Banking the unbanked has proved to be an uphill battle for the Middle East and North African (MENA) region with only 15 to 20 percent of eligible clients having at least one bank account, according to the Consultative Group to Assist the Poor (CGAP), the global microfinance policy and research institute housed at the World Bank. The figure is indicative of the fact that a large segment of the region’s population still has no access to financial services and is typically disenfranchised from modern banking.
The microfinance industry across the region is estimated to have a potential worth of $5.5 billion, according to most observers. However, at the beginning of 2008, the industry only had a gross loan portfolio of $1.5 billion. The region has also seen heterogeneous growth across different countries with around 80 percent of the market existing in Morocco and Egypt, according to Xavier Reille, director of the CGAP MENA Initiative.
Even so, the industry has seen rapid growth in recent years due to a heightened interest by investors and governments. In Morocco alone, the industry has multiplied its assets by 11 times over the past four years, and currently holds around $750 million of assets in microfinance.
As for the rest of the region, microfinance is still in its infancy despite some 60 million people living on less than $2 a day, according to the International Labor Organization. Nevertheless, promising signs have begun to emerge.
In the past two years, the industry has seen several new players enter the fold and greater interest in microfinance from both the private and public sectors.
A long way to go
While these actions may be encouraging, in order for the industry to truly grow and cover more of the population, it will need to realize that extra $4 billion in potential. Today it seems the reason this has not happened is because most of the microfinance institutions (MFIs) operating in the MENA region are not financial institutions, but non-profit, non-governmental organizations (NGOs). “You cannot ask all the small NGOs to gather 80 percent of the market,” said Reille. “This is not possible, they are not designed to do that.”
The money will have to come from somewhere and since many NGOs working in the industry rely on donor contributions that have been depleted by the effects of the global downturn, the time is nigh for the region’s financial sector to step in.
This has already begun to happen in many countries where banks see the opportunity that the sector offers in terms of investment and corporate social responsibility.
“They hit two birds with one stone,” said Ziad al-Refai, chief executive officer of Tamweelcom, a Jordanian non-profit MFI that currently uses money from banks to fund their operations.
For the most part however, regional banks have been slow to enter the market, despite the fact that it offers a return on investment (ROI) of up to 25 percent with a default rate of around one to two percent. While this may sound like a diamond in the rough at a time when equity markets are still reeling from the downturn, there is a catch.
Reaching much of the unbanked population in the rural and remote areas of the region requires loan officers to physically travel to such places, which in turn substantially increases labor costs.
“The banks failed [to penetrate the market] actually because of the high cost of operations,” said Ahmad Mokhtar, deputy general manager of the Alexandria Business Association, one of the first MFIs in the region which handles a loan portfolio of around $35 million.
There are many like Mokhtar who believe that the sector should maintain its current structure and not be used as a money making machine by banks or financial institutions. “We believe in something else and the word investment is not in our dictionary,” he says.
The global economic downturn’s impact on microfinance, by region
• Lower segment of clients not experiencing drastic slowdown yet, less appetite for
expansion and credit from bigger borrowers.
• Securing food expenditure remains priority but less problematic in the MENA than in other regions, especially compared to rest of the African continent.
Source: CGAP Global Opinion Survey, March 2009 (29 answers from Middle East and North Africa) and World Bank website.
Nonetheless, the sector looks to undergo a paradigm shift away from the non-profit model and towards a more commercialized structure. The more developed markets of Egypt and Morocco already have commercialized organizations, as do countries such as Jordan and Lebanon.
“We see signs of things getting more commercial and commercial banks investing in microfinance,” said CGAP’s Reille.
With both the non-profit NGOs and commercial banks looking to get in on the microfinance game, the sector looks set to begin a segmentation between the lower and higher ends of the market. Even with an ROI of 25 percent, the fact that lower end microcredit loans can be lower than $200 means that the eventual return is negligible. So when the banks come into the market in full force, this segment will ostensibly be left to the non-profit organizations.
“The banks will come but they will take the low hanging fruit first and they will focus on the high-end of the market, which is the most profitable,” said Reille.
MENA microfinance highlights
• Low exposure to currency volatility: 16% of development financial institution loans to MFIs denominated in hard currency.
• Strong balance sheets: MENA MFIs have the highest equity-to-asset ratios of all regions.
• Repayment down for 41% of MFIs surveyed.
• Morocco and Egypt among top 20 fastest growing microfinance markets worldwide.
Source: CGAP Global Opinion Survey, March 2009 (29 answers from Middle East and North Africa) and World Bank website.
Microfinance in the financial crisis
Like all financial sectors, microfinance has been adversely affected by the global economic downturn. That said, in comparison to other markets the MENA region seems to have weathered the crisis well.
“We don’t feel this fake financial crisis in Egypt,” claimed Mokhtar. “On the contrary, now we are spending more.”
That’s not to say that there have been no recent incidents, as Morocco’s market has indeed been suffering. However, it seems that the reasons behind it were not directly related to the crisis, but to a lack of government oversight. Youssef Fawaz, executive director of SANABEL, a regional network of MFIs, explained that Morocco’s MFIs were unknowingly lending to the same clients because a functioning credit bureau did not exist. As such, when the crisis washed ashore in the Maghreb the bottom then fell out of the market, resulting in a great deal of over-indebtedness.
The primary reason the industry has faired well is because the financial segment of the market was, and still is, largely underdeveloped. As a result, the market did not have as much exposure to the credit crunch as Latin America and Asia.
“The MENA was less affected because of NGOs, and the position of the poor was less affected by the crisis. GDP continues to grow in the MENA region,” said Reille. Despite the optimism, the International Monetary Fund’s figures show total sector growth is expected to decline from 6 percent in 2008 to 2.5 percent in 2009. The irony is that because the financial crisis has affected the attractiveness of both public and private equity markets, microfinance has to some extent stood out as a solid and reliable investment in a sea of financial insecurity.
“At the beginning of the financial crisis we thought the banks would stop giving us loans,” said Tamweelcom’s Refai. “What is happening now is most of the banks and investors are looking to invest in microfinance.”
While the supply side may be willing to invest in the asset class, this now seems to have been offset by the demand side of the market. Since overall growth in the region’s economies has decreased, the activity of micro-entrepreneurs’ businesses has also been affected. As such, requests for loans are not being made in order to leverage businesses but just to keep afloat.
“This is not going to bring them out of poverty, it’s just going to keep them where they are,” said Refai. “We are back to square one.”
“The banks will come but they will take the low hanging fruit first and they will focus on the high-end of the market”
Regulating microcredit
Ultimately, the private sector can only do so much to facilitate microfinance growth. What is also needed is for governments to engage the industry. Today most countries in the region do not have laws covering microfinance and governments have been slow to encourage its growth.
This is beginning to change, however, as governments realize microfinance’s importance in fighting poverty. Yemen, Morocco, Sudan and Syria have all passed laws to regulate the industry. Egypt currently has a draft law which not only covers microfinance but covers and consolidates the entire financial sector under one umbrella.
Some laws even allow for financial intermediation and the mobilization of savings for MFIs to function as banks, allowing them to be more flexible with their capital and reach more of the poor.
At present, there are more than 100 MFIs operating in the MENA region, covering a client base of some 3.5 million people. With one fifth of the region’s 350 million people living below the poverty line, much will have to be done to leverage the use and application of microfinance in the region. And since all the elements seem to be in place for an industry boom, what remains to be seen is how long it takes the region’s private and public sectors to get hungry for the market.
