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Making the best of a bottom dollar

Socially conscious services from local microlenders

by Philip Issa

Want to take out a loan to open a small workshop in your village? Without owning a piece of land that could be used as collateral, banks would pass on that; they’d also decline the $200 loan request for a woman who wanted to invest in a sewing machine as the starting point for a small business and economic self-sufficiency.

Despite Lebanon’s high bank saturation, the poor here have long lacked access to financial services. Only six years ago, the International Finance Corporation found that  Lebanon’s microfinance sector comprised just 11 providers, with a total outstanding loan portfolio of      $33 million. 

Related article: Every little helps

Photogallery: The people benefitting from microloans

Microfinance is considered an entry point for those in the lowest income brackets to penetrate the formal economy. Al Majmoua, the largest Lebanese microfinance institution (MFI) according to publicly available data, offers group loans — making up 26 percent of their clientele — to women in which the borrowers mutually guarantee each other. 

The practice serves as a screening mechanism, as borrowers will naturally exclude non-trustworthy partners. Importantly, it eliminates the need for collateral.

Vitas, the second-largest Lebanese MFI, told Executive that a third of its portfolio was lent to micro-entrepreneurs in the retail sector, followed by 24 percent in the services sector. Less than 9 percent of its loans were for personal use.

The Association for the Development of Rural Capacities (ADR) reported that 79 percent of its outstanding loans were for business, with the remaining 21 percent personal.

Today, the number of providers has passed 20 and the publicly available audited loan portfolios of five of the top MFIs have a combined worth of $62 million. Officials at major MFIs told Executive that they estimate the total cumulative portfolio of all providers at between $120 million and $150 million.

The proliferation of local providers is creating a financial industry that serves people on the margins of the national economy. These clients stand to gain much from the sector’s growth. But a lot will depend on whether MFIs can remain faithful to the social mission of microfinance: to help poor clients smooth their incomes, mitigate financial risk and invest in their futures.

An Opaque Expansion

If industry estimates are correct, then the size of the microfinance sector has quintupled since 2007, as measured by total outstanding loan portfolio. But verifiable data is hard to come by.

Five institutions (see chart) publish audited data on the MIX Market, a non-profit microfinance data site founded and sponsored by a World Bank research center. Three of these institutions — Al Majmoua, Emkan and Vitas — are operationally self-sufficient, meaning they are able to cover all of their expenses from revenues. These three still accept grants and loans from local and international organizations, but they do not depend on them. 

Operational sustainability is complementary to the social mission of microfinance. An MFI that operates below the threshold of sustainability relies on subsidized funding, indicating that it may be making overly risky loans that fail to pay off — casting doubt on the efficiency of such lending.

However, there is no requirement to list on MIX Market and there is no central registry of Lebanese MFIs. Thus, the exact number of microcredit providers is unknown, as is their financial viability. 

Industry executives agree that the largest provider of microloans in Lebanon is one such unlisted institution: Al Qard Al Hassan (AQAH). As a non-profit, it is registered with the Ministry of the Interior, but it does not have to follow the lending regulations incumbent upon financial institutions registered with Banque du Liban (BDL), Lebanon’s central bank. 

According to AQAH’s website, the organization disbursed $208 million in loans in 2012 alone, but the figure does not subtract repayments; the outstanding portfolio is therefore assumed to be smaller. 

That a microlender of such a scale can operate in such opacity highlights the need for data disclosure and sector-wide cooperation. Unusual among MFIs, AQAH will sometimes require physical collateral, such as jewelry, gold or a deed to make a loan. The organization has not submitted to operational audits that would verify that such practices do not overburden financially-illiterate borrowers. 

Lacking financial history, stable income, collateral and access to financial guidance, microborrowers are particularly vulnerable to unscrupulous lending practices. MFIs often guard themselves against such accusations by submitting to social performance audits conducted by internationally-recognized microfinance organizations, such as Planet Rating and Kiva.

These audits not only gauge transparency and client-protection practices; they also recognize social accomplishments, such as lending to women-owned enterprises or non-lending services, and employing women at all management and staff levels. Principally, the audits seek evidence that an MFI’s services measurably improve the welfare of its clients’ families.

Planet Rating and Kiva have evaluated only two MFIs in Lebanon to date: Vitas and Al Majmoua. Planet Rating, in 2010, found that both institutions demonstrated a “clear commitment to social goals”. It added that Al Majmoua was likely to achieve a positive social impact, but Vitas was yet to measure its impact and refine   its practices.

The USAID-funded Lebanon Investment in Microfinance (LIM) program requires social performance data from its partners and conducts field audits of its own. Although the audit results are not public, the program’s director Mohammed el-Zrein told Executive that LIM has not found evidence of questionable practices among its partners (ADR, Al Majmoua, Vitas, Emkan, Cooperative for Lebanese Development, AEP, EDF and Makhzoumi).

Not all Lebanese MFIs have received social performance ratings. Some, such as Ibdaa, which began its operations in July 2012, do not have enough data available for an audit. Others simply may not have a business or regulatory interest in acceding to a public audit. There are no BDL or government requirements to publicly disclose data that can be used to protect micro-borrowers against unsavory lending practices. 


Cross-lending roulette

The proliferation of unregulated microcredit in Lebanon has led to serious concerns about cross-lending, wherein clients borrow from multiple institutions without disclosing their level of indebtedness to each. “This should be a red alert,” said Ali Hejazi, microfinance operations manager    for ADR.

Some information on over-burdened debtors can be obtained from the Central Office of Credit Risk at BDL, but access to this data is reserved to registered financial institutions. Najib Choucair, head of the Banking Department at BDL, told Executive that Parliament will have to amend the Code of Money and Credit by law in order to allow non-profit MFIs access. 

In the meantime, MFIs are doing what they can to reduce default risks in an information-poor environment. Vitas and Al Majmoua told Executive that their loan officers check with officers of other institutions to see whether they share clients, but this practice is informal and undocumented.

Financing microfinance

 “Usually, we [MFIs] are supposed to be dealing in a non-profit manner,” said Hejazi. Indeed, there is a pervading expectation that microcredit providers do not make money off of the backs of the poor — to do otherwise would seem contrary to the social mission. 

But Lebanese MFIs are moving towards registering as for-profit, financial institutions. Partly, this is to access BDL’s Central Office of Credit Risk. There are cost motivations,        as well.

Vitas — formerly Ameen — pioneered the MFI financial institution model in Lebanon. The organization, established in 1999, shed its non-profit status in 2003 and registered as a financial institution in 2007. It is now the second-largest MFI in Lebanon, serving 15,500 borrowers. Emkan, which also began operations as a non-profit, followed suit in 2011. Its lending portfolio is spread across 5,493 clients.

Ibdaa started as a non-bank financial institution registered with BDL. Its managers had decided from the start not to pursue a non-profit status, Chief Executive Bachar Kouwatly told Executive. 

By registering as a financial institution, Ibdaa can demonstrate regulatory compliance and attract otherwise hesitant, profit-minded investors to upscale its operations. 

“Being a financial institution gives you certain credibility with third parties, investors, donors and even clients,” said Dalia Farouki, deputy general manager of Vitas. 

Al Majmoua confirmed to Executive that it, too, is considering registration, but in a deliberative manner. “We are concerned about mission drift,” said Executive Director  Youssef Fawaz. “Our average loan amount is lower than our competitors. We go more down market. [Financial institutions] may focus on a segment that is slightly more profitable.”

Farouki, however, is convinced that Vitas’ status as a financial institution is fully compatible with its commitment to poverty reduction.

“True, we are a financial institution, but we have a social mission as well,” she said. “We’ve never lost sight of our mission.”

Tangled regulations

“We believe there is room for microfinance in the country, and some people can benefit from it,” BDL’s Choucair told Executive. “But it is not a very large sector, and we do not believe there is much money to be made from it,” he said, adding that BDL is not very concerned about the ramifications of a cross-lending bubble among micro-borrowers.

Even so, BDL last year revised its Basic Circular 93 to cheapen the cost of commercial lending to MFIs in the interest of expanding credit access. Under Circular 93, bank loans to MFIs do not need to be offset by a BDL reserve deposit. In fact, the loan can be made directly from the bank’s BDL deposit account, cheapening the cost of the capital and therefore allowing lower interest rates for repayment.

ADR has been able to obtain capital at 4 to 5 percent interest through its partnerships with Bank Audi and BLC Bank, according to ADR President Youssef el-Khalil.

 Khalil, who is also the director of BDL’s Financial Operations Department, credits the regulation for reducing the costs of ADR’s borrowing. He said that his position at BDL had no impact on the regulator’s decision to allow Bank Audi and BLC to lend to ADR from reserves.

But while ADR has been able to obtain low-cost, Lebanese commercial bank investment for its operations, Ibdaa and Al Majmoua complained that they have not.

“There is a reserve exemption, but it is not [specifically] for MSE [micro- and small- enterprise] lending. It is for unserved markets. Banks saw micro as overly risky, and most lending went to housing,” said Ibdaa’s Kouwatly. 

“We went through a road show; we knocked on the doors of many banks,” said Fawaz. “The [commercial banking] sector is simply not interested, in spite of our [portfolio-at-risk] rate.” Those banks that did consider lending to Al Majmoua, according to Fawaz, offered interest rates between 9 and 11 percent, more burdensome than rates the institution can obtain from abroad.

Moreover, BDL regulations effectively prohibit MFIs from accepting deposits, severely constraining the sector’s ability to offer other services. Only banks in Lebanon may accept deposits, not non-profits, nor non-bank financial institutions.

“That’s why we initially wanted to [register as] a bank — we wanted to bring something new to the industry,” Kouwatly said of Ibdaa. He did not comment on why Ibdaa’s application for a banking license fell short, but industry executives agree that the reserve requirements are too onerous for microbanking.

Regulatory and operational restraints and cost barriers on funding should be expected to stay with the microfinance industry for the foreseeable future. 

Nevertheless, facing the pressing financial needs of Lebanon’s poor, Lebanon’s MFIs are showing promising signs of evolution. The USAID-funded LIM program expects to establish the first ever Lebanese microfinance network this year. 

LIM’s Zrein, the program director, said, “The network will provide a unified voice for the sector, lobby for the sector and promote the sector.”

But even more important than speaking with one voice — which will not be an easy task in the mosaic of Lebanese communal identities — is the need for this maturing industry    to innovate. 

To date, the Lebanese microfinance sector offers lending services and business development support, but little else. “What the poor need are a vast array of services, not the least of which are savings, insurance and financial education,” said Al Majmoua’s Fawaz.

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