Microfinance in the Arab States

Building Inclusive Financial Sectors

Since 1999 when the first survey was undertaken in the region, microfinance in the Arab States has evolved from a nascent sector to a fledgling industry. Over the past four years there have been some significant changes as well as areas in need of further development. Outreach of the microfinance industry in the Arab world has almost quintupled in size since 1999, going from over 129,000 active borrowers at year-end 1999 to over 710,000 at year-end 2003.

Published September 2004

Introduction

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Introduction

This survey is the third in a series of publications documenting the state of microfinance in the Arab States Region and tracking the development of this young industry over time. It attempts to map out the major suppliers of microfinance in the region and highlight the challenges and opportunities present for developing a mature industry. The first two surveys were undertaken by the Private Sector Development Group of the Middle East and North Africa Region of the World Bank. The Sanabel Microfinance Network was the key force behind the third survey, having decided to institutionalize the regular update of MFI data as part of its core regional initiatives.

1.1 Sanabel: the Microfinance Network of the Arab Countries

Sanabel is a membership-driven regional network for microfinance institutions in the Arab world. Today the network has 27 institutional members distributed as follows:

These 27 MFIs together are estimated to serve 70% of the number of active borrowers in the region.

Sanabel was founded in September 2002 by 17 representatives from seven countries (Egypt, Jordan, Lebanon, Morocco, Occupied Palestinian Territories, Tunisia, and Yemen). The founding members-14 institutions and three individuals-formulated the by-laws and membership criteria, vision, and mission and objectives of the organization, and elected an Executive Committee for the network. The start-up of Sanabel and the first few years of its operations have been supported by the Rockdale Foundation.[1]

Criteria for membership in Sanabel include (a) a focus on lending to microentrepreneurs; (b) an operational presence in one or more Arab countries; (c) a minimum of three years of operations; (d) a minimum of 5,000 active clients, with special consideration for some countries; (e) the goal of achieving full operational and financial sustainability; and (f) a commitment to transparency, evidenced by the annual submission of financial information to external auditors, the Micro Banking Bulletin (MBB), and the Microfinance Information eXchange (MIX). Affiliate members that may not yet meet the above requirements but are expected to do so over time are also allowed. Affiliate members cannot vote in general assembly meetings of the network.

1.2 Data Collection

In the spring of 2003, Sanabel sent out a comprehensive 19-page questionnaire through its local country representatives to all the known MFIs in the Arab States asking year-end 2002 data on loan portfolios and key performance indicators. The questionnaire also asked for information on governance, legal issues, management issues, and products and services.

The initial feedback was disappointing, with a small minority of institutions responding. This poor response was most likely caused by the fact that the questionnaire was too long and very technical in nature.[2] Furthermore, Sanabel was still quite young and as such not fully established as a representative network in the region. At the same time, the use of local MFI focal points operating in the same sector may have made MFIs reluctant to reply because of competition issues. Finally, the fact that in some countries, such as Lebanon, many MFIs did not meet the Sanabel eligibility criteria for becoming a member further reduced MFI receptivity to the initiative.

However, after substantial time and effort was dedicated to follow-up with respondents, a relatively complete and reliable 2002 year-end dataset was established for 51 MFIs. A mini-questionnaire covering year-end 2003 data (where available) was collected during the Conference on Microfinance in the Arab World in December 2003, closing many of the gaps and providing further basis for analysis.

Annex 1 provides a list of the programmes that participated in the 2002 survey and that provided year-end 2003 data. It also indicates those MFIs that did not fill in the questionnaire but were considered important for the total picture in a country, and for which secondary data were used where available. When key players did not respond to either survey the authors relied on secondary sources.

The report uses year-end 2003 data for the most important indicators such as active clients, loan portfolio outstanding, and gender outreach. For more detailed analysis on issues such as governance, client characteristics, and business activity, the 2002 dataset is used.

Whenever historical data are used, the data provided by the MFIs in the 2002 survey are updated with the 2003 mini-questionnaire. Thus the 2002 dataset is more complete than the datasets used in the 1997 and 1999 surveys. A comparison with these two surveys was therefore not done or recommended.

The sources for the tables and figures in the report are the Sanabel surveys unless otherwise noted.

1.3 Scope of Survey: Countries and Content

The Arab world is made up of more countries than those included in this survey. Countries such as Sudan, Somalia, and Djibouti are not covered because they either have no microfinance industry or only a few very small programmes on the ground. Other countries, such as Bahrain, while possessing small-scale experiments on the ground, have a very different set of experiences owing to the higher per capita income levels of the Gulf States, which make it difficult to compare them with other lower- and even middle-income countries in the region.

Although some initial data from Iraq are becoming available, the quality is highly questionable. Once security is fully restored and basic infrastructure fully rehabilitated, microfinance could be an important development tool in this country of more than 24 million inhabitants. It is hoped that the vast sums of money being invested for microfinance in Iraq will lead to positive developments that can be included in the next survey.

The authors are pleased that Syria is included for the first time. Only year-end 2003 data were available but no historical data. Syria's microfinance industry is the youngest in the region and, as a result, the lack of historical data does not much affect the historical regional picture.

The initial intent for the survey was to include a complete treatment on the legal and regulatory environments in these countries and its impact on the growth of the microfinance sector, including issues related to interest rate policies, legislative requirements, access to and regulations governing commercial funding, and access to capital markets. However, because of unanticipated funding constraints, the separate enabling environment review was not undertaken, forcing the authors to rely on the institutionally focused survey data. Wherever possible the authors have drawn from their first-hand knowledge of the countries to comment on known bottlenecks to a financial systems approach to development; however, a more comprehensive cross-regional analysis of these issues was not possible.

Finally, it should be noted that the survey covers all programmes that provided data, and not simply those adhering to good practices. Because an important characteristic of the region is the presence of several very large government-sponsored programmes that do not follow good practices and that distort the market, the inclusion of their data was essential.[3] Such programmes are present in Tunisia, Jordan, Egypt, and Syria, where the following programmes were included: Development Employment Fund in Jordan, Agency for Combating Unemployment in Syria, and the Banque Tunisienne de la Solidarit� (BTS) in Tunisia. The Social Fund for Development in Egypt was excluded because no reliable data were available.

Footnotes

1 The Rockdale Foundation, based in Atlanta, Georgia (USA), is a private family foundation funded primarily by private resources and profits from the family's private business. The Foundation has two primary focus areas in which it invests its time and resources: Microfinance in the Arab World and education reform in Atlanta public schools.

2 Sanabel had developed the questionnaire with the hope of improving the quality of data from the region for the MicroBanking Bulletin.

3 In the remainder of this report, these programmes are labelled government-sponsored programmes.