Syria Thinks Small

Feb 2010
Cairo, Egypt, February, 05 2010 - Damascus turns to microfinance to combat poverty.

Aregional front-runner in microfinance legislation, Syria is still struggling to find a sustainable model to finance its rural poor. Currently, NGOs geared toward poverty alleviation dominate Syria’s microcredit market, but further expansion of their role is inhibited by outdated government regulation. The entry of more private players is needed to increase market competition and efficiency, which will in turn help the microfinance network to realize its social goals.

While the government has done much to liberalize the financial sector since 2001, Syria remains under-banked and its financial services are limited. Private commercial banks are slowly expanding, having distributed $6.4 billion (LE 34.8 billion) in credit in 2008. However, most of that is oriented towards high-income clients and small and medium enterprises, leaving the many people lower on the economic scale out in the cold.

In particular, those subsisting on agriculture have suffered in recent years due to drought and other climate problems. The UN estimates that 803,000 Syrian farmers have lost their livelihoods since 2006.

Microfinance in Syria came to prominence as the banking sector opened up, in the form of the Fund for Integrated Rural Development of Syria (FIRDOS), an initiative by the first lady Asma Al Assad. The modest success of this lending venture, which operated a multi-million dollar portfolio, and those that followed, enabled Syria to reach an unprecedented milestone: Law No. 15, governing microfinance, was passed in 2007.

“Syria was the first country in the Arab world to issue specific legislation dedicated to the area of microfinance,” says Adib Mayaleh, Governor of the Central Bank of Syria. “Yemen has recently approached us for help in this area, which shows that our standards are held in high regard.”

Law No. 15 established a licensing process for social financial banking institutions (SFBIs), defined as those that, “help families create opportunities for owning and increasing the accumulation of assets.” This does not imply that all SFBIs must be charitable by nature. On the contrary, the legislation specifically paves the way for profit-making businesses to legally disperse microloans. Despite this, Syria’s microfinance market has been dominated by non-profit organizations that are not permitted to charge an interest rate of more than 9%.

The first SFBI to be licensed was First MicroFinance Institution Syria (FMFI-S), part of the international Aga Khan Development Network. The NGO has captured a significant portion of the microfinance segment, distributing over 60,000 loans totaling $82.3 million in the past six years. Working within the framework of the World Health Organization’s Healthy Villages Program, FMFI-S focuses on loans to the rural poor. Although the organization offers a wide range of products, handing out individual, enterprise, group and housing loans from as little as $100, it is active in only six of Syria’s 14 provinces.

Elsewhere, Syria has been the site of a pioneering microfinance project by the United Nations Development Program (UNDP). A sunduq (savings box) is a type of community-run lending center that has been established throughout Jabal al-Hoss, an impoverished collection of villages southeast of Aleppo. The area is part of an agricultural development project run in conjunction with the International Fund for Agricultural Development (IFAD) since 2000. Sunduq members, predominantly small farmers and women, pay a small fee to receive loans, averaging $556 (LE 3,028), according to the IFAD.

With groundbreaking legislation and innovative techniques, microfinance has been moderately successful, but slow to spread. The market has expanded to include a handful of SFBIs with limited regional coverage. None compete directly for clients and unmet demand is extensive. The Consultative Group to Assist the Poor (CGAP) estimates that there are one million potential microfinance customers, yet only 41,500 currently receive microfinance services. According to a 2008 World Bank report, 79.3% of loan takers for micro-enterprises considered it “impossible, very difficult, or difficult to obtain a loan” via formal channels — including microfinance. People are far more likely to borrow money from friends and family or visit informal moneylenders, who often impose interest rates of more than 70%.

In contrast, Syria’s current microfinance providers charge very little interest or none at all — but this brings its own problems.

“[FIRDOS] didn’t charge interest for the loans, so we couldn’t cover the cost of administration or providing finance,” says Nader Kabbani, director of research at the Syria Trust for Development, which ran FIRDOS. The initiative was restructured three years ago to receive a positive return on assets. FMFI-S charges a 1% monthly interest rate, while the UNDP sunduq program follows the Islamic banking strategy, asking for a fixed mark-up of around 5%.

Sustainability has therefore been a challenge for Syrian microfinance providers, many of which stay afloat with support from international financing institutions. The sunduq program was established with $1.5 million (LE 8.3 million) in UN grants as well as government money. In July 2009, German development bank KfW Entwicklungsbank signed a contract with the Syrian government to provide a total of 7 million (LE 54 million) to the FMFI-S for its expansion.

For the Syrian government to ensure long-term viability for NGO microfinance providers, the clear next step is to remove its 9% interest rate cap. Microfinance has relatively high administrative expenses, due to many tiny transactions, so providers must charge higher interest rates than normal banks to break even. According to the Microfinance Information Exchange, the average annual interest rate for microfinance providers internationally in 2006 was 26.4%, with those charging less than 20% very likely to be unsustainable.

Another way to meet demand is to encourage the entry of commercial corporations. The private sector may have been reluctant to enter the microfinance arena due to perceived risks, yet small-scale loans for the poor have a very low default rate. FMFI-S reports a repayment rate of over 99%, compared to the 95% typically seen at commercial banks. That, in addition to vast unmet demand and an existing government framework for SFBIs, should make for a sound business investment. In 2008, the World Bank estimated Syria’s potential microfinance market to be worth $472.5 million (LE 2.5 billion), much of which is unrealized. Moreover, the addition of new players will generate competition, leading to product differentiation and increased regional coverage. In short, everybody wins.

Bassel Al Hariri, head of microfinance at FMFI-S, says that they are focusing on expanding the scope and scale of their business. “We now have two branches licensed to take deposits,” he says. “We want to achieve the best geographical coverage possible in Syria, and have plans to expand to 22 branches.” Still in its teething stage, microfinance has the potential to become a major economic force.

Source : Business Today

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