UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 14 / July 2005

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By Lauren Kesner, School of International and Public Affairs, Columbia University

Beset by a brief civil war and economic instability, Yemen is one of the poorest countries in the Arab world and one of the Least Developed Countries, according to the UN Office of the High Representative. With 42% of the population living below the poverty line,[1] Yemen ranked 149 out of 177 countries in the 2004 UN Human Development Report and has the lowest score in the Arab world for building capacities among women. Discouraging as these figures may seem, the Government and members of civil society have started to address Yemen's development needs and identified microfinance as one of the most effective tools for eradicating poverty.

A History of Microfinance in Yemen

Enter UNCDF. In 1988, the United Nations Capital Development Fund (UNCDF) undertook a microfinance project in cooperation with the Government of Yemen and the Government of the Netherlands, to promote small-scale enterprises. The project was originally intended to serve the Northern part of Yemen, but was extended to the entire country after the 1990 unification. In 2000, the United Nations Development Programme (UNDP) introduced the UNCDF MicroStart programme, managed by the organization's special unit for microfinance, to provide technical assistance and grant funding to four start-up NGOs to start microfinance institutions (MFIs). UNCDF's early microfinance programmes were important first steps toward development in the newly unified Yemen.

At the time of UNCDF's entry into the country, there was no formal microfinance sector to speak of. This may be due, in part, to the fact that moneylenders were forbidden for religious reasons. However, with the efforts of UNCDF and others, microfinance caught on quickly and by 2002, there were 16 microfinance providers in Yemen, serving an estimated 7,000 borrowers.[2] In 2003, UNCDF launched a second phase of the MicroStart programme in collaboration with the Social Fund for Development (SFD), an organization that served as the umbrella to establish MFIs in 2000. MicroStart Phase II has a total project budget of US$1,437,908 with an additional US$1,200,000 of financing from SFD. Currently underway, the programme supports the development of professional, sustainable MFIs capable of providing both savings and credit services to thousands of poor people, especially women.

UNCDF Programmes Target Women

One of the main objectives in the Government of Yemen's 2001 five-year National Programme Framework for Poverty Alleviation is, "to promote the socio-economic integration of the poor, especially rural women, by providing microcredit and creating sustainable livelihood opportunities." UNCDF's programmes are directed at attaining this goal by providing financial services to women. Women-only programmes have been very successful, increasing the number of women borrowers from 35% in the early years of microfinance to 83% by the end of 2003. In 2005, two of the MFIs supported by MicroStart had 100% female clients, the third had 90%.

UNCDF's women-only programmes have witnessed high levels of voluntary saving. In many cases women literally want to hide the money from their husbands to invest in the needs of the children and the family.[3] In response to this demand, SFD implemented two types of savings and credit programmes for women. One was created in the wake of a savings and credit pilot programme, whereby the women participants formed their own NGO to continue savings and loan groups independently from SFD after the pilot programme ended. After the first year, SFD started supporting these new NGOs. The second savings and loan programme uses the methodology of ASA, a well-known microfinance intermediary in Bangladesh, which promotes microfinance through a highly decentralized management structure. By the end of 2003, the National Microfinance Foundation, the umbrella organization established to consolidate the different activities of the branches in Yemen, had almost 5,000 savers, 5 branches and over 1,500 borrowers, all women.

Challenges for the Future

UNCDF was integral in laying the foundation for microfinance institutions in Yemen, however, an inclusive financial sector is still a long way off. According to figures from the Statistical Yearbook in 2002, there is one bank branch for every 113,000 people in Yemen, on average.[4] Those with access to financial services come from a limited population of wealthy, urban, businessmen and small and medium enterprises (SMEs) lack financial services.

In 2002, a SME Baseline Survey estimated that 310,000 SMEs in Yemen employ more than 485,000 people (about 12% of the population). 72% of all SMEs are self-employed enterprises (one-worker) most of which are subsistence enterprises, owned by low income or poor people. For these SMEs, cash is the main tool used in daily transactions because financial services are not available. Thus, their enterprises experience limited growth, investment and opportunity for innovation.

Experts in the region argue that banks are mostly interested in import trade finance and are hesitant to give loans, especially small ones. In Tadamon Islamic Bank, a private bank in Yemen, for example, the minimum loan is YR 200,000, equal to US$1,110.[5] However, according to the World Bank, the per capita GDP is just US$460.[6] In the absence of access to formal financial services, people often resort to friends and family for credit. Many people keep their cash "under a pillow" or use their crops and livestock as savings, preventing return on investment and often leading to lost capital due to lack of proper storage. The lack of financial services for poor people in Yemen means that demand for microfinance services far outweighs the supply.

With a burgeoning microfinance market, Yemen's young MFIs have experienced steep learning curves and still face many challenges including lack of experience, weak infrastructure and inadequate governance. Most of the MFIs in Yemen are small, consisting of one manager, a few loan officers, and an accountant.[7] Institution building, professional management and, in many cases, mergers will be necessary for Yemeni MFIs to reach large-scale capacity and sustainability. Further, legal transformation will be an integral step in the maturation of the industry. Peter Kooi, Director of UNCDF Microfinance, remarked, "Yemen is at the very early stages of economic development. Thus the economic, social and political environment present particular challenges in building inclusive financial sectors - the type of challenges UNCDF is focused on meeting as a United Nations fund focused on Least Developed Countries."

Yemen's First Privately Owned MFI

UNCDF supported a series of activities that led to the creation of Awa'el, the first privately owned MFI in Yemen. Awa'el was formed and registered as a Joint Stock Company in 2003 in Ta'iz, after extensive discussions were held with individuals from the Ta'iz community explaining microfinance, the rationale for creating a new company and the governance and management structure the company would have. After many community meetings, a group of founding members was identified, a board was established and a local lawyer drew up a Memorandum of Understanding and Articles of Association, following the requirements of company law. UNCDF hopes that Awa'el's initiative will be a model for communities across Syria.

Awa'el is one of three MFIs that MicroStart II is providing technical assistance to. The other two, located in Al Hodeidah and Sana'a, have overcome severe obstacles, including fraud and internal system reform, but are now catching up to Awa'el in terms of growth and outreach. Awa'el's experience shows that the transformation of MFIs in Yemen is possible with adequate support, cooperation and commitment. Reflecting on the process, UNCDF believes that the transition from service delivery models to a private sector approach with transparent governance and oversight will require patience, sensitivity and hard work. Collaboration between the Government of Yemen, UNCDF and microfinance clients has laid the foundation for building an inclusive financial sector in Yemen, but there is still much work to be done. In a country grappling with the aftermath of civil war, macroeconomic instability and extreme poverty, Yemen is eager to begin a new chapter in which poor people have opportunities to invest in their families, businesses, education, and ultimately, their future.