Microfinance In the MENA Countries

Microfinance In the MENA Countries A position paper on Partnership for Development prepared to MENA - Net Conference Cairo - Egypt Dec. 13-17, 1998 Radi Atoom Project Director D.E.F, Jordan 1

1.0 : Preface :- MENA countries contain more than 60 million poor people ( defined as those living on less than $2 a day ) of which 112000 have access to financial services. Today MENA has $95 million in outstanding microloans. More than 60 microfinance programs are active in the MENA,Most are run by NGOs, quasi-government, only one private bank is engaged in microfinance. 2.0 : Historical Background :- Microfinance programs in the MENA countries initiated first in Jordan in 1937 by Near East Foundation - American Organization. In 1970s Microfinance programs established in Egypt and Tunisia ( Gov. & NGOs ). 70% of the programs launched during 1987-1997. Less than 10% existed before 1985. The legal structure of the MENA institutions is distributed as follows : - 78% are NGOs ( local and International) served 72% of active borrowers - 13% are Governments served 8 % of active borrowers. - One private Bank served 17% of active borrowers * The Arab Bank, Jordan National Bank, and Commercial Bank of Palestine recently started microfinance programs in the West Bank and Gaza with the help of IFC, and also it is expected that one bank in Lebanon, Morocco and, two banks in Yemen to start microfinance operations. * The number of borrowers and outstanding loans in ( 7 ) MENA countries are distributed as follows : 2

Table No. ( 1 ) Country No. of Borrowers Outstanding Loan Egypt 66.5% 57.2% Jordan 8.6% 21.5% Tunisia 2.2% 8.8% W.Bank and Gaza 8.7% 4.8% Lebanon 6.3% 6.5% Morocco 6.6% 1.0% Yemen 1.1% 0.2% Total ( % ) 100.0 100.0 ( # ) ( 112,316 ) ( $ 96,065,000 ) Source : World Bank, Making Microfinance work in MENA, J. Brandsma and R. Chaouali, 1998. 3.0 : The Real Situation of Microfinance in MENA : MENA characterized by high growth rates of population, low GDP per capita, high poverty rates and low participation rate of the labor force especially among women, Table No.( 2 ) explores those facts. World Bank estimated that there are more than 4.6 million potential microfinance clients in the MENA region, only 112,316 are being served. Thus supply covers only 2.4 % of the potential demand ( which defined as the number of people who want microcredit and are willing and able to repay their loans ). 3

Country Pop.(m) 1995 Table No. ( 2 ) MENA Basic Indicators Pop.Growth rate% 1994-2000 GDP per capita US$ 1995 LFPR * 1990 Women s share of labor force 1998 URBAN Pop. 1994 Business Women to Total 1994 Egypt 62.9 1.9 832 35% N/A 45% 20% Jordan 4.6 3.2 1520 27% 18% 71% 1% Lebanon 3.0 2.0 3046 31% 27% 87% N/A Morocco 27.0 1.8 1200 38% 35% 48% 11% W.Bank 2.2 N/A 1537 N/A N/A N/A N/A &Gaza Yemen 14.5 4.0 454 30% 30% 33% 15% Tunisia 8.9 1.8 2029 35% 29% 57% 17% Algeria 27.9 2.4 1600 28% 21% 55% 2% Iran 68.2 2.3 1033 29% 21% 59% N/A Syria 14.7 2.6 1120 28% 25% 52% 3% - LFPR : Labor Force Participation Rate - N/A : Not available sources : ESCWA : Women and Men in Arab Countries ( brochure ), 1996. UNDP : Human Development Report, 1997. It is important to note that : A = Algeria, Iran and syria have no microfinance programs. B = Egypt has the most microcredit borrowers, it reaches only 5% of its estimated market. C = West Bank & Gaza and Lebanon have the highest coverage reaching 23% and 17% of their potential markets respectively. D = Jordan covers only 7% of potential demand. E = Morocco and Yemen cover less than 1.5% of their potential demand. 3.1: Poverty and Unemployment in MENA : 4

* Consultative Group to Assist the poorest ( CGAP ) defines the poor as those people living below the poverty line established by each country, and the poorest as those people in the bottom 50% of that group ( WB ; Microcredit Summit Feb. 1997 ). * Poverty in MENA region is estimated by Van Eeghen ( UNDP 1995 ) at 5.6% of the population ( on the average ). This corresponds to ( 11 ) million people living below one dollar a day in 1995. Therefore, the number of poor jumps to ( 60 ) million when using a poverty line of $2 a day. Table No. ( 3 ) shows poverty and unemployment of some of MENA countries. Table No. ( 3 ) Country Poverty as a % of Population Unemployment Rate 1990 Egypt 1992 22% 12% Jordan 1996 24% 18.8% Lebanon 1993 28% 15% Morocco 1991 11% 16% W.Bank and Gaza 1995 50% 48% Yemen 1992 47% 25% Tunisia 1990 7% 16% Algeria 1990 25% 23.8% Iran --- --- Syria 1996 22% 5.7% Source : UNDP,Poverty Eradication, 1997. Ministry of Administrative Development, Unemployment National Conference, Jordan, Amman 20-22, Sept. 1998. 3.2: Services and Outreach of the MENA Programs : The type of services of some MENA programs focused mostly on group lending and to urban beneficiaries. Women have been targeted few-times as shown in Table No. ( 4 ). Henceforth 36% of the MENA programs targeted women and 14% targeted urban population. 5

Country Percentage of individual via Group lending Table No. ( 4 ) Women Benefited Percentage of Urban Beneficiaries Egypt 70% 30% 20% 90% Jordan 35% 65% 45% 78% Lebanon 50% 50% 63% 89% Morocco 0 100% 73% 60% Tunisia 55% 45% 68% 31% W.Bank & 40% 60% 97%* 98% Gaza Yemen 48% 52% 35% 44% Source : World Bank, Making Microfinance Work in MENA, J. Brandsma & R. Chaouli, 1998. *UNRWA activities. According to the theory of microfinance, targeting the poorest is the main goal to outreach. It is believed that, microfinance is a powerful tool for : a- Alleviating poverty ; b- Raising living standards ; c- Creating jobs ; and d- Boosting economic growth. Effectiveness of microfinance in targeting the poor can be measured by comparing the average outstanding loan balance to per capita income and to poverty line. Thus the poorer the borrower the smaller is the loan. In MENA only Jordan and Tunisia have an average loan balance above per capita income. Whereas, Programs in Morocco and the West Bank &Gaza have an average loan below the poverty line. Those programs rely on group which appears to be more attractive to the poor and the poorest. Finally outreach examined a long three dimensions ( USAID, 1995 ) : 1. Quality of Services 2. Level of Poverty of clients 6

3. Scale 3.3 : Structure and Staff of the MENA Programs : 1/3 of the Institutions have at least 67% of their staff working on micro finance. 20% have all their staff working on microfinance. 18% have less than 3% of their staff working on microfinance. Decision making is centralized among 78% of the institutions. 3.4 : Systems and Procedures of the MENA Programs : Most microfinance institutions do not have ; a- Internal Control System. b- Effective Information System. c- Incentive Schemes for the staff. Only a third of the programs have a performance based incentive scheme for their staff. 3.5 : Sustainability of the MENA Programs : Financially Self-Sustainable Program ( UNDP - Special Unit for Microfinance/SUM, 1997 ) : - Requires substantial loan volumes to reach scale and cover costs. - Means charging an interest rate that covers all costs of delivery at scale. - Achieves a high repayment rate. - Maintains a very low default rate. The MENA Status : - 3 Programs are fully sustainable : National Bank for Development /Egypt, Alexandaria Business Association. Save the Children in Jordan, Lebanon and W.Bank & Gaza are well on the way to full sustainability. - 11 Programs cover 50-99 % of their costs. - 46 Programs are unable to recover 50% of their operational costs. 7

4.0 : Micorfinance in Jordan - Are Social Funds Emergency Funds or Development Organizations? 1 - Microfinance in Jordan is Launched by Near East Foundation ( NEF ) - American Organization- in 1937. It focuses on microlending, strictly speaking establishing credit schemes on the targeted communities, also NEF provides Technical Assistance to the poor population in remote areas. 2 - After refugees influx onto the East Bank in 1948, UNRWA is started its activities in 1950 to on- lend Palestinian refugees in Jordan. 3 - In 1959 General Union of Voluntary Societies (GUVS) was established to support social work and assist grass root societies(vs). There are 707 VS working in Jordan.In 1997 Development & Employment Fund financed (GUVS) for one million Dinar to help establish group projects by VS (0.5 Million JD) and lndivijual microenterprises through establishing credit schemes in local communities. 4 - As a matter of fact Agricultural Sector was one of most important sectors of the economy in 1960 s and before, Therefore, the Government focused on enhancing agriculture by soft loans. Henceforth Agricultural Credit Corporation ( ACC ) was established in 1963 to contribute to the promotion and development of agriculture, increases its efficiency, and develop and improve its production. 5 - In the mid of sixty s Jordan established a few main Economic Institutions, especially Central Bank of Jordan, Dept. of Statistics, and Industrial Development Bank ( IDB ) in 1965. IDB aiming at encouraging industrial development, job creation and, business development through the provision of loans to small, medium, and large scale enterprises. 6 - In 1977 Queen Alia Fund - QAF \ NGO was established. QAF aims to participate in social and economic development, it started its lending operations after Development & Employment Fund ( DEF ) support technically and financially in 1994. DEF financed at first voluntary societies belonged to QAF since 1991, then in 1994 DEF provide QAF with one million Dinar to on -lend it to the target groups, and in 1996 DEF also provide it with another one million Dinar. 8

7 - In 1986 the Government established the National Aid Fund ( NAF ) in order to assist the poorest where income is less than JD 120 per month ( Widows, Orphans, Disabled etc) by providing them with a monthly salary to help cater themselves. Recently ( 1993 ) NAF started lending for microenterprises to the poor individuals and group of individuals in 1998, 8 - In 1980 s many governmental institution and NGOs were established ; Housing and Urban Development Corporation ( HUDC ) - Gov. 1985, to serve some of their time housing residents only ; Noor Al-Hussein Foundation (NHF ) - NGO, 1985 ; Save the Children ( SC ) - International, 1985. 9 - In late 1989, Development and Employment Fund ( DEF ) - Quasi - Governmental Organization-was established. DEF s mission is to enable the poor, low income and unemployed individuals, families and groups to perform productive work, thus contributing to poverty alleviation and unemployment reduction as stated by DEF s law No. 33 of the 1992. DEF works through two channels : First : Direct lending to individuals. Second : Indirect lending through Intermediary Agencies ( IA s ) - NGOs or Gov. institutions - such as ACC, QAF, NHF, GUVS and IDB. Under agreement conditions of the donor agencies, DEF provides IA s with FREE LOANS ( No Interest ) for (7) years and (3) years grace period and also, a grant amounted to 15% of total loan ( un repaid ) -------?!. However DEF provides loans to individuals only from the Government Budget with 6.5% interest rate and loan duration of ( 7 ) years with a one year grace period. 10 - In 1990 s two foreign NGO s was established ; CARE International in 1993 and Cooperative for Development ( CD ) - in 1992. CD provided loans amounted to JD 500,000 to Palestinian refugees and two years ago its operations is freezed. CARE is established in 1993 to act in the field by providing very small loans to the poorest, its portfolio is very small ( = JD 300,000 ). Table No. (5) 9

Organization Microfinance in Jordan; Basic Indicators 1997 Legal status Established Loan portfolio JD (M) Outstanding loan JD(M) No. 0f active Borrowers Average loan size JD Interest Earned per Annum 1989 23.00 16.00 5516 4560** 6.5% DEF Quasi- Gov. ACC Gov. 1963 77.00 23.0 4957 4640 7.5% NAF Gov. 1986 19.5 12.1 8569 1420 ZERO HUDC Gov. 1985 0.03 0.03 30 1000 7.5% QAF NGO 1977 3.00* (2.40)* (560) 4280 9.5-10% NHF NGO 1981 0.15* (0.06)* (60) 1000 7.5% GUVS NGO 1959 1.00* (0.70)* (100) 700 7.5% IDB QUASI- 1965 15.2 15.1 3726 4075 9.5% GOV. NEF F-NGO 1937 0.10 0.09 220 400 8%Flat CD F-NGO 1992 0.50 0.40 100 4200 M.R CARE F-NGO 1993 0.30 0.28 80 350 10%FL UNRWA UN 1950 0.50 0.45 2250 2000 11% SC F-NGO 1985 0.01 0.01 1100 100 32% TOTAL - - 116.64 67.46 25848 - - * Those programs are Funded from DEF so they are acting as a supportive hand to DEF. ** Average loan size for Direct lending to Individuals from DEF Center. - Gov. stands for government organization and, F ; for Foreign organization. - M.R stands for Market rate of interest. - JD stands for Jordanian Dinar = $ 1.40. - FL = Flat Interest. Note ; No. of active borrowers is calculated by excluding the no's between brackets and 700 of ACC borrowers because it is included in DEF operations. Analyzing the above mentioned organizations assures that the Governmental Institutions; ACC&NAF and the quasi-governmental Institutions; DEF and IDB are by their mandates dedicated fully to be Developmental Organizations aims at motivating socio-economic development and improving formal and informal sector of microenterprises in Jordan. It is a matter of concern that all the above institutions are working under a special laws. Therefore, They were designed for long-term plan to alleviate poverty, enhance economic development and hence unemployment. The target groups and target projects are well defined, but there is a need to improve their tools and mechanisms to deal with the whole subject. 10

The international organizations and also, UN agency were well identified their means of operation, target groups, target areas, and also their social and economic actions. Whereas, the local NGOs tried to identify their target population, areas and sectors to achieve their goals. The quasi-gov. institutions supported them financially and technically to help achieve their goals. The experience shows that it is difficult for the NGOs to achieve their goals without governmental and international organizations support. Finally, it is important to note that the Association in Jordan has no direct and obvious role in supporting and developing microenterprise sector. References 1. World Bank: Making Microfinance work in MENA, J. Brandsma and r. Chaouali, 1998. 2. UNDP: Human Development Report, 1997. 3. ESCWA: Woman and Men in Arab Countries (Brochure), 1997. 4. UNDP: poverty Eradication, 1997. 5. World Bank: Microcredit Summit, Feb. 1997, Washington, Draft Declaration, 1996. 6. USAID: Maximizing the Outreach of Microenterprise Finance, R.Christen, E. Rhyne, R. Vogel and, C. Mckean, July 1995. 7. UNDP/SUM: Strenghening the Capacity of the Microfinance Sector in the Arab States, 1997. 8. World Bank: Jordan Micro-credit Mission, J.Brandsma and DJ. Khayatt, Final report, oct.1996. 9. World Bank: The Microfinance in MENA: priorities and Challenges, Microfinance workshop, Marrakech, Sep. 1-5, 1998. 11