The Arab Spring and Microfinance in Syria

The winds of the Arab Spring gusted late into Syria, arriving within a climate quite distinct from the political storm that swept through Egypt and Tunisia. Violent clashes between protestors and government forces in Syria are ongoing without any sign of slackening, dispute resolution, or concord bringing a timely settlement. At this point, the balance of political forces suggests that there will be a protracted civil conflict in which neither side is able to overcome the other. While political protests are widespread—being especially fierce in Daraa, Homs, Hama, Idlib, and Deir ez-Zour—they have not affected all parts of the country. The two major population centers of Damascus and Aleppo, with the exception of the Douma neighborhood in Damascus, have been surprisingly quiet with little sign of sustained public opposition to the government, whether from support or fear.

But with the intensification of western governments’ strategic boycott of Syria, the economic prospects are set to deteriorate. Despite GDP growth of 4% in 2009 and 5% in 2010—largely driven by the finance, services, and tourism sectors, reflecting the gains of economic liberalization in the state-dominated economy— ordinary householders felt little respite during this period with inflation marking 5% and prices rising by 22% over two years. Moreover, outside Egypt, Syria has one of the largest rural populations in the region that historically generates up to a quarter of GDP, but this population has been grievously affected by a four year long drought that has forced hundreds of thousands of farming families to relocate to urban centers in search of employment. Taken together with significantly high rates of poverty, and youth unemployment estimated at 50-60%, the basic economic fundamentals in the country provide scant comfort to those who believe that the government will soon be able to ride out this crisis through robust policing of protests, since it is these same fundamentals that helped spark the uprising.

Unsurprisingly, political unrest has created economic hazard and new financial risk, resulting in the first ever crisis within the nascent microfinance industry in Syria. And the longer this continues, the deeper the crisis will gnaw at the performance and viability of the industry. UNRWA microfinance, which is now has the second largest microfinance operations in the country with five branch offices, has not been immune from its affects, although its operations in Damascus and Aleppo are not in the eye of the storm. The behavior and mood of clients at the onset of the unrest in late January 2011 remained positive, with the first quarter figures showing outreach continuing to grow from month to month, with the financing of 1,950 loans worth SYP 69.79 million on average each month. Moreover, the outstanding balance during this period grew form SYP 236 million to SYP 280 million, while PAR remained below 3% (2.28-2.58%). At this point, monthly interest income flows remained buoyant at between SYP 8.03-8.43 million each month, while additions for loan loss provisioning remained quite flat, with an increase in provisioning of 7% on a portfolio that had grown by 19% over three months.

However, by March, the temper and conduct of clients and staff became more risk focused as protests became more widespread and concurrent, spreading from the south to the north and to the center of the country, even affecting the Douma and Hajar al-Aswad areas of Damascus. Having already managed a series of crises through two civil uprisings, military conflict, war, and boycott in the West Bank and Gaza over the past 20 years, UNRWA has varied and rich experience in the crisis management of microfinance in conflict situations. We immediately began taking measures to mitigate risk by rationalizing and curbing procurement, reducing the average loan size, tightening credit and guarantee conditions, spotlighting and acting on delinquency, focusing on changing market conditions to identify sectors remaining stable and those retrenching, and redeploying staff within crisis struck branches.

These interventions squeezed the portfolio, which also retrenched as demand slowed. Thus, the monthly outreach declined from 2,050 loans valued at SYP 70.19 million in March to 1,217 loans worth SYP 37.75 million in July, which was followed by a shallow turn around in August when it financed 1,573 loans worth SYP 47.67 million. The most significant financial concern was the combination falling portfolio and rising PAR that reduced income streams and required larger provisioning, which is cutting into profitability. Thus, OSS fell from 117% at the end 2010 to 105% by the second quarter of 2011, while the gross loan portfolio fell from SYP 292.74 million in March to SYP 249.41 million in August, with PAR reaching 10.53% and the loan loss provision increasing by SYP 9.22 million over the period, an almost three-fold increase. However, despite this, our microfinance operations were still operating in the black, but with margins being squeezed tighter. As a result, we may need to require some de-capitalization and drawdown on returns from our profitable operations in Jordan and West Bank to cover costs through the end of the year.

Even though our microfinance operations are concentrated in Damascus, where four of our five branch offices are located, the impact of the crisis has varied across each branch offices. The Bustan al-Basha branch in Aleppo and the Saida Zeynep branch in Damascus have been least affected by the crisis, with risk in each rising from 0 to 4.64% and from 1.30% to 5.64%, respectively, but with outreach remaining strong.

Unsurprisingly, in Douma, which has been a key flashpoint for protests in Damascus, PAR has risen most dramatically from 0 to 18.84%, as a result of extended security closures preventing staff and clients from gaining access to the branch office and restricting staffs’ ability to visit their clients. Moreover, the unrest has led a number of clients to temporarily close their businesses and return to their ancestral villages. While risk has increased significantly in the Yarmouk and al-Amin branches, staff and managers believe this can be contained as they cleanse the portfolio of bad debt.

Moreover, the level of risk varies by loan product, with the specialized women’s household enterprise product, which accounts for 44% of the portfolio, having the least risk at 5.87%, followed by consumer lending at 10.40% and microenterprise credit with the greatest risk at 12.50%. While drawing up emergency plans that could result in the temporary closure of branch offices and shedding of staff, our experience in the West Bank and Gaza shows that it take 12-18 months to cleanse and renew loan portfolios in conflict situations, since even in extreme crisis situations business people and microentrepreneurs have no option but to find ways of making a living. As we have done in both these regions, we will follow market developments within the conflict zones to ensure that we can continue to serve our clientele, even if this means doing so on a reduced portfolio and slimmer operations. Only by doing so can we be ready to serve the huge potential of the Syrian microfinance market at the end of the current crisis. But even in the midst of this crisis, we still plan to open two new branch offices this year and introduce a new youth enterprise product. As a social enterprise, it is incumbent on us to maintain or services and sustain the hopes of our clients in these adverse circumstances. Moreover, we must be willing to rationalize and sustain short-term losses in order to rebound robustly in the future.