Microfinance in Iraq, performance proves critics wrong: Report

Microfinance Focus, July 16, 2010: Microfinance in Iraq has achieved an ambitious rate of growth and socio-economic impact on those it serves. Despite critical views that Iraq is not ready for microfinance, the sector, as of the end of April 2010, has cumulatively disbursed over 197,000 loans of more than $453.3 million. The Iraqi microfinance sector had at the same time period an outstanding portfolio of $85.5 million serving an active client base of almost 63,000. With a 99% repayment rate and a portfolio at risk greater than 30 days of around one percent, Iraqi MFIs grew at the rate of 31% for the one-year period through the end of April 2010. These are the finding published in the recently released report ‘State of the Iraqi Microfinance Industry, 2010’ by USAID-Tijara (U.S. Agency for International Development).

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Tijara, an initiative of USAID has been building the industry at the macro, meso and micro level through several targeted interventions aimed at integrating microfinance institutions into the formal financial system, capacity building of industry participants, product innovation as well as enhanced transparency and reporting.

Relatively new to the Arab region, Iraqi microfinance industry which was established in the latter half of 2003, now comprises 14 microfinance institutions (MFIs), international and indigenous, with presence in all 18 provinces of Iraq. More than 780 people are gainfully employed in this industry that has 100 offices throughout Iraq. Capacity building and training for more than 600 professionals has been completed and several new initiatives are underway.

MFIs have adopted internationally compliant reporting norms; developed effective rules and recently instituted an industry-wide code of conduct. They have also installed modern systems and software applications to effectively track portfolio growth. The Central Bank of Iraq and the NGO Assistance Office are also actively engaged in the regulation and supervision of the industry, the report says.

USAID-Izdihar6, a provincial economic growth project funded by USAID from 2004 to 2008 and implemented by the Louis Berger Integrated Development Group, collaborated with the U.S. and coalition militaries in late 2006 to establish indigenous MFIs in order to ensure the presence of at least one MFI in each province to enable private sector growth. In supporting the development of MFIs, USAID envisioned local institutions serving communities through strategies for delivering locally acceptable loan products, fulfilling a market gap unmet by the larger players.

The report identifies major trends of the past year and how they will shape outcomes in the years to come – establishing microfinance institutions as downscaling and deepening outreach to poorer clients. They are progressively mainstreaming into the formal financial sector, signified by diversifying sources of capital such as from debt, equity and donors, the development of an enabling environment, and adoption of a microfinance code of conduct and ethics. All of these are facilitating the mainstreaming of MFIs and making the overall financial sector ever more inclusive.

With the availability of poverty data and improved security in Iraq, 2009-2010 saw the microfinance industry playing a greater role in deepening outreach to poorer clients, especially in southern and central Iraq where poverty is greater. Minimum microfinance loan size reduced to $500 mainly due to the introduction of the solidarity group lending (SGL) methodology among four Iraqi MFIs. MFIs will further refine their downscaling strategies in order to capture this market more effectively to achieve their overall mandate of enabling financial inclusion for those at the bottom of the pyramid.

MFIs, with a track record for financing micro businesses are now showing themselves as easier providers of SMEs financing and have developed competency in accurately assessing the cash flow and repayment capacity of potential borrowers.

USAID has provided over $37 million to MFIs since 2004. In 2009, two MFIs received grant funding from Australian Agency for Development Cooperation (AusAid) and the UN, and in 2010, capital commitments (in the form of ‘line of credit’) were made by Overseas Private Investment Corporation (OPIC), an Agency of the U.S. Government.

According to the report, the microfinance sector in Iraq is fast gaining global recognition as an ‘investment worthy’ destination among donors and other more commercially-oriented development investment vehicles. In addition, with enabling regulations issued by the Central Bank of Iraq (CBI), donors and other stakeholders will enter the Iraqi microfinance sector not only as grant capital providers, but also as equity investors and low-cost credit providers.

MFIs, supported by USAID-Tijara, have also drafted and adopted the Microfinance Code of Conduct and Ethics. This marks the emerging leadership among MFIs to take stock of the sector and promote ethical good practices. The Code adopts principles of client protection14 prescribed by Consultative Group to Assist the Poor (CGAP), which include transparent pricing, appropriate collection behaviour, ethical staff behaviour and privacy of client data.

Based on the Government of Iraq’s recognition of microfinance as a developmental tool for achieving their goal to reduce poverty from 23% to 16% as set forth in their ‘Strategy for Poverty Reduction in Iraq for 2010 – 2014’, the next couple years may see the seven government banks playing a greater role in lending to MFIs in addition to an introduction of broader schemes for MFI-bank linkage, the report suggests.

CBI is in the process of issuing regulations allowing NGO-MFIs to transform to NBFIs for extending financial services to SMEs. Under this legal status, MFIs will be able to access a broader range of capital for scaling-up their impact in effectively reducing unemployment among the low-income population in Iraq. With MFIs transforming into NBFIs, the Iraqi microfinance sector is poised for new growth and partnerships. Led by USAID, the Iraqi microfinance industry has come together to form a Transformation Working Group (TWG) to leverage ongoing dialogue with CBI to balance supervision and orientation of the transforming NGO-MFI. Specifically, the TWG will be engaging with the CBI and related government agencies to assure that the enabling environment will support transformation.

The report has identified certain key drivers for the growth of Iraqi microfinance industry including factors like market potential, technology, mobile telephone network and its outreach, timely availability of trained human resources and enabling environment. Despite the high growth of financial services in the country, there is less than one percent market penetration. Consequently, the Iraqi microfinance industry will witness the entry of more actors seeking investment opportunities. Over 90% of the current microfinance portfolio is concentrated in urban Iraq, with nominal outreach to rural areas.

As additional MFIs incorporate the solidarity group lending methodology and fine-tune group formation practices based on local contexts, MFIs will increasingly move to rural areas. Approximately seven million people live in rural Iraq, with agriculture and livestock as the predominant economic activity. MFIs success in providing financial services for the rural poor will be contingent on an improved security situation as well these institutions’ ability to develop loan products and services targeting agri-based activities and enterprises.

Understanding the importance of information technology, the report claims that all MFIs have created in-house management information systems (MIS), and their ability to connect growing number of branches will allow institutions to make timely decisions and effectively analyze growth across short periods.

To achieve a sustainable growth in the sector, the report also suggests certain priorities for the nation’s microfinance institutions. It recommends MFIs to make timely and complimentary investments into human resources, technology, systems and processes. Building on the success of the industry infrastructure in Iraq, MFIs now need technical assistance on operational growth management and risk management systems. Institutional capacities and strengths will play a key role in Iraqi MFIs ability to reach scale and maintain sustainability, it says.

As MFIs grow, it is important that clients’ interests remain at the core of their institutional decisions. MFIs who understand their clients’ needs and address them more effectively through a viable business model may benefit in the long term from greater client retention. The MFI should spend enough time understanding clients’ needs and then design products that meet those needs.

The envisaged Iraqi Microfinance Network aims to facilitate the establishment of a credit bureau for the sector in order to provide information on microfinance borrowers’ credit history and interest rate structures of loan providers. As MFIs mature and the sector establishes itself as a reliable provider of financial services, their access to capital for growth and investments will determine their sustainability. While donor funding for the industry is projected to increase, the Iraqi microfinance sector needs financing vehicles that not only provide low-cost accessible on-lending capital but also promote best practices and self-sufficiency.

Small farmers are gaining increased attention as part of the government’s mandate to promote inclusive economic growth throughout Iraq. In early 2010, the Agriculture Ministry approved over 2,000 loans of approximately $15,000 each for small farmers. MFIs’ ability to develop value chain capacity and structure new financing products focused on the livelihood potential in rural areas will enable them to create greater value for the poor. Microfinance Institutions are closely positioned to both producers and consumers of products and services. This positioning provides opportunities for synergies between MFIs with expertise in credit delivery and community mobilization with businesses operating with agriculture or low-income segments.

The report proposes that the Iraqi microfinance sector can utilize the proliferation of mobile phones to increase accessibility and outreach through research into alternative delivery channels. Examples of evolved models from successful partnerships between financial service providers and mobile companies, such as the M-Pesa model from Kenya, will serve as important lessons for the Iraqi microfinance sector. Donors can play an important role by supporting market research through technical advice and funding.

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