The entrepreneurial poor

The Entrepreneurial Poor

A presentation on microfinance in the Middle East by Ellie Howard

Contents

• Introduction to microfinance • The target market• Microfinance activities• Demand• Impact • The media • Lessons for the region

“When the powerless start to see that they really can make a difference, nothing can quench the fire”

Leymah Gbowee

What is microfinance?• Pioneered by Muhammad Yunus of Grameen Bank in the 1970s,

microfinance involves making small loans to the poor who are unable to acquire credit from commercial lending institutions due to a lack of collateral and credit history.

• Loans are used by the borrower to start or expand their own business.

• Businesses generate income, increase self confidence and help clients reach self sufficiency, improving their own quality of life and that of their families.

• With a growing track record and over 150m families receiving loans globally (Microcredit Summit report 09), borrowers have shown a low risk of default, with ‘portfolio at risk’ averaging around 1%.

• As part of the evolution from microcredit to microfinance, microfinance institutions (MFIs) also offer other financial products such as microinsurance as well as business development and social services.

What is an MFI?• Microfinance institutions are registered as either non profits

or limited liability companies (LLCs) in Jordan.• The largest MFIs in Jordan serve in excess of 60,000 clients

with a loan portfolio exceeding $25m.• Whilst unregulated, MFIs are rated on adherence to social

mission, social performance (including impact on gender equality, education and health) adaptation of services to meet client demand, cost of services, responsible pricing, fair and respectful treatment of clients, ethics in finance, human resource management and labour policy.

• MFIs are supported by grants and loans from government and the global donor community as well as finance from institutional investors and funds. Some MFIs have also developed holding companies, enabling them to sell a minority share to global organisations with a social mission.

Who is the target market?

• 56% of adults do not have access to basic financial services - 64% of them live in developing countries (Ardic, Oya Pinar et al, World Bank).

• In Jordan, MFIs primarily focus on serving the female population below the poverty line who live on less than $2.6 a day (CSS, University of Jordan 2008).

Why women?• Women represent 70% of the world’s poor and are subject to more

forms of systemic discrimination than men (Women, Poverty and Economics, UNIFEM).

• On average women (18-65) invest 90% of earned profits back into their families, while men invest only about 30 to 40% (Chris Fortson for the Girl Effect).

• Women reinvest in family education, healthcare and improvement to their homes, enabling themselves and their communities to break free from the negative cycle of poverty.

• In addition, becoming wage earners improves the social status of women in society, contributing significantly to gender equality.

Demand • The Global Financial Inclusion Database estimates 300,000

potential microfinance clients in Jordan – this includes small businesses, private loans and non financial services. Immigration due to the Iraqi war has contributed to growth of the market.

• The most favourable enterprises are trade or service orientated – examples include dry cleaners, tailors and manufacturers of dairy products.

• Clients look at wealth generation as a means to an end, to buy food and clothes and to educate their children.

• Primary education is of particular interest, and MFI clients suggested that they would like non financial services to expand to include the schooling of their children.

• MFIs operate in poverty pockets throughout Jordan as well as in Palestinian refugee camps.

• However, some argue that microfinance is unable to reach the ‘poorest of the poor’ and that it is a role of government to provide grants to the most dependent families.

Typical Microfinance Institution (MFI)

offeringBy consistently striving to initiate and advance client driven products, the breadth and depth of microfinance services can be extended:

• Group loans including seasonal loans (approximately 60% of clients).

• Individual loans for established businesses and maternity (approximately 40% of clients).

• Microinsurance, both life and hospitalisation - including families.

• MFIs also look to achieve their social mission through the use of non financial services:o Capacity building and trainingo Market linkageso Social serviceso Educational opportunities

A typical loan size is around 544USD, with annual percentage rates (APR) ranging from 27 – 41% producing a portfolio yield of around 45%.

Typical microfinance loan process From start to finish the process averages around 2-3 days

Client visits branch and completes application form.

Application is assigned to a loan officer, who has up to 500 clients in her care under any one branch – she visits the project to verify credibility.

Documents are then sent to the Head Office credit department, where signatures are approved and documents validated. If clients are refugees, their identity number is used instead.

The finance department then determines loan amount (approx $141 – $14,100), term (approx 4-36 months) and interest rate (which varies across products and clients) and instructs the treasury to distribute cheque.

Where neighbours have joint (social) collateral via one application, one client is responsible for repayments. Assets are never used as collateral.

Repayments are deposited at the branch by clients, where their outstanding debt is altered on their ID cards. ‘Tellers’ then coordinate with banks to avoid banking time being taken up by small deposits.

Microinsurance • Life insurance is the ‘starting point for MFIs to penetrate the

microinsurance sector’, protecting MFIs against client death and loan default – some MFIs also award a lump sum (up to 80% of loan) to clients’ families.

• Usually, microinsurance products are mandatory. This measure insures the bulk of clients against financial instability, reduces risk and lowers premiums. Products cost in the region of 1JD a month.

• Some MFIs offer voluntary and free insurance to the families of clients.

• MFIs also offer hospitalisation insurance, which covers illness and pregnancy. Clients can can claim approximately 15JD a night for four nights of every months of their loan – MFIs operate a cap, of 30 nights continuous stay.

• Whereas Jordanian life insurance is tax exempt, hospitalisation insurance isn’t - innovative MFIs use a rider on the same contract which can reduce costs by up to 16%.

• Claim frequency and profitability data - obtained through monitoring - enables MFIs to negotiate with partner insurance companies to increase client benefits (e.g. 50% more claim value per night in hospital). Satisfaction of product rather than decreased cost is the preferred way to add value.

In the field • Branch network managers are described as the ‘lungs MFIs

breathe from’. They operate a hierarchical structure: Branch network manager – branch manager – senior loan officer – loan officer – teller – admin.

• BNMs decide where to open new branches or expand into new areas - central marketing departments then work to promote MFI offering to potential clients through the use of promotional materials.

• As well as receiving training and development provided to all staff, field staff (which constitute a high percentage of staff) receive basic salaries, loan disbursement incentives and follow up incentives such as mobile phone and transportation allowances.

• Incentives are linked to quality of portfolios determined by PAR (portfolio at risk) on a sliding scale.

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The media• MFIs’ relationships with the media in Jordan are

largely positive, with cooperation taking place for mutual benefit.

• Whilst looked at as non profits working to improve the lives of low income women, articles are often placed in the ‘economic’ sections of national newspapers.

• On an international level, there has been some negative press surrounding overindebted clients, high profits and a lack of transparency, but this has been buffered by the development of regional groups such as ‘Tanmeyah’, a recently formed microfinance network comprised of the seven largest MFIs in Jordan.

Impact – Economic development

• In recent years, Jordan’s Gross National Income per capita has grown, with Human Development Index figures above other Arab states in the MENA region.

• The percentage of individuals below the poverty line has fallen, with Jordan on track to achieve most of its Millennium Development Goals.

• It is suggested that microfinance has contributed through improving the socio-economic situations of the ‘informal sector’.

• By boosting the financial awareness, education and productivity of low income women, microfinance continues to greatly increase the living standards of many Jordanians.

• Other extraneous variables include the Government’s 10 year National Strategy to Alleviate Poverty, launched in 2005.

Impact - Gender equality

• Whilst the literacy standards of Jordanian women are relatively high at 87%*, microfinance works to improve female work force participation which currently stands at 12%*, one of the lowest rates in the Arab region.

• By educating women about equality, health and business, and providing them with much needed financial skills, microfinance fosters the self esteem of low income Jordanian women, empowering them both economically and socially.

• Other extraneous variables include the efforts of the constitutional monarchy under King Abdullah II, such as the move to a compulsory women’s quota in Parliament in 2002.

*Microfund for Women, Annual report 2010

Impact - Political stability

• One of the main contributing factors to political instability is societal frustration with existing living standards.

• Therefore, by helping to bring low income women and their families above the poverty line through investment in enterprise, microfinance works to stabilise community frustration, reducing the risk of domestic disequilibrium.

Lessons for the region – regulation

• It is widely accepted that the regulatory environment in Jordan holds back the growth of the microfinance sector. Currently the industry is unrecognised and unsupervised with any legal entity able to provide loans.

• MFIs are unable to offer savings products, which results in clients using loans to cover life events such as maternity and university education. In addition this restriction results in little variation between products offered by different MFIs.

• Clarity on the registration of MFIs is also found wanting, with many registered as non profits but producing large returns, reflecting the push and pull between charity and commerce. This negatively affects the attraction of institutional lenders, with many investors concerned about the consequences of potentially taking action against organisations registered as non profits.

• Reporting is also an issue with guidelines on which Governmental department to report to remaining unclear.

• In 2012, the Central Bank of Jordan committed to studying the possibility of regulation and is expected to shortly publish an analysis.

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Lessons for the region – measurement and

transparency • The microfinance sector in Jordan requires a fully reliable monitoring system

in order to measure efficiency, profitability and cross-selling rates within the market.

• Currently, a lack of standardised metrics, information and reporting practices in Jordan prevent the adoption of - and investment in - new products such as savings accounts due to poor visibility.

• In order to attract mainstream financial institutions, professional managerial and operational practices (such as simple complaints processes) and clear social missions need to be communicated widely.

• This also applies to platforms that facilitate overseas retail investment, where there is often confusion about the destination of invested monies due to a miscommunication of fund structures.

• Information brokers such as The Social Performance Task Force, MixMarket (MicroBanking Bulletin), the Microfinance Information Exchange (MIX), founded by CGAP, SMART Campaign and The Microcredit Summit Campaign (Seal of Excellence) continue work in this area.

• In terms of measuring impact on poverty, MFIs also struggle, with some adopting the Progress out of Poverty Index (PPI), supported by Grameen, to measure their clients’ poverty levels and track changes of those levels over time.

Lessons for the region – financial education

• With spending on non financial services currently around 2% of operating expenses, it is recognised that MFIs in Jordan need to develop much needed development programs – in particular those that focus on financial education - to increase both investment readiness and the value of loans.

• This may have a positive affect on the landscape in terms of shifting the focus from intermediaries to the ventures themselves.

• It has also been suggested that the subcontracting of these services to projects such as Middle East Partnership Initiative (MEPI) is beneficial in order to avoid conflicts of interest.

• Universities may have a role in developing this culture, and MFIs could partner with reputable institutions to foster such ambitions at an earlier stage.

• By developing awareness of business practices, women on low incomes are more likely to grow their businesses to scale, however MFIs must recognise that it may not be in clients’ interests to mature their enterprises to a stage where they can eventually take on equity investments.

Lessons for the region - technology

• MFIs in Jordan are well equipped with computers, printers and telephones and field staff admit that ‘technology makes life easier’.

• Some suggest that the introduction of scanners could speed up the loan process, however there are concerns that ‘too much technology’ creates a divide between MFIs and their clients.

• Mobile banking remains nascent, with many clients reluctant due to a lack of understanding.

• Although mooted as a ‘vehicle’ for microfinance, and successfully demonstrated in East Africa, mobile banking requires robust business models, not yet consistently seen throughout the region.

Lessons for the region – scaling up

• With the microfinance market in Jordan reaching saturation, many MFIs are looking to broaden their focus to ‘inclusive financial services’.

• Partly, this development requires closer collaboration with mainstream financial institutions, some of which already work in this area, focusing on CSR initiatives or research on Islamic finance.

• However, due to the limited ambitions of some clients and the low returns of their ventures, it may be that retail banks, currently experiencing low returns in developed countries, are more suited to the space than investment banks who focus on MFI’s client outreach and are keen to scale enterprises in preparation for IPOs.

• As seen in India, organisations could issue bonds guaranteed by the Government, although ‘overfinancing’ can cause standards to fall.

• In terms of private investment, investment by high net worths in MFI holding companies has potential through the use of revenue funding – ensuring adherence to social mission.

• Other approaches with scope to scale include web based peer-to-peer microlending platforms such as Zidhisha which directly link borrowers to lenders, reducing admin time and boosting competition.

Financial exchange risks must be considered due to a difference in currency, however the Jordanian Dinar is currently pegged to the US Dollar.

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AfterwordEllie Howard travelled to Amman, Jordan in 2012 shadowing the work of Microfund for Women, both in the office and in the field. As well as completing an entry to the Grameen Jameel awards and carrying out desk research, Ellie interviewed various staff within the organisation.

Content is also derived from interviews with other organisations in the region such as FINCA and Jordanian Insurance Company.

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