1. Sfax 2nd International Forum on Islamic Finance
June, 27-29, Sfax (Tunisia)
A proposal for Jobs Creation based on Islamic Microfinance and Cooperatives
Mahmoud Sami Nabi, IRTI & Rami Abdelkafi, IDB
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Any views expressed in this presentation are only ours and do not necessarily represent those of IRTI or IDB

3. Outline 1. Introduction 2. Unemployment in Tunisia 3. Employment policies adopted in Tunisia 4. Best practices in tackling Unemployment 5. Microfinance 6. Islamic Microfinance 7. Role of microfinance in creating job opportunities 8. Conclusion and Policy Recommendations
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4. 1. Introduction
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2
4
6
8
10
12
14
16
18
20
Algeria
Bahrain
Egypt
Islamic Republic of
Iran
Jordan
Kuwait
Morocco
Saudi Arabia
Sudan
Tunisia
Unemployment rate in the MENA Region in 2012
(Source: WEO 2013)
2010
2012
-High unemployment rates with some differences at the national level
-However, similarities are important with regards to youth unemployment
-In 2011, the International Labour Organization (ILO) estimated that 12.6 percent of youth in the global labor force are unemployed— about 74.6 million youth. Youth unemployment rates are everywhere considerably higher than adult rates.
-The ILO forecasts that unemployment among young people in the Middle East will rise by 2% over the next five years as the euro crisis hits emerging economies. The Middle East will see the rate rise to 28.4% by 2017
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Youth unemployment: Comparing OECD and MENA (Source: Eurostat and ILO)

5. Main causes of youth unemployment in the MENA Region
Demographic factors (Demographic transition, high growth of the labor force)
Low economic growth and weak economic diversification (weak role of the private sector and large public sector, weak business climate)
Ill-adapted education system (skill mismatches)
Institutional factors (weak labor market reforms and inefficient macroeconomic strategies – Labor market rigidities, high reservation wages)
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6. 2. Unemployment in Tunisia
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80 thousands additional demands yearly
Structural Unemployment between 12%-13%
 Increase of the unemployment after the revolution to around 19%
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11
12
13
14
15
16
17
18
19
20
May-05
May-06
May-07
May-08
May-09
May-10
May-11
Nov-11
Dec-12
May-13
Unemployment rate in Tunisia 2005-13 (Source: INS)

7. 2. Unemployment in Tunisia (continued)
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Unemployment is even higher for youth and highly educated
Unemployment by Age Group -2010-2013 (Source: INS Enquête Nationale sur la Population et l'Emploi)
Age
2010
2011
2012
2013
15 - 19
28.7
43.6
35.2
31.5
20 - 24
29.7
41.8
38.7
37.3
25 - 29
24.2
34.5
32.7
32.2
30 - 34
12.9
19.0
18.0
17.0
35 - 39
6.1
8.8
8.8
8.6
40 - 44
3.7
4.3
4.7
5.0
45 - 49
3.2
2.8
3.5
3.1
50 - 54
2.8
2.4
2.4
3.2
55 - 59
2.8
2.6
2.5
2.1
60 - 64
3.5
1.5
2.1
2.1
65 - 69
2.8
2.4
1.4
1.7
70 - above
3.2
0.6
0.8
0.3
Total
13.0
18.3
17.6
16.5

8. 2. Unemployment in Tunisia (continued)
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Unemployment is higher specially in the center west and south of the country

9.  revising the incentive policies,
especially with regards to investment
Demand side
Inefficiencies of the labor market environment
Supply side
 Need to revise the education system
• Weak impact of the active employment policies on the private sector
• Low value added of the job opportunities
• Lack of private investment in the labor intensive sectors
• Lack of private initiatives owing to pessimistic prospects (corruption, weak infrastructure, lack of financing, financial crisis, fierce competition facing the SMEs)
Lack of follow up and support to the beneficiaries of the active employment policies
•Skill mismatches
•A public sector more attractive for diploma holders than the private sector
•High reservation wage
•Lack of soft skills
•Low entrepreneurial culture
•Lack of trust in the social and economic environment
Deviation of some financial structures form their goals
Rigidities of the labor market
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Main causes of unemployment in Tunisia

10. 3. Employment policies adopted in Tunisia
 Before the revolution the following active policies to create jobs (with an annual cost of 1.5% of GDP) were adopted:
o Active programs incenting firms to recruit diploma holders (financial incentives mainly)
oCreating new financing structures to promote investment (BTS, Fund for Guaranties, SMEs Fund…)
oInvolving the civil society in the financing of SMEs through NGOs and Development Agencies
oCreation of structures (incubators, etc.) to support new entrepreneurs.
After the revolution the following active policies to create jobs (with an annual cost of 1.5% of GDP) were adopted:
oAdoption of the « Amal » Program (Financial and training support)
oEvaluation studies of the active programs in place
oConsolidation of the financing system for new investments and restructuring of the financing bodies (the Tunisian Solidarity Bank (BTS) in particular)
oInvolvement of the civil society in the follow up and monitoring
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11. 4. Best practices in tackling unemployment
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 Labor market and education reforms are essential but require long time to be designed and implemented
Some quick-wins and short-run policies could be adopted :
oHelping the young find better jobs through active labor market policies (job search assistance, employability training, public support for apprenticeship and internship programs, and on-the-job training subsidies)
o Public actions to develop entrepreneurship initiatives among the youth
oBuilding relevant skills through more market-oriented approach to training
oReform of subsidies policy (use of smart subsidies)
oDifferent models of public works (short + long term safety nets, public works plus)
 In general, for the policies to be efficient there is a need for:
oCoordination among stakeholders
o Alignment of the types and objectives of the programs
o Targeting
o Signaling
o Monitoring and evaluation

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5. Microfinance
“Microfinance” initiated in the mid-1970s appears to be the ‘new paradigm’ to eradicate poverty. It encompasses not only “micro-credit” but also “micro- saving” and “micro-insurance”.
CGAP: "Microfinance is the supply of loans, savings, and other basic financial services to the poor. People living in poverty, like everyone else, need a diverse range of financial instruments to run their businesses, build assets, stabilize consumption, and shield themselves against risks. Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services."
Successful innovations of microfinance is “group lending” and the ability to use group-based incentives to disburse credit to the poor, who would not obtain credit otherwise (since they lack collateral).
The idea of group solidarity to provide credit and enhance wellbeing, were known in the context of “traditional” cooperatives. (Vakulabharanam and Motiram, 2007)

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5. Microfinance (continued)
The Microfinance Institutions (MFIs) are target-oriented (poverty-focused) financial institutions with focus on group—micro and small enterprises (MSEs)
Target Graduation from poverty :
“Virtuous circle”
INCOME
CREDIT
INVEST- MENT

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Features of MFIs services:
oSmall amount of funds given for microenterprises for 3months -1year
oCapital and interest paid back in small weekly installments
oForced savings and insurance programs
oSocial Development Programs:
behavioral,
ethical,
and social development
Sustainability of MFIs depends on :
oMitigating Credit Risk : ensure repayment in the absence of acceptable physical collateral
oSolving the Moral Hazard problem : ensure funds not diverted and used for intended activity
oEconomic viability: keep (operating & financing) costs to a minimum relative to income
5. Microfinance (continued)

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Source: Economics of Microfinance (2005)
GROWTH IN GRAMEEN BANK MEMBERSHIP, 1976–2001
5. Microfinance (continued)
Success story:

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Source: Alpay (2011) “Enhancing Employability in OIC countries”
SHARE OF ACTIVE BORROWERS, 2009
5. Microfinance (continued)
In OIC: microfinance still concentrated in few countries :

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5. Microfinance (continued)
In Tunisia:
oIn the last few years, particularly following the revolution, Tunisia has been working on a national strategy to develop its microfinance sector. A study done in 2010 estimates the potential new clients of micro-credit to 1 million.
oMicrofinance services are confined to micro-credit, which is provided by the Tunisian Bank of Solidarity (TBS) and by Enda-Inter Arabe.
oTBS was established in 1997 with 60 agencies covering the entire territory. It services 160,000 active clients with 79 million TND ($ 50.8 million) of outstanding credit as of March 2011.
oAround 266,000 clients have benefited from the total amount of 482 million TND ($ 309.8 million) that have been disbursed since TBS started operations, to March 2011.
oEnda-Inter Arabe: second major provider of micro-credit, an NGO established in the country since 1995 and endowed with a network of 59 agencies.
oIn January 2013: ENDA counts 201.638 active clients with an outstanding credit of 132.867 million dinars
oFrom its inception to January 2013: 1,204,261 loans to 395,007 clients with a total amount of 855 million TND.

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6. Islamic Microfinance
CGAP (2008): “ Islamic microfinance represents the confluence of the two rapidly growing industries: Microfinance and Islamic finance. It has the potential to not only respond to unmet demand but also to combine the Islamic social principle of caring for the less fortunate with microfinance’s power to provide financial access to the poor. Unlocking this potential could be the key to providing financial access to millions of Muslim poor who currently reject microfinance products that do not comply with Islamic law.”

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6. Islamic Microfinance (continued)
Source: Ahmed (2002) “Financing microenterprises: an analytical study of Islamic microfinance institutions”
DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC MFIS

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6. Islamic Microfinance (continued)
CGAP (2013): Approximately 255 financial service providers offering Sharia- compliant microfinance products around the world. 92% of these providers are concentrated in East Asia and Pacific (164 providers) and MENA (72) providers.
Poor clients using Sharia-compliant products estimated at 1.28 million
TYPES OF IMFIs
NUMBER OF ACTIVE CLIENTS, BY TYPE OF PRODUCT
Source: CGAP (2013) “Trends in Sharia-Compliant Financial Inclusion”

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7. Role of Microfinance in jobs creation
Limited access to finance is key constraint to private sector growth and particularly to Micro and Small Enterprises (MSEs).
The MSEs do not qualify to get funds from institutional sources (banks)
olack of collateral
otoo much risk
otoo costly

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7. Role of Microfinance in jobs creation (continued) Typical Islamic Model of Microfinance
Client desires to start a business and approaches Islamic Microfinance Institution (IMFI) or vice versa  IMFI buys the goods and provides it to the client using Islamic mode of Finance. Profit calculation is based on the mode used which depends on the requirements.
Client obtains the required goods subsequently repays the financing to the IMFI. Alternatively client will be financed via Ijarah, Istisna or Salam.
Greater amount of involvement in the Client’s business & risk sharing + IMFI undertakes study to determine which SME business can be feasible and requires higher amounts of capital
Clients and IMFI share in the profits + IMFI subsequently “sells” various parts to partners (clients) using Islamic modes
Intensive involvement in the Client’s business, full partnership, risk sharing , forward and backward linkages developed to assist entrepreneurs
Source: Omar (2013) “Innovative Islamic Structures: IDB Group’s Experience in Financing SMEs”

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7. Role of Microfinance in jobs creation (continued) Examples of Latest Islamic Model of Partnership with the poor
Source: Omar (2013) “Innovative Islamic Structures: IDB Group’s Experience in Financing SMEs”
Indonesia: Rice growing, harvesting and local marketing
Pakistan:
oCotton and rice growing, harvesting and marketing support to farmers.
oLivestock (Cows and goats)
Sudan:
oHerbal tea growing, harvesting, packaging and marketing, local marketing and export.
oExotic vegetables and fruits growing in greenhouses, harvesting, local marketing and export
Palestine: Olive orchards to oil mill

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7. Role of Microfinance in jobs creation (continued) Jobs creations from Full-Fledged Microfinance Projects financed by IDB
Source: Omar (2013) “Innovative Islamic Structures: IDB Group’s Experience in Financing SMEs”

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7. Role of Microfinance in jobs creation (continued) Jobs creations : Thinking of innovative ideas to unlock the potential of young people
CHF International (2011) :"A New Middle East: Investing Where it Matters Most“: “Microenterprises on average only employ a few people – but they create job opportunities where very few exist.”
The UN declared 2012 the international year of cooperatives. “Cooperatives are business enterprises owned and controlled by the very members that they serve. Their member-driven nature is one of the most clearly differentiating factors of cooperative enterprises. This fact means that decisions made in cooperatives are balanced by the pursuit of profit, and the needs and interests of members and their communities.” Source: http://social.un.org
Example of cooperative in Tunisia: “Nomad 08” created by 8 unemployed young people from Rdeyef in 2013 using recycled electronics components to create translation materials. Equipped 50 rooms during the World Social Forum in Tunisia (2013)

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7. Role of Microfinance in jobs creation (continued) Jobs creations in Tunisia
In 2012 TBS was put in charge of implementing an IDB financed project (75 million TND over 15 years) in support of the low-income and young unemployed people.
In February 2013 ENDA received a 4 million TND financing line from the French Development Agency with the objective of developing its micro-credit services for agriculture in the rural regions.
ENDA: "Bidaya": start-up businesses for unemployed youth financed through a grant of 4.5 millions TND from the Swiss confederation
Source: Ben Hamida (2013) "Financing youth Start-ups: Achievements & Challenges - ENDA Inter-Arabe"

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7. Role of Microfinance in jobs creation (continued) Jobs creations in Tunisia
In 2012: idea of creation a shared fund for employment in favor of investment in the development regions of Tunisia
Partnership between public and private sectors, civil society, professional from different sectors
Benefiting from the specificities of the regions
Exit strategy of the initial investors (public and private) after a certain period of years in favor of the entrepreneurs or new investors via the alternative capital market

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7. Role of Microfinance in jobs creation (continued) Our proposal (presented during the IMF-World Bank Workshop. “Employment Policies in MENA Countries”, Kuwait, April 2012)
Revising the Program Amal and linking it to Islamic Microfinance financing by the Tunisian Bank of Solidarity Objectives:
•Developing entrepreneurial initiatives among the youth
•Reducing the Moral Hazard problems
•Targeting the graduated youth in poor areas
•Filling the gap in sectors with labor force deficit
•Create an economic dynamism in the remote areas
•Reducing poverty
•Reducing regional disparities
•Preparing for long term programs

29. Creating cooperatives based on Musharakah
Linking the Program Amal to economic entities based on Musharakah
To tap the skills available in the regions and the investment opportunities
 Using new technologies in the production and marketing process
 Developing jobs in the handicrafts sector
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Objectives

30. Grouping of available skills
Diagnosis of the economic characteristics and identify potentials for development
Agriculture
Accounting, Finance and Economics
Humanitarian sciences
Science and Technology
ICT
Tourism
Handicrafts
Creating cooperatives based on Musharakah
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Neighboring professions
Services

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Example of Diagnostics done by the Sudanese Development Initiative
Source: UNDP (2010) “Youth Labor Market Survey - South Kordofan State Report”

32. Practical Steps towards the training and creation of cooperatives
A group of youth graduated in different fields
Training based on program “Amal”
Cooperative
Demand derived by the needs of the region and other created cooperatives
Private sector firms
Government
Islamic Finance modes based on decreasing Musharakah
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Training structures

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8. Conclusion and policy recommendations
Reducing unemployment in Tunisia is one of the priorities specially for the young people in the inner regions of the country where the poverty and unemployment are much higher than the national average.
 Need for urgent and quick-wins generating economic policies while thinking about the a long term strategy to tackle the root causes of the structural high unemployment which needs structural adjustment of the economic development model of Tunisia and restructuring the education policy of the country.
 Short-term economic policies to reduce unemployment could benefit from the potential of microfinance and cooperatives.
The program Amal targeting young people holder of university diploma could be more effective if coupled with training, creation of cooperatives financed through private-public partnership through Diminishing Partnership.
The Diminishing Partnership (Mushrakah Mutanakisah) at the individual level of each member of the cooperative could take the form of a microfinance service from the Tunisian Solidarity Bank.

34. Thank you
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