Microfinance: The 21st century solution

The bank had also helped to bring more women into business, create thousands of new enterprises and introduce the financially illiterate to the banking system. While microfinance has long been used as a tool against poverty in areas like India and Bangladesh however, it remains a largely untapped sector in the Middle East. Until now that is. Faced with a huge impending jobs shortfall and suffering an inherent lack of entrepreneurial spirit, the region is finally turning its attention towards microfinance.

But in an area witnessing some of the fastest economic development on the planet, is there really a need for the emerging sector? According to Delphine Bazalgette, project manager for the Middle East at Planet

Finance – an international NGO charged with raising awareness of microfinance – the answer is invariably ‘yes’.

“The overall economic prosperity of GCC countries hides some contrasted situations,” she says. “The most vulnerable population groups, facing situations of poverty or quasi poverty, could use microfinance to develop income-generating activities,” she adds. And with a fifth of people in the Arab world living on less than US$2 a day there is certainly a significant level of poverty to warrant the emergence of microfinance institutions.

But, as Bazalgette explains, the benefits of the phenomenon run far deeper than merely tackling poverty.

“Besides poverty reduction, microfinance could also allow GCC countries to reduce welfare assistance and promote economic entrepreneurship especially among young people,” she says.

Cashing in

At the moment, the Middle East makes up only a small proportion of the global microfinance sector. While there are 140 million microfinance beneficiaries worldwide, there are only 1.5 million in this region. With more and more local businesses starting to get involved in microfinance however, this figure looks set to increase in the next few years.

After having a presence in the UAE for four years, Planet Finance has managed to secure the backing of drinks manufacturer Pepsico, jewelry retailer Damas and investment giant Gulf Holdings. For executives looking to get involved in the business of giving small loans to micro-entrepreneurs there are several options available. “Companies can help by developing microfinance as their CSR strategy, choosing to fund small projects in places like Palestine, Lebanon or Jordan,” says Claire Cabanel Rey, UAE director at Planet Finance. But there are also numerous opportunities for executives to make money by joining the micro-revolution. “Microfinance is not charity, it is helping people to enter the financial system,” explains Cabanel Rey. “There are a number of ethical funds that you can invest in, you can go and meet the microfinance institution (MFI) to see where your money is going and you can definitely get a return on your investment.” Debbie Arnold, managing director for emerging markets at Visa, agrees that there is money to be made by becoming a financier for MFIs. “This isn’t just a nice little CSR project, it’s a commercially viable business opportunity,” she says. “It’s early days but we have already seen some of the multinational banks looking to get involved in this region,” she adds.

Bodo Liberam, operations manager at Microcred, an international investor in microfinance services, believes that private sector companies and banks have a lot to gain from getting involved in the microfinance sector. He cites “access to new markets, attractive returns on investment, additional revenues from services and the positive image effect,” as the key factors in enticing financial institutions to join the growing microfinance movement.

On the other side of the coin, budding Middle Eastern CEOs looking to get their business idea off the ground could benefit greatly from the birth of MFIs in the GCC alongside the less affluent areas of the Arab world. “Microfinance can create the CEOs of tomorrow,” says Cabanel Rey. “Actually we have some very successful stories among the microentrepreneurs that started with a very small loan to develop very small activities and developed their activities by accessing the commercial banks and then became fully-fledged CEOs.”

The female factor

And, while these rags-to-riches CEOs are helping address the region’s future shortage of jobs, the fact that a significant number of them are women could also play a vital role in MENA’s ongoing development.

At last year’s World Economic Forum, delegates discussed the fact that MENA countries would never escape the trap of poverty and technological backwardness if women continued to be excluded from economic activity. With women representing 61% of the Middle East’s microfinance clients, the emergence of MFIs looks likely to redress the balance of women in business in the Arab world over the coming years.

Cabanel Rey recalls the case of a Bahraini woman who started out as perfume street seller, got a loan from a local microfinance institution four years ago and now owns a number of shops across the country.

There is also the case of a group of women in Fujairah (UAE) that, after struggling to find a way to take their children to school, used a micro-loan to launch a taxi business.

KSA study

In all, the number of active micro-clients in the MENA has increased ten fold since 1999, from 129,000 to 1.5 million today, with those living in rural representing 22% of the region’s microentrepreneurs. At the moment microfinance is not evenly spread across the region with 77% of all active loans being concentrated in Egypt, Morocco and Palestine, with only 10,000 clients in the GCC. Despite having higher revenues and GDP per capita than it’s surrounding neighbours however, the GCC houses a significant segment of people – widowed or divorced women, unemployed youth and rural dwellers – that could benefit greatly from the development of MFIs. Saudi Arabia (KSA), a country with GDP per capita of around US $13,100, hardly seems like a place where MFI’s can thrive.

As Jamil Al Wahidi, microfinance advisor at the Abdul Latif Jameel Company (ALJC) testifies however, KSA is a market with huge potential in the microfinance sector. “When I decided to go into Saudi, people said I was crazy setting up a microfinance program there. It was a rich country with oil, so who was going to loan 70 or 100 dollars,” he recalls. ALJC – an international diversified investment group – set up its Program for Productive Families in 2004.

By the end of its first year it had empowered 545 poor Saudi women through the use of tiny loans to help them start small businesses. By the end of its second year, the program had reached over 2000 female micro-entrepreneurs in KSA. “When I started the program, I saw a study that said there were 431,000 Saudi households living under the poverty level – these were the poorest of the poor, people with no access to commercial banking and no collateral,” says Al Wahidi. “It wasn’t just a lending program, it was about women empowerment and building a workforce that believed in the fundamentals of microfinance. I remember asking the brother of one of our clients why he wanted his sister to work, and he told me it was so that she could be a productive member of this program and this society,” he adds.

If microfinance is to become as big a phenomenon here as it is in parts of Asia, there are a number of challenges to be overcome. Al Wahidi believes that, in the GCC in particular, raising awareness with governments and commercial banks is the key to microfinance’s ongoing development.

“Without taking the leaders of these institutions to the field to show them the experiences, the success stories, the balance sheets and the papers, we will never be able to convince them to come to the microfinance table,” he says. Al Wahidi urges the region’s chambers of commerce and commercial banks to work together in the establishment of microfinance institutions and business development centres to support micro-companies.

With five million potential microentrepreneurs that don’t have access to financial services in the Arab world, there is clearly room for growth of microfinance in the region. And, while it is still in its infancy, it is slowly but surely establishing itself on the agendas of commercial banks and the region’s government institutions.

With the ability to fight poverty, tackle the job shortfall, fill the entrepreneurial void, bring women into business and educate the financially illiterate, perhaps microfinance really could be the Arab world’s 21st Century solution.