With a series of crises unfolding throughout much of the Arab world today, the donor community has been challenged to find appropriate ways to address the widespread loss and increasing vulnerability in the region. This is particularly the case because those areas most in need (for example Gaza, Syria, Afghanistan and Yemen, but also Tunisia after its revolution and Morocco after its repayment crisis) are typically those where donors may be reluctant to engage due to perceived high risks, as well as economic and/or security concerns. However, these difficult times are precisely when donors/investor support is needed most.
Microfinance is an important tool that can help households limit vulnerability and increase opportunities. Whereas humanitarian interventions (health care, shelter, food, etc.) can often better address immediate needs in a time of crisis, the provision of a range of quality and affordable financial services represents a long-term, sustainable solution that can support households to get back on their feet at a time of great difficulty.
Working through private-sector intermediaries
IFC, a leading global investor in the microfinance sector, supports financial intermediaries (microfinance institutions or banks, NGOs, and global networks) with a combination of investment and advisory services/ Indeed, IFC currently has over a $2 billion portfolio with over 300 client MFIs in over 90 countries.
We have seen that the choice of partners matters significantly. By identifying and working with strong institutions with in-depth local knowledge and relationships in their communities, a crisis response can be better tailored to the needs of end beneficiaries. Likewise, building the capacity of local, private sector actors can help donors and investors achieve greater scale and impact than they could by acting alone, while also ensuring that this support is sustainable long after the intervention. Furthermore, in times of crises, donors and investors can often remain actively engaged in these countries by acting through these same local partners.
FATEN head office in Ramallah.
A long-term investment partner
The ability and willingness to provide financing in countries with higher risk (before times get rough) and potentially ‘crowd in’ other social or private sector investors is critical to donors and investors being able to have an impact when a crisis actually emerges. For example, in 2011, IFC provided a $3 million loan to FATEN, the leading MFI operating in West Bank and Gaza - a market with a highly unstable economy wracked with periodic government salary freezes, resource constraints and conflict. Furthermore, nearly 25% of FATEN’s portfolio is concentrated in Gaza. This investment, while modest, may have encouraged other investors to also provide the funding that has helped spur FATEN’s formidable recent expansion.
During or in the aftermath of a crisis - when MFI portfolio growth slows down and funding sources dry up, currency may be devalued or economic activities are disrupted - is certainly another occasion where investors’ resources (in the form of local currency or foreign-denominated debt, capital calls, or even partial credit guarantees) may be most critical. In Tunisia, as the Arab Spring unfolded and the country’s leading MFI, Enda Inter-Arabe (ENDA), experienced a liquidity crunch, donors and investors (including IFC) were eventually able to step in to provide critical medium-term financing needed to help the MFI continue serving its clients. Furthermore, despite conflict and security issues in places like Syria and Afghanistan, investors such as IFC, KfW and AKAM have maintained some equity in local Aga Khan Network affiliates (FMFI-Syria and FMFB-Afghanistan) rather than pulling out completely.
In the same vein, in response to the 2008-2009 global financial crisis and unprecedented financial stress, IFC, KfW and other partners launched the $500 million global Microfinance Enhancement Facility (MEF) to provide short- and medium-term financing to MFIs facing funding shortfalls. As of December 2013, the MEF had cumulative disbursements of $651 million in 214 loans to 99 institutions, providing rapid response to crises as they have emerged in Bosnia and Herzegovina, Nicaragua, India, Cambodia, and elsewhere across the world.
Such staying power sends an important signal to both MFIs and the microfinance sector as a whole, that an investor is not merely a fair-weather friend looking for an upside, but a reliable strategic partner willing to stay the course when times get rough.
Timely and high-quality advisory
In addition to this critical investment support, many donors and investors also provide MFIs with advisory services or active equity management, acting as a sounding board for management and the governance structure. Accessing global expertise and technical support may help MFIs build capacity and, in many cases, to emerge from current crises or prepare for the next one. For example, in the wake of different repayment crises in Tunisia and Morocco, IFC helped both ENDA (Tunisia) and Al Amana (Morocco) fine-tune strategies for managing existing non-performing loans and build strong risk management frameworks to support the MFIs’ efforts to rebuild their portfolio quality and prepare them for future challenging circumstances.
IFC SME workshop in Cairo with Al Amal Bank.
Meanwhile, in Yemen, before the recent conflict, IFC provided two of the leading microfinance banks – Al Kuraimi Islamic Microfinance Bank and Al Amal Microfinance Bank – with comprehensive advisory support designed to help strengthen the banks and diversify products (including into SME). Whereas many donors have pulled out or halted their support due to the political impasse and security concerns, IFC has tried to remain actively engaged and continue providing support. We’ve seen that the advisory provided by donors/investors (and particularly during a time of crisis) is greatly appreciated by the affected entities whether in Yemen, Afghanistan, Bosnia or Liberia.
In summary, based on feedback from MFI partners, what is most valued, particularly in times of crises, is for donors and investors to first and foremost have a continued presence and as a stable, long-term partner. Furthermore, MFIs value the combined support on the investment and advisory fronts – both to access the liquidity or foreign exchange necessary in times of uncertainty to mitigate funding shortfalls, and also the ability to leverage an donor/investor’s global experience and knowledge base, either through technical assistance and advisory support, or else a presence on the Board and active equity management at times when such advice is indeed most required.