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Developing Microfinance Institutions in the Arab World

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We advance a strategy for developing regional microfinance institutions which could affect the lives of 1.6 million people with only $6 million

We advance a strategy for developing regional microfinance institutions which could affect the lives of 1.6 million people with only $6 million

Published in: Economy & Finance, Business

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  • 1. Developing Microfinance Institutions in the Arab WorldAbout Us Tahseen Consulting is an advisor on strategic and organizational issues facing governments, social sector institutions, and corporations in the Arab World. You can read more about our capabilities at tahseen.aePublic Sector ▲Social Sector How to affect the lives of 1.6 million people with only $6 millionCorporate ResponsibilityCONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of Tahseen Consulting is strictly prohibited www.tahseen.ae | 1
  • 2. Microfinance has gained acceptance worldwide as a tool for alleviating poverty andspurring entrepreneurship; A few Arab institutions have emerged, though MohammedYunus called on Dubai in a Nov. 2007 conference to fill current leadership vacuum … Yunus Issues Dubai a Call to Action Late 2002 1990s 2005 Grameen Bank Microfinance Network of Arab Countries, membership- UN declares the November ‘07 model finds driven regional network “international year of Mohammed Yunus urges Dubai to adopt acceptance in of Microfinance Institutions microfinance“ reminding micro-credit concept, offering to set up South Asia By 2007, 53 Members in 11 people that millions benefit system at Leaders in Dubai event Countries from microfinance activities 1990 2000 2001 2002 2003 2004 2005 2006 2007 2003 2006 Peer to peer social lending World Bank estimates 1.2 billion marketplaces emerge as alternative to people subsist on less than banks US$1 a day, 850 million in rural areas 2000 Oct/Nov 2006 Grameen Bank receives Nobel New microfinance paradigm - developing full-service Peace Prize, highlighting that peace + for-profit banks. Offer savings, insurance, remittance is inextricably linked to poverty. Other services, and personal and business loans, to help Bank’s model achieves worldwide clients grow assets while increasing incomes Services recognition June 2007 Formation of Grameen-Jameel Pan-Arab Microfinance Limited, a joint venture that will focus on alleviating poverty in the Arab World through microfinance | 2
  • 3. In the Arab world, microfinance providers are typically small, local organizations;increasingly intl. organizations and a handful of larger regional MFIs are offering an arrayof financial services to low income clients and SMEs in the region Microfinance business models Traditional microfinance model New microfinance model Comparison Factor (Local impact, poverty approach) (scale ops, institution building approach) Low-income households, individuals, Target Market Microenterprises entrepreneurs Working capital loans and other business Full financial services (savings, remittances, Core Product credit insurance, education etc.) Local branches, often in villages and rural Retail outlets, peer-to-peer websites, payment Delivery Channel locales systems via ATMs, POS, cards, mobile phones Promoters such as Microfinance Client Relationship Mgmt. Loan officer Institutions/websites Organizational Structure Decentralized Centralized Credit Underwriting Integrated, personalized services Specialized, increased automation Return on Equity (Benchmarks: 13% - Potential to increase with technical Large scale – 11%, medium scale - 5% UAE Banks 17%, Citigroup 15%, assistance Potential to increase with technical assistance HSBC 10%) Group lending, situational, zero tolerance for Risk Management Statistical models, risk based pricing delinquency International organizations, more sophisticated Key Players Small, local organizations. local organizations Service sophistication is increasing as MFIs have begun to move “up-market,” serving higher-income clientele and making operations more profitable and attractive to commercial investors | 3
  • 4. Despite the presence of 75+ MFIs servicing 1.3 million borrowers, there are manyneeds to be filled to expand impact and facilitate capital market access Regional economic variation requires support for smaller poverty reduction focused MFIs and sustainable, larger institutions to expand microfinance to SMEs & low income clients Unmet Demand  MFIs serve only 15-20% of the estimated 8 million micro entrepreneurs with no access to financial services  The majority of MFIs are in Egypt, Jordan, Lebanon, Morocco, Palestine, Tunisia, and Syria Focus on Poverty Lending Not SMEs  Except for Jordan and Palestine, where institutions also cater to small enterprises, loans across the region do not exceed one fourth of local income; average loan per borrower is $248 in the Arab World  Entrepreneurship and related job creation impacts require funding access and growth capital not being provided now Commercial Lenders Not Interested …  In developed world, SME funding typically provided by commercial sources rather than governments  Commercial lenders cannot accommodate credit needs of SMEs and microenterprises due to less mature financial markets;  Only 20% of microfinance funds come from commercial lenders, versus 60% globally  To scale up microfinance, increasing involvement of private sector investors is a key priority … But Potential Unrealized Regional Market Opportunity  Returns of well managed, sustainable MFIs can be higher than normal commercial banks MFI Scale and Profitability = More Loans to More People  Small/medium MFIs lack access to commercial finance  Economies of scale could greatly expand the activities of Arab MFIs  As institutions gain in scale, they invest more in productive assets and allocate more to lending Source: Mix Benchmarking Arab Microfinance, Sanabel 2005 Regional MFI Survey, Deutsche Bank Microfinance: An Emerging Investment Opportunity | 4
  • 5. How a Microfinance Investment Vehicle facilitates leverage to reach 166,000 borrowersAssumptions• Loan $5 million ( $500,000 to each of 10 initial partner MFIs)• Below market annual interest rate, approximately 1.5 to 2%• 3 - 5 year term• Local currency loan with a minimum leverage ratio of 2:1 but could be as high as 6:1• Loans to micro-entrepreneurs have maturities of six months, doubling lending capacity and ensuring near 100%repayment 1 Loan Arab MFIs Loan $20 M 4 $5 M at 2% APR in local ($20 M increase in Microfinance currency Micro- loanable funds Development Fund entrepreneurs and annually, reaching ($5 million) other borrowers roughly 166,000 Repayment Repayment 5 $5.31 M borrowers) $44 M (30% APR is MFI industry avg.) 2 3 $5 M enables 2X leverage via commercial banks MFIs leverage $5 M to generating $20 M in loanable funds access commercial funds MFIs pay $5.9 M to commercial lenders * EIBOR is 4.3% + 1-1.5% risk premium and 1% origination Possible Technical Assistance Partners • Grameen • FINCA • ACCION Possible Bank Partners (guarantees, lines of credit • Oikocredit etc.) • Incofin Arab financial • National Bank of Dubai • Développement International Desjardins institutions • Mashreq Bank • Deutsche Bank Start-up Fund • Emirates Bank International • Microfinance Network of Arab Countries • Dubai Islamic Bank • Dubai First (Dubai Holding consumer banking entity) | 5
  • 6. • For Further Information About This Initiative ‫للمزيد من المعلومات عن هذه المبادرة‬ • To get a copy of the full presentation or to ‫للحصول على العرض التقديمي الكامل لهذه المبادرة يرجى‬ discuss the findings, please contact Wes ‫االتصال بـ ويزلي شوالييه على العنوان‬ Schwalje wes.schwalje@tahseen.ae wes.schwalje@tahseen.ae• For Inquiries About Our Services and ‫• لالستفسار عن خدماتنا ولعرض أفكاركم علينا‬ Requests for Proposals ‫لالستفسار عن خدماتنا أو عرض أفكاركم علينا يرجى االتصال‬ To inquire about our services or submit a request ‫بنا عبر اإلنترنت باستخدام النموذج أدناه أو إرسال بريد إلكتروني‬ for proposal, please contact us using the online fikra@tahseen.ae ‫إلى‬ form or send an e-mail to fikra@tahseen.ae• For Organizations Interested in Alliances ‫• بالنسبة للمنظمات التي لديها اهتمام بالدخول في اتفاقيات شراكة‬ ‫وفي تحالفات مع شركة تحسين لالستشارات‬ We are interested in opportunities where our technical skills and expertise can be used to ‫إننا مهتمون بالفرص التي يمكن من خاللها استخدام مهاراتنا‬ complement or diversify those of potential ‫وخبراتنا الفنية لتكميل أو لتنويع مهارات وخبرات شركائنا‬ partners to pursue specific government funding ّ ‫المحتملين بما يمكن من السعي للحصول على تمويل حكومي أو‬ opportunities, commercial contracts, or RFPs. To begin a discussion about entering into an alliance ‫عقود تجارية. لبدء نقاش حول الدخول في تحالف مع شركة‬ with Tahseen Consulting, please contact Walid ‫تحسين لالستشارات يرجى االتصال بوليد العرادي على العنوان‬ Aradi at walid.aradi@tahseen.ae walid.aradi@tahseen.ae• For Members of the Press or Media ‫• بالنسبة للعاملين في الصحافة أو في وسائل اإلعالم‬ For media inquiries, please contact Wes Schwalje ّ ‫لالستفسارات المقدمة من قبل وسائل اإلعالم يرجى االتصال بـ‬ at wes.schwalje@tahseen.ae wes.schwalje@tahseen.ae ‫ويـزلي شـوالييه على العنوان‬