Microfinance Focus, December 16, 2010: Arab microfinance sector which is one of the youngest markets in microfinance is in an evolving and growing phase. Reaching more than 3million clients, the sector is experiencing increased outreach, greater level of commercialization, and improved regulatory frameworks.

This year, the Microfinance Network of Arab Countries, Sanabel has been awarded with the ‘Network of the Year Award for 2010’ by SEEP (The Small Enterprise Education and Promotion) Network. In an interview with Microfinance Focus, Executive Director of Sanabel, Ms. Ranya Abdel-Baki reflects on the progress of the industry and the road ahead.

Microfinance Focus: Sanabel won the ‘Network of the Year Award for 2010’ from SEEP. What in your opinion were the major contributors to this achievement?

Ranya Abdel-Baki: Each year the “Network of the Year Award” is awarded for outstanding work in one of the six areas of network effectiveness from its Network Capacity Assessment Tool (NCAT); namely, Governance, Operations, Human Resources, Financial Viability, External Relations, and Service Delivery.  This year SEEP recognized networks that achieved success in the area of human resources and leadership, as well as overall achievements over the past year.  While human resources management remains a challenge for Sanabel, there has been some exceptional progress in this area when compared to 4 years ago when we first conducted the NCAT.  Our progress in this area outstripped all other networks and was the reason that we were chosen for this award.  Moreover, the network was able to achieve many successful activity-based results over the course of 2010 thanks to improvements in the internal structure of the network and more levelled human resource management.

Microfinance Focus: What are some of the major challenges the sector is struggling with?

Ranya Abdel-Baki: Restrictive regulatory environments in most countries, with the exception of a few specifically Syria and Yemen is a major challenge.   Legal and regulatory reform is still much needed in most Arab countries to enable the transformation of existing MFIs to for-profit entities that are able to provide a wide array of financial products to micro-entrepreneurs (beyond microcredit). In the absence of proper regulation and supervision that allow for greater transparency and information on pricing and client creditworthiness, responsible growth and responsible finance is becoming increasingly important as well.

Microfinance Focus: Are Arab microfinance institutions still following the Grameen model of lending or have they evolved their own model to serve their clients better?

Ranya Abdel-Baki: The Arab region has long evolved beyond the Grameen model for lending.  While many of the MFIs in the early 90s had focused more on group lending we can see now a shift towards the individual lending methodology in most countries in the region.  As such the product mix (although limited to microcredit for the most part) has evolved to include, beyond the conventional business loans, consumer loans, Islamic loans, housing loans, and loans specifically designed for youth.

Microfinance Focus: Are Arab microfinance institutions able to attract enough investments? What are the challenges they are facing in terms of raising funds?

Ranya Abdel-Baki: Tier 1 Arab MFIs don’t have a problem in attracting funding for the most part.  Their strong track record as well as ambitious business plans are often enough to attract funding at reasonable prices.  Most tier 3 MFIs in the region continue to face difficulties in raising funds due to some structural and operational problems for which bilateral funding that is coupled with technical assistance may be the answer. However, some challenges in attracting funding differ from one country to another in the region.  For Egyptian NGO-MFIs, for example, once the FOREX hurdle is overcome, legal and bureaucratic difficulties often makes it difficult to secure international funding.  At the same time, local funding is still not available at the level that is able to satisfy the MFIs ambitious growth plans.    

Microfinance Focus: What is the current outreach of Arab microfinance? Is it sufficient to meet the requirements?

Ranya Abdel-Baki: The current outreach for Arab MFIs is approximately 3 million clients receiving microcredit.  Very rough demand estimates conducted by Sanabel show that, at conservative levels, demand for microfinance in the region may be around 24 million clients.  This comes out to a very low penetration rate, especially when considering that the current product mix is limited to microcredit for the most part.

Microfinance Focus: There was a decline in number of microfinance clients in Syria from 45, 175 in 2005 to 22,660 in 2008. What contributed to the fall?

Ranya Abdel-Baki: If you look at the figures for 2007 – 2009 you will see the numbers in Syria rising.  The drop since 2005 is mainly due to the closing down of some programs.

Microfinance Focus: Can you shed some light on the impediments to the success of microfinance?

Ranya Abdel-Baki: Some of the impediments to the success of the industry include restrictive regulatory environments, lack of sufficient risk management systems and IT systems to cope with the growing outreach, and limited availability of skilled and trained human resource capacity to cope with the growth of the industry.

Microfinance Focus: In countries like Egypt, Morocco, Tunisia and Jordan where microfinance has a good outreach, is there a problem of multiple lending or concentration in one region? How MFIs are addressing the problem?

Ranya Abdel-Baki: We know that there was a problem of multiple lending in the Moroccan market in 2007 – 2009 but with the merger of one of the two largest MFIs in the country and the intervention of the Central Bank (Bank Al Maghrib) the situation began to gradually improve.  Moreover, Moroccan MFIs are also sharing client information now in an informal credit bureau like system.  In Egypt, the market was initially set up in a way where there was limited competition (MFIs in different geographical areas) but with growth and new entrants in the market, competition in the Greater Cairo area is increasing and some practitioners are beginning to worry about multiple lending and some bad practices.  Again, practitioners have begun sharing client information to overcome this issue through an “Information Sharing System” and are currently negotiating with the only private sector credit bureau in Egypt (iScore).  The case in Tunisia is different as there is only one commercially based MFI while the remaining programs are government based so there is not much competition in terms of product offering that would prompt multiple lending.  In Jordan, the practitioners also got together and began an informal information sharing system which has been operating for around a year now successfully and resulted in more information on cases of multiple lending in the market.

Microfinance Focus: Is microfinance in Arab region still purely ‘microcredit’ or moving beyond that?

Ranya Abdel-Baki: Unfortunately, due to the regulatory frameworks in most countries in the region, MFIs are currently unable to provide services beyond credit.  However, MFIs have diversified their credit offerings from the traditional business loans to include a variety of other products (seasonal loans, Islamic loans, youth loans, consumer loans, housing loans). Some MFIs in Jordan and Egypt have introduced microinsurance products (often through partnerships with existing insurance companies operating in the country).

The exceptions to this are MFIs operating in Yemen and Syria where newly introduced microfinance laws allow for the mobilization of savings and the introduction of other financial services such as remittances.

Microfinance Focus: How transparent Arab microfinance institutions are and what role is Sanabel playing in achieving transparency?

Ranya Abdel-Baki: One of Sanabel’s key objectives is to “promote microfinance best practices among stakeholders in Arab countries through transparency, standardization, peer learning and information exchange efforts.”  Sanabel has played an important role in increasing the level of disclosure in the region and promoting transparency on financial and social performance. Through a partnership with Microfinance Information eXchange (MIX), Sanabel gathers, analyzes and publishes data for the annual benchmarks which are published in the MIX MicroBanking Bulletin (MBB).  MFIs in the region participating in the benchmarks have grown from 6 in 2003 to 56 in 2010.  Moreover, the number of Arab MFI with profiles on the MIX Market has also increased significantly since 2003 to reach 65 MFIs.  Today, it can well be said that the majority of Arab MFIs realize the importance of transparency and are more than willing to share their data with Sanabel in order to be able to benchmark their performance and make meaningful decision based on the standard reports which we provide them with.

Microfinance Focus: Microfinance in Arab world needs to be Islamic microfinance. How successful MFIs have been in developing such products? Are there any setbacks because of this requirement?

Ranya Abdel-Baki: In some countries in the region, sharia’a compliant products are needed to reach currently un-served populations.  Some sharia’a compliant products have been developed in Palestine, Jordan, and Lebanon and in Yemen and Sudan Islamic finance is the dominant lending mechanism.  However, there is no model for best practices in Islamic microfinance in the region that ensures MFI sustainability with strict compliance to sharia’a regulations.  Sanabel is currently working on identifying appropriate training and capacity building activities on Islamic microfinance to contribute to building knowledge in this area within the region.

Microfinance Focus: How many microfinance institutions are your members?

Ranya Abdel-Baki: We currently have 82 members from 12 Arab countries and 1 European Country.  Our members include 1 institution providing support service to microfinance “WAFAA Community Interest Company - UK” (Friend of Sanabel), 3 individual founding members (Full members), 1 apex government institution, “Social Fund for Development – Yemen” (Full Member), 3 national networks,  “Fédération Nationale des Associations de Microcredit – Morocco”, “Sharakeh – Palestine” and “Yemen Microfinance Network – Yemen” (Affiliate members) and 74 MFIs that provide direct lending to clients (divided into Full and Affiliate members)

Microfinance Focus: Will you brief us about the regulatory role that Sanabel plays as a Network?

Ranya Abdel-Baki: As a network we do not regulate or supervise our members, we play more of an advisory and supportive role.  However, one of our objectives is to “advocate for a positive and conducive microfinance environment and for the inclusion of microfinance in the financial sector,” and as such we will be working over the coming period on more advocacy related initiatives to achieve this objective.

Microfinance Focus: What are some of the new initiatives that Sanabel will be coming up with in the next year?

Ranya Abdel-Baki: Some of the new initiatives that we are currently working on include re-launching of Sanabel website with new features including interactive regional map, updated quarterly data from the region, consultants’ database, as well as many new features and informational pages.  We are working on increasing data collection points and publication of Annual Industry Survey.  We are promoting activities for strengthening existing national networks and supporting the establishment of more national networks in the Arab region.

Sanabel will be introducing new SPM tools and documenting case studies on SPM from the region. It is exploring partnership with the Smart Campaign to increase awareness of the 6 principles for client protection in the region and will be supporting new training courses and capacity building activities including regional and international peer exchanges. We will be organizing more advocacy events related to regulatory reform throughout the region.