several n tg rams cial costs of making and managing loans. small countries in the Middle East and North in the region Africa have limited markets and face a chal- may never The sustainability of microfinance lenge in building sustainable programs. become in the Middle East and North Africa Programs in the region that are already sustainable nearly sustainable indicate that at least Of the 60 microfinance programs studied in 5,000-10,000 borrowers are needed. detail, 2 are fully sustainable and 8 are on the Many programs in the region may road to sustainability. The "sustainability per- never become sustainable. Fifty-five pro- formance box" provides an analytical frame- grams have not yet achieved minimum out- work for evaluating the performance of a reach and do not cover 100 percent of their microfinance program based on outreach operational costs. Of these "small depen- (number of active borrowers) and operational dents," 10 are very young programs that cost recovery (see figure). Programs that do started with an explicit objective to become not cover 100 percent of their operational fully sustainable. They are developing costs will remain dependent on donor or gov- their capacity to deliver microfinance ser- ernment subsidies to maintain their current vices before expanding. Fewer than 20 of activity level. A drop in subsidies would auto- the 45 remaining programs may opt for sus- The sustainability performance box Operational cost recovery (percent) 160 140 Small capables \ Large capables 120 (0, but 8 are close) (2) 100 \/ 80 60 Small de spendents Development strategies Large dependents 40 (55; 30 show potential for a microfinance (3) and 25 are deficient) institution 20 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Outreach (number of active borrowers) Note: Numbers in parentheses are the number of each type of institution in the region. 4 MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA tainability and-with sufficient exposure to now-serving 112,000 active clients-it is best practices-move up the learning curve unrealistic to expect these programs to meet while increasing scale. the large unmet demand. "Large dependents" have achieved sig- Microfinance could be provided by NGOs nificant outreach but do not cover their oper- or, preferably, microfinance institutions with ational costs. Often government programs or legal status as nondepos,t-taking financial quasi-government development funds, they institutions. However, it to)k the region's two are usually inefficient and charge subsidized most successful microfir ance institutions interest rates. Given their success in reach- about six years and $20 million to amass The formal ing a large number of borrowers, suboptimal 35,000 borrowers. Expanding an NGO or but "working" management systems, and microfinance institution is expensive because financald bectom vested (political) interests, it is difficult to tens if not hundreds of new branch offices should become reorient these programs toward full efficiency must be set up to meet the demand. more active and cost recovery. Thus, to fill the outreach gap and the $1.4 in delivering "Small capables" are programs that are billion financing gap in a timely manner, the microfinance designed to achieve sustainability but that formal financial sector should become more services have not yet reached sufficient scale. active in delivering microfinance services. Microfinance programs need time to exper- The outreach potential of formal financial iment with loan products, get to know the institutions is perhaps many times that of target group, and develop systems and pro- NGOs and microfinance institutions, because cedures before pursuing rapid growth. formal institutions have extensive branch net- Examples of emerging (but not yet fully) works. In Egypt, for exarnple, banks have small capables include the Save the Children more than 2,200 branch offices, and in programs in Jordan, Lebanon, and the West Morocco they have more than 1,300. The Bank and Gaza, and the United Nations $1.4 billion financing gap represents less than Relief and Works Agency program in Gaza. 0.5 percent of total assets of the banks in the The two "large capables"-the Alexandria region, and less than 1 percent of their total Business Association and the National Bank lending. for Development, both in Egypt-are star Today only one bank in the region is performers. They cover their operational and actively engaged in best-practice microfi- financial costs while making a profit that is nance (Egypt's National Bank for reinvested in the program. The Alexandria Development), and one NGO is trans- Business Association's immediate challenge forming itself into a formal financial insti- is its transition into a formal financial tution (Egypt's Alexandria Business intermediary. The National Bank for Association). The outreach potential of the Development's challenge is to expand its pro- region's banks has been neglected by both gram nationwide across all branches. donors and governments. The only reason a bank should engage in microfinance is What next? because it could be profitable. Emerging best practice from around the world has shown More and better microfinance providers are that microfinance can bt a profitable and needed to fill the region's enormous outreach appropriate niche for banks-especially gap. The 60 programs studied would have to those that are active in retail banking or con- increase their number of active borrowers by sumer lending. Promising initiatives include more than 40 times to provide services to 4.5 those in the West Bank and Gaza and in million people. Given that it took them an Lebanon. For the sake of the poor, such average of five years to get where they are efforts must increase. The Importance of Microfinance Wo orldwide, microfinance has been less entwined. A small enterprise may Microenterprise recognized as a powerful tool for employ some outside workers and may have activities are alleviating poverty, raising living a rudimentary accounting system separate productive standards, creating jobs, and boosting eco- from the household budget. The household investments nomic growth. But because microfinance is of a small enterprise owner often has that generate relatively new, there is much confusion about achieved economic viability and security, income for oor its role in development. Understanding the allowing it to invest in or diversify business peome and poor basic features and potential benefits of micro- activity. Small enterprise owners may not be people and their finance is essential to extending its reach in poor. Other differences between microen- households the Middle East and North Africa. terprises and small enterprises are described in table 1. Note that the box does not men- tion number of employees-depending on the what are microentrepriseursan influence of the household economy on deci- sions affecting the business, an enterprise Donors, policymakers, and practitioners with, say, three workers can be small or micro. often use conflicting terminology when defin- Microenterprise activities are productive ing microenterprises, especially relative to investments that generate income for poor small enterprises.' There is, however, no people and their households. These activities clear-cut distinction between microenter- are inextricably linked to the household's prises and small enterprises. The formal def- hierarchy of economic goals, which generally inition used by the World Bank and the U.S. seek to increase security over time and across Agency for International Development- generations. The primary goal is economic microenterprises have fewer than 10 employ- viability, or the ability to meet the basic needs ees and small enterprises have 10-50 of household members, including food, shel- employees-does not contribute to a better ter, and clothing. The second goal is eco- understanding of these businesses and the dif- nomic security, or the ability to protect ferences between them. Although the dis- household assets and income from unpre- tinctions between the two types of businesses dictable forces or actions, natural or human. are fluid, the key difference is the interde- The third goal is longer-term economic secu- pendency between the household economy rity and a higher standard of living that will and the business activity. be sustained to the next generation. In a microenterprise the household econ- Households try to minimize the risk of los- omy cannot be separated from the business ing the economic security already achieved, activity: the household's economic decisions and higher-level goals are pursued only when affect the microenterprise, and the microen- lower-level goals have been met. terprise's economic decisions affect the For the poor, household viability and secu- household. In a small enterprise the house- rity are a primary concern that cannot be hold economy and the business activity are taken for granted. Microenterprises and S 6 MAKING MICROFfNANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA Table 1. Distinguishing features of microenterprises and Decisions about microenterprises-whether small enterprises made jointly or individually by household members-can be understood more clearly Feature Microenterprises Small enterprises mmescnb nesodmr lal when considered relative to tradeoffs within Resources the overall household economy. Tradeoffs are Sources of finance Household savings Household savings important because microenterprises depend to Retained earnings Retained earnings Loans from formal and varyig degrees on their households for cap- informal sources ital, labor, and other inputs. An example is a Workers Working owner Working owner household's decision to use accumulated assets Unpaid family members Unpaid family members to send a child to school or to buy a cart to Low-skilled Paid outside workers transport vegetables to the market. Low- and medium-skilled Households will not take risks that Assets Very few, mostly current Greater mix of current and endanger their basic viability and security. Some low-value fixed assets moderate-value fixed The availability of surplus resources is Insecure tenure assets Limited access to services Secure tenure directly associated with the household's level Limited access to services of economic security and is key to under- Inputs Narrow range, few sources, Broader range, more standing how households move to higher lev- mostly retail sources, mix of retail els of security. Householcis with a minimum Low quality, irregular supply, and wholesale base of income and asstts are highly vul- uncertain and variable costs Better and more predictable nerable and thus are likely to be risk averse. quality, more stable supply, Because even small losses could threaten their and lower costs viability, any surpluses will be used for low- Production processes Output Low volume Higher volume risk ventures. Households with a broader Narrow range Broader range base of income and assets are more secure Low quality Mixed quality and better able to balance risks by diversifying Technology Traditional Mix of traditional and their resources across a mix of higher- and modern lower-risk investments. Management One of the constrain.s facing microen- practices Informal Mix of informal and formal terprises is lack of access to finance. For the Markets Uncertain and limited size Moderate to large most vulnerable households-those with a Unstable More specialized and more minimum base of income and assets-this Customers mainly individual predictable often means lack of access to savings services, and local end users Customers a mix of local meaning a safe place to store funds as a cush- and nonlocal end users and informal and formal ion against income shocks. For households businesses that have surplus assets above the level Financial required for minimum viability and securi- performance Often moderate to high Moderate profitability ty, lack of access to finance means often lack profitability but low absolute More stable income of access to credit. Access to credit enables amounts them to increase household income and to Uncertain income use surpluses to invest in the well being of household members and in microenterprise other productive activities are both a means activities. through which the poor subsist and a means Not every poor person makes a good to gain a slight economic foothold (by accu- microentrepreneur, and many poor people mulating assets) to put them one step ahead are better served by nonfinancial services. of the next crisis. Both functions are tied to The international microfinance community poverty alleviation. distinguishes between two groups of poor Microenterprises exist within a larger port- people: those that can manage profitable folio of household economic activities. activities and increase their standard of liv- THE IMPORTANCE OF MICROFINANCE 7 ing if given access to financing, and those that * Convenient location and timing of services cannot (box 1). Giving the poor access to (Fruman and Goldberg 1997). financial services can help reduce poverty, at International donors have become increas- least among the entrepreneurial poor. It can ingly interested in microfinance for at least also ease the burden on public funds by three reasons. First and most important, more cutting subsidies and allocating spending to than half the people in developing countries more productive sectors of the economy. And have been neglected or underserved by the for- given that they are labor intensive, micro- mal financial sector. Second, microenterpris- enterprises can absorb a large portion of es and small enterprises can raise the living excess labor. (Conversely, microenterprises standards of poor people in most developing are not bound by labor market rigidities, for countries. Finally, the shift toward private and More than half they involve owner and family labor.) financial sector development-in response to the people the declining role of government in the econ- in developing What is microfinance and why is it omy-has made microfinance part of the over- countries have important? Is microfi and why Is It all strategy for private sector development. negle important? Microenterprises and small enterprises been neglected Microfinance programs provide financial ser- not only raise the living standards of the or underserved vices-such as credit, deposit, and savings poor and the self-employed, they also pro- by the formal services-to the entrepreneurial poor that are vide jobs and contribute to GDP and eco- financial sector tailored to their needs. Good microfinance nomic growth. Yet such enterprises often programs are characterized by: have limited access to financial services. * Small, usually short-term loans, and Providing financial services to the entre- secure savings products. preneurial poor increases household * Streamlined, simple borrower and invest- income, reduces unemployment, and creates ment appraisal. demand for other goods and services-espe- * Alternative approaches to collateral. cially nutrition, education, and health ser- * Quick disbursement of repeat loans after vices. Thus microenterprises play an timely repayment. important role in alleviating poverty. * Above-market interest rates to cover the Women's World Banking (1995, p. 2) argues high transactions costs inherent in that "providing the poor with access to microfinance. financial services may be the single most * High repayment rates. effective means to address poverty and cre- Box 1. Differentiating between two groups of poor people The development community distinguishes need help accessing the resources required to between two groups of poor people: those that develop this activity. Credit is often-but not can increase their income by themselves and always-among those needed resources. The those that cannot. If properly assisted, members nonentrepreneurial poor, by contrast, require of the first group can generate activities that direct assistance simply to survive. enable them to move closer to or above the The concept of entrepreneurial poor poverty line. The second group includes poor allows antipoverty policies to move from pure- people who have no capacity to undertake any ly direct assistance (such as subsidies) to a mix economic activity, whether because they lack of direct and indirect assistance (such as sub- skills or because they are extremely destitute. sidies for the nonentrepreneurial poor and Members of the first group have been called credit for the entrepreneurial poor). the "entrepreneurial poor." The entrepre- Governments and donors are more interest- neurial poor do not need assistance for them- ed in indirect assistance because it targets the selves, but they do need help setting up or causes of poverty rather than the poor them- managing economic activities that will even- selves, making antipoverty policies more cost- tually increase their income. In particular, they effective. Source: UNCDF 1996. 8 MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA Box 2. Financial dynamics and profitability in a microenterprise: The case of Sahar Sahar, a typical microentrepreneur, lives in Deciding on a loan Egypt near Port Said. She buys and sells fresh (Egyptian pounds) fish. Every morning she goes to the fish mar- ket with her bicycle cart, which is equipped Indicator Before After with an icebox to keep the fish fresh. The cart, Indicator _he loan the loan built by her husband, cost about $200. Sahar Daily profit' 20 40 usually sells her daily merchandise by 3:00 p.m. Weekly profita 120 240 Each day she buys 100 Egyptian pounds (LE) Emergency savings 30 30 worth of fish and LE 10 worth of ice; hence her Depreciation on cart 20 20 Banking with daily working capital is LE 110. Her daily rev- Loan repayment 0 28.6 the poor can enue is LE 130, so her daily profit is LE 20. The Sahar's contribution to be profitable demand for fish is high in her neighborhood, household income 70 161.4 and she could sell more if she had more work- Other family income 84 84 and sustainable ing capital. Total family income 154 245.4 Sahar works six days a week; thus her week- Daily income per household ly profit is LE 120. She uses LE 70 of this prof- member (U.S. dollars) 0.92 1.47 it to support her household of seven, including a. Before depreciation and finance charges. her unemployed husband, and puts aside LE 30 for emergency savings and LE 20 for depre- to finance. As a result of the loan her daily prof- ciation on the bicycle cart. One household it would double, and her contribution to member, her uncle, works for a small enterprise household income would more than double. In and makes LE 60 a week. Her oldest son, an fact, Sahar could pay an even higher interest unskilled construction worker, works an rate and still be better off. average of two days a week and makes LE 12 With this loan Sahar coulc not only increase a day. Hence the weekly household income is the standard of living of her household, she could LB 154. also increase her savings. If, for example, she Sahar has been offered a loan of LB 110 at saved LE 60 a week instead of LE 30, she could 1 percent flat interest per week for a period of afford to send one of her children to school. one month. Her weekly repayment would be Alentvy,ifwrthnigtmtsse LE 28.6 (LE 27.5 principal and LE 1.1 inter- Alternatively, in fewer than eight months she est). Should she take the loan? The table below could invest in a second bicycle cart, allowing one shows that the loan is an attractive proposition of her unemployed household members to also for Sahar and her family. start a microenterprise activity. This move would The high interest rate is trivial in this cal- not only create an extra job, it would raise house- culation. By paying this rate, Sahar gains access hold income even more. ate broad-based economic growth. Finance poor's unmet demand for financial services. and enterprise systems that serve the These institutions have shown that the poor majority can be the pivotal links and the are bankable and that banking with the poor levers, enabling the poor to share in eco- can be profitable and sustainable. Because nomic growth and giving poor people the microenterprises can be highly profitable, means to use social services." More than microentrepreneurs are willing and able to pay 500 million of the world's economically high interest rates for convenient and quick active poor people run profitable microen- access to well-designed financial services (box terprises and small enterprises. 2). A microfinance program that collects loan repayments at an entrepreneur's business, for example, offers a convenient service that entre- Whatisrofite bestiwayution develpreneurs value and are wiling to pay for. If microfinance institutions? entrepreneurs were to have to close their busi- Successful microfinance institutions have nesses for, say, half a day to travel across town emerged in response to the entrepreneurial to make a repayment, half a day's profits THE IMPORTANCE OF MICROFINANCE 9 Box 3. Guiding principles for microfinance best practice Covering costs Promoting outreach and demand-driven To become sustainable, microfinance institu- service delivery tions-whether credit unions, cooperatives, Successful microfinance institutions increase NGOs, or banks-need to cover their costs of access to financial services for growing numbers lending. If microlending costs are not covered, of low-income clients, offering them quick and the institution's capital will be depleted and the simple savings and loan services. Loans are continued access of microenterprises to finan- often short term, and new loans are based on cial services-and even the existence of the timely repayments. Loans are based on bor- microfinance institution-will be in jeopardy. rowers' cash flow and character rather than their assets and documents, and alternative Avoiding subsidies forms of collateral (such as peer pressure Successful Microentrepreneurs do not need subsidies or through group lending) are used to motivate microfinance grants-but they do require rapid and continued repayment. institutions access to financial services. Besides, microlenders cannot afford to subsidize borrowers. Subsidies Maintaining a clear focus respond to the imply that govermnent or donor funds are a formn It takes time and commitment to build a sus- special needs of of charity, which discourages borrowers from tainable microfinance program. Thus mixing microenterprises repaying. Moreover, microfinance institutions the delivery of microfinance services with, for have learned that they cannot depend on gov- example, the provision of social services is inad- ernments and donors as reliable, long-term visable because it sends conflicting signals to sources of subsidized funding. clients and program staff. would be lost. This is a much higher price than Rakyat. Microfinance institutions can expand the interest rate premium. Entrepreneurs are the range of financial products offered to the also willing to pay a premium for quick and poor beyond simple lending to include such ser- continued access to financial services. The vices as savings, consumer and housing cred- profits forgone in waiting a few weeks for a its, pawn lending, and money exchange. loan approval can be many times the interest rate premium paid for getting a loan today. Successful microfinance institutions What role can commercial banks respond to the special needs of microenter- play in microfinance? prises. These needs, which make microfi- Successful microfinance efforts have encour- nance different from traditional commercial aged some commercial banks to enter this bank lending, include: market. In developing countries private, * Access to short-term credit to build up state-owned, and savings banks play impor- working capital. tant roles in microfinance. A survey of 206 * Access to timely credit, due to the high- microfinance intermediaries around the ly liquid nature and short-term requirements world found that banks and savings banks of their businesses. served more than 70 percent of active bor- * Access to repeat loans, which provides a rowers and 90 percent of savers and depos- powerful incentive for timely repayment. itors. The outstanding microfinance loan * Access to savings services, especially in portfolio of these banks was nearly $7 billion, remote areas without branches of banks. serving more than 14 million borrowers. And Emerging best practice shows that success- the banks had mobilized more than $19 bil- ful microfinance institutions can become suc- lion in deposits and savings from almost 45 cessful financial institutions by diversifying their million depositors. Given their large branch services and targeting specific groups (box 3). networks, banks have a much larger outreach Examples include Bangladesh's Grameen potential than nongovernmental organiza- Bank, Bolivia's BancoSol, and Indonesia's Bank tions (NGOs) and credit unions (table 2). 10 MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA Commercial banks should be encouraged microentrepreneurs, the high cost of lending to engage in microfinance for several reasons. to microenterprises, the inability of microen- Most important, microfinance can be prof- trepreneurs to pay high interest rates, legal and itable for banks-especially banks that are regulatory constraints, and social constraints. strong in retail banking or consumer lending. But all these barriers car. be overcome, as In addition, banks have a large outreach poten- examples around the world have shown. To tial through their extensive branch networks. be successful in this field, banks must change These networks give banks large economies how they do business and adopt new lending of scale relative to NGOs or microfinance techniques to manage risks and lower costs. Banks may institutions, which would have to make major be the most investments in infrastructure to reach the same Microenterprise risk number of borrowers or savers. efficient channel With well-designed loan delivery mech- For two reasons, commercial banks perceive for providing anisms, operations, and procedures, banks microenterprises as highl-risk borrowers. microfinance may be the most efficient channel for pro- Microentrepreneurs usually have no track to the viding microfinance to the entrepreneurial record and no formal relationship with a bank entrepreneurial poor. Moreover, banks have the most (that is, a checking or savings account). In poor accessible source of funds for onlending: addition, most microenterprises are informal, their deposit base. For instance, in the and so lack the legal registration and finan- Middle East and North Africa total funding cial reporting that the formal sector requires. needs for microfinance account for less than But microenterprises are no more or less 1 percent of deposits in the banking system. risky than any other business. Most simply Finally, banks can offer deposit and savings need to establish a formal -rack record with a services to the poor, a financial service often commercial bank to eliminate the information more needed than credit. As financial insti- asymmetry described above. A track record can tutions, banks are governed by regulations be built up if a bank initiallv provides only sav- that prevent them from jeopardizing other ings or deposit services, or only small loans people's money; deposit-taking by NGOs or with short maturities for w. orking capital pur- microfinance institutions, by contrast, poses. With timely repayment, the size and should be approached with extreme caution maturity of loans can be gradually increased. (box 4). Commercial banks have been reluctant to provide finance to microenterprises and Lack of collateral small enterprises and perceive several barri- The entrepreneurial poor usually have no assets ers to entering this field. The main barriers are or valuables to use as a guarantee. Making mat- the riskiness of microentrepreneurs and the ters worse, in most developing countries banks informal sector, the inadequate collateral of accept only registered immovable assets (such Table 2. Outreach of microfinance intermediaries worldwide Median Median savings number of active Median loan Number of and deposit Type of intermediary microborrowers size (U.S. dollars)a savings accounts amount (U.S. doalars)a Banks 44,271 681 39,883 186 Savings banks 2,866 3,011 224,180 950 Credit unions 15,320 449 38,610 409 NGOs 1,781 248 0 0 a. Among banks the sample included some extremely large institutions (more than 1,000,000 active clients), including such well-known examples as Bangladesh's Grameen Bank, Thailand's Bank of Agriculture and Agricultural Cooperatives, and Indonesia's Bank Rakyat Indonesia. Thus the table shows medians instead of means (averages) lo offset this bias. Source: World Bank 1996. THE IMPORTANCE OF MICROFINANCE 11 Box 4. When should a microfinance institution mobilize voluntary savings from the public? As a source of commercial finance for micro- government that is willing to modify its bank- credit institutions, voluntary deposits have gen- ing supervision so that the rules for micro- erated a lot of interest in recent years. Locally credit institutions are appropriate for their mobilized voluntary savings are potentially the activities, and to ensure that the supervisory largest and most immediately available source body is able to monitor these institutions of finance for some microcredit institutions. effectively. Mobilizing such savings also helps meet the vast The third consideration concerns the history, unmet demand for local savings services in capability, and performance of the microcred- developing countries. it institution. Before mobilizing voluntary pub- Three conditions should be met before a lic savings, a microcredit institution should have Banks have microcredit institution starts mobilizing vol- demonstrated consistently good management found ways untary savings. First, profitable mobilization of its own funds. It should be financially sol- to lower the requires an enabling macroeconomy, an appro- vent, maintaining a high rate of loan recovery priate legal and regulatory environment, polit- and earning attractive returns. A good track transactions ical stability, and suitable demographics. record is important because in many countries costs associated The second consideration concerns the low-income people have entrusted their savings with a large supervision of institutions providing micro- to small, unsupervised financial institutions- volume of finance. To protect their clients, especially only to lose their life savings. Once these three depositors, financial institutions that mobilize conditions have been met, the microcredit insti- small loans voluntary savings should be under govern- tution should carefully consider how to mobi- ment supervision. This, of course, requires a lize voluntary savings. Source: CGAP 1997. as land or real estate) as collateral. Legislation It is true that microlending is costly. A and systems to accept more flexible collater- study of the world's 12 most efficient al (such as movable assets, inventories, and microlending programs found that opera- accounts receivable) are lacking. tional costs reach 10-30 cents for every $1 Where traditional collateral is unavailable, lent (Christen and others 1994). But microen- new types of guarantees have emerged. These trepreneurs are willing and able to pay inter- include solidarity group guarantees, group est rates and fees that enable the intermediary lending instead of individual lending, and to cover its costs-provided it offers a finan- lending based on the borrower's character cial service that is quick, convenient, and tai- and cash flow rather than their assets and lored to entrepreneurs' needs. At the same documents. Loan officers are recruited time, banks have found ways to lower the from the microentrepreneurs' community transactions costs associated with a large vol- and hence have and gain intimate knowledge ume of small loans. These include: of the borrowers and can monitor them every * Recruiting loan officers from the areas week or every other week. Another major where borrowers live. incentive to repay-perhaps the most impor- * Making loan officers responsible for both tant-is access to continued financial services. granting loans and collecting repay- ments, so that they can develop borrow- High cost of lending er and industry knowledge. * Rewarding loan officers for their perfor- The operating guidelines and administrative mance-for example, paying a low base procedures of commercial lenders are salary that can increase substantially designed for large loans. Thus, it is argued, based on number of new loans granted these procedures are costly and inappropri- and repayments obtained. ate for the scale of financing required by Decentralizing decisionmaking (for exam- microenterprises. ple, to the level of the branch manager). 12 MAKING MICROFINANCE WORK [N THE MIDDLE EAST AND NORTH AFRICA * Simplifying loan procedures. ulators could work together to learn from the * Using information technology to track experience. borrowers and manage loan portfolios. Social constraints Inability to pay high interest rates Commercial banks tend to avoid providing It is a myth that poor entrepreneurs are not financial services to low-income communities bankable and cannot pay high interest because of social obstacles that exclude this rates. Experience around the world shows population from mainstream society. And when It is a myth that the poor are bankable. Their main con- they do provide services :0 the poor, com- ItS a myt straint is the lack of access to finance-not mercial banks do not want to be perceived as that poor the price of finance. As noted, microentre- charging exploitative interest rates. Thus they entrepreneurs preneurs are willing to pay a premium for often end up providing subsidized loans. are not access to financial services that are tailored Banks around the world have found cre- bankable to their needs and delivered in a convenient ative solutions to these social constraints. One manner. involves "packaging" the terms and condi- tions of a loan. That is, nominal low inter- Legal and regulatory constraints est rates can be charged, but the bank can generate much more revenue than is mdi- In addition to imposing interest rate ceilings, cated by the stated nominal rate by calcu- some countries consider banking to informal lating a flat interest rate and introducing fees. enterprises illegal. Moreover, prudential loan In addition, some financial institutions have classification and auditing standards that are set up microfinance operations under a dif- appropriate for regular lending are inap- ferent legal entity or under a different name. propriate for microfinance. The legal framework and prudential Not banking standards should not be changed N e overnight. Instead, financial institutions lished under the U.S. Agency for International that are committed to microfinance could be Development's Assessing thn Impact of Micro- exempted from these regulations. A pilot enterprise Services (AIMS) project, including exemption could be granted for, say, two Sebstag and Chen (1996), CDIE (1995), and years, and the financial institution and reg- Barnes (1996). Microfinance in the Middle East and North Africa M icrofinance has demonstrated its poverty. Medium-term World Bank growth The region's power and potential in many projections for the region are 3.5 percent a microfinance parts of the world. Likewise, year. Thus poverty is expected to increase at industry is at a microfinance can help alleviate poverty in the the projected growth rate. One way to avert nascent stage Middle East and North Africa. What this outcome is to extend microfinance services impedes its development? And what can be to poor people throughout the region. done to extend its reach? Barriers to the development of a Poverty in the region healthy microfinance industry Van Eeghen (1995) estimates that 5.6 percent Some of the barriers to the development of of the people in the Middle East and North a healthy microfinance industry in the Africa were poor in 1990. This corresponds Middle East and North Africa are unique to to 1 1 million people living on less than $1 the region. Others are more universal. a day (the international poverty line) in 1995. The number of poor jumps to 40 million when measured using spending per month of Lack of experience and exposure $50 per capita, and to 60 million when using Some regions, such as Asia and Latin America, a poverty line of $2 a day. have more than two decades of hands-on In general, countries in the Middle East and experience with microfinance. In the Middle North Africa have low social indicators rela- East and North Africa, by contrast, the indus- tive to other countries with similar or lower try is at a nascent stage. Moreover, most income levels. Despite high public spending microfinance players in the region-microfi- on education and health care, the quality of nance institutions and bankers alike-lack and access to basic services are limited in most exposure to worldwide best practice. This puts Middle Eastern and North African countries. them at a disadvantage and prevents them Except in Jordan, poverty is most pronounced from learning from the experiences of others. in rural areas. But urban poverty is prevalent Hardly any best practice material is available and rising among self-employed workers in Arabic or French, the most widely used lan- engaged in small-scale trade. Poverty is guages in the region. strongly correlated with a lack of education. In addition, most poor people have large fam- Political uncertainty and macroeconomic ilies. As a result the young are dispropor- instability tionately represented among the poor. Economic growth remains the most effec- Political factors, including armed conflict, con- tive way to alleviate poverty. But in the Middle strain the development of the microfinance East and North Africa GDP would have to industry in some Middle Eastern and North grow by at least 5 percent a year to reduce African countries. Still, several well-known 13 14 MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA programs have managed to deliver credit even remote areas with inadequate infrastructure, under the most extreme circumstances. which dramatically increases a microfi- Microenterprises are known for their nance institution's costs Df doing business dynamism and resilience and are generally with these people. It is important to distin- removed from the effects of macroeconom- guish between two target groups in remote ic instability. But the combination of macro- areas. One group faces infrastructure barri- economic instability and political uncertainty ers that make it difficult for microfinance eventually affects microenterprises. In Gaza, institutions to reach microentrepreneurs. A for example, frequent border closures forced second group faces infrastructure barriers Many of the poor microentrepreneurs out of business-because that make it difficult for borrowers to seize Manyo the poord they could not obtain inputs and because they economic opportunities. people in need had trouble selling products. The incomes and The obstacles facing the first group can of financial consequently the purchasing power of their sometimes be overcome using innovations services live traditional clients (other citizens of Gaza) such as mobile branches or decentralized vil- in remote areas decreased rapidly as a result of the closures. lage banking systems. Among members of the with inadequate second group the demand for financial ser- infrastructure . . vices may be latent, but it will not material- ize until higher-priority needs-such as access In some countries microfinance is constrained to water, electricity, basic education, and by social, cultural, or religious barriers. For health care-are met. For example, lack of instance, some Islamic groups consider the access to water and electricity is one of the charging of interest rates to be against sharia biggest constraints to microenterprises in (the code of law based on the Koran). But some parts of Yemen. Such barriers are dif- microfinance services can also be offered ficult to overcome in the short term. using Islamic banking principles such as mudaraba, murababa, or musharaka. Several programs in the region offering financial ser- Legal and regulatory barrers vices based on Islamic banking principles The regulatory framework in the Middle show promising results. East and North Africa does not impede microfinance. Although laws restrict the pro- vision of financial services by NGOs in some countries (Egypt), set a ceiling on interest A lack of adequate infrastructure is another rates in some North African countries, and barrier to microfinance. Many of the poor restrict loan sizes, these are rarely enforced. people in need of financial services live in Furthermore, regulatory barriers to the Table 3. Status of microfinance efforts in the Middle East and North Africa Indicator Egypt Jordan Lebanon Outstanding loan portfolio $54,938,000 $20,624,000 $6,195,000 Number of active borrowers 74,635 9,697 7,111 Rural borrowers (percent) 10 22 11 Female borrowers (percent) 20 45 63 Average outstanding loan balance $736 $2,127 $871 Type of institutions 14 NGOs, 1 6 NGOs, 3 9 NGOs, 1 government government UN agency program, 1 programs, 1 UN agency, UN agency 1 bank Source: World Bank survey of microfinance institutions. MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 15 financial sector are being eliminated in most Figure 1. The potential for microfinance is much greater than the supply... countries as part of macroeconomic stabi- Millions of borrowers lization and structural adjustment pro- 0 0.25 0.5 0.75 1.0 1.25 1.5 1.75 2.0 grams. Algeria -Cretoutreac Where do things stand? Egypt Potential outreach Iran Of the more than 4.6 million potential micro- finance clients in the region, only 112,000 are being served (table 3). Thus the supply Lebanon I of microfinance in the region covers just 2.4 Morocco = i percent of the potential demand. (Potential Syria demand is conservatively measured as the number of people who want microcredit and West BankL are willing and able to repay their loans.) and Gaza ;3 Three of the region's ten countries-Algeria, Yemen Iran, and Syria-have no microfinance pro- grams (figure 1). Egypt, which has the most microcredit borrowers, barely reaches 5 per- *-.and the financing gap is enormous cent of its estimated microfinance market. Millions of U.S. dollars The West Bank and Gaza and Lebanon, with 0 50 100 150 200 250 300 350 400 about 9,800 and 7,100 active borrowers, Algeria have the highest coverage, reaching 23 per- Crrent microfFinancing Egypt ... .....fififif ° 9 ' ''~ 'yssi-v9Xvg , ~ X sa c cent and 17 percent of their potential mar- gap kets-mainly because of the small size of Iran .... .. * these markets. Jordan covers less than 7 per- Jordan us: cent of potential demand, and Morocco and Lebanon Yemen less than 1.5 percent. Microfinance in the region also suffers Morocco from a sizable financing gap. About $95 mil- Syria lion in microloans is outstanding, while at Tunisia least $1.4 billion is needed to meet the West Bank demand of the 4.6 million potential bor- and Gaza rowers (see figure 1). It is unrealistic to think Yemen that this financing gap can be closed solely Source: World Bank survey of microfinance institutions. West Bank Morocco Tunisia and Gaza Yemen Total $994,000 $8,432,000 $4,640,000 $242,000 $96,065,000 7,385 2,512 9,795 1,181 112,316 40 69 2 56 14 73 68 97 35 36 $135 $3,357 $474 $205 $855 4 NGOs 6 NGOs, 3 5 NGOs, 1 3 NGOs, 1 47 NGOs, 8 government UN agency goverment government programs program programs, 4 UN agencies, 1 bank 16 MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA with donor or government funds. Thus avail- Figure 2. Egypt has the most microfinance able resources need to be used more effi- borrowers... Egypt ciently, and the private sector must be encouraged to participate in microfinance. Mechanisms that encourage private partic- ipation must ensure that such efforts are prof- itable and help the poor on the one hand, and Yemen reduce reliance on donor and government I _ funding on the other. 2% Available Sixty microfinance institutions and pro- Lebanon resources need grams were surveyed in Egypt, Jordan, 6%M resourceusneed Lebanon, Morocco, Tunisia, the West Bank and Morrocco to be used Gaza, and Yemen (see annex 2). The oldest more efficiently, microfinance program, in Jordan, dates to and Gaza 9d and the private 1937 and was initiated by the Near East 9% sector must Foundation. Egypt and Tunisia have had gov- ... as well as the largest outstanding loan be encouraged ernment and NGO microfinance programs portfolio to participate since the early 1970s. These programs are E57y%t in microfinance heavily subsidized and are usually components of larger government development and social programs. Despite this seemingly long tradi- tion, however, microfinance remains a fairly new sector in the Middle East and North Africa. Most microfinance programs in the Morroccc 1% region-70 percent-were launched in West Bank 1987-97, and less than 10 percent existed and Gaza 5% before 1985. Lebanon Egypt contains 66 percent of the region's 6% 112,000 borrowers and accounts for 57 per- Tun9sia Jordan cent of the outstanding loan portfolio (fig- 22% ure 2). Though Jordan contains only 9 Source: World Bank survey of microfinance institutions. percent of the region's borrowers, it accounts for 22 percent of the outstanding loan port- sition of small machinery and other invest- folio because loans are fairly large. By con- ments. Some programs provide fixed capital trast, Yemen's recent foray into microfinance for periods ranging from 18 months to 20 involves about 1,200 active borrowers and years. accounts for less than $250,000 of out- standing loans. Institutional setup Loan sizes and uses vary among programs and between countries. Loan sizes also vary Microfinance institutions zome in a variety considerably within the same program-the of institutional forms, including NGOs, non- upper range of loans can reach 30-60 times profit microcredit entities, government- that of the lower range. In the Egyptian Small owned banks operating m-crofinance units, Enterprise Development Foundation and and commercial banks operating through Assiut Business Association programs, for microfinance subsidiaries. Most of these types example, loans range from $150 to $5,000. of institutions are in place in the Middle East This range reflects the various purposes for and North Africa (figure 3). Local NGOs are loans acquired by microentrepreneurs, rang- the most common form, followed by gov- ing from low working capital needs to acqui- ernment programs operating through the MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 17 banking sector (and usually subject to polit- Figure 3. Many types of institutions are involved in microfinance ical pressure), by international NGOs such Percentage of active borrowers as the Near East Foundation, CARE 100 . International, and Save the Children, and by 90 ........... United Nations agencies. Only one bank in 80 a. the region, Egypt's National Bank for 70 Development, provides microfinance services 60 without government interference (box 5). 50 International NGOs operate either inde- 40 pendently or jointly with local entities using 30 domestic funding, foreign funding, or both. 20 Private microfinance institutions have played 10 _ _ _ _ _ _ _ a very limited role in the region's microfi- Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen nance efforts. and Gaza Each type of institution's share in the total * Banks U UN agencies ED Government programs LII NGOs number of active borrowers is not always cor- Source: Word Bank survey of microfinance institutions. related with its share in the number of micro- finance institutions. Local and international This impressive performance by the NGOs account for 78 percent of the 60 micro- National Bank for Development is not sur- finance institutions in the region and serve 72 prising given the economies of scale inherent percent of active borrowers. Governments in its branch network. Moreover, other com- account for 13 percent of microfinance insti- mercial banks in the region have started to tutions and serve 8 percent of borrowers. But show more interest in microfinance. The Arab while the National Bank for Development is Bank, Jordan National Bank, and Commercial the only bank active in microfinance, it serves Bank of Palestine recently started microfi- an impressive 17 percent of borrowers. nance programs in the West Bank and Gaza Box 5. Egypt's National Bank for Development: A model of best practice and private participation in microfinance The National Bank for Development's micro- in Cairo where the bank has no branches. credit program-the only program in the Repayments are collected, new loans are dis- Middle East and North Africa run by a private bursed, and applications are reviewed. In areas commercial bank-shows that banks can build where the bank has branch offices, loan officers profitable microloan portfolios. The bank has visit borrowers every week to collect assets of $1.7 billion, capital of $71 million, and repayments. total lending of $946 million. The microcred- The outreach potential of the National Bank it program has been implemented in 33 of its for Development is considerable given its net- 66 branches. work of branches. Until a year ago the bank The microcredit program has 19,000 active recruited recent graduates to serve as loan offi- borrowers and an outstanding loan portfolio of cers because it was thought that current staff $12 million. Like the Alexandria Business were "tainted" by traditional banking proce- Association's programs, it offers individual suc- dures and could not be trained to issue and cessive loans to microenterprises. The initial manage loans on a cash-flow basis. But the bank loan size is $100, which indicates that the bank may prove this microfinance premise wrong: targets poorer entrepreneurs than the it recently started using existing staff. This staff Alexandria Business Association. The bank also is paid partly on a performance-based reward offers small business loans. One of its unique system and works on the microcredit program features is the mobile branch. Every week mini- after official office hours. Initial results are vans-with a driver (who also acts as a securi- promising and show that financial incentives are ty guard), tellers, and loan officers-visit areas a major determinant of performance. Source: National Bank for Development and World Bank. 18 MAKING MICROF[NANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA with help from the International Finance ance). Only the poorest seek very small loans. Corporation. And at least one bank in For short-term working capital loans with a Lebanon, one bank in Morocco, and two maturity of less than six months, the average banks in Yemen are expected to start micro- loan size (that is, the original principal amount finance operations in the near future. While lent) is often twice the average outstanding loan microfinance practitioners should see these as balance. A microfinance program's effectiveness positive signs, a lot of work is needed to avoid in targeting the poor can be gauged by com- suboptimal practices and results. Monitoring paring the average outstanding loan balance to banks' involvement to ensure the develop- the country's per capita income and to the Well-designed ment of a solid microfinance sector-based poverty line. In the Midd.e East and North programs that on best practice-is crucial. Africa only Jordan and Tunisia have an aver- focus on female age loan balance above per capita income-sug- participation ca Typeofservicesandoutreachgesting that these programs are not targeting participation can Type Of services and outreach the poor and the poorest. Most microfinance be successful Most of the services provided by microfi- programs in the region have an average loan nance institutions (except in some programs balance somewhere between the per capita in Egypt) are either purely lending operations income and the poverty line. with some form of compulsory savings or Only the programs in Morocco and the part of an overall package of charitable activ- West Bank and Gaza have an average loan bal- ities. Group (joint liability) lending and indi- ance below the poverty line, indicating that vidual lending are the two main forms of they may be targeting the poorest. The pro- lending in all countries (except Morocco, grams in these countries-the Save the where group lending is the only document- Children program in the West Bank and Gaza, ed form). In addition, Egypt and Yemen have the United Nations Relief and Works Agency village banking systems, in which 30-40 vil- group lending program in Gaza, and Al Amana lagers save and borrow. In terms of active in Morocco-target exclus,vely women, who borrowers, group lending is dominant in all around the world are among the poorest. countries except Egypt and Tunisia (figure 4). These programs also rely on group lending, Group lending is most prominent in Jordan, which appears to be more attractive to the Morocco, and the West Bank and Gaza. poor and poorest. All three programs are well There is a positive correlation between the on the road to sustainability. Though there is poverty of the borrower and the size of the a perception that it is difficult to reach women loan: the poorer is the borrower, the smaller is in the Middle East and North Africa, well- the loan (and the average outstanding loan bal- designed programs that focus on female par- Figure 4. Group lending is more common than individual lending ticipation can be successfutw. Percentage of active borrowers There is no clear relationship hetween Percentage of octwe borrowers institutional setup and depth of services. 90 o g While NGOs like Save the Children target 80 _ the poorest, other NGOs have large, medi- o0 ~ ~ ~ ~ ~ndividual um-size, and small average loans relative to 60 a country's per capita income. The same 50 ~~~~~~~ ~ ~ ~ " ~~~~~ ~applies to government and bank programs. 40 30 Group Target groups 20 1 0 Four of the seven countries studied (Lebanon, 0 Morocco, Tunisia, and the West Bank and Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen Gaza) have more female than male borrow- and Gaza Source: World Bank survey of microfinance institutions. ers. Three countries (Egypt, Jordan, and MICROFINANCE IN THE MIDDLE EAST AND NORTH AFRICA 19 Yemen) serve more men than women (figure Figure 5. Though some microfinance programs target women, 5). But given the regional dominance of a majority of borrowers are men Egypt's programs (in terms of number of bor- Percent rowers), more men than women benefit from 100 l microfinance services in the region. 90 3QMPkv Most programs target both poor men and 80 poor women. But some-such as those run 70 O , g Male by international NGOs (Save the Children) 60 and UN agencies (United Nations Children's 50 .- Fund and United Nations Relief and Works 40 Agency)-focus exclusively on women to 30 promote their participation in economic 20 Female activity and alleviate their poverty. Thus it is 1 0 not surprising that the two countries with the Egypt Jordan Lebanon Morocco Tunisia West Bank Yemen largest share of female borrowers (Morocco Source: World Bank survey of microfinance institutions. and Gaza and the West Bank and Gaza) also have the deepest outreach; because, in general, women are the poorest. Meanwhile, local Although outreach is necessary for sus- NGOs and government programs that have tainability, it is insufficient. A few programs no specific gender orientation (as in Egypt) in the region have reached a large number of have mostly male borrowers. borrowers-in some cases more than In just two countries (Tunisia and 10,000-but are far from sustainability. Most Yemen) are more than half the borrowers in of these programs are government or quasi- rural areas (figure 6). In Egypt, which con- government programs that charge subsidized tains 66 percent of the region's active bor- interest rates. Borrower screening and follow- rowers, only 10 percent of borrowers are up are inefficient and loan arrears are high. rural. Even in rural areas microfinance ser- The political will to transform these pro- vices are concentrated in high-density grams into sustainable microfinance institu- areas, leaving sparsely populated and tions appears to be lacking. remote regions almost untouched. These Sustainability in the region's microfinance geographic disparities develop because institutions will be a challenge for years to microfinance services are costly to provide come. About 95 percent of programs have (particularly when the number of borrow- not reached the first level of sustainability: ers is low) and the difficulty of accessing these groups is aggravated by a lack of ade- Figure 6. The region's microfinance programs mainly reach urban quate infrastructure. residents Percent 100 Sustainability and outreach 90 m Sustainability and outreach are the most wide- 80 Urban ly used criteria for assessing microfinance insti- 70 ;: X tutions. To be sustainable, a microfinance 60 . .. .. 50 O institution must achieve a certain level of out- reach-in terms of number of borrowers-to 30 ~i benefit from economies of scale. In addition, 2 20 it must generate enough revenue to cover oper- 0 00N°s>zG9 o?67% relatively higher need for training in micro- Source: World Bank survey of microfinance institutions. finance practices. Only Lebanon has a greater need for training in general business For example, 78 percent of the institutions practices. The other countries in the region surveyed have centralized decisionmaking for have more or less the same need to learn loan approval or rely on lengthy and about general business practices and micro- bureaucratic approval procedures. Some loan finance practices. approval decisions involve board members, Can microfinance institutions expect to an executive committee, and the director of receive such training locally? Maybe. the microfinance institution, while others Microfinance practitioners from Egypt, require a series of approvals before the loan Jordan, and Tunisia, for example, believe that is disbursed. training in most of the general business areas Most microfinance institutions have listed in table 5 can be provided locally (table untrained staff, and there is a huge need for 6). Except for Jordan, the same respondents training in all areas of management-par- believe that local training capacity is slight- ticularly areas related to microfinance. ly lower for microfinance subjects. On the Most of the training provided by microfi- other hand, microfinance practitioners in nance institutions is general and is not tai- Lebanon, Morocco, and the West Bank and lored to the needs of the institution and staff Gaza believe that local training capacity in or to the microfinance industry. all areas, particularly microfinance, is very low. But in countries where local training capacity is believed to exist, training facil- Most microfinance institutions do not have ities are rarely used or the training tends internal control systems, effective informa- to be irrelevant to the needs of microfi- tion systems, or incentive schemes for staff. nance institutions. One reason for this All the institutions surveyed produce month- weakness is that microfinance institutions ly and annual reports, including financial do not consider training an important ele- statements. Yet in most cases management of ment of strengthening management and information appears to be deficient. motivating employees. Another is that the In many instances basic information- curriculums of training institutions do not number of staff working on microfinance, meet the needs of the marketplace. As number of active urban or female borrowers, noted, microfinance training is believed to 28 MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA Table 5. Microfinance institutions assess their training needs Wes t Bank Training needed Egypt Jordan Lebanon Morocco Tunisia anc Gaza Yemen General business practices Governance 14 8 1 2 3 7 3 Strategic and business planning 11 8 3 3 33 8 3 Finance and accounting 15 7 3 4 18 0 5 Human resource management 15 6 3 3 7 6 4 Legal and regulatory issues 12 6 2 2 7 8 2 Microfinance practices Loan portfolio management 18 9 1 3 20 7 4 Management information systems 19 9 1 3 18 4 1 Delinquency management 19 9 1 4 20 8 4 Fraud management 14 6 2 6 10 3 Product development 20 7 1 3 30 8 4 Accounting, budgeting, and control 17 8 2 4 29 9 2 Targeting and outreach 15 7 1 3 20 6 2 Loan officer incentive systems 20 7 3 2 5 7 3 Program evaluation 17 8 3 3 33 8 2 Maximum possible score 39 33 15 12 36 '2 15 Note: Scores show the number of times respondents indicated an area where they need training and skills development. Respondents could sc vre an area from 0 (no need for training) to 3 (training is needed at the basic, moderate, and advanced levels). The maximum possible score is the number of responclents multiplied by 3. Source: World Bank survey of microfinance institutions. be less available than general business training in the next few years. Despite the courses by all respondents except those in large demand for microfinance training, Jordan. local supply has been aln-iost nonexistent. The need for microfinance training is Few local microfinance experts are capa- expected to increase because of the ble of conducting good training. Most region's large outreach gap. The expansion training is conducted abroad with foreign of existing microfinance institutions and consultants, making it very expensive for the entry of new ones should dramatical- microfinance institutions to meet their ly increase the demand for microfinance training needs. Table 6. Microfinance institutions assess local training (percent) Respondents who believe that Respondenrs who believe that general business troining can microfinonce training can Country be provided locally be provided locally Egypt 88 82 Jordan 69 77 Lebanon 15 0 Morocco 25a 0 Tunisia 92 81 West Bank and Gaza 25 25 Note: Results for Yemen are not shown because survey responses were unclear. a. Finance and accounting only. Source: World Bank survey of microfinance institutions. What Next? T he provision of microfinance services Many more providers of microfinance are Practitioners, in the Middle East and North Africa needed. Banks could play a key, if not a lead- donors, and must increase dramatically to even ing, role in this sector. The opening up of governments scratch the surface of the poverty challenge. Iran and Syria offers a unique opportunity to must focus on At least 4.6 million entrepreneurial poor need build sustainable microfinance programs right delivering access to financial services, and at least $1.4 from the start. In addition, the growing inter- financial services billion is needed for onlending. Although it est of Islamic banks in sustainable microfi- to the poor is unlikely that donor funding for microfi- nance will contribute to new approaches to and poorest nance will decrease-given the increasing microfinance that are unique to Middle role of the European Union in the region, Eastern and North African countries. especially in North Africa-for several rea- Our recommendations are grouped in two sons microfinance intermediaries must sections. First we offer ways to improve and become more self-sustainable. expand the microfinance industry in the Encouraging microfinance institutions to region. Then we translate those recommen- know their operational and financial costs dations into specific actions for governments, and strive to cover them builds a culture of donors, and practitioners. self-evaluation and increases efficiency in the use of resources. And increased effi- alon wih god mnageent Developing more and better ciency, . . microfinance programs capacity and ability to generate profits, attracts private capital and helps narrow the The most important recommendation for financing gap. Sustainability will make microfinance institutions is to adopt a busi- microfinance institutions less vulnerable to ness orientation-based on best practices- government interference and donor toward delivering financial services to the unreliability. poor. Similarly, the performance and out- But practitioners, donors, and govern- reach of existing microfinance institutions ments must do more than build sustainable must improve; training will play a key role microfinance programs. They must also focus in this regard. Finally, the formal financial on delivering financial services to the poor sector must be engaged in microfinance, and and poorest-especially women and people new nonbank microfinance intermediaries in rural areas. Sustainable programs that tar- must be created-especially in countries get women exclusively can succeed in the where they could catalyze the development Middle East and North Africa. To do so, they of the microfinance industry. must both target women and pursue sus- tainability. The next frontier for microfinance Institutionalizing best practices institutions in the region is to deliver finan- cial services to the rural poor, who are large- All microfinance providers should adopt stan- ly underserved. dard principles of management that are pre- 29 31) MAKING MECROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA requisites for good performance. Several of tial growth dependents and 25 deficient these principles were either partly or total- dependents). Recommendations for increas- ly absent in most of the microfinance pro- ing a program's capacity depend on the grams surveyed: group in which it falls. A capable governing body. If a microfi- nance institution has a visionary board of Large capables. The main challenge for directors and leaders who understand the large capables-which cover 100 percent of microfinance business and have clear goals their operational costs and have extensive on where they want to go with it, all the outreach-is to become fully sustainable Managers rest will follow. (covering financial costs) while maintaining and staff g A clearly defined mission, accompanied by their focus on serving the poor. Such pro- anould st medium- and long-term goals that are grams must manage rapid growth, decen- should be translated into short-term objectives and tralize their lending efforts, and obtain legal aware of strategies. Goals and objectives should be status as a financial intermediary (in order to developments quantifiable and set within a reasonable borrow commercially for onlending or to in microfinance timeframe. take deposits). If these programs do not wish best practice * Qualified management and staff, to to transform into a specialized financial inter- design and implement strategies and mediary or bank, they could merge with achieve goals and objectives. banks or sell their loan portfolios to a bank. * Systems and procedures that clearly Both programs in this category in the define roles, responsibilities, and account- Middle East and North Africa have achieved ability, and aim to achieve objectives in the full sustainability. The Alexandria Business As- most efficient way possible. Services sociation's challenge is becoming a formal must be tailored to local demand; thus financial institution while staying focused on they must be able to adapt to changes in the poor. The National Bank for Dev- market characteristics. elopment's challenge is expanding its program - A good management information system nationwide while keeping a focus on efficiency. that is easy to use, captures all necessary Both programs, operating in Egypt, have an information (on clients, loans, and staff almost limitless market. performance), and produces reports on a routine or ad hoc basis. This information Small capables. The main challenge for should be used continuously to monitor small capables-which have the basics right and evaluate programs. and manage small programs according to best All these efforts should share efficiency as a practice-is to grow. Although none of the common denominator, so that microfinance programs studied technically fits this cate- institutions can be competitive and service gory, the three Save the Children programs clients in the most timely manner and at the in Jordan, Lebanon, and the West Bank and lowest cost. Managers and staff should be Gaza and the United Nations Relief and aware of developments in microfinance best Works Agency program in Gaza are close to practice and adopt those that allow more effi- 100 percent cost coverage and face similar cient and effective ways of doing business. issues. They all operate in small countries with limited markets; growth means staying small but becoming sustainable. In some cases Building capacity for sustainability and this will require diversifying the financial ser- outreoch vices offered because the market may be too Of the 60 programs in the region, 2 are large small to allow sustainability with just one capables, none are small capables (though 8 product. These programs need help design- are considered close), 3 are large dependents, ing and testing new loan products and adapt- and 55 are small dependents (with 30 poten- ing their operational and management WHAT NEXT? 31 information systems to accommodate these to increase the size of their operations to new products. By contrast, small capables in reach more borrowers. First these institutions large countries like Egypt could become large should strive to become small capables-that capables by reaching more poor people with is, to develop and test loan products, get to the same product and maintaining efficiency. know their markets, implement management The eight potential small capables men- systems, and so on. Only when these fun- tioned above are all part of larger (sometimes damentals have been mastered will these pro- charitable) organizations. Spinning off these grams be able to proceed to the next phase: microfinance programs from their larger growing and becoming large capables. operations is essential for their survival and About 30 of the small dependents show expansion because they need the freedom to potential for learning and growth. These are Developing the implement managerial and operational sys- often young programs designed and imple- microfinance tems that are appropriate for microfinance. mented according to best practice standards, industr in the Whenever possible, these programs should with clearly stated objectives for sustainability Y be immediately spun off into a microfinance and outreach. These programs need tailored region will legal entity instead of an NGO, to avoid a assistance to move up the learning curve as require building second legal transformation once the pro- soon as possible. The timing and appropri- human capital gram is ready to borrow funds from com- ateness of this assistance are of paramount in microfinance mercial banks to onlend commercially (see importance to the successful transition. above). In most cases microfinance legal enti- The 25 deficient dependents have slim ties should not take deposits as a source for chances of ever becoming sustainable. Most onlending. suffer from government interference, lack The main risk for small capables is that they capable leadership and staff, are inefficient will grow too fast and their systems will not and oriented toward charity, and offer sub- keep up with their growth. They may need sidized loans. help upgrading their management information systems, introducing fraud control, and Increasing training opportunities decentralizing functions and responsibilities. The absence of local microfinance training Large dependents. The main challenge for capacity has contributed to the lack of man- large dependents-which have achieved agement capacity in most microfinance insti- significant outreach but do not cover costs- tutions in the Middle East and North Africa. is to become more efficient and cover all Developing the microfinance industry in the costs. This move usually involves eliminat- region will require building human capital in ing subsidized interest rates for borrowers. microfinance. Doing so will allow continuous These programs have always been heavily local training for practitioners, lower the cost subsidized by donors and governments, and of training, and develop and disseminate these subsidies are unlikely to disappear. microfinance material and best practices. Given the large number of borrowers these To that end, material on best practices in programs have reached, their suboptimal but microfinance should be translated (into functioning management systems, and vest- Arabic and French) and disseminated. Local ed political interests, it will be difficult to turn and regional microfinance training should be these programs into independent, self- developed and provided to all practitioners. sufficient programs that fully cover their Similarly, local, regional, and international costs. training should be given to all potential train- ers, to build local training capacity. Training Small dependents. The main challenge for materials should be adapted to market needs. small dependents is to move up the best prac- And professional standards, supported by a tice learning curve to become capable, and body of microfinance professionals, should 32 MAKING MICROFINANCE WORK IN THE MIDDLF. FAST AND NORTH AFRICA be developed, possibly with an accreditation approaches to lending are inappropriate mechanism. for microfinance. To succeed in this field, banks must charge how they do Engaging the formal financial sector business, adopting new lending tech- niques that manage risks and lower costs. Only one bank in the Middle East and North In addition, several conditions must be Africa-Egypt's National Bank for met to build profitable microfinance Development-has engaged in best practice programs in banks. Banks must be finan- microfinance and is turning a profit. Many cially viable, with a strategic commitment Banks will other banks have been under government or to microfinance. An enabling legal and political pressure to provide credit to regulatory framework rnust be in place. only engage microenterprises and small enterprises. And government policitcs must be favor- in microfinance These poorly designed programs lack man- able to the financial sector. when it IS agement commitment, since they are imposed profitable rather than chosen. In addition, they usually Financial viability and strategic commit- for them charge subsidized interest rates. Thus it is not ment. Not every bank should engage in to do so surprising that such programs have poor per- microfinance. Only banks that see microen- formance. Along with the cheap microloans terprises (and small enterprises) as a strate- provided by NGOs and government agencies, gic market niche should engage in it. For such programs have been major disincentives instance, banks that are strong in retail bank- for banks to engage in microfinance. ing or consumer lending a-e closer to micro- Banks and other formal financial interme- finance target groups than are banks that diaries, such as consumer lending companies, provide only corporate services. Management are potentially the main players in the provi- commitment is crucial because it means sion of microfinance services. In some coun- microfinance will be treated like any other tries the outreach potential of banks with product line, giving it due attention in terms thousands of branches is indisputable, and the of setting objectives and plans, mobilizing total funding needed for onlending to human and material resources, and ensuring mmicroenterprises ($1.4 billion) represents less accountability to boards of directors. If a than 1 percent of their total assets (table 7). bank is state-owned, continued commitment Banks will only engage in microfinance to microfinance-for example, after priva- when it is profitable for them to do so. But tization or restructuring-needs to be traditional asset- and document-based assured. In addition, any Dank engaging in Table 7. Outreach and funding potential of the formal financial sector (millions of U.S. dollars unless otherwise noted) Outreoch gop Number (number of of bank Microfinancing Total Total Total Country borrowers) branches gap assets lending deposits Egypt 1,475,000 2,325a 371 76,000 38,000 51,000 Jordan 145,000 265 54 18,200 6,800 7,100 Lebanon 36,000 200 37 19,000 5,600 15,500 Morocco 485,000 900 194 28,000 t 5,000 20,000b West Bank and Gaza 33,000 80 17 2,500 500 2,000 Yemen 649,000 - 97 1,800 300 1,400 Total 2,824,000 3,445 770 145,500 66,200 97,000 a. Excludes 2,900 branches of the postal savings network. b. Estimated. Source: World Bank survey of microfinance institutions. WHAT NEXT? 33 microfinance should be financially viable and erage of operational and financial costs, will in compliance with central bank turn to banks to borrow for onlending to requirements. microenterprises. Donors and governments should make it a priority to promote links Legal and regulatory framework. between the various players in microfinance. Microfinance activities may be impeded by For instance, donors can guarantee loans by such legal and regulatory obstacles as interest commercial banks to sound microfinance rate ceilings (Morocco), inability to reward institutions. Such links will not only deepen loan officers based on performance (state- the financial system, they will also enable owned banks in Egypt), lack of legal status for microfinance institution borrowers to grad- mobile branches (Lebanon), inability to uate and become bank clients. They will also Donors and engage in financial transactions with non- enable banks to get to know microentre- governments registered (informal) enterprises, minimum preneurs, which will help eliminate banks' should make it deposit or savings requirements that exclude misperceptions about them. shou it the poor from opening accounts, and loan a priority to classification rules. In such cases financial sec- promote finks tor legislation should not be immediately over- Developing new microfinance between the hauled. Rather, exceptions should be allowed various players on a pilot basis for a transition period. Engaging the formal financial sector in micro- in microfinance Regulators and microfinance practitioners finance will be the most efficient, fast, and should coordinate their efforts and learn from cost-effective way to fill the outreach gap and these pilot programs before making permanent financing gap and serve the needs of many changes to rules and regulations. more entrepreneurial poor. Still, for sever- al reasons new, nonbank microfinance inter- Government policies for the financial mediaries should be created. sector. A deregulated, competitive financial Some target groups-especially the sector creates incentives for banks to seek out poorest women-have financial needs that new market niches and offer new financial banks may never be able or willing to meet services. Lebanon offers a good example. because the costs of doing so are too high. Such opportunities also exist in Jordan, In the Middle East and North Africa the where steady deregulation has increased the poorest, usually women, are served by pro- interest of banks in microenterprise and small grams that offer group guarantee lending. enterprise finance. Although deregulation is This methodology substitutes for the not a prerequisite for microfinance-as poor's lack of collateral and enables the Egypt's National Bank for Development microfinance intermediary to transfer to the shows-an environment in which banks can group the high transactions costs of compete is more favorable to such activities. microlending. Group members evaluate and More difficult to overcome is the negative guarantee one another's business projects, attitude of governments toward donor- while the group treasurer usually collects funded microfinance demonstration pro- repayments. Although a few banks in the grams, especially with private banks. world have successfully engaged in group Agricultural banks and postal savings systems lending, individual lending appears to be should not be excluded from such efforts, but more appropriate for banks. Hence there should be treated with caution on a case-by- is a need to replicate the successes achieved case basis. with group lending programs in the The financial sector's role in microfinance Middle East and North Africa, both in the is not limited to the direct provision of finan- same countries and in countries with no cial services to the poor. Many microfinance microfinance programs. Lessons from intermediaries, when increasing their cov- emerging best practice group lending pro- 34 MAKING MICROFINANCE WORK IN THE MIDDLE EAST AND NORTH AFRICA grams-such as the Save the Children pro- Moreover, an easier and possibly cheaper gram and United Nations Relief and way to raise funds is to borrow commercially Works Agency program in Gaza-should be from the financial sector. carefully documented. The local staff of Legal and regulatory obstacles to micro- these organizations should be involved in finance (such as interest rate ceilings) should the replication process. be removed. Such adjustinents should pro- A new microfinance intermediary is ceed on a pilot basis and build on the lessons more visible because it specializes in microen- learned. In countries where microfinance terprises, and its success can help set stan- intermediaries are ready to borrow com- The main priority dards for best practice. Especially in countries mercially for onlending-Egypt, Jordan, for donor with no experience in microfinance (Algeria, Lebanon, West Bank and Gaza-govern- forndingistor Iran, Svria) and countries with limited expe- ments should enhance or create a legal frame- funding is to rience (Morocco, Tunisia, Yemen), a visible work for microfinance intermediaries as develop local and successful microfinance intermediary can nondeposit-taking financial institutions. capacity to set best practice standards right from the This ensures accountability, transparency, and deliver start. In addition, its success can motivate adherence to financial sector standards. services in banks to enter this market. Intermediaries that are ready to become an effective Finally, new microfinance intermediaries deposit-taking banks should be considered on manner can help meet the needs of the poor in coun- a case-by-case basis. tries where banks are not ready for or inter- ested in microfinance. In some countries the financial sector is weak or undergoing intensive restructuring. In other countries the The most important recommendation for financial sector is overregulated and there are donors is to adhere to and implement best no incentives for banks to engage in micro- practice standards in selecting and funding finance. Both situations justify the creation microfinance programs. Possibly the best- of new microfinance institutions. These insti- known and most effective platform for donor tutions should be linked to the formal finan- coordination and dissemination of best cial sector whenever possible. practices is the Consultative Group to Assist the Poorest; donors are advised to join What should governments do? this platform. The main priority for donor funding for Governments should create an enabling envi- microfinance in the Middle East and North ronment in which microfinance intermedi- Africa is to develop local capacity to deliv- aries and microenterprises can develop and er services in an effective manner. This grow, and in which banks can engage in requires training, institutional development, microfinance. Governments should not technical assistance, and translation and dis- interfere with or deliver financial services to semination of best practice materials. Any the poor; rather, they should encourage the donor-funded microfinance program should private sector and NGOs to do so. adhere to basic business standards and prac- As long as microfinance intermediaries tices. In designing and inmplementing new such as NGOs and foundations do not take programs, donors should aim to include the deposits, there is no need to regulate or formal financial sector. supervise the sector because doing so may sti- Donors wishing to target women should fle learning, experimentation, and growth fund programs that target women exclusive- (box 6). Except for Egypt's Alexandria ly. Efforts should also be made to increase the Business Association, no microfinance inter- poor's access to financial services in rural mediary in the Middle East and North Africa areas. Despite pressures to disburse, donors is ready to take deposits as a source of funds. should spend their funds with restraint to WHAT NEXT? 35 Box 6. To regulate or not to regulate? Bank regulators in many countries must microfinance industry has matured, decide whether to regulate the emerging microfinance institutions have established microfinance sector. As unregulated financial associations or interest groups to define entities, healthy microfinance institutions have best practices and set industry standards. been able to adapt operating methods to serve * Self-regulation. Self-regulation occurs when their target markets. This has led to the devel- the microfinance industry develops its own opment of a small but growing number of supervisory and governance bodies. This robust, specialized financial institutions, inno- has occurred primarily through federations vative delivery methods, and an extension of of credit unions or cooperatives. financial services. When regulation is war- * The hybrid approach. Under the hybrid ranted, it requires coherent prudential guide- approach, regulatory authorities contract As long as lines that allow the microfinance sector to grow a third party-such as an accounting or microfinance while protecting the interests of small savers and consulting firm-to perform some or all institutions do supporting the integrity of the financial sector. supervisory functions. Most bank superintendents and their staff, Existing law or special law. Some coun- not mobilize central bank officials, and personnel from other tries have chosen to regulate microfi- savings from public agencies are unfamiliar with microfi- nance institutions within the existing the public, they nance institutions and the regulatory develop- legal and regulatory framework for finan- should not be ments affecting them. Whether microfinance cial institutions while adapting required institutions are specialized or part of a com- ratios and supervisory practices to regulated mercial bank, supervising them is difficult address their unique risk profile. Other because of their large number of small trans- jurisdictions have established special laws. actions, lack of conventional security, and Most microfinance institutions are small, decentralized operations. Many regulations informal, and operate as voluntary associations adopted to address the risks of commercial at the local level. It is neither feasible nor desir- banks do not apply to microfinance institutions. able to regulate them. Instead regulators should The challenge facing regulators is compli- focus their efforts on institutions that want to cated by the fact that microfinance institutions offer deposit-taking services to the general pub- range significantly in institutional type, scale of lic. Very few microfinance institutions have the operations, and level of professionalism. ownership structure, management, financial dis- Informal rotating savings and credit associa- cipline, information systems, and profitability tions, village banks, national and regional needed to be safe deposit takers. In most coun- NGOs, credit cooperatives, and commercial tries no more than one or two institutions might banks may all fall within the broad definition warrant regulatory attention. In general, it is only of microfinance institutions. A country's reg- necessary to regulate microfinance institutions ulatory approach must be consistent with the that mobilize voluntary savings for the purpose financial sector framework and consider the of onlending. But some organizations that mobi- variety of institutional types. Possible respons- lize voluntary savings do not need to be regu- es to microfinance institutions range from no lated. For example, it may not be necessary to regulation to full regulation: regulate village banks and rotating savings and * No regulation. Because microfinance has credit associations, which are usually so small that evolved outside a regulatory framework, all members know each other. Most experts it has been free to develop nontraditional agree that as long as microfinance institutions do approaches to providing financial ser- not mobilize savings from the public, they should vices. In some countries, as the local not be regulated. Source: Berenbach and Churchill 1997. avoid flooding the market. Funding for micro- tive with its focus on serving the poor and finance programs should be contingent on poorest. If sustainability is the sole objective, these programs meeting realistic performance a microfinance program may become a standards that become tighter over time. closed loop, sealed off from reality and the Donors have to carefully balance a needs of the target groups it was launched to microfinance program's sustainability objec- serve. 36 MAKING MICROFINANCE WORK IN THE MIDDLE FAST AND NORTH AFRICA What should practitioners do? services are provided by existing or new pro- The main recommendation for the hundreds grams. Having basic business standards at all of microfinance practitioners in the Middle managerial and operational levels is an essen- East and North Africa-from loan officers to tial condition for sustainability and for micro- chairs of supervisory boards-is to learn from finance development. the experiences with microfinance elsewhere Local microfinance training capacity and to implement best practice principles tai- should be expanded, and microfinance lored to local needs. Microfinance is a should be introduced in schools as a field of nascent industry in the region. Thus practi- study and specialization. In addition, pro- tioners are in a unique position to shape the fessional standards should be developed and industry, set standards, and develop best prac- a body of microfinance professionals should tices that reflect the features of Middle be formed, possibly with an accreditation Eastern and North African countries. mechanism. Microfinance practitioners in Strengthening and expanding the region's each country should set minimum perfor- microfinance industry will require adopting mance standards and guidelines for best prac- a business orientation toward the delivery of tices; doing so avoids excessive government financial services to the poor-whether these interference. Annex 1. Financing gap and outreach gap for microfinance in the region Potential Current Number of GDP outstanding outstanding Number of potential per capita microfinanceb microfinance Financing gap' current active Country borrowersV (U.S. dollars) (U.S. dollars) (U.S. dollars) (U.S. dollars) borrowers Outreach gapd Egypt 1,550,000 832 425,568,000 54,938,000 370,630,000 74,635 1,475,365 Jordan 155,000 1,451 74,218,650 20,624,000 53,594,650 9,697 145,303 Lebanon 43,000 3,046 43,222,740 6,195,000 37,027,740 7,111 35,889 Morocco 492,500 1,200 195,030,000 994,000 194,036,000 7,385 485,115 West Bank and Gaza 43,000 1,537 21,810,030 4,640,000 17,170,030 9,795 33,205 Yemen 650,000 454 97,383,000 242,000 97,141,000 1,181 648,819 Subtotal 2,933,500 857,232,420 87,633,000 769,599,420 109,804 2,823,696 Tunisia 122,500 2,029 82,022,325 8,432,000 73,590,325 2,512 119,988 Subtotal 3,056,000 939,254,745 96,065,000 843,189,745 112,316 2,943,684 Algeria 240,000 1,600 126,720,000 0 126,720,000 0 240,000 Iran 1,150,000 1,033 392,023,500 0 392,023,500 0 1,150,000 Syria 203,000 1,120 75,028,800 0 75,028,800 0 203,000 Total 4,649,000 1,533,027,045 96,065,000 1,436,962,045 112,316 4,536,684 a. Calculated as 5O percent of people living on less than $2 a day. b. Calculated as (number of potential borrowers) * (0.33 * GDP per capita). c. Calculated as (potential outstanding microfinance) - (current outstanding microfinance). d. Calculated as (number of potential borrowers) - (number of current active borrowers). Source: World Bank survey of microfinance institutions. 37 Annex 2. Institutions that participated in the World Bank's microfinance survey Egypt Ministry of Social Development Africare Noor Al-Hussein Foundation Alexandria Association for Home Economics Queen Alia Fund Alexandria Business Association Small and United Nations Relief and Works Agency Micro Enterprise Project Association for Community Development of Lebanon Small Projects Association of Free Market Economy Association D'Entraite Profesionnelle Assiut Businessmen Association for the CARITAS Association Najdeh Liban Development of Small Industries Cooperation for Development Businessmen Association for the Social CRS/CARITAS Village Bank Program Development of Sharkiya Instituto Per la Cooperazione Universitaria, Businessmen Association of Asswan Rome* Economic and Social Development La Cooperative Libanaise de Developpement Association Middle East Council of Churches Egyptian Association for Assistance Mvt. Libanis to Small Industries and Handicrafters United Nations Relief ancd Works Agency Evangelical Charity Association National Bank for Development Morocco Port Said Business Association Save the Children Cairo Al-Amana Save the Children Minia Association Morocaine de Solidarite et Social Fund for Development de Developpement United Nations Children's Fund Fondation pour le Developpement Local et le Partenariat Jordan Foundation Zakoura Agricultural Lending Association* Association for Housing Assistance Tunisia Development Banque Nationale Agricole* CARE International Banque Tunisienne de Solidarite Cooperation for Development Comite Regional de Solidarite Social Development Employment Fund de Mahdia General Union of Voluntary Societies Comite Regional de Solidarite Social Industrial Development Bank* de SILIANA Jordanian Women's Development Society Commissariat General Au Developpement (as of 1997), Save the Children (1994-97) Regional* 38 ANNEX 2 39 Culture and Free Thought Association Federation de Tunis de Solidarite Sociale Save the Children Fondation Atlas United Nations Relief and Works Agency, Fondation Tunisienne Pour le Income Generation Program Developpement Communautaire Gouvernorat de Tunis Yemen Ministry of Economic Development Union Tunisienne Solidarite Sociale Adventist Development and Relief Agency Hodeida Women Union Unit of Small Industries Development West Bank and Gaza Wd ia oprtv Wadi Siham Cooperative Agricultural Union of Palestine * These institutions participated in the survey but CARE were not included in the aggregate data because Centre for Women's Economic Projects, their responses suggested that they served small Oxfam enterprises rather than microenterprises. Bibliography Akhtar, Muhammad Ramzan. 1996. "Practice and Institutions: When and How?" Focus Note 8. Prospects of Musharaka Financing for Small World Bank, Washington, D.C. Enterprises in Pakistan." Journal of Islamic Christen, R.P., E. Rhyne, R.C. Vogel, and C. Banking and Finance (February). McKean. 1994. Maximizmng the Outreach of Ansari, Javed Akbar. 1996. "A Proposal for Microenterprise Finance: The Emerging Lessons Establishing a Microenterprise Islamic Bank of Successful Program-. Arlington, Va.: (MIB)." Journal of Islamic Banking and Finance International Management and Communications (March). Corporation. Ansari, Javed Akbar, and Mohammad Yaqoobi. Cuevas, C.E. 1996. "Enabling Environment and 1994. "Financing the Micro-enterprise Sector in Microfinance Institutions: Lessons from Latin Pakistan." Journal of the Institute of Bankers in America." Journal of International Development Pakistan. (March-April). Barnes, C. 1996. "Assets and the Impact of Dichter, T.W 1996. "Questioning the Future of Microenterprise-Financed Programs." U.S. NGOs in Microfinance."Journal of International Agency for International Development, Assessing Development (March-April). the Impact of Microenterprise Services project, Fruman, C. and M. Goldberg. 1997. Washington, D.C. "Microfinance Practice Gu ide: For World Bank Bennett, L., and C.E. Cuevas. 1996. "Sustainable Staff." World Bank, Sustainable Banking with the Banking with the Poor." Journal of International Poor and Consultative Group to Assist the Development (March-April). Poorest, Washington, D.C. Bennett, L., M. Goldberg, and P. Hunte. 1996. Ghate, P.E., and V Manaio. 1996. "Poverty "Ownership and Sustainability: Lessons on Alleviation and Enterprise Development: The Group-based Financial Services from South Need for a Differentiated Approach." Journal Asia." Journal of International Development of International Development (March-April). (March-April). Haron, S. 1996. "Islamic Banking: A New Vehicle Berenbach, S., and C. Churchill. 1997. in Fostering Entrepreneurship." Journal of "Regulation and Supervision of Micro-finance Islamic Banking and Financ.e (March). Institutions: Experience from Latin America, Mahajan, V, and B.G. Ramola. 1996. "Financial Asia and Africa." Occasional Paper 1. Services for the Rural Poor and Women in India: MicroFinance Network, Washington, D.C. Access and Sustainability." Journal of CDIE (Center for Development Information and International Development (March-April). Evaluation). 1995. "Assessing the Impact of Mangi, N.A. 1996. "Micro-enterprise Financing: Microenterprise Interventions: A Framework for A Review of the Small-Scale Credit Programmes Analysis." U.S. Agency for International Dev- in Pakistan." Pakistan anJ Gulf Economist, elopment, Assessing the Impact of Micro- February 17-23. enterprise Services project, Washington, D.C. Montgomery, R. 1996. "Disciplining or Protecting CGAP (Consultative Group to Assist the Poorest). the Poor? Avoiding the Social Costs of Peer 1997. "Introducing Savings in Microcredit Pressure in Micro-Credit Schemes."Journal of 40 BIBLIOGRAPHY 41 International Development (March-April). Van Eeghen, Willem. 1995. "Poverty in the Mutua, K., P Nataradol, and M. Otero. 1996. Middle East and North Africa." World Bank, "The View from the Field: Perspectives from Middle East and North Africa Region, Managers of Microfinance Institutions." Journal Washington, D.C. of International Development (March-April). Von Pischke, J.D. 1996. "Measuring the Trade- Robinson, M. S. 1996. "Addressing Some Key Off Between Outreach and Sustainability of Questions on Finance and Poverty." Journal of Microenterprise Lenders." Journal of Inter- International Development (March-April). national Development (March-April). Saeed, Khawaja Amjad. 1996. "Institutional Webster, Leila. 1994. "Lending for Micro- Support for the Informal Sector." Pakistan and enterprises: A Review of the World Bank's Gulf Economist, February 17-23. Portfolio." FPD Note 23. World Bank, Schmidt, R.H., and C.P. Zeitinger. 1996. Washington, D.C. "Prospects, Problems, and Potential of Credit- Webster, Leila, and Peter Fidler. 1995. The Granting NGOs." Journal of International Informal Sector and Microfinance Institutions in Development (March-April). West Africa. A Regional and Sectoral Study. Sebstag, J., and G. Chen. 1996. "Overview of Washington, D.C.: World Bank. Studies on the Impact of Microenterprise Women's World Banking. 1995. "The Missing Credit." U.S. Agency for International Dev- Links: Financial Systems that Work for the elopment, Assessing the Impact of Micro- Majority." Paper prepared for the Global enterprise Services project, Washington, D.C. Policy Forum, April, New York. UNCDF (United Nations Capital Development World Bank. 1996. "A Worldwide Inventory of Fund). 1996. Policy Series 1996: Microfinance Microfinance Institutions." Sustainable Banking and Poverty Alleviation Strategies. New York. with the Poor, Washington, D.C. p~ ~ I E I I - I- ll_ E I s I I-- IMMM l--- Emu I- ** lam l _ Ag- - -2- -b-.-NMNM- I a g~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 5 I~~~~~~~~~~~~~~~~~~~~~ A |s~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ S