20 Years of Financial Inclusion in the Arab World

It is a common perception that the Arab world lags behind when it comes to financial inclusion. According to the 2014 Findex figures and excluding Gulf countries, the region indeed reports the highest percentage of financially excluded adults, with 80% of the population or about 200 million not having access to an account, and 95% not having access to credit. Yet, this has not always been the case.

Microcredit starts early, but commercialization never happens

When CGAP started back in 1995, the Alexandria Businessmen’s Association (ABA) already had five years of experience disbursing small individual loans. By the early 2000s, over 40 microfinance institutions (MFIs) had started their lending activities across the region, many of them with the support of US organizations, be it USAID itself or international NGOs such as Save the Children or Global Communities. Several of those MFIs ranked in the once famous Mix Market’s Global 100 Composite Ranking and Forbes’ Top 50 MFIs. By 2010, as per the figures reported to the Mix Market, the decade’s compounded annual growth rate (CAGR) stood at 43% for the number of borrowers, surpassing Latin America & the Caribbean’s CAGR of 34%.

Surprisingly, despite such impressive growth and as opposed to other parts of the world, commercialization never happened. Today, the region counts less than five transformations, or more accurately the transfer of assets from a non-governmental organization to a company, and boasts some of the largest NGO MFIs in the world, with assets worth up to $300 million. This absence of clear ownership might have weighed on further expansion and product diversification, as growth has generally stagnated over the past few years. While it is easy to attribute this to the Arab Spring, the fact is that growth stalled even earlier. MFIs in the region are now estimated to reach out to approximately 3 million borrowers with an outstanding portfolio over $2 billion – far below their once declared objective of 10 million clients by 2010.

Micro-savings constrained by regulatory hurdles, and heralded by postal networks

The biggest difference between Arab MFIs and their global peers probably lies in the historical absence of enabling regulations. Limited advocacy efforts concerted from within the industry as well as a lack of champions within public authorities both played a contributing factor here.

Another element that stands out in the region is the role of postal networks, which are the largest providers of savings products for low-income people in many of the region’s countries. In Morocco, Tunisia, and Egypt, the postal network serves between a fifth and a third of the total population – six- to twenty-fold the number of microfinance clients. Under the impulse of the Universal Postal Union, and building on the successful example of Al Barid Bank that has been opening half a million account a year, they are increasingly looking at ways to expand their financial services offering, sometimes in partnership with MFIs.

Early microfinance projects that promoted income-generating activities for low-income people came with savings components. But such efforts were discontinued as MFIs were established, most often as NGOs since the non-bank financial institution legal status did not exist, except in Lebanon. Where would the region stand today if, as some ventured elsewhere, MFIs had required cash collateral as a condition for their loans, and had progressively grown a significant balance of deposits? Had this happened, MFIs might have addressed the most important need of their clients, offering an alternative to postal accounts, significant share of which is dormant – quite at the opposite of low-income people’s financial lives.

High-level interest and evolving regulation paving the way for a more inclusive future…

But microfinance professionals can attest that 2010 marked the beginning of a new era, with positive signs of long-lasting, albeit arduous, change.

• New regulations are in place. Throughout the region, sound financial consumer protection measures are now in effect. MFIs are being brought under the umbrella of a financial regulator (Central Bank in Jordan, Palestine, and Morocco, EFSA in Egypt, Microfinance Control Authority in Tunisia). Only Syria and Yemen authorize microfinance banks per se but, at the 2015 Union of Arab Bank’s annual meeting titled “Global Financial Access”, Governor Fariz paved way for a different future by stating the Central Bank of Jordan is seriously considering allowing MFIs to collect deposits.
• National financial inclusion strategies processes have started. In 2012, the Council of Central Bank Governors has mandated the Arab Monetary Fund to support regional financial inclusion efforts through a dedicated task force. Since then, several countries have either launched or committed to undertake a national financial inclusion strategy (e.g. Palestine, Jordan, Morocco, but also Qatar).
• Digital financial services are poised to take off. Payment service companies have been allowed (e.g. Jordan, Morocco), world-class fully interoperable digital switches are in place (e.g. JoMoPay in Jordan), and mobile network operators (MNOs) are increasingly interested in the digital financial services space. Fawry processes over 1.2 million transactions daily in Egypt, and the GSMA has recently outlined the opportunities and challenges for mobile money in the region.
• Innovative micro-insurance products are being scaled. Among the numerous examples, Al Amana’s medical assistance product is worth mentioning, as it covers a record of approximately 350,000 beneficiaries, with pay-outs equivalent to over 70% of the average social security’s pay-out.

… including for refugees?

It is of course difficult to write about the Arab world and not mention the massive human and development challenge posed by over sixteen million refugees and internally displaced people. As financial inclusion specialists operating in the region, we often wonder what is the role of financial services in such contexts, and how can such services be offered across borders with all due care for AML/CFT rules. Why would it not be possible for banks and financial institutions from the region to consider serving refugees, as German banks are now required to? Could digital payments facilitate fund transfers and remittances, a major contributor to GDPs across the region, and perhaps contribute to economic resilience of both refugees and their hosts? CGAP and its regional partners sure hope to move beyond questions and shed a new light on this topic in the years to come!

Editor's note: Read this post in Arabic on the FinDev Gateway