Microfinance in MENA

Microfinance Mena

  • Financial inclusion levels are alarmingly low in the MENA region, and the trickle-down effect can be felt on the region’s Microfinance market, which is among the youngest and slowest growing in the world. 
  • Although every country in the region has its unique challenges (use of technology, income levels, etc.), lack of institutional and regulatory support is a common cause for the undergrowth of the microfinance sector in MENA.
  • Growth be achieved if MFIs have the support of Arab governments in the form of good institutional and regulatory framework.

Microfinance in MENA, and the need for a Supportive Institutional and Regulatory Framework

Financial inclusion levels are alarmingly low in the MENA region.  According to Pi Slice, MENA’s first online microcredit platform, the region has a population of 370 million of which at least 26% are estimated to be living on less than USD 2 per day. Also, financial inclusion in the region is very low; as per Findex, MENA has the lowest percentages of adults with a formal bank account (18%) and of poor people with formal access to financial services (9%).

The trickle-down effect can be felt on the region’s Microfinance market, which is among the youngest and slowest growing in the world. World Bank estimates that microcredit accounts for just 0.2% of MENA’s GDP and lending by microfinance institutions currently reaches only 1.8% of the adult population. To put things into perspective, this is half the penetration rate as compared with South Asia or Latin America and the Caribbean. 

Therefore, it comes as no surprise that while there are ~6 million households eligible for a microfinance loan, the underdevelopment of the microfinance market in the region means that there is a gap of about 3 million potential microfinance customers for a total of nearly USD 3.5 billion in Gross Loan Portfolio (GLP), as per Pi Slice. And new research from responsAbility shows that this situation is unlikely to change soon since the growth rate of MENA’s GLP is predicted to lag all other regions, expect Eastern Europe. 

2014 Forcasts for Growth of Regional Microfinace Markets
Region Gross Loan Portfolio Growth Rate 2014
South America 15 – 12%
Central America 10 – 15%
Sub-Saharan Africa 15 – 25%
MENA 10%
Central Asia 15 – 20%
Estren Europe 5 – 10%
South, South East and East Asia 25 – 35%
Total 15 – 20%

Source: Responsability Research

However, within the region, microfinance markets are in different stages of development with Morocco, Egypt, Jordan, and Yemen showing higher levels of maturity as compared to relatively new markets in Iraq, Sudan. The variation in the maturity level of the microfinance market within various MENA countries can be observed by the number of borrowers in each country, as per the Washington-based Microfinance Information Exchange (MIX).

Microfinance Mena information

 Source: Microfinance Information Exchange (MIX)

Although every country in the region has its unique challenges (use of technology, income levels, etc.), lack of institutional and regulatory support is a common cause for the undergrowth of the microfinance sector in MENA. Products offered by MFIs in the region are primarily focused on credits while other financial services, such as saving, insurance or monetary transfer are negligible due to lack of an enabling legal, regulatory and institutional environment in the microfinance sector. While few countries like Sudan, Syria, and Yemen allow for savings mobilizations, the remaining markets are impacted by restrictive regulations and structure of their respective financial sectors, which limit the growth potential of MFIs. As a result, 60% of all external funding is done by local banks, but at high lending rates, thereby negatively impacting borrowers.

The lack of institutional support can also be gauged from that >90% of financial services for poorer households in MENA are provided by non-governmental organizations, with an underdeveloped financial infrastructure and low levels of financial literacy further inhibiting the sector’s growth.

It is abundantly clear that growth of the microfinance sector in MENA can be driven only through institutional support, and some recent developments lend hope. As per a 2013 report by the Economist Intelligence Unit (EIU), regulatory developments in the region point towards an effort to help MFI grow. Most notably: 

  • Morocco updated its Microfinance Associations Law, with an aim to encourage consolidation among smaller microcredit associations (MCAs). While some microfinance professionals have criticised it for assisting MFIs in transforming into commercial banks or NGOs, it should still be viewed as a step in the right direction to grow the microfinance sector.
  • Jordan adopted a microfinance strategy providing for comprehensive legislative reforms.
  • In Egypt, a bill to that effect was introduced to Parliament even before the Arab Spring.
  • In the Palestinian territories, a presidential decree has set the course for standard monitoring of the microfinance sector by the Palestinian Monetary Authority. 

Other positive indicators include:

  • increased diversity of financial service providers (banks, microfinance banks, non-bank financial institutions, service companies, and NGOs);
  • higher and deeper penetration levels;
  • a widening pool of experienced human resources; and
  • improved credit risk systems

The above are but a few steps that have been taken. However, much can still be achieved if MFIs have the support of Arab governments in the form of good institutional and regulatory framework.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

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