Wednesday, December 30, 2009

The Significant Demand for Microfinance in Syria


December 2009
DAMASCUS, Syria  Traditionally, banks do not provide financial services to clients without resources, meaning with the word resources little or no cash. Banks work for a profit and if a client does not guarantee them with an asset, it would be a very risky business for the banks to incur in some cost without a sort of insurance in relation to their activity. Microfinance can be defined as the provision of financial services to clients with very low income, including in this category also consumers and self-employed that normally do not have access to financial resources.

In the past centuries, different movements have tried to provide low-income people with financial services. Among them it is worth to remember the Franciscan monks, who in the fifteenth century founded the community-oriented pawnshops; then the members of the European credit union movement in the nineteenth century and lastly the founders of the microcredit movement in the 1970s. One of the founders of the microcredit movement is today's well-known Dr. Muhammad Yunus (2006 Nobel Prize for Peace), a Bangladeshi economist turned into a banker who has developed the concept of microcredit.  In 1976, in Bangladesh, Dr. Yunus founded the Grameen Bank, a microfinance institution and community development bank that makes small loans to poor people without requiring collateral. In the last thirty years relevant progresses have been implemented in the field of microfinance but the big problem is how to help those who earn less than $1 per day, especially those living in remote rural areas.   
In the Syrian Arab Republic there is a huge demand for microfinance, but this demand is only partially satisfied. In fact, according to a 2008 report ( by the Consultative Group to Assist the Poor (C.G.A.P.), a policy and research center based in Washington D.C., just 41,500 out one million of potential estimated microfinance clients in Syria are obtaining today microfinance services.

In February 2007 the Syrian government introduced the General Microfinance Decree (Syrian Legislative Decree No. 15), which is the first of this kind in the MENA region (Middle East and North Africa). This legislation is important because it mirrors an important opening of the financial markets. The aim of this decree related to microfinance is to help the large portion of the population who is poor and probably also part of the Syrian middle class in order to have greater access to financial services (in other words, to give financial access to low-income and unbanked people). The decree authorizes the Credit and Monetary Council (C.M.C.) of the Central Bank of Syria to license Social Financial Banking Institutions (S.F.B.I.s) with the target of providing microfinance services like micro-lending, deposit-taking, and micro-insurance to the poor people. In particular, the decree would try to regulate all the microfinance actors like banks, S.F.B.I.s and N.G.O.s, and all the different models of action like charities, relief-oriented microfinance and S.M.E.s lending in order to get a very inclusive approach, capable of really helping the unbanked population of Syria. Decree No. 15 is the first and unique Syrian law related only to microfinance. Previous laws were not specifically linked to the issue of microfinance. It is worth noting that Private Banking Law (No. 28 for the year 2001) and Islamic Banking Law (No. 35 for the year 2005) permit to private and Islamic banks to implement all of the kinds of banking activity including also microfinance. The S.F.B.I.s are all registered as commercial companies. And for this reason, article 13 of the Microfinance Decree requires that all of the S.F.B.I.s have to be governed by Commerce Law (Law No. 149), which dates back to 1949. In fact, in the eventuality of a legal contrast between the Microfinance Decree and Commerce Law, the former shall prevail. The S.F.B.I.s should follow reporting requirements very similar to those set for normal banks. In fact, an audited balance sheet and a profit and loss statement have to be submitted to the Central Bank of Syria following the international accounting standards.   
Until now the most important actors in the field of microfinance in Syria have been both the state and the N.G.O.s. But it should be clarified that the Aga Khan Development Network (A.K.D.N.) is the only real provider of microfinance in Syria and the only one big player. In addition to this, there are very limited microcredit lines thanks to the United Nations Development Program (U.N.D.P.) and the United Nations Relief and Works Agency (Unrwa), which both obtain funds through their parent institutions. The latter is serving Palestinian refugees in the cities of Damascus and Aleppo. Two local non-governmental organizations the Fund for Integrated Rural Development of Syria (Firdos) and Boosting and Inspiring Dynamic Youth Achievement (Bidaya) are also developing microcredit facilities. Firdos gets 60 percent of its funding from the European Union (E.U.) and the United Nations (U.N.), while the remaining 40 percent comes from local corporate social responsibility of Syrian institutions. Previously, the most important public microfinance provider was the Agency for Combating Unemployment (A.C.U.), but thanks to the Legislative Degree No. 39 of 2006, it has been transformed into the Development and Employment Commission (DEC) and will no longer provide credit. It will just service the agreed loans while its main task will be to provide job skills, training and employment opportunities. As it will be explained below, on the public side, today in the field of microfinance, the basic public institution is and will probably be Savings Bank. 

The A.K.D.N. started its operation in Syria in 2002 under a framework of cooperation agreement with the Syrian government. In fact, in 2003 the Aga Khan Agency for Microfinance (AKAM) — the specific agency within the A.K.D.N. that works with microcredit — began to grant the first loans. Now this agency has been denominated the First MicroFinance Institution (F.M.F.I.) and has seven branches in the country (located in: Damascus, Tartus, Lattakia, Aleppo, Hama, Suweida and Maysaf). This agency has been capable of handing out more than 60,000 loans for a total value of 3.76 billion of Syrian pounds($80 million). Since 2007 this has been the most important microfinance operator in Syria. Moreover, it is interested in broadening its actions implementing up to 20 branch offices. The maximum amount for loan that the agency may offer is 141,000 Syrian pounds ($3,000). It charges a flat rate of 1 percent a month. By the end of 2010, AKAM would like to have a lending portfolio of $43 million and to cover all the 14 provinces of Syria with more than one office in the two big cities of Damascus and Aleppo. 

CGAP-Characteristics-and-Indicators-For-the-Five Primary-Microfinance-Providers-in-Syria-2008

In addition to external actors, there is also the microfinance action built up by the Syrian government through the state-owned Savings Bank. In 1968, the Syrian banks, which had been previously nationalized after the Ba’ath Party came to power, were reorganized into six state banks. One of them was the Savings Bank (the smallest of the state banks), that up to 1999 had been just a postal savings bank (with an average deposit of $950). In 1999, this bank was converted into a full-fledged bank with lending operations starting the following year. The bank since then has been quite successful and has considerably expanded its reach in Syria. In particular, this bank has decided to incorporate in its services also microfinance tools.  The experimental project of this bank started this year in the cities of Lattakia, Tartous and Homs with loans for a total of 15 million Syrian pounds ($319,150). The aim of this project is to help people to be able to own a small store. The people covered by this initiative are those who do not have survival problems and who can think of starting a commercial activity. According to the general manager of the Savings Bank, Haifa Younes, his bank will be in a privileged position because Syrians still prefer to deal with governmental banks. Savings Bank would like in the next four years to get around 33,000 clients with an offer of different loans ranging from 9,000 Syrian pounds ($190) to 1.5m Syrian pounds ($ 31,915). The bank will also have the so-called “My Lady Loan” that is specifically implemented for housewives.

Apart from the successful results of AKAM and the other agencies (at the level of S.F.B.I.s, N.G.O.s and state institutions), other operators are interested in microfinance and are planning to develop additional microfinance operations in Syria. Among them there is the Arab Gulf Program for the United Nations Development Fund (Agfund). This is a Saudi-based non-profit organization that was established almost thirty years ago in 1980 by Prince Talal Bin Abdul Aziz al-Saud. It is interested in developing mainly rural areas, distributing in five years up to 360,000 loans through a net of around 40 branch offices in Syria. Dr. Muhammad Yunus is also a partner in this enterprise.

The road for Syrian microfinance is not easy. In fact, there are at least four big issues to be tackled in the near future. One of the biggest hurdles will be to convince clients looking for Islamic banking products that microfinance is sharia-compliant. At the moment sharia-compliant microfinance is almost inexistent totaling less than 1 percent of the global market. A possible solution could be to explain clearly what microcredit is. In this way it could be possible to point out that the microfinance institutions are not accepting interest rates, but that what they take are just collective service charges in order to have additional funds to distribute later to other eventual clients. Another problem is that there are more people that want a loan than the available loans, an issue that will only be partially deflated given the additional microfinance providers that are interested in entering the microfinance market in Syria. The third issue is that in Syria it exists a big black or shadow economy. This is a huge problem on both sides of a microfinance transaction, the one pertaining to the bank and the one related to the client. In fact, the bank if it does not have an official working transcript from the client cannot provide him/her any loan, while the latter many times does not want to produce any paperwork and in this way renounces to the possibility of obtaining a microfinance loan.  Last but not least, providing microfinance loans is a very time-consuming activity and it requires a very well trained staff. Nowadays, it is not easy to find this expertise in Syria as it is also recognized by all the most important bank managers operating in the country, both in relations to microfinance and to the other classic sectors of the banking activity.

In order to continue to develop the microfinance sector in Syria four additional activities could be implemented by the main actors:

  • Training and awareness building. Through this it could be understandable for all the actors that it exists a commercial viability for microfinance in order to help the poor people and in the same time it could be built up locally the capacity to regulate and use microfinance tools in accordance to globally accepted good practice norms.
  •  Networking. Linkages between local, regional and international bodies are of paramount importance in spreading good practices and general know-how, facilitating transparency and encouraging innovation based on local realities.
  •  Alternative models for microfinance. Among them there are at least three main possibilities. The first one is to have greenfield microfinance banks. Given the potential size of the microfinance sector in Syria, there is room to grow the sector through greenfield investments. The second possibility is bank downscaling. The rationale for this is that downscaling could permit banks to really better interact with the local realities to which the microfinance loans are mainly addressed. The third possibility is instead the adoption of the bank servicing model as a very viable alternative to the N.G.O. approach. The bank servicing model will enable a private sector approach of managing microfinance portfolios, while in the same time capitalizing on the strengths of both the private and public sectors of the bank activity.
  • Technological innovations. Technological innovations in the microfinance sector could be of basic importance with reference to increasing operational efficiencies and expanding it to very remote areas of Syria.

If well carried out, these four activities will strongly help improving the results of the microfinance sector in Syria with the final target of integrating the country into the global microfinance industry.   
This paper has been republished by C.G.A.P. Microfinance Gateway