Micro Finance In Palestine Characteristics of Palestinian Enterprises.

Micro Finance In Palestine

Characteristics of Palestinian Enterprises

OverviewOverview The development of the Micro and Small

Enterprise (MSE) sector in Palestine over the years.

The characteristics of the entrepreneurs. The characteristics of the enterprises. Financing Palestinian enterprises. MSE’s contribution to the Palestinian

economy. Constraints for growth of Palestinian MSE’s. Demand for credit. Supply of credit.

The Development of the The Development of the Palestinian (MSE) sector Palestinian (MSE) sector Although there is a lack of

research and studies describing the evolution of the sector, some NGO’s conducted exploratory research in the field.

Four major studies were conducted in the field

MSE Sector (Cont’d)…MSE Sector (Cont’d)… The first was published in December

2000 by the Palestine Economic Policy Research Institute, or MAS) titled, “The Informal Sector Enterprises in the West Bank and Gaza: Case Studies”

The second was a survey conducted and published in March 2002 by Massar Associates, “The Demand and Supply of Credit for Small and Micro Enterprises”

MSE Sector (Cont’d)…MSE Sector (Cont’d)… The third was conducted and published in

March 2003 by Massar Associates, “Palestinian Informal Enterprises: Key Characteristics, Constraints to Growth, and Development Opportunities”.

In addition to these three important studies, another one was conducted in 1999 by Weidemann Associates, a US consulting firm, which was awarded a contract by USAID to assess the demand and supply of credit for small and micro enterprise in the WBGS.

MSE Sector (Cont’d)…MSE Sector (Cont’d)… MSEs play an important role in the

economy, by generating employment and income for a majority of marginalized groups in Palestinian society.

The exceptional and constraining political, economic, and social circumstances facing Palestinian society since 1967 have made informal MSEs especially important.

MSE Sector (Cont’d)…MSE Sector (Cont’d)… According to the Bisan Center for Research

and Development, Israeli policies have forced Palestinians to adopt economic development strategies focusing on MSEs, because these types of businesses are considered the most appropriate forms of business activity, given the constraints faced by Palestinians (Bisan 1999)

MSE Sector (Cont’d)…MSE Sector (Cont’d)… Assisted by the microfinance operations of NGOs

from the 1980s, establishment of informal MSEs have continued to spread to urban, rural, and refugee camp areas, as sources of income.

The sector is widely believed to be in a cycle of growth due to the deterioration of the security situation and increased instability in the region. From the first Intifada, which lasted from December 1987 through September 1993, to the second Al-Aqsa Intifada, which started in September 2000 and continues through the present, informal MSEs have been playing an increasing role in securing minimum income for living.

MSE Sector (Cont’d)…MSE Sector (Cont’d)… This sector is a vital and significant source of

employment and livelihood.

The number of informal MSEs has been growing in number over time and increased substantially during the past three years of political instability and violence.

The tightened closures and the extreme constraints (checkpoints and road blockade) on mobility between cities, villages and camps, have forced people to search for a living through small and micro productive activities.

MSE Sector (Cont’d)…MSE Sector (Cont’d)…

YearWBGS

TotalWB GS

Before 1995 31 27 29

1996 Thru 1999 22 23.5 23

2000 Thru 2002 47 50 48

Total 100 100 100

Percentage of informal MSEs by year of establishment

MSE Sector (Cont’d)…MSE Sector (Cont’d)…

The overwhelming majority of these informal enterprises were established because of three main reasons, as stated by the respondents: The informal business is a substitute for

the loss of job. The type of business fits my knowledge

and personal interest. Increase income.





Characteristics of EntrepreneursCharacteristics of Entrepreneurs In general, the owners of the enterprises

are males. The majority of enterprises (80 percent) in the WB are owned by males, compared to 92.5 percent in the GS

Females in the WB are more engaged in informal business activities (20 percent), than their counterparts in the GS (7.5 percent).

Entrepreneurs (Cont’d)…Entrepreneurs (Cont’d)…

Females in rural areas and camps of the WB, are more engaged in informal business activities than their counterparts in the cities. This is also the case in the GS.

Almost all age categories are engaged in informal business activities.


About half of the owners/managers of informal enterprises in the WBGS, are between 26 and 40 years of age.

There is a significant proportion of young people between 18-25 years of age, who are involved in informal business activities.

Entrepreneurs (Cont’d)…Entrepreneurs (Cont’d)… A significant proportion of

entrepreneurs are illiterate (10.5 percent in the WB and 7.5 percent in the GS).

Slightly less than half of entrepreneurs had any levels of primary and elementary school education.


A significant proportion of university graduates are involved in informal activities, indicating the difficulties that university students face in finding jobs.





The Characteristics of The Characteristics of EnterprisesEnterprises The tendency to have only the owner

as the sole employee.

More than half of MSEs in the WB (52 percent) that have employees other than the owners, employ one person.

About 75 to 85 percent of employees are relatives of owners.

Enterprises (Cont’d)…Enterprises (Cont’d)… A large segment of the population depends

on their enterprises as the sole source of income.

About two thirds of owners of MSE’s in the WB generate more than half of their income from their enterprises, compared to three quarters in the GS.

Informal enterprises give little attention to upgrading the skills of employees.

Enterprises (Cont’d)…Enterprises (Cont’d)… Most MSE operate from home.

In the WB, around 85 percent of enterprises have more than 90 percent individual customers, compared to 83 percent in the GS. The remaining clients are retailers, wholesalers and contractors.

The MSE’s depend on domestic sources for raw material and goods.

Enterprises (Cont’d)…Enterprises (Cont’d)… The majority of enterprises (61

percent in the WB and 69 percent in the GS), primarily use simple manual tools and machinery in their operations.

The average capital investment in WB enterprises is about $2,500, while it is about $1,700 in the GS.

Enterprises (Cont’d)…Enterprises (Cont’d)… The average annual sales revenue for

MSE’s is relatively low, with less than $800 value of sales per month.

In the WB, the MSE sector employs about 98,000 individuals including owners and partners.

The added value of the informal sector is about 316 million dollars, constituting about seven percent of Gross Domestic Income (GDI).





Financing EnterprisesFinancing Enterprises The majority of MSE’s in the WB (71

percent) and the GS (63 percent) used their own savings to finance their businesses when started. The second largest source of financing, were loans from family and friends

The average loan amount required in the WB ($4,000) is significantly higher than the average required in the GS ($2,300).

Financing EnterprisesFinancing Enterprises The estimated total potential demand for loans is

about 105 million dollars, distributed between the WB (about 80 million) and the GS (about 25 million).

Loan duration: the majority (about two thirds) preferred loans with more than 18 months loan term.

Repayment schedule: the majority in the WBGS (83 percent), preferred monthly payments.

Interest rate: most respondents in the WB felt that an average of 1.74 percent per month would be acceptable.





Contribution to the EconomyContribution to the Economy In the WB, the MSE’s employ about 32,000

individuals, other than owners and partners.

In the GS, the MSE’s employ about 34,000 individuals other than owners and partners.

Over all an average of 66,000 employees work in MSE’s.

Contribution (Cont’d)…Contribution (Cont’d)… In the WB, the MSE’s employ about 98,000

individuals, including owners and partners.

In the GS, the MSE’s employs about 90,000 individuals including owners and partners.

Over all an average of 188,000 employees work in MSE’s throughout the WBGS.

Contribution (Cont’d)…Contribution (Cont’d)… These results demonstrate the significance of the

sector in terms of its contribution to total employment.

The average annual net profit of an MSE is about $2,800. That is, each enterprise brings an average value of $2,800 per year.

The total number of informal enterprises in the WBGS is about 110,000. Therefore, it can be concluded that the added value of the MSE’s is about 316 million dollars, constituting about seven percent of Gross Domestic Income (GDI).





Constraints Facing MSE’sConstraints Facing MSE’s

Internal constraints/problems Constraints of the entrepreneurs:

Limited managerial skills. Low levels of education Social and psychological factors: Limited

ambitions, no partners, unwillingness to borrow because of rejection of interest or of being in debt.

Constraints (Cont’d)…Constraints (Cont’d)… Internal constraints/problems (Cont’d)

Constraints of the enterprises: Low level of organization Small capital investment and lack of capital

accumulation Spontaneous projects responding to existing

demand; enterprises were established to secure income.

Low level of technology Low level of quality assurance and control Lack of proper work place and space

Constraints (Cont’d)…Constraints (Cont’d)… External constraints/problems

Lack of finance Lack of supporting policies Lack of information Lack of training programs Increasing economic hardship and decrease in

demand Lack of proper infrastructure, especially in rural

areas and camps (electricity, transportation) Access to raw materials Increased competition, which forces the

enterprises to reduce prices Political instability





Demand for CreditDemand for Credit

The general belief is that credit may not be available under the current political situation for the following reasons:

Banks don't lend to small businesses Poor credit history No collateral Low profit margin and/or risk of business The political situation is too risky Credit not available to women

Demand for Credit (Cont’d)…Demand for Credit (Cont’d)… The average loan size requested by MSE’s

in Palestine as per the studies published by NGO’s is $8,000.

Most of the loans are taken for the purpose of financing current operations. Only few are taken to buy new business equipment or invest in a new production technology or improved shop facilities.

Some want the loan to refinance their current debt.

Demand for Credit (Cont’d)…Demand for Credit (Cont’d)… The majority (86%) of loans are long

term loans (over one year).

Culture may also play a role in affecting the decision to take loans.

The estimated total amount of micro loans needed in the country is 37.5 million USD.





Supply of CreditSupply of Credit In recent years, microfinance activities expanded

significantly in terms of number of credit programs, scope, outreach, coverage and focus.

Commercial banks and more focused NGOs are now engaged in lending activities with a commercial approach and businesslike manner.

According to the Weidemann report of 1999, the total supply of micro and small lending was about 78 million dollars, of which 57 million was channeled through banks and the remaining 21 million through NGOs. The same report concludes that the outstanding loans were about 41 million dollars distributed among 20,492 loans in 1999.

Supply of Credit (Cont’d)…Supply of Credit (Cont’d)…

Arab Bank Bank of Jordan Bank of Palestine National Bank of

Jordan Commercial Bank of

Palestine Palestine for Credit

and Development (FATEN)

YMCA

Business Women Association (ASALA)

ANERA PARC IFAD – Arab Bank

Program Care international UNRWA ACAD Palestinian Banking

Corporation

Lending institutions include

Supply of Credit (Cont’d)…Supply of Credit (Cont’d)… With the exception of several specialized

NGOs and banks such as ANERA, ACAD, PBC none of these programs have focused sectoral targets.

Women are well represented in most NGOs programs and some NGOs such as FATEN and ASALA are only engaged in lending to women businesses.

Most programs cover the West Bank and Gaza Strip.

Supply of Credit (Cont’d)…Supply of Credit (Cont’d)… Programs are diversified and targets micro

and small businesses.

Interest rates vary according to program.

The total fund available for micro and small lending in the West Bank and Gaza, including outstanding loans, is approximately 67 million dollars distributed between banks (40 million) and NGOs (27 million) dollars.

Supply of Credit (Cont’d)…Supply of Credit (Cont’d)… The total amount of loans outstanding is

about 24 million dollars representing approximately 19,000 outstanding loans. This amount represents only 36 percent of the supply available for small lending.

NGOs seem to have the largest share with 15 million dollars outstanding loans compared to 10 million dollars for banks.

Supply of Credit (Cont’d)…Supply of Credit (Cont’d)… Loans provided by NGOs are significantly

larger in number and smaller in amounts.

NGOs have an outstanding number of loans at about 17,000 whereas banks’ outstanding loans are about 2,300.

These results show that NGOs are most likely to target the lower end of businesses (micro and for the most part group lending with very small loans) whereas banks tend to focus on small businesses.

Supply of Credit (Cont’d)…Supply of Credit (Cont’d)… Future plans of NGO’s in this field include:

Introduce new loan products or programs, Expand target groups, Implement some changes regarding loan

purpose, Expand the geographical coverage of

microlending, Increase the revolving fund amount, Introduce a new credit program for IT sector, Focus on saving & credit, Establish social security programs, Improve marketing program.

Micro Finance In Palestine Characteristics of Palestinian Enterprises.

Documents

palestinian mse sector

mse sector contd mses

informal sector enterprises

micro enterprises slide

growth of palestinian

small enterprise mse

field slide

number of informal mses