Tuesday, 29 December 2009

Microfinance is the need of the hour

Last month I was part of a team that travelled to Washington, D.C. and met with officials from the US administration. I learnt that President Barack Obama is holding an 'entrepreneurship in Muslim communities summit' next March in the US capital about an emerging phenomenon known as social entrepreneurship. A social entrepreneur is, according to Wikipedia, a person who recognizes a social problem and uses entrepreneurial principles to organise, create, and manage a venture to make social change. I had never heard of this concept prior to that visit, or so I thought. It turns out that the founder of one of the most popular forms of social entrepreneurship is the Nobel Laureate Mohammed Younis who developed the practice of microfinance in 1976.

Microfinance allows low income individuals who were previously outside the traditional banking and finance sectors radar screens, to have access not only to small amounts of funding but also to insurance, transfer and savings. These funds can be as low as a few score dollars and are usually requested by individuals who do not want charity but need funding to start a business and get a head start in life. By the time Mr Younis won the Nobel Prize for peace in 2006, Grameen bank had almost seven million borrowers - 97% of whom were women.

Younis’s work has lifted microfinance in to the limelight the world over. Similar concepts are now used in Asia, Africa and Latin America. But I wondered if such an idea could work in the oil rich Gulf States.

First, it may be unfair to place all the Gulf States in the same basket with regards to the need for microfinance. After all there are glaring differences between a demographically rich county like Saudi Arabia and a small but extremely wealthy state like Qatar. Although Saudi Arabia is much wealthier than Qatar overall, the latter enjoys the second highest GDP income per capita in the world and its citizens may not be in dire need for three and four-dollar digit loads.

The Gulf States can be roughly split into two groups, on one had are the three wealthier states in terms of GDP income per capita: Kuwait, Qatar and the UAE.

On the other hand are the three relatively less wealthy states in terns of GDP per capita: Bahrain, Oman and Saudi Arabia. These states have a significant lower income portion of the population that might benefit from this growing industry.

In fact, microfinance is very much alive and kicking in the Gulf today. In 2007 the Gulf’s first dedicated microfinance firm was established when Abdul Latif Jameel Group’s subsidiary, Bab Riq Jameel teamed up with Mr Younis’ Grameen Foundation to create Grameen-Jameel. This institution’s mandate was wider than its home base of Saudi Arabia and extended to North Africa, the Levant and Yemen. By April 2009, Grameen-Jameel reported that it had already brokered more than US$44 million through a Guarantee Fund in micro financing transactions in Egypt, Syria, Jordan and Tunisia.

Egypt, the most populated Arab country, saw the establishment by the Egyptian Gulf Bank of a US$8 million (EGP 46 million) microfinance firm that is envisioned to provide about EGP 400 million credit facilities by offering loans from EGP 4,000 to EGP 35,000 via its planned 300 country wide network.

The truth is in order for this industry to flourish in the Gulf and the Arab world, the regional economic regulators must reform their laws to make it possible for small businesses to be established from homes and bring down licensing costs. It will not make sense to encourage micro financing that involves extending a few hundred or thousand dollars to aspiring youth and then burden them with a series of debilitating fees, charges and hidden costs.

According to the United Nations Development Program, the Arab world needs to create 50 million new jobs by 2020 to accommodate its young and growing population. The government sector, which is a major employer in the region, will not be able to accommodate all the new job market entrants and it is time for the regional governments including those in the Gulf to think outside the box. Even wealthier states like Kuwait and Qatar can chip in and create microfinance funds for other Arab states citizens. The private sector in the region can also start extending loans either directly or by creating microfinance websites and portals.

Creative, widespread and pragmatic entrepreneurship is the only way for Arab countries to be able to provide work for tens of millions of young Arabs. Microfinance must be utilised as part of a spectrum of tools including economic reform and severe start up cost reduction. Only then will the region be able to provide jobs to our youth.

*This article first appeared in Moneyworks magazine, December 2009 issue

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