Economic Peace & Conflict Risks in Palestinian Microfinance
By Jake Lomax | Researcher | Birzeit University Center for Development Studies
Economic peace is topical again, thanks to the vision of the new Israeli Prime Minister Binyamin Netanyahu. But this view is closer to donor policy than it was in the past. The failure of Oslo’s promised peace dividend to materialize has led to a growing shift towards the view that improved economic conditions can make an important contribution to peace in the Near East rather than being a positive outcome. It is the clear, stated objective of many donors working in the occupied Palestinian territory (oPt) that they intend to increase economic welfare in order to generate support for the two state solution.
Of course Netanyahu and the various donors do not share one vision of economic peace nor motivations for pursuing it. But the principal shares a broad underlying assumption: that the well-off are more likely to accept the status quo and improved economic conditions will strengthen the social contract between state and citizen (or however this is manifested in a non-sovereign entity). To this should be added some residual belief in the ‘less poverty – less terrorism’ mantra of Bush Jr circa 2001. A report of a presentation by Berkeley Professor Ananya Roy provides one interesting example of this: “A recent Untied States Agency for International development meet witnessed an explicit discussion on how to give loans to young men in Arab countries, who will make ‘filafel’ rather than becoming suicide-bombers”.1
These claims that microfinance can support peace-building in oPt are widespread. The Portland Trust works to promote peace and stability between Palestinians and Israelis through economic development, and focuses much of its effort on microfinance. And early 2009 saw the launch of Lend for Peace, which claims to help build peace through Kiva-style extension of the funds available to Palestinian MFIs. –
Much of the theory underlying the donor conception of economic peace rests on the work of Paul Collier and others, which examined civil wars and economic factors and concluded that if a country fails to achieve economic growth after cessation of hostilities, it is more likely to return to war. In line with this idea, Lend for Peace “believe(s) that economic growth leads to increased political stability and therefore believe(s) that addressing the issue of individual economic self-sufficiency means addressing a fundamental driver of conflict.”2
But oPt is facing a colonial occupation not a civil war;3 we are not talking about a post-conflict situation. There is an ongoing, political conflict with no resolution in sight. For supporting evidence of the futility of trying to bring Israeli-Palestinian peace through economic growth one need look no further than the first and second Palestinian intifadas, both of which were preceded by significant economic growth. So those Lending for Peace should perhaps be grateful that microfinance has yet to demonstrate success in generating economic growth anywhere, let alone in the oPt where according to the World Bank -“in economic terms, the restrictions arising from closure not only increase transaction costs, but create such a high level of uncertainty and inefficiency that the normal conduct of business becomes exceedingly difficult and stymies the growth and investment which is necessary to fuel economic revival.” 4
For microcredit to be successful – assuming you have a higher bar for success than extending access to finance – entrepreneurs need to be able to make positive returns on investment. This suggests an important role for microcredit in post-conflict environments, given the frequently observed ‘post-conflict boom’ where individuals and businesses make investments they have been postponing during hostilities. In a stabilizing business environment, investments have a chance to make profit greater than the interest rate charged. So improving access to credit can speed up economic recovery and increase client welfare.
Even when the conflict is ongoing, positive returns to investment are certainly not impossible for micro-businesses, particularly in political conflicts where the social fabric remains largely intact. An absence of intra-Palestinian looting distinguishes this conflict-business environment from many in sub-Saharan Africa, and improves both the likelihood of making investment and the likelihood of success. But with ongoing hostilities the risks of investment are greater, as the Palestinian microfinance industry discovered in 2006, when it almost collapsed with the rest of the economy. The 30-day PAR rocketed from a 14% average in 2005 to 41% in September 2006 as aid flows dried up and debt repayments stopped. In a sample of 1200 micro-businesses, average profits fell heavily from 2005 to 2006 – from $500 per month to $400 in the West Bank, and from $715 to $380 in the Gaza Strip.5
This perspective suggests a need for greater examination of micro-business risk factors in conflict areas where microcredit is being used, and the degree of additional financial risk that should responsibly be placed on entrepreneurs. One Palestinian MFI’s 2007 Market Survey found a major use of loans, particularly in Gaza, was to repay existing debt. And the PlaNet market survey found one fifth of West Bank MFI clients admitted to needing credit to reimburse existing debt.6 The report concluded that this situation was probably underreported and that: “there is an important risk of over-indebtedness … in a context of reduced income and rising poverty levels”.
So entrepreneurs in conflict areas face severe business risks. Microcredit adds financial risk and, in oPt, currency risk. In common with debt financing everywhere, the requirement of regular repayment with volatile income increases risk of one or more of the following: business failure, further borrowing, sale of assets, or default. And in Palestine loans are made in dollars, but the main currency used is the Israeli Shekel. Lending in dollars decreases MFI risk and increases borrower risk – in the last few months, the dollar has strengthened from 3.35 NIS to 4.2 NIS with clear repercussions for the cost of debt.
–
If we see microcredit primarily as introducing increased personal risk rather than increased income, what then are the conflict repercussions? Lerner’s 1958 study of political extremism in the Middle East found: “The data obviate the conventional assumption that the Extremists are simply the ’have-nots,’ suggesting rather that they are the ‘want-mores’”.7 For those seeking economic peace, there may be risks of promoting ‘local neoliberalism’,8 amongst a people who are largely deprived of the opportunity to determine their own economic future. Might it not prove a catalyst of violent resistance to increase the gearing of the economic risks of peace process failure that fall squarely on the shoulders of individual entrepreneurs – especially those who are already poor and seeking a loan out of desperation?
An alternative view is that increasing personal debt reduces violence by encouraging people to focus on working to repay loans rather than protesting, or fighting, to achieve their rights. This seems to be the hope of some microfinance donors, as the USAID example above demonstrated. Which of these outcomes proves more realistic will depend on Palestinian individual and group tolerance of injustice and an oppressive business environment. Certainly there needs to be further investigation of these issues than the simplistic assumptions that seem to underlie some donors’ thinking on the relationships between microfinance and conflict.
And what of poverty reduction? With MFI loan sizes up to $30,000 over three years it is clear that many MFI clients are far from the poverty line. For those who are poor, findings on the performance of Palestinian MFIs in moving people out of poverty are as inconclusive as elsewhere. In order to avoid increased client risk exposure worsening poverty, the response of MFIs to heightened political-economic crisis will be key. Following the 2006 crisis MFIs took a light touch, and many lost a large chunk of their loan funds. How well the situation was managed is unclear, but balancing the two bottom lines is a particularly complex issue in conflict areas, and ignoring the social bottom line is not so easily done here as elsewhere.
Products that reduce risks for entrepreneurs rather than increasing them seems like a sensible option both for MFI sustainability and for client welfare in conflict areas, and oPt has seen some welcome developments of late. PlaNet Finance and Reef are planning the first micro-insurance product and are introducing microloans that are designed to be flexible around crop cycles, while SIDI is starting to implement a loan guarantee scheme with ACAD.
Still, microcredit will remain as the dominant tool of microfinance, and so there remains a need to understand in more detail the business risks faced by micro-entrepreneurs in conflict areas. Only then can the financial risk that clients face from microcredit be put in proper context. One first step towards improving our understanding would be for standard SPM measurements tailored to conflict regions to be adjusted to enable a more thorough understanding of indebtedness and the volatility of the business environment for various business types and geographical areas.
Author Note: I am grateful to Fairouz Boumhaouss, Prof. Milford Bateman and Dominique LeSaffre for comments on an earlier draft of this article.
References:
1. Presentation at 7th Doha Forum on Democracy, Development and Free Trade, 2007 - http://www.qatar-conferences.org/democracy2007/viewlastnews.php?id=41
2. http://lendforpeace.org/content.php?OQ
3. For an in-depth examination of whether the occupation is colonial, see the forthcoming publication: Occupation, Colonialism, Apartheid? A re-assessment of Israeli practices in the occupied Palestinian territories under international law, from the Democracy and Governance Programme of the Human Sciences Research Council of South Africa – http://www.hsrc.ac.za/Event-363.phtml
4. MOVEMENT AND ACCESS RESTRICTIONS IN THE WEST BANK: UNCERTAINTY AND INEFFICIENCY IN THE PALESTINIAN ECONOMY – World Bank Technical Team May 9, 2007 http://siteresources.worldbank.org/INTWESTBANKGAZA/Resources/WestBankrestrictions9Mayfinal.pdf
5. PlaNet Finance: Microfinance Market Survey in the West Bank and Gaza Strip – May 2007
6. Ibid.
7. Lerner, D. (1958). The Passing of Traditional Society. Illinois: Free Press. Cited in Krueger, A.B. and Jitka Maleckova (2003). Education, Poverty and Terrorism: Is there a causal connection? Journal of Economic Perspectives – Volume 17 Number 4
8. See Bateman, M. (2008) Microfinance and Borderlands: Impacts of ’Local Neoliberalism’. In Michael Pugh, Neil Cooper and Mandy Turner (2008) (eds) Whose Peace? Critical Perspectives on the Political Economy of Peacebuilding, London: Palgrave MacMillan.
******************
