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.
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Microfinance in 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%).
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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 Forecasts for Growth of Regional Microfinance 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
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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).
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
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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
