The Middle East is enjoying an investment boom but risks leaving the poor further behind. Microfinance can help to improve their prospects but it will take more than loans alone. Rula Dababneh explains.

With the price of oil more than doubling in the past year, Arab investors from Dubai to Marrakech are channelling the windfall into everything from Islamic bonds to regional telecoms. One such investor, Investcom Holding, recently earned $741m through its initial public offering, the largest ever for a Middle Eastern company.

Given such opportunities, more Arab investors are keeping their money in the region (Investcom, for example, recently became the first company to list shares on the new Dubai International Financial Exchange). Although that may be a function of strained relations with the West, the more pressing point concerns domestic, not foreign, politics.

With the majority of its population under the age of 25, the Arab world needs to create about 80 million jobs in the next 20 years – a challenge of such scale and urgency that it dominates the development agenda of Washington as much as that of Riyadh and Cairo. But, with education lagging and illiteracy rates topping 50% in some countries, even today’s staggering oil income and closer-to-home investments could easily leave the region’s poorest behind. That is why Arab governments and aid agencies have been seeking ways to involve the poor more in the thriving financial system.

Regional initiative

“What the poor need are their own investment opportunities,” says Xavier Reille of the Consultative Group to Assist the Poor (CGAP), a global resource centre for microfinance housed at the World Bank. CGAP has worked with leaders such as Queen Rania of Jordan to spearhead an ambitious microfinance initiative for the Middle East and north Africa.

The first task on the agenda is to convince other regional policymakers of the core insight of microfinance programmes worldwide: that given access to financial services, such as credit and deposits, poor people find their own entrepreneurial path out of poverty. The examples abound: from Latin America to south Asia, micro-entrepreneurs have turned small loans – 5000 pesos here, 20 dinars there – into innovative businesses that not only create jobs, but also boost overall economic growth.

Growing momentum

An October 2004 study by the United Nations Capital Development Fund (UNCDF) and the Arab microfinance network Sanabel confirmed that the number of microfinance clients in the Middle East and north Africa multiplied by more than five in the preceding five years. Today, they number almost one million, representing an outstanding loan portfolio of more than $340m. Two of the region’s largest microfinance-only institutions are among the top 20 such providers worldwide in terms of outreach, profitability and efficiency.

The huge market for financial services among the poor has also attracted commercial banks such as Egypt’s Banque du Caire, which has reached more than 80,000 microfinance clients in just three years. In Lebanon, Jamal Bank and Crédit Libanais are using microfinance institutions as agents to offer productive and housing loans. In Morocco, Banque Populaire, Banque Commerciale du Maroc and Société Générale Marocaine are providing more than $50m in loan capital to Moroccan microfinance institutions. They are now planning to set up a mutual fund to diversify risk and increase their commitments in microfinance. Commercial banks in Tunisia, Yemen, and the West Bank and Gaza are catching on.

Gaps in outreach

However, microfinance services are concentrated in just a few countries – for example, Morocco, which represents 42% of the market share – and mostly in urban areas. Outreach to rural areas, where the majority of the region’s population lives and poverty is most severe, is virtually non-existent. Reaching these unbanked millions will take an even greater diversity of institutions and products, says Mr Reille.

At present, roughly 70% of the 62 known microfinance providers in the region are funded mainly by donor grants. Although there seems to be no shortage of aid in the region, the reliance on donor money has left most providers with little incentive to develop a wider range of products. The UNCDF study concludes that 90% of microfinance providers offer only loans to their clients.

Although these loans are valuable, even indispensable, to many poor families, the money needs to flow both ways. Deposit services, in particular, will earn returns for the poor while giving them a safe place to save – a key concern in many developing countries.

As important, a wider range of products can help microfinance providers to develop a domestic funding base for their operations. In the long run, this more sustainable model can help to secure permanent access to the financial system for tens of millions of poor people.

CGAP hopes to rally more top policymakers around this vision, which will take a more enlightened regulatory environment – at minimum, allowing microfinance providers to take deposits and not setting artificially low interest rate caps on loans. Although such measures may be politically sensitive, they are far less so than the larger challenge of poverty and growing unemployment.

Rula Dababneh is a microfinance regional specialist for the Consultative Group to Assist the Poor (CGAP), based in Amman, Jordan.

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