Developments in the Arab World
Although it could be too early to analyze the impact of recent events in the Arab world on microfinance, one can conclude some general and common lessons despite differences among countries:
The importance of emergency plans: MFIs that had such plans in place were better prepared to deal with the new situations and were not taken by surprise.
Political affiliation: The recent events showed how risky it is to be affiliated politically with the government/president etc. or even with the opposition and that the only affiliation an MFI should have is with the poor people it was founded to serve.
Strategic partnerships with clients: MFIs that have worked to build strategic relationships and managed to demonstrate to their clients that they are there to serve them and improve their lives, and not only to give them a loan and make some revenue, continued to have “business as usual,” according to the director of one of the major Egyptian MFIs. Their clients continued to pay on time and the impact of the situation on their operations was very minimal. Reemphasizing the social part of the MFI mission in the good days can really protect the MFIs in such crisis. In Tunisia, clients themselves went to protect their MFI branches.
Strong MFIs with good internal control systems: The coming days will reveal which MFIs were severely affected. It is important to keep in mind that not all of it was because of the situation and a good part of it was a result of already existing weaknesses, lack of internal controls, and uncontrolled growth etc., and the recent events just accelerated that process of cracking.
Job creation: One of major reasons of unrest in the region, besides the absence of democracy, is the prevalence of unemployment and lack of opportunities for youth. The number of youth will continue to increase over the coming decade. So far, there is a sort of a consensus belief that conventional microfinance is not a solution for job creation, nor a support to start enterprises.
- Would this be different if an Islamic microfinance business model, which uses the profit/loss sharing financing instruments, was developed?
- Should sustainable and well established MFIs begin working on loan products for start- up businesses and for small enterprises?
- Are we going to witness more projects based on the Graduation model that is being piloted in Yemen?
We are interested to hear your views on how microfinance in the region can be taken forward to support job creation.
Comments
Dear Mr. Khaled,
Dear Mr. Khaled,
It is like continents away we had the same idea of trying to start a debate on the link between the Yasmine Revolt in Arabic countries and Microfinance. If you have time and interest you might want to read my article on the microfinancefocus website “The Arab Revolt and Microfinance”.
A few points that I would like to make:-
1. The creation and sustained development of enterprises in the informal sector of Arabic countries faces many more and more important problems than that any kind of credit can solve. Logically that a Presidential Microcredit Fund (Tunisia and copiers) or a United Nations MC Fund (Egypt and copiers) can never really work as a tool to create businesses and jobs on a sustained and considerable scale.
2. Tunisia’s Ibn Khaldoun, probably the world’s first Economist, already explained that money and finance (services to enable goods and services) constitute a JOB, work that adds value so should be remunerated. Islamic thinkers have taken the “RIBA prohibition” very narrowly to mean all interest rates and omit to add that the prophet (several nice stories in the Hadiths) considered lending only as a time waiting, which modern finance and economy does not justify. If this definition of Riba will take over as well as religious thoughts on all economic and political activities then there is not much hope of building an inclusive society and economy, as world history clearly and without exception shows.
3. Finally, if “graduation” means undertaking MF as a financial intermediation business than it requires a regulatory framework and supervisory systems that are built on a coherent national strategy and policy. I wonder whether these factors are reunited at the moment in Yemen or many other Arabic countries. Microfinance as part of the evolution of a society and economy follows a process in which all citizens need to be involved.
The recent developments in the Arab world can be used for great debates but so far I can only conclude that socio-political micro-credit champions rule in MF and don’t want that debate.
Thank you for your article and kind regards, Peter
Peter van Dijk
BSD City, Indonesia
Dear Mohammed
Dear Mohammed
As desired I like to share my views on the moot points raised
1.Profit /loss sharing financial instrument, based on religious and ethical codes, is useful for financial management and accounting at institutional level from supply side.. Looking from the demand side perspectives, the ultimate goal of Microfinance is to raise the poor target groups above the poverty level. . Here I consider that irrespective of financial management practices, the productivity of Micro credit, supported with other needed pro poor services, once delivered from the institution (MFI), assumes importance in terms of its effectiveness in addressing the achievement of. the said goal . I therefore assert that there is no difference
2.Sutainable and well established MFI need to focus more on integrated MF services including other MF services such as savings, insurance, remittance services and other support services etc., besides credit. Mere loan product for start up business and small enterprises will not deliver the desired result. As for as these type of clients, besides credit , capacity building , insurance, power,, marketing , are all essential prerequisites. Theses services can be arranged either singly or severally with like minded development partners. Further these group of clients represent small share in poverty segment. These MFIs therefore need to focus more on the poorest in the bottom of poverty pyramid for their upliftmenet staring with capacity building, savings and insurance services.
3. Graduation model, being piloted in Yeman, is interesting and need to be encouraged for candid achievement of the goal of MF. However as observed in the cited model , the values of Micro insurance is not adequately integrated for the schemes like livestock and small trades which are all susceptible to vulnerabilities in the given environ.In fine, conventional microfinance by MFI limits to micro credit services only without much contributing to the ultimate goal. Monopoly of micro credit in development project in general and poverty reduction in particular is suicidal and enough lesson is enough. Job creation cannot be done with mere pumping micro loans for any region for that matter. The new MF model should focus more on MF plus services with the matching products and services to the poor clients for making a sustainable dent in poverty canvas. For this difference in financial practices as pointed in point one appears immaterial.
Thanks
Rengarajan
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