Hopes for More Financial Inclusion in the Arab World

For the Arab World, 2011 was historic. The Arab Spring, ignited in Tunisia, quickly spread to Egypt, Libya, Syria and other Arab countries. The year brought much hope and a sense of opportunity as Arabs from the Atlantic Ocean to the Arabian Gulf saw the possibility of a future without dictatorship, corruption and hypocrisy – the reasons underlying the poverty, unemployment, and political grievances which sparked the Arab Spring.

The Arab Spring began when Mohammed Bouazizi, a fruit-selling microentrepreneur, doused himself in paint thinner and set himself on fire in protest against police harassment and the confiscation of his fruit crates and electronic scale – his family’s primary source of income. Despite the clear message of the need for economic opportunity that Mohammed’s tragic death sent, there is unfortunately no indication yet that the governments emerging in the region see the bigger financial inclusion agenda. Their focus so far has been limited to loans for MSMEs instead of an agenda which works to build financial systems that serve the whole population.

There were some baby steps in 2011 toward financially inclusive regulation. First, in Tunisia, a new microcredit law was approved allowing both for-profit and non-profit entities to provide loans to microenterprises (but the law still does not allow such entities to provide savings and other financial services to the poor. In Egypt, talks continue about the microcredit law that would allow the establishment of new microcredit companies, but no action yet has been taken to finalize or approve it. In Palestine and Iraq, there were similar regulatory developments but still focused only on microcredit. So in a sense, these “new” developments are not really so new. The irony in all this is that only inSyriaandYemen, two countries still heavily affected by the uprisings, did the governments sanction savings mobilization by MFIs meeting minimum standards. In these countries, there was an early recognition that integrating the poor into the financial system and ensuring that they are served with a variety of financial services was important for their country’s development. But perhaps it was too little, too late.

Some key developments in 2012 are needed to enhance the agenda of financial inclusion in the Arab World:

1) Regulatory Progress: emerging and existing governments in the region should foster regulations which enable a wide array of actors to responsibly serve more low-income customers with a fuller range of financial services. This would necessitate: (i) eliminating interest rate caps, (ii) focusing on consumer protection, (iii) permitting MFIs, and other legal entities fulfilling specified prudential criteria to mobilize savings, and (iv) promoting branchless banking – the use of agents and technology to provide financial services to previously unreached segments.

2) Increased Leverage of Existing Infrastructure: Postal networks and state-owned banks have the overwhelming majority of branches and outreach in most Arab countries and often reach rural and remote areas where no other providers exist. Governments and donors should invest in (i) the modernization of such infrastructure, (ii) development and training of related human resources, and (iii) encouraging partnerships which allow MFIs, insurance companies, MNOs, etc. to use these outlets to maximize the outreach of their services, especially to those who are not served by the existing formal and semi-formal financial system.

3) Responsible Donor and Investor Behavior: The new governments and their financial sector efforts are already attracting more and more donor and investor money. If these resources are not used well, they could potentially cause more harm than good. There is nothing revolutionary about coordination, but it is still needed, nonetheless. More than coordination, donors need to integrate responsible disbursement practices and ensure that every intervention adds value to the reality on the ground.

4) Keeping over-indebtedness at bay: Major MFIs in the region have already signed on to the SMART campaign, an industry-wide campaign that was launched late in 2009 which developed seven client protection principles and is working to put them in practice. Some countries have already developed a code of ethics and other self-regulatory measures among MFIs – and there have been initiatives (such as in Palestine and Egypt) to develop credit bureaus and the inclusion of MFIs in those bureaus. All stakeholders should focus on “pre-emptive” actions ensuring client protection.

While these developments will clearly require more than a year to be realized, 2012 is a crucial year for financial inclusion in the Arab World and CGAP stands ready to help these developments take root.