A closer look at the state of microfinance in the Arab World

June 3, 2009    

A number of recent regulatory initiatives across the Arab World are changing the face of microfinance across the region. The governments of Syria and Yemen have recently introduced regulatory regimes for the only deposit-taking microfinance insitutions in the region, while Egypt is introducing a new category of non deposit-taking microcredit companies to fill the gap in demand not met by NGOs and the commercial banks. Algeria is planning to issue new regulations on financial cooperatives and the Palestinian Authority has just completed draft regulations governing its microcredit sector.

Despite different approaches and needs, regulators in the Arab world are confronting a wide array of similar policy challenges including (i) establishing credit bureaus, (ii) “transformation” of NGO MFIs into commercial institutions, (iii) the role of deposit- taking institutions and (iv) and how to meet demand for microfinance products compliant with Islamic principles. In addition, – in a region where only 20 MFIs, mostly in Egypt and Morocco, serve 74 percent of the region’s microfinance clients - expanding outreach is a constant priority.

These common challenges brought together for the first time policymakers from 11 Arab countries at the CGAP-sponsored Microfinance Policy Forum for the Arab World, organized in Beirut on May 11, 2009 with the coordination of the Sanabel Arab Microfinance Network.

Modeled on other regional policy forums, such as the recent forums for Francophone Africa and Eastern Europe/Central Asia, the one-day event gave central bankers and other officials the unique opportunity to exchange experiences and knowledge with their peers and develop strategies for effectively mitigating sector risks, while simultaneously expanding outreach in a region where only an estimated 15 percent of microfinance demand is being met.

The Forum highlighted several key issues:

• Country differences. The microfinance sector in the Arab World is diverse. Some countries, like Egypt and Morocco, have mature sectors serving over a million clients each and have been the major force behind the record growth rates of thirty to fifty percent the region has seen over the last few years. Others, like Bahrain and Saudi Arabia have seen nearly zero growth and in Algeria, no microfinance institutions exist. Lebanon and the Palestinian Authority, because of war and political crises, experienced significant drops in client numbers, but are both now progressing again. Even the definition of microfinance varies: proposed regulation in Egypt permits a loan of up to US$100,000 to be considered a microcredit loan, while in Lebanon the cap is placed at approximately US$6,000.
• The financial crisis. Though the region’s MFIs are not immune to the crisis, a CGAP survey found that most MFI managers were optimistic that PAR would improve in the coming year after 62 percent of MFIs interviewed reported a rise in PAR. Most managers also expect to face liquidity pressures in the coming months.
• Policy and regulatory developments. Syria, Egypt and Yemen have recently approved new regulations or decrees while West Bank/Gaza and Iraq are working on regulations for non-bank financial institutions. Major regulatory issues in the region include restrictions on deposit-taking, lack of consumer protection measures, over-regulation of non-deposit taking institutions, lack of common standards and frameworks that favor NGO MFIs.
• Morocco. Long a leader in the region in terms of outreach and performance. Morocco witnessed in 2008 a decline of eight percent in the number of microfinance clients as some MFIs began to face critical repayment problems. Policymakers and MFIs are facing the challenge by letting the pace of growth cool off and by intensifying efforts to increase industry transparency.

"Microfinance in the region, at least in some countries, is becoming mature and facing new challenges that were not imaginable just three to four years ago,” says Xavier Reille, CGAP Lead Microfinance Specialist and WANA region director. “Some of these issues, such as increased competition, the need for credit bureaus and better consumer protection measures, are necessary growing pains, however, and if properly addressed, will lead to stronger institutions and better served clients."

The participants at the first Microfinance Policy Forum for the Arab World concluded that more opportunities for policymakers to meet and discuss common challenges in depth would be helpful to learn from each others’ experiences and establish a common vision for the microfinance sector on a regional basis.