Microfinance Market Survey in the West Bank and the Gaza Strip

Transcription

1 Microfinance Market Survey in the West Bank and the Gaza Strip Conducted by: May 27 IKM Methodology (Impact, Knowledge and Market Research) Copyright PlaNet Finance, 13 rue Dieumegard 934 St Ouen - France

2 27 The International Finance Corporation (IFC) / member of The World Bank Group 2121 Pennsylvania Avenue Washington DC 2433 Telephone: Internet: webmaster@ifc.org All rights reserved The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the International Finance Corporation or the Executive Directors of the International Bank for Reconstruction and Development / The World Bank or the governments they represent. IFC does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of IFC concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Finance Corporation encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 1923, USA; telephone: ; fax: ; Internet:

3 INTERNATIONAL FINANCE CORPORATION - IFC The mission of IFC, the private sector arm of the World Bank Group, is to promote sustainable private sector investment in developing countries, helping reduce poverty and improve people s lives. IFC s goal is to scale up access to a range of high quality financial services for underserved populations. IFC has been active in microfinance and achieved industry leadership over the last 1 years. Through committing US$5 million through 128 deals spread over 47 countries, the corporation has been able to prove that microfinance is a viable solution to poverty alleviation. As of 26, IFC s microfinance activities have made a difference in the lives of around 3.5 million entrepreneurs as our clients have a loan portfolio of US$5.6 billion. IFC supports microfinance by partnering with microfinance operators and forming collective investment vehicles, linking microfinance institutions with local financial and capital markets, supporting the transformation of nonprofit organizations (NGOs) into for-profit financial intermediaries, encouraging large commercial banks to enter the microfinance market and reinforcing government efforts to strengthen the legal and regulatory frameworks for microfinance. IFC s investments and activities in the Middle East & North Africa (MENA) region span from Morocco to Pakistan and include both investment and advisory services. IFC s partners in the MENA region reached over 62, borrowers and had outstanding loans of around US$3 million. This represents 19% of total borrowers and 26% of total loans in the region. PALESTINIAN NETWORK FOR SMALL AND MICROFINANCE - PNSMF The Palestinian Network for Small and Microfinance (PNSMF) is an independent judicial and legal entity entitled to execute projects and programs within the consortium of its organizations. The PNSMF is a coordinating body that coordinates the work of its member institutions and establishes a framework to regulate and organize competition and develop their work. The work of the Network is governed by its mission statement: «Develop a sustainable industry for Microfinance in order to contribute to the development of small enterprises through representing, supporting, and regulating the work of the service providers in Palestine.» PNSMF represents a consortium of 1 non-profit institutions that finance small enterprises, and whose goal is to provide credit and financial services to these small enterprises while dedicating their support to developing this industry in the West Bank and Gaza Strip. This stems from the PNSMF members belief that Microfinance is one of the most powerful tools of economic development in a manner that corresponds with the needs of the Palestinian economy.

4 Table of Contents ABBREVIATIONS AND ACRONYMS... 6 FOREWORD... 7 I. EXECUTIVE SUMMARY OF MARKET ANALYSIS OF MICROFINANCE IN THE PALESTINIAN TERRITORIES... 8 II. INTRODUCTION II.1 CONTEXT II.2 SURVEY METHODOLOGY II.2.1 SAMPLING II.2.2 DATA COLLECTION METHODOLOGY III. MARKET ANALYSIS OF MICROFINANCE IN WEST BANK III.1 CHARACTERISTICS OF HOUSEHOLDS AND THEIR ACTIVITIES III.1.1 DEMOGRAPHICS III Evaluation of Wealth: Index of Asset Ownership III.2 INFORMATION ABOUT ECONOMIC ACTIVITIES III.2.1 GENERAL INFORMATION III Profits by Type of Activity and Location III Employment III Investment III Seasonality of Activities III.2.2 EFFECTS OF ECONOMIC AND FINANCIAL CRISIS... 3 III.2.3 MARKET CONDITIONS III.3 FINANCIAL SERVICES USE AND ACCESS III.3.1 CREDIT III Sources of Credit and Size III Rejected Application III Reasons for Not Applying for a Credit III Savings and Other Products III.3.2 STRUCTURE OF CREDIT DEMAND III Credit Needs III Willingness to Borrow from Banks or Islamic Banks III Loan Size III Loan Size and Wealth III Loan Size and Type of Location, Region, Activity, and Legal Status III.3.3 LOAN REPAYMENT MODALITIES III Repayment Terms and Installments III Collateral III Ranking of Credit Characteristics III.3.4 OTHER FINANCIAL PRODUCTS NEEDED III.4 TYPOLOGY OF CREDIT DEMAND III.5 POTENTIAL DEMAND... 45

5 IV. MARKET ANALYSIS OF MICROFINANCE IN THE GAZA STRIP IV.1 CHARACTERISTICS OF HOUSEHOLDS AND THEIR ACTIVITIES IV.1.1 DEMOGRAPHICS IV Evaluation of Wealth: Index of Asset Ownership IV.1.2 INFORMATION ABOUT ECONOMIC ACTIVITIES... 5 IV General Information... 5 IV Profits by Type of Activity and Location IV Employment IV Investment IV Seasonality of Activities IV.1.3 COPING STRATEGY IV.1.4 MARKET CONDITIONS IV.2 FINANCIAL SERVICES USE AND ACCESS IV.2.1 CREDIT IV Sources of Credit and Size IV Rejected application IV Reasons for not Applying for Credit... 6 IV Savings IV.3 STRUCTURE OF CREDIT DEMAND IV Credit Needs IV Willingness to Borrow from Banks or Islamic Banks IV.4 LOAN SIZE...63 IV Loan Size and Legal Status IV Loan Size and Gender IV.5 LOAN REPAYMENT MODALITIES IV Repayment Terms IV Installments IV Collateral IV.6 RANKING OF CREDIT CHARACTERISTICS IV.7 OTHER FINANCIAL PRODUCTS NEEDED IV.8 TYPOLOGY OF CREDIT DEMAND IV.9 POTENTIAL DEMAND IN GAZA STRIP... 7 V. RECOMMENDATIONS ANNEXES V.1 SAMPLE SIZE CALCULATION V.2 ASSET OWNERSHIP INDEX V.3 SELECTED AREAS FOR WEST BANK V.4 SELECTED AREAS FOR GAZA STRIP... 78

6 Abbreviations and Acronyms ACAD Arab Center for Agricultural Development ANERA American Near East Relief Aid ASALA Palestinian Businesswomen s Association CHF Cooperative Housing Foundation FATEN Palestine for Credit and Development GDP Gross domestic product GS Gaza Strip IFC International Finance Corporation IKM Impact Knowledge Market IUED Institut Universitaire d Etudes du Développement MSE Micro and Small enterprises NGO Non Governmental Organization NIS New Israeli Shekel PA Palestinian Authority PARC Palestinian Agricultural Relief Committees PCBS Palestinian Central Bureau of Statistics PDF Palestinian Development Fund PLC Palestinian Legislative Consul PNSMF Palestinian Network for Small and Micro Finance R&D Research and Development SEC Small Enterprise Center UNDP United Nation Development Program UNOCHA United Nation Office for the Coordination of Humanitarian Affairs UNRWA United Nations Relief and Work Agency for Palestinian Refugees VAT Value Added Tax WB West Bank WBGS West Bank and Gaza Strip YMCA Young Men s Christian Association 6

7 Foreword Since 2, a number of different studies have been carried out on the informal sector and on micro enterprises in The Palestinian Territories. They have made information available on the estimated number of micro enterprises, their characteristics and those of their owners. This Market Survey focuses specifically, on the financial needs of the Palestinian micro entrepreneurs, which are rapidly evolving in the light of the ongoing financial and economical crisis affecting the Palestinian Territories. This document is divided into 5 sections. The first section includes a summary of the results and introduces the methodology used in this survey and the context in which it has been conducted. The second section contains an executive summary on the main findings. The third and fourth sections include a detailed market analysis of microfinance in West Bank and in Gaza Strip, respectively. The final section includes recommendations for microfinance institutions, donors and other interested parties on the development of new microfinance products as well as on the regulatory framework for microfinance. This survey has been conducted in two stages, in the West Bank from July to September 26 and in the Gaza Strip from October to December 26. Calendar Research Preparation June - July 26 Field research West Bank August 26 Analysis of West Bank results September 26 Field research Gaza November 26 Presentation of results December 26 Analysis of Gaza results January 27 Report drafting February-May 27 3 people have been involved in the conduct of this research including field research, analysis and report drafting. Research Team Position Name IKM Researcher Daniel Sorrosal Project duration IKM Research Analyst François Cajot Project duration Local Coordinator Delphine Thizy Project duration Local Consultant West Bank Tawfiq Nasser 6 days Local Consultant Gaza Alaa Ghalayini 3 days Translator West Bank Reem Irshaid 2 days Translator Gaza Ashraf Shannon 2 days Survey Team West Bank 12 interviewers 1 days Survey Team Gaza 12 interviewers 1 days Research Consultant William Pariente 3 days We want to thank all these people for their efforts in making it possible to conduct this survey especially under the difficult conditions that this exercise entailed in the Gaza Strip. 7

8 I. Executive Summary of Market Analysis of Microfinance in the Palestinian Territories The Market Research Survey on Microfinance has been conducted by PlaNet Finance on behalf of the International Financing Corporation (IFC) and the Palestinian Network of Small and Micro Finance (PNMSF). This survey among microentrepreneurs in the Palestinian Territories had the objectives of: 1. Providing information on Palestinian microentrepreneurs and their activities 2. Assessing the demand for microfinance lending services 3. Assessing the demand for microfinance non-lending services 4. Providing recommendations to Microfinance Institutions, Donors and stakeholders Sampling This survey has been conducted within 6 governorates, subdivided into three categories: cities, villages, and camps. A sample of 122 micro-entrepreneurs randomly selected within these areas has been used for this survey. Jenin Ramallah Hebron Khan Yunis Gaza Remal North Gaza Total Camp City Village Micro enterprises Characteristics Palestinian micro entrepreneurs lack access to financial services in WBGS. Even if 25% of them hold a current bank account, the majority (9%) has no access to other financial services like credit or savings. The majority of businesses are in trade activities (56% in WB and 82% in GS) and services (19% in WB and 8% in GS). About half of the micro enterprises operate in the informal sector in WB (55% in GS). The majority have been working in their activity for more than 3 years (61% in WB and 51% in GS) Main indicators West Bank % of % of Gaza Strip respondents respondents Sector of activity Trade 55% Trade 82% Registration non registered 49% non registered 55% Financing sources Self financing 88% Self financing 91% Existence of More than 3 More than 3 61% business years years 51% Employees None 63% None 74% Sales frequency Daily 73% Daily 88% Purchase of input Several times Daily/several per month times per month 27% Average monthly profit US$ 4 - US$ 38 - All surveyed micro enterprises are affected by the present situation: decrease in profits (by 27% in WB and 47% in GS since last year) and difficulties in collecting debts are the main problems mentioned. 8

9 Micro entrepreneurs respond to the crisis by reducing credit sales (54% in WB, 49% in GS), reducing the level of purchases (49% in WB, 57% in GS), or delaying payment of debts to suppliers (24% in WB, 2% in GS). Demand for Lending Services The number of potential clients is estimated at 19, and the estimated potential market size for micro lending services amounts to US$ 28 million in West Bank and Gaza Strip. 9% of the surveyed micro entrepreneurs in West Bank and 91% in Gaza Strip have no access to credit services. The market penetration of microfinance lenders is low, 1% of the total demand is served in WB (9% in GS) 57% of the interviewed micro-entrepreneurs in West Bank and 56% in Gaza Strip are in need for credit and would borrow provided certain conditions relative to loan size, procedures or type of credit. In addition, 27% of the interviewees in West Bank and 19% in Gaza Strip, do not want a credit because of the situation, but could be potential clients in the future; The market for micro-lending credit according to demand levels expressed in this survey (56% of respondents) is estimated at US$ 157 million. The most requested loan is under US$ 2,5, for a term of up to two years. Type of loan desired West Bank US$ Gaza strip US$ Average loan requested 5,2 3,39 Loan range most requested < 25 < 25 Monthly installment 98% 91% Loan term desired by more than 5% of the respondents Under 2 years Under 2 years Repayment capacity Collateral proposed Guarantor Guarantor Surveyed micro entrepreneurs indicate credit needs mainly for expanding their businesses financing assets, working capital and starting up new businesses. % of respondents Credit needs West Bank Gaza Strip Reimburse debts 18% 9% Working capital 46% 7% Finance assets 49% 6% Start up new activities 45% 8% Expand business 79% 43% Education 15% 2% House improvement 31% 5% 9

10 Demand for savings and other financial services The demand for savings services is also important. About 1/3 of the surveyed micro entrepreneurs state a need for saving products (28% in WB and 39% in GS). At present, only 7% in WB and 5% in GS have savings bank accounts but micro entrepreneurs save informally. 24% of the interviewees in WB and 19% in GS keep their savings at home. Insurance products interest 1 out of 2 of the micro entrepreneurs interviewed (47% in WB and 53% in GS) 52% of the micro entrepreneurs in the West Bank, are interested in loan reimbursement insurance, paid upon the release of the loan (19% in GS). 95% of the micro entrepreneurs in West Bank and 53% in GS are interested in health insurance; About 1 out of 4 respondents in West Bank and Gaza Strip are also interested in property insurance and pension fund. 14% of the micro entrepreneurs in WB (35% in GS) would be interested in money transfer services. Potential demand for Islamic loans is high in both West Bank (55% of the micro entrepreneurs would prefer it if given the choice) and Gaza Strip (61% of the micro entrepreneurs would prefer it if given the choice). 1

11 II. Introduction II.1 Context Conflict and Poverty: A Downward Spiral Since the beginning of the second Intifada in 2, the Palestinian Territories have become increasingly impoverished. Ranked 12 out of 177 in the UNDP Human Development Index of 25 and 11th among the 2 Arab countries, the GNI per capita in the Palestinian territories has been declining dramatically in the last years according to the World Bank, falling from US$ 1,626 in 2 to US$ 1,12 in 26, a 31% drop in just six years. Furthermore, after the January 26 Palestinian elections, many western countries suspended its budget financial support to the PA while Israel has stopped the transfer of VAT and customs taxes, resulting in the loss of financial resources for the Palestinian Territories. This resulted in the PA operating at roughly 25% of its regular budget. The Informal Sector: A Survival Mechanism As shown in a survey conducted by the UNDP in 22, poor Palestinians see job creation as the number one priority to reduce the level of poverty in the country 1. The unemployment rate ranges from 26% to 5% according to different estimates, 2 a situation even more worrying given the fact that half of the Palestinian population is below the age of 15. However, despite these alarming rates, the informal sector has proven to be a resilient and viable mechanism for Palestinians to seek out a minimal existence. Contrary to most predictions, the informal sector in the Palestinian Territories, traditionally very large, has grown further due to continued economic deterioration witnessed since the second Intifada. The hallmark of the informal sector, the micro enterprise, is both the dominant and traditional entrepreneurial feature of the economy, constituting 95 percent of all businesses. 3 Given the importance that the informal sector and micro enterprises have played in preventing the onslaught of absolute poverty among Palestinians, the development of this sector currently represents the most important source of employment for poor Palestinians. Moreover, this trend will continue in the medium term. Current Economic and Financial Situation The decrease of financial aid and suspension of tax transfers further weakened an already fragile economy. PA revenues have dropped by 57% from US$1.233 billion in 25 to US$ 53 million in 26 4, and salaries for a large part of the 164, PA employees have not been paid. These civil servants wages directly support another one million people, or more than 25% of the Palestinian population 5 which have seen their income reduced by half. The household dependency ratio in Palestine jumped to 6.2 in the second quarter of 26 from 4.8 in the third quarter of 2. According to a poll conducted in May 26 by IUED, 7% of the population is living in poverty, rising from 68% in 25 and approximately 3% before the Intifada 6. By the end of 26 real GDP is estimated to have contracted by 8% from US$ 4,13 Billion in 25, while real GDP per capita has fallen by nearly 11% to almost 4% below its pre-intifada level in Palestinian Participatory Poverty Reduction Program, UNDP Palestinian, PA Ministry of Planning and International Development 22 2 Data prior to the current situation 3 Microfinance Note, June 25, Palestinian Network for Small and Microfinance/ Wolfensohn Mission Report 4 UNOCHA Special Focus, Occupied Palestinian Territories, April 27 5 UNOCHA, Revised Emergency Appeal, 31 May 26 6 IUED poverty figures are used here because the Institute provides the only poverty data on the opt for 26 that allows the comparison with previous years. The poverty line in 26 stands at US$2.7 per person per day, with hardship cases living on US$1.35 per person per day or less. PCBS has published poverty data for 24 (PCBS, Poverty in Palestine, 25) but plans to publish data for 25 in June. The pre-intifada (1999) poverty data is from PCBS and is roughly comparable to the IUED poverty figures because both sources use income-based poverty definitions. Importantly, the PCBS and IUED use the same poverty line. 7 International Monetary Fund-World Bank. West Bank and Gaza. Economic Developments in 26 A first assessment. March

12 Around 7% of Gaza s potential workforce, for example, will either be out of work or go without pay this as a result of the 4% unemployment, the loss of PA salaries, and further job cuts through the contraction of the economy and the loss of work in Israel. Furthermore, banks have imposed more restrictive credit policies. The microfinance sector has shown the ability to cope despite periods of crisis. But the magnitude of the current crisis which affects the whole society - has begun to impact the capacity of the institutions to sustain operations and continue to lend. Many of the MFIs have reduced their levels of lending or even nearly stopped making new loans. Indeed, Palestinian MFIs are facing potentially high default rates. Whereas in 25 the average portfolio at risk (> 3 days) for Palestinian MFIs was at 13.9%, it had increased to 4.6% by September 26 questioning overall sustainability of the sector. The response to this situation by a number of Palestinian MFIs has been a deferral of all repayment for 6-9 months without additional interest charges. In any case, reduced repayment rates have negatively impacted the cash flow of Palestinian MFIs and means that Palestinian MFIs have great problems to sustain operations and cover administration costs. The situation is particularly difficult in the Gaza Strip where the effect of the current crisis have provoked a dramatic raise in poverty levels with the subsequent shrinking of the market for micro entrepreneurs, who in many cases cannot repay their loans and are often obliged to close their businesses. Microfinance in the Palestinian Territories The Palestinian Microfinance sector unlike others in the Middle East has not been able to continue its growth in the last years; the ongoing military occupation and current political and economic crisis have prevented it from increasing its portfolio. Unlike other Arab countries where the microfinance sector has shown in many cases remarkable expansion, consolidation, and evolution, microfinance in the Palestinian Territories has somewhat diminished, calling into question the sector s ability to work effectively in such difficult context and in its current form. Yet, despite difficulties, the Palestinian microfinance sector has shown impressive resilience. Although the number of active clients decreased sharply in 2, after the second Intifada, the microfinance sector has been recovering slowly since 22. The Palestinian microfinance sector is characterized by the presence of two kinds of microfinance institutions: Microfinance Institutions and Commercial Banks. Palestinian MFIs include 11 organizations operating with different legal forms: UNRWA (a UN Agency), ANERA and CHF (International NGOs), ACAD, ASALA, PDF and YMCA (lending-only Palestinian NGOs), PARC (Palestinian NGO with cooperative status), FATEN (non-profit company) Caritas, (an international religious NGO) and Al Amin (a for Profit company). In addition to these institutions, 2 Commercial banks (Bank of Palestine and more recently Al Rafah Microfinance bank) are also currently active in the micro lending sector. However, despite available funding 8, the role of banks remains very limited as they target small and medium enterprises (SMEs) and have not been very involved with the informal micro enterprise sector which has emerged in the last years 9. Palestinian MFIs started their operations in the mid-9s with support of international donors such as USAID as well as and EU funded NGO programs. It is estimated that around US$ 3 million have been invested by donors either in capital or technical assistance in the microfinance sector in West Bank and Gaza. Donors have continued their support with USAID, Islamic Development Bank and the European Union being the most active donors in the microfnance sector nowadays. At present, Palestinian MFIs are not regulated as financial intermediaries by the regulatory authorities and therefore limited in their product offer, which includes individual and group micro-lending for microentrepreneurs, agricultural loans, Islamic loans, and consumer and housing loans, the latter being a more recent product, even if it represents up to 1/4 of the total loan portfolio. Most Palestinian 8 Credit to the private sector by Palestinian Banks is estimated at 3% of GDP, compared to 76% in Lebanon and 73% in Jordan. 9 According to CGAP, the general guideline accepted in the Palestinian microfinance sector is that a micro loan has an initial principal amount of US$5 to US$5,. An SME loan ranges in size from US$5, to US$25,. 12

13 MFIs target the micro lending segment up to US$ 2,5 and the SME segment. Some MFIs also offer business development services in a somewhat limited manner. Microfinance Institutions in the occupied Palestinian territories Products ACAD ASALA CHF FATEN ANERA PARC PDF/PBC UNRWA YMCA Total SME na Microenterprise na Group lending na Housing na June 5 Consumer/personal na Main products offered by Palestinian MFIs (mid 25) For individual loans, borrowers are required to provide some collateral. Predominantly, this involves post-dated checks, promissory notes or personal guarantors who are salaried employees with a steady income. In December 26, the 9 Palestinian, MFIs grouped within the Palestinian Microfinance Network for Small and Microfinance, served altogether 25,39 active clients. Together they have a large geographical coverage with 6 branches and offices in the West Bank and Gaza. Their combined outstanding portfolio in December 26 was US$ 37.3 million. The largests MFIs in Palestine are UNRWA, FATEN and CHF Palestine. Together they have 71% of clients and 64% of loan portfolio. In 26, effective annual interest rates charged by MFIs are estimated between 12% for collateralized loans (family or small enterprises loans) and 55% (for emergency and fast loans). Due to the regulatory environment, Palestinian MFIs may not offer saving products to the general public (although Cooperatives offer them to their members) or services linked to remittances and payment transfers. The provision of savings products is legally restricted to PMA authorized institutions, i.e. banks. In order to collect savings from the general public, under the current legal environment (see below), most MFIs who are registered under the Ministry of Interior, would need to do so through partnerships with banks, something unlikely given the few links between banks and MFIs in the current context. Summary table of Microfinance Institutions in West Bank and Gaza 1 : Name Legal Entity Outstanding Portfolio US$ (Dec 6) Number of Active clients Avg. Out. Bal. US$ Number of branches Coverage West Bank Coverage Gaza ACAD NGO 2,72,389 1,381 1,957 8 North, Central and South WB All ANERA International program 1,12, ,865 1 All ASALA NGO 1,715,469 2, North, Central and South WB All CHF International program 9,592,759 4,132 2,322 8 FATEN Non-Profit Company 8,294,176 4,54 1, PARC Rural Cooperative 2,28,41 2,111 1,46 _ PDF NGO 2,955, ,966 3 North, Central and South WB North, Central and South WB North, Central and South WB North, Central and South WB North, Central UNRWA MMP UN Program 5,83,85 9, All and South WB YMCA International program 2,95, ,398 7 Total 37,36,154 25,39 1,474 6 North, Central and South WB * North WB: Nablus, Jenin, Tulkarem, Qalqelia **Central WB: Jerusalem, Ramallah, Jericho ***South WB: Bethlehem, Hebron All All All All All 1 No data was available on Caritas and Al Amin activities 13

14 Nine Palestinian MFIs are members of the Palestinian Network for Small and Micro Finance (PNMSF). PNSMF was established in 22 and officially registered in 24 as a non-profit association at the Palestinian Ministry of Interior. PNMSF is an independent legal entity, entitled to implement its own programs and projects on behalf of its members. PNMSF is a coordinating body that represents non-commercial Palestinian microfinance organizations that provide loans and other financial services to small and micro businesses. The network supports the growth of the industry in the West Bank and Gaza Strip, promoting microfinance as an efficient tool for economic development that responds to the realities of Palestinian economic life. The role of PNMSF is to support the work of Palestinian MFIs through joint activities and programs and to assist them in attaining both operational and financial sustainability in the medium-term. The legal environment for Microfinance in West Bank and Gaza Due to historical reasons, the legal system was actually different in the West Bank and the Gaza Strip, Jordanian, British and Ottoman laws applied in the West Bank, while Egyptian law applied in Gaza. From 1994 onwards, there has been an effort on legal harmonization regarding the Law on the Palestinian Monetary Authority, the Banking Law, the Capital Markets Authority law and the Securities Law. At the present time, neither the current legal status of Palestinian MFIs nor the legal environment for Microfinance, are really adapted to the specificities of the microfinance sector. This legal vacuum represents a major institutional and financial constraint for Palestinian MFIs, which hampers their development. As unregulated financial intermediaries, they are not allowed to collect savings and offer a full range of financial services to their clients, which increase their dependence on donor funding. Currently, NGO MFIs operate under the Law of Charitable Associations and Community Organizations (Law on NGOs) and are registered and overseen by the Ministry of Interior. As such, they bear severe restrictions: they cannot receive savings, any legal documents including checks have to be signed by the chairman, and they cannot raise capital from private investors and have to resort to fund received by donors. Cooperatives are under the authority of the Ministry of Labor and refer to the law of cooperatives. Non-profit companies are registered under the Ministry of the National Economy. Additionally, Unlike NGOs which are exempted from taxation, for-profit finance companies are in a clear position of disadvantage, being subject to government taxation without having the advantages of the traditional banking sector: deduction for loan loss reserves and deduction for VAT paid on staff salaries. A change and harmonization of status could lead the MFIs to be supervised by the authority of either the Ministry of the National Economy, the Palestinian Monetary Authority (PMA) or the Capital Markets Authority (CMA). There are particular ambiguities about the scope of financial entities falling under the authority of the PMA or the CMA. The PMA is in charge of regulating finance companies and the CMA is in charge of certain specific finance companies (mortgage finance companies, security market, insurance companies) and monitor the development of non-bank finance companies. In addition, the PMA has a legal right to define maximum interest rate levels, which is a major concern for MFIs. Attempts to reform have taken place. A draft for a Microfinance law to regulate MF in the Palestinian Territories had been designed with the support of the European Union s Food Security Program but it was neither finalized nor submitted to the Legislative Council. This draft includes some provisions on the possibility of taking deposit by the MFIs, yet without defining the supervising authority. The recommendation of CGAP 11 in its 26 review of the Microfinace sector in West Bank and Gaza was the establishment of a government strategy regarding microfinance and the appointment of a financial body for the supervision of Palestinian MFIs, rather than the enforcement of a new burdensome law. Instead, CGAP suggests focusing on some specific reforms such as transformation of NGO MFIs into non-profit companies, reinforcement of regulations on conflict of interest and transparency for MFIs, specific and tailored laws for credit and saving cooperatives 11 Source: MEETING THE DEMAND FOR MICROFINANCE IN THE WEST BANK AND GAZA by Mohammed Khaled, Kate Lauer, and Xavier Reille- January 26- CGAP 14

15 The Microfinance Market in the Palestinian Territories Using available data 12 on the Palestinian Labour Force, it is possible to estimate the number of people being currently underemployed or unemployed who would be potential clients for microfinance institutions. Palestinian Labour Force (PCBS Q1/27) Population Total WB Gaza Within the working age (>15) 2,162,7 1,43,1 759,6 Outside the labor force 1,272,3 83,6 468,7 Within the labor force 89,4 599,5 29,9 Unemployed - Ever employed 156,2 88, 68,2 Unemployed - Never employed 35,9 15,8 2,1 Total Unemployed 192,1 13,8 88,3 Fully employed 636,5 45,9 185,6 Underemployed 61,8 44,8 17, Total Employment 698,3 495,7 22,6 As per the above figures, the potential number of microfinance clients in the Palestinian Territories has been estimated as follows: Estimated demand Total WB Gaza Assumptions Unemployed - Ever employed (6%) 93,72 44, 34,1 The assumption being that at least 4% of these people would need first training and coaching in order to qualify for a MF loan Fully employed (1%) 63,65 45,9 18,56 The assumption being that at least 1% of these people would be potential MF clients even if currently employed Underemployed (1%) 61,8 44,8 17, The assumption being that this is the natural segment of MF clients Estimated MF clients 219,17 133,89 69,66 Active MF Clients (Dec 6) 25,39 1,124 15,185 Estimated Potential MF clients 193, ,766 54,475 The assumption being that they are already represented in the above categories If we consider the number of unemployed and underemployed people, as well as those employed but having a complementary activity, the potential number of microentrepreneurs, or those susceptible to receive microfinance loans, is estimated at around 19, people. Taking the average loan granted by the Palestinian MFIs as of December 26, of around US$ 1,475, the potential Microfinance market in the Palestinian Territories would be estimated at around US$ 28 million. Considering the credit demand levels expressed in this survey (56% of respondents need credit), the estimated market for microlending would be established at around US$ 157 million. This estimation is corroborated by existing data from previous studies on the number of microentreprises existing in the Palestinian Territories, such as Massar (23), CGAP (26) and UNDP (22). Adding together these estimations, the existing number of microentreprises in the Palestinian Territories would be around 186,. Potential clients Total Nber WBGS WB Gaza Sources Micro enterprises Informal Sector 11, 6, 5, Massar 23 Registered Micro enterprises 4, 27, 13, CGAP 26 / PCBS Registered Small Enterprises 36, 24, 12, CGAP 26, UNDP 22 Total MSEs (< 1 employees) 186, 111, 75, 12 Palestinian Central Bureau of Statistics, 27. Labour Force Survey (January-March 27) Round (Q1/27). Press Conference on the Labour Force Survey Results. Ramallah. Palestine. 15

16 II.2 Survey methodology Following the above estimations, the population of potential clients, which includes registered and informal MSEs in West Bank and Gaza Strip, is estimated at 19,. Within this sample universe, the minimum sample size would be 1,61. Considering the lack of precise information available concerning the informal sector in particular, the adjusted sample size has been set at 1,2 MSEs. Given that there is no clear definition of MSEs in WBGS or even in the larger Middle East region, for the purposes of this study, we have used the number of employees as the point of reference: any enterprise that has between -6 employees falls into the MSE category (with -3 employees for micro enterprises and 4-6 employees for small enterprises). The geographical scope of the study has been developed through an analysis of the existing geographical coverage of Palestinian microfinance institutions and interviews with industry experts. The geographical sample was then validated by the Palestinian Network for Small and Micro Finance (PNSMF) and Al-Rafah Bank. Selected Governorates West Bank: Hebron, Ramallah, and Jenin. Gaza: Gaza, North Gaza, and Khan Younis. After an initial geographical screening, the final areas for survey were selected with the involvement of the PNSMF s members. A precise mapping was completed in order to define where the interviews would be conducted. Three field visits took place in conjunction with PNSMF s credit officers for this purpose. II.2.1 Sampling The methodology employed for this study is multi-stage sampling, the most practical technique for surveying a large population where detailed cataloging is not necessary. The advantages of multistage sampling are thus convenience in preparation and execution, a lowered overall cost, and efficiency in terms of time spent in the field. In this case, an in-depth listing of all micro- and small entrepreneurs in the Palestinian population would have been both unnecessarily time consuming and costly. The methodology applied consists of three main stages: 1) A selected number of governorates are chosen for conducting the field research and interviews 2) The types of location of the selected governorates are divided into three broad categories: cities, villages, and camps 3) A simple random sample of micro and small entrepreneurs living in the chosen governorates is then selected 16

17 II.2.2 Data collection methodology WEST BANK Seven hundred and two (72) micro entrepreneurs participated in the survey in West Bank, which was undertaken in collaboration with New Vision Management Consulting. Established in 2, New Vision is a management and marketing consulting and training firm working with local, national, and international businesses and organizations. It provides state of the art consultation to Palestinian entities and international corporations interested in the region. The sample of micro enterprises was randomly selected using random walk techniques among the pool of micro enterprises in the selected potential areas. The sample was stratified according to several variables such as locality type, departments and gender. The survey was conducted with 72 business owners following the segmentation presented in the table below 74% were male and 26% were women. Indeed, while it is generally believed that informal businesses ownership is predominately female, a previous survey revealed 13 that male ownership is much higher than expected. This distribution has been validated by PNSMF. Locality type * selected department cross tabulation in West Bank (count) Selected department Jenin Ramallah Hebron Total Camp (18%) Locality type City (52%) village (3%) Total (32%) (32%) (36%) 72 In order to construct a socio-economically relevant questionnaire that could be applied to evaluate the demand for finance among Palestinian micro- and small entrepreneurs, qualitative methods of data collection were initially used. The preliminary qualitative analysis consisted of eight Focus Group discussions with the target population in the West Bank, led by a Palestinian microfinance expert. A large quantity of information has been collected among respondents: household characteristics, asset ownership, economic activities, access to markets, use of financial services, investments, and credit demand. GAZA STRIP Five hundred (5) micro entrepreneurs participated in this survey in the Gaza Strip. The survey was undertaken in collaboration with New Vision Management Consulting. The sample of micro enterprises was randomly selected using random walk techniques among the pool of micro enterprises in the selected potential areas. The sample was stratified according to several variables such as locality type, Departments and gender. The survey was conducted with 5 business owners following the segmentation presented in the table below 73% were male and 27% were women. Indeed, while it is generally believed that informal businesses ownership is predominately female, a previous survey revealed 14 that male ownership is much higher than expected. This distribution has been validated with the PNSMF. 13 Massar, P Massar, P

18 Locality type Locality type * selected department cross tabulation in Gaza Strip (count) Total Selected department Khan Yunis Gaza Remal North Gaza Total Camp % City % village % % 38% 28% In order to construct a socio-economically relevant questionnaire that could be applied to evaluate the demand for finance among Palestinian micro- and small entrepreneurs, qualitative methods of data collection were initially used. The qualitative analysis realized after the first analysis, consisted of nine Focus Group discussions with the target population in the Gaza Strip, led by a Palestinian microfinance expert. A large quantity of information has been collected among respondents: household characteristics, asset ownership, economic activities, access to markets, use of financial services, investments, and credit demand. 5 18

19 III. Market analysis of microfinance in West Bank III.1 Characteristics of households and their activities III.1.1 Demographics The age of the majority of respondents ranges between years. 73% are male, and 75% are married. 32% of respondents have completed higher education; 29% preparatory education; 14% only primary schooling; and 5% received no formal schooling. The level of education varies between men and women. It is generally higher between men: only 3% of the males received no formal education compared to 11% of females. It is important to note that this applies mainly to the older population (46 years old and above) and is no longer the case among younger generations (between 18 and 3 years old). This is evidence of the progress in women s access to education. 5 Age (%) Formal education university-graduate college 8% 11% 5% no formal education 14% primary stage secondary stage 32% 29% preparatory stage 18-3 years years 46-6 years Chart 1 : Age Chart 2 : Formal education. 19

20 Housing ownership No 14% 86% of the respondents in West Bank own their homes, (in line with PCBS figures for the West Bank published by in 24). According to PCBS, the average number of people per household in the West Bank was 6.2 in 24. This corresponds to the household profile of micro enterprise owners, which averages 3-5 people under the age of 18 (chart 4) and 2 dependents over the age of 18 years old (chart 5). Yes 86% Chart 3 : Housing ownership # of dependents less than 18 years old (%) # of dependents 18 years old and more (%) 2 persons 42 2 persons persons persons persons persons More than 1 persons more than 1 persons Chart 4 : Number of dependent less than 18 years old Chart 5 : Number of dependent 18 years old and more As chart 6 shows, the primary source of income for the respondents to this survey is their own business (98%) followed by the income of other family members (36%) and welfare support (from UNRWA or NGOs). Qualitative interviews stressed that family borrowing has decreased sharply, since all family members face financial constraints as a result of the present economical situation. In fact, 83% of respondents in West Bank admit to having financial commitments to help family members pay back debt (chart 7). Concerning the dependence on welfare, there is an important difference between types of location. Indeed out of the 8% of respondents quoting welfare as a main source of income, 55% live in camps compared to 28% in cities and only 17% in villages. Most of the respondents contribute between 75 and 1% of the households budget. The contribution of female micro entrepreneurs to the household budget is on average lower than males, with only 13% of women in the group of entrepreneurs contributing more than 76% to the budget versus 87% of men in the same group. This implies that women often run a micro enterprise to provide an additional source of income to the household, and not as their main activity. 2

21 1 Household sources of income (%) 98 Commitment to pay debt 8 No 17% Yes 83% 8 6 own business other family members welfare employment other Chart 6 : Household sources of income Chart 7 : Commitment to pay debt III Evaluation of Wealth: Index of Asset Ownership In order to evaluate wealth, an asset ownership index is used to subdivide a sample into several groups with respect to their degree of wealth. Each individual or household included in the sample is assigned a score, based on the number or nature of assets owned by the household. This index has been used to divide the sample into five quintiles or groups of equal size (see methodology explanation in annex). Wealth Index and Location Wealth by location Graph 8 shows the result of crossing this wealth index with different types of location (City, Village and Camp). From left to right, quintiles are represented from poorest to wealthiest. Wealth of micro entrepreneurs by location shows that respondents living in cities are significantly wealthier compared to those living in villages and camps, since the majority of respondents fall into the wealthier groups camp city village wealth index Chart 8 : Wealth by location 21

22 Wealth Index and Gender 3 Wealth by gender The comparison between male and female respondents does not show significant differences between the two groups in terms of wealth female male Wealth index Chart 9 : Wealth by gender Wealth Index and Department Wealth by department Wealth of micro entrepreneurs varies significantly per location in West Bank. The proportion of relatively wealthier respondents is higher in Ramallah, while there is a higher concentration of respondents in the poorer quintiles in Jenin, and the distribution is more even in Hebron Jenin Ramallah Hebron Wealth index Chart 1 : Wealth by department 22

23 III.2 Information about Economic Activities III.2.1 General Information Type of activity (%) trade service 19 handicraft/small ind 12 agriculture-breeding 9 employed 56 Trade is the most important activity of the respondents in West Bank (56%), although the proportion of traders varies by type of location, with a higher presence in camps. The second main activity of respondents is services (19%), followed by handicrafts and small industries (12%), agriculture and breeding (9%). In terms of gender, the proportion of women is lower in trade (45.3% of women micro entrepreneurs in this sector versus 6.1% of men) but higher in services (23.2% versus 16.8%) and in agriculture (14.4% versus 7.3%). other A more detailed breakdown of the primary and secondary activities per type of location of respondents follows below. Chart 11 : Type of activity PRIMARY ACTIVITIES Cities Villages Camps Trade - 54% Trade - 53% Trade - 67% Services - 29% Agriculture/Breeding - 25% Most of the participants in the qualitative study rely on a second source of income in addition to their main activity, while others showed willingness to start a new project in order to have an extra source of income. 23% of the respondents to this survey run in fact two economic activities. When respondents are formally employed, the additional income earned through a second activity is dedicated to special purposes such as: children education, helping family members, marriage or starting a new business. The breakdown of secondary activities per type of location is as follows: SECONDARY ACTIVITIES Cities Villages Camps Trade - 27% Agriculture/Breeding - 4% Trade - 39% Agriculture/Breeding - 2% Employment - 18% Handicrafts/Production - 25% 23

24 Type of principal activity by location (%) other agriculture-breeding 4 employed 3 handicraft or small 2 producing industry 1 service Type of second activity by location (%) other 5 16 agriculture-breeding employed handicraft or small producing industry 2 service trade trade camp city village camp city village Chart 12 : Type of principal activity by location Chart 13 : Type of second activity by location Location of sales products/services (%) in souks 46 As Chart 14 shows, the majority of micro entrepreneurs surveyed sell their products and services directly at their shops (55%) or in markets (45%). in shop Palestinian intermediary 55 A very small proportion of the respondents sells through intermediaries (Palestinian or international) or exports their products. International intermediary direct export Chart 14 : Location of same products/service Source of financing (%) 17 In terms of financing, the majority of micro entrepreneurs surveyed (88%) have no external sources of financing. Some are financed by family or friends (17%), while a small number is financed by suppliers (7%). Only a very small number of respondents have received financing from MFIs (2.7%) or banks (1.4%). Please see section on sources of financing in this survey for further detail. 7 self financing suppliers family-friends MFI banks Chart 15 : Source of financing 24

25 Home-based activities In the West Bank, 18.4% of respondents run home-based businesses. These businesses are mainly run by female respondents (31% of women enterprises are home-based versus 14% for the men), which indicates that women although economically active, need to strike a balance between their economic activity and their duties within the households. Micro enterprises in rural areas are also more often home-based (26.9%) than in cities (1.5%). Registration status According to the respondents of this survey, 36% of micro enterprises are formally registered, while 49% of the micro-enterprises are not registered or informal. The remaining respondents preferred not to answer this question. Gender of the business owner does not affect the registration status. There is a strong correlation however between wealth and registration status, as only 28% of the poorest segment is formally registered versus 66% of the wealthier segment. In terms of type of location, urban micro enterprises are registered more often than rural ones (43.9% versus 38%). In camps, informal micro businesses seem to be the norm with only 8.9% of respondents having registered businesses. Experience in Activity The majority of respondents to this survey have at least 3 years of experience in their activity (61%). On average, respondents have been working in their activity: 13% less than one year. 28% between 1-3 years. 23% between 3-5 years. 38% more than 5 years. In terms of experience there is no significant difference between registered and informal businesses. Registration status Experience in main activity (%) Other less than 1 year 13 16% 36% Formally registered 1-2 years 2-3 years years 23 49% 6-1 years 18 Not registered 1+ years Chart 16 : Registration status Chart 17 : Experience in mean activity 25