Micro-credit works wonders - where it exists

Dec 2006
Beirut, Lebanon , December, 18 2006 - Special loans for non-traditional borrowers have yet to reach their potential in lebanon

The Nobel Peace Prize awarded to Bangladeshi banker Muhammed Yunus for his efforts to create economic and social development through micro-credit loans is an important landmark in the long history of the Nobel program. The reason is simple: This is the first time attention has been given to an individual who tried very hard to relieve the financial suffering of the poor.

In Lebanon, where the number of those living in poverty has been growing steadily, the expansion of micro-credit has the potential to be one of the ways to reduce the pain of large segments of the population and  contribute to the growth of the country's gross domestic product. But experts note that micro-credit programs are still not as widespread in Lebanon as they are in many countries in Asia and Africa.

Micro-credit, which usually provides soft and small loans to people who do not qualify to receive orthodox loans from traditional banks, has been applied by several non-governmental organizations (NGOs) and a handful of banks in Lebanon. Audi Saradar Bank has worked with NGOs to provide micro-credit. Jammal Trust Bank is one of the few banks in the country which is very involved in micro-credit, especially in the South, the Bekaa Valley and other poor, primarily rural areas.

Micro-credit usually focuses on individuals who are not "bankable" under the definitions followed by most traditional banks. Traditional banks frequently require clients to provide collateral or some other kind of guarantees in order to get a loan.

But in the case of a micro-credit program, the majority of the applicants are people who have very low incomes or no steady jobs with established companies.

The Cooperative Housing Foundation International (CHF) has made a serious attempt to address the issue of micro-credit in Lebanon.

"Micro-finance in Lebanon matters for three reasons," CHF said in a report on the subject.

"First, economists, government, and donors believe that constraints on access for low-income households might affect how well Lebanon can achieve rapid economic growth and share the fruits of growth. Second, access to micro-finance can help improvements for the poor families. Third, access is important for equity."

It added that increasing families' income is a first step toward building some wealth, which is obviously a key requirement to escape poverty. "But access to finance requires wealth in the first place."

The group stressed that access to standard bank credit requires assets that most of the poor do not have, such as buildings or land. In contrast, micro-finance uses assets the poor do have, such as reputations or household goods.

It also noted that the micro-finance sector in Lebanon has witnessed very limited growth over the years. "The sector seems to be dominated by a very few major organizations," the report found, "limiting a healthy competition that could give the providers an incentive to improve efficiency, lower operational costs, decrease interest rates charged to the final borrowers and improve product innovation."

The CHF has not been pleased with the pace at which Micro-credit has spread in Lebanon.

"The lack of government support and micro-finance initiatives exacerbates the problem of discouraging the entry of new micro-finance organizations and improving the micro-finance sector offerings," the CHF's study warned.

Despite serious efforts carried out by various actors over the past 10 years to expand programs, micro-credit is not as popular as in other emerging countries such as India, Pakistan and Bangladesh.

Micro-credit represents such a tiny percentage of total outstanding loans provided by traditional Lebanese banks to the private sector or individuals that in many cases these institutions do not even include it on their balance sheets.

Youssif Khalil, the head of the Financial Operations Department at the Banque du Liban, said that relatively speaking, Lebanon's achievements in the area of micro-credit programs are still acceptable compared to other Arab countries.

"But yes we are not as developed as Latin America or the Asian continent in general," Khalil told The Daily Star in an interview.

He argued that banks in general cannot entertain the idea of maintaining micro-credit programs because it is too costly.

"It is easier for a bank to deal with one or a few customers involving loans of $5 million, for example, because it will require one or two staff at the most. But in the case of micro-credit, the banks will have to hire many loan officers to follow the cases of thousands of small loan recipients," Khalil stressed.

He added that a micro-credit officer is frequently called upon to go out into the field in order to interview some of the potential recipients.

"That's why some of the banks have preferred to empower some of the NGOs to implement micro-credit programs," he explained.

Khalil, who is widely considered one of Lebanon's strongest advocates of micro-credit programs, has worked closely with several NGOs to promote the increasingly well-known practice.

He added that some commercial banks have become more involved in private and commercial loans over the past five years and are also getting more involved in small products.

"Our financial institutions and banks are very liquid," he noted, "and they can play a bigger role in the micro-financing program."

Khalil explained that micro-credit can involve very heavy overhead costs because of the need to cover both the cost of borrowing and the risk of default. "That's why the interest rates charged on micro-credit recipients are usually higher than normal bank loans," he told The Daily Star.

Interest rates charged on micro-credit loans currently range between 12 percent and 22 percent.

But what is striking about micro-credit, is that the default rate is typically a very low 1 percent or less.

Payment defaults jumped to 5 percent in the wake of the July-August war with Israel, but most NGOs agree that the rate is still a very acceptable one under such extreme conditions.

One of the NGOs which is quite active in the micro-credit field is the Association for the Development of Rural Capacities (ADR).

The ADR's micro-finance program was established in 1999 to strengthen the economic base of the low-income population by offering reliable financial services to the non-bankable individuals in urban and rural areas. Adriana Doumet, project manager for the ADR's Micro-Credit Program, said that her group focused most of its operations in rural areas, with special emphasis on the South.

"The program has partnered with different public and private institutions [including the European Union, the United Nations Economic and Social Commission for Western Asia (ESCWA) and Bank Audi] and has provided micro-credit to more than 19,000 productive business ventures," Doumet told The Daily Star.

She added that the EU and ESCWA provide the programs with steady grants to finance the ADR's numerous programs, including micro-credit work.

"Bank Audi usually matches 50 percent of the grant," she explained. "If I have a credit line of $100,000 the bank provides half of this amount."

She added that word of mouth has been one of the most effective ways to spread the use of micro-credit in rural areas in Lebanon.

As for the procedure, "the loan officer sits down with the potential client and fills out the form. We analyze the business of the customer and the committee studies the case before dispersing the money."

Once the loan officer of an NGO program completes the paperwork for the client in question, he or she can go to the bank and get the money.

The average income of applicants for micro-credit is between $500 and $700 a month.

Micro-credit clients in Lebanon are usually fishermen, farmers and owners of very small businesses.

"We don't ask for any guarantees or collateral from the client but he must comply with some of the conditions for the loan such as working experience in the field," Doumet said.

An impact study was conducted by the ADR in in 2005. The results show that the income of 75 percent of the recipients of micro-credit loans has risen, encouraging savings among one-third of the beneficiaries. The income increase was especially significant among those who earned $500 or less before taking out the loan, according to the ADR report.

Under most programs micro-credit loans do not exceed $3,000 and the amount should be settled within six months to 30 months.

Apart from NGOs and a handful of banks, Hizbullah has successfully operated a micro-credit program since 1982, focusing on areas with very low income.

The party named the program Al-Qared al-Hassan, or "the good loan," to meet the needs of individuals who fail to qualify at traditional banks.

Samer Fawaz, the director general of the program, said the group operates under a different set of rules.

"We don't charge any interest on any loan we give out to customers," he explained. "But we do ask any potential clients to deposit some kind of a guarantee, such as an item of gold."

The guarantee or deposit is returned to the client once the loan has been paid in full.

Fawaz insisted that Hizbullah's program was not receiving any funding from other groups in Lebanon or abroad. Instead, he said, the program ask all members of the party, who are estimated at more than 48,000, to pay monthly membership dues.

"We use the membership fees to finance all of our loan operations and the member has the right to retrieve all of his or her membership money any time he or she wants," he told The Daily Star.

Fawaz said that as of 2005, the number of beneficiaries from this program had amounted to more than 120,000. He added that since the program was started in 1982, about $920 million has been distributed. The program is registered with the Interior Ministry but does not follow any direct guidelines from the Central Bank or any other financial authority in Lebanon.

Fawaz said that approximately 90 percent of Al-Qared al-Hassan offices were destroyed during the war with Israel.

"But this did not stop our work," he added, "and we have managed to restore some of the offices in the South and other areas."

Source : The Daily Star

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